The latest amendment to the Czech Insolvency Act applies a shorter debt discharge period to both entrepreneurs and non-entrepreneurial individuals.

Background

The Czech Parliament has finally approved an amendment to the Czech Insolvency Act, reducing the debt discharge period from five to three years, in line with EU Directive 2019/1023. A key point of contention that delayed the amendment was whether to apply this shortened period not only to entrepreneurs but also to non-entrepreneurial individuals, extending beyond the EU’s minimum requirements.

Czech Republic has recently implemented the Act on Preventive Restructuring (the Act), with effect from 23 September 2023, which offers companies in financial difficulty a chance to restructure their assets, liabilities, and capital structure.

Initiation

The preventive restructuring process may be initiated by a company if it:

A proposed amendment to the Insolvency Act, has been approved by the government and is currently under discussion in the Czech Parliament. It is expected to significantly alleviate the situation for debtors seeking debt relief. The previous government had intended to introduce similar changes; however, the legislative process was halted by the end of its term.

Current position

Currently, debtors can achieve debt relief only after 5 years of "good conduct", unless they:

A reworked Czech Republic bill on preventive restructuring could soon be implemented.

Act on preventive restructuring

On October 17, 2022, Justice Andrea Masley of the NY Supreme Court issued a decision and order denying all but one of the motion to dismiss claims filed by Boardriders, Oaktree Capital (an equity holder, term lender, and “Sponsor” under the credit agreement), and an ad hoc group of lenders (the “Participating Lenders”) that participated in an “uptiering” transaction that included new money investments and roll-ups of existing term loan debt into new priming debt that would sit at the top of the company’s capital structure.

On October 14, 2022, the Fifth Circuit issued its decision in Ultra Petroleum, granting favorable outcomes to “unimpaired” creditors that challenged the company’s plan of reorganization and argued for payment (i) of a ~$200 million make-whole and (ii) post-petition interest at the contractual rate, not the Federal Judgment Rate. At issue on appeal was the Chapter 11 plan proposed by the “massively solvent” debtors—Ultra Petroleum Corp. (HoldCo) and its affiliates, including subsidiary Ultra Resources, Inc.

On July 6, Delaware Bankruptcy Court Judge Craig T. Goldblatt issued a memorandum opinion in the bankruptcy cases of TPC Group, Inc., growing the corpus of recent court decisions tackling “uptiering” and other similar transactions that have been dubbed by some practitioners and investors as “creditor-on-creditor violence.” This topic has been a hot button issue for a few years, playing out in a number of high profile scenarios, from J.Crew and Travelport to Serta Simmons and TriMark, among others.

While the Czech government has not yet enacted the June 2019 EU Directive on restructuring and insolvency, it has proposed another debt relief measure, the Milostivé léto or 'Debt Jubilee'. This will give debtors the opportunity to discharge debts owed to the Czech state.

Background

The measure will provide relief for debts where interest repayments substantially exceed the principal amount. The measure follows on from the previous 'Debt Jubilee' between 28 October 2021 and 28 January 2022 when 42,000 debt enforcement proceedings were cancelled.

The most recent amendment to the Act on Commercial Companies and Cooperatives, effective since 1 January 2021, has brought several changes to the liability of managing directors (MDs), which we outline below.

Salary and benefits

The time period within which an MD is obliged to return any salary and benefits received from an insolvent company has been altered.

On August 26, 2020, the Court of Appeals for the Third Circuit held that the Bankruptcy Code does not require subordination agreements to be strictly enforced in order for a court to confirm a cramdown plan, so long as the plan does not discriminate unfairly.