On 1 July 2017, a major amendment to the Czech Insolvency Act came into effect. The amendment introduces a change to the definition of insolvency – the term liquidity gap. Debtors, who are entrepreneurs and keep accounting books, will now be allowed to prove that they are able to pay their due monetary liabilities by proving the possession of a sufficient amount of available funds or by proving that they are able to obtain such funds in the near future. Thus, in simple terms, a liquidity gap means in this connection a lack of available funds for the payment of due liabilities.

Inspiration from the German approach to insolvency

The concept of a liquidity gap apparently draws on the German approach to the definition of insolvency. Under German law, liquidity gap is understood as one of the means of ascertaining a debtor’s insolvency. If the debtor’s available funds exceed the amount of its due liabilities, there is no liquidity gap and the debtor is not regarded as insolvent.

Liquidity gap in the Czech legislative environment

The Czech approach to the liquidity gap is based on the introduction of a legal assumption that an entrepreneur who keeps accounting books is able to fulfil its monetary liabilities if the difference between its due monetary liabilities and available funds (liquidity gap) is less than one tenth of its due monetary liabilities or if the liquidity outlook indicates that the liquidity gap will drop below one tenth of the value of its due monetary liabilities in the relevant period. Thus, the liquidity gap concept under Czech law will mainly serve debtors as another way of averting a decision on their insolvency. 

The liquidity gap regulation should cover situations in which the debtor is temporarily unable to pay its due liabilities (for example, due to secondary insolvency). The main principle of the proposed legislation is that a temporary shortage of liquidity alone does not imply the entrepreneur’s insolvency. 

Liquidity statement and liquidity outlook

Entrepreneurs may prepare a document indicating the amount of available funds and due liabilities (a liquidity statement) in accordance with the conditions set out by an implementing regulation. In addition, the implementing regulation sets out the conditions for making an estimate of the future trend in available funds and due liabilities (a liquidity outlook).

The liquidity outlook can be drawn up for a period of up to eight weeks after preparation of the liquidity statement or for twelve weeks if the outlook is prepared for a period starting from a different date. In exceptional cases, it will be possible to extend this period by another four weeks.

These documents can only be prepared by a statutory auditor or an audit firm, a qualified expert in the field of economics (accounting records), an expert institute for the field of economics or a person providing economic consultancy in the field of insolvency and restructuring.

Outlook

The primary aim of this approach under Czech law is to help debtors cope with the problem of a temporary liquidity shortage. Compared to the German legislation, the Czech legislation is much more flexible since, instead of a temporary period of three weeks, it grants up to sixteen weeks during which the debtors may overcome its lack of liquidity. Experienced insolvency experts now question the possibility of precisely predicting liquidity trends for such a long period.  Unfortunately, many other issues arise in connection with the new concept.