The long-discussed amendments to the Czech Insolvency Act entered into force on 1 July 2017.
These aim primarily to strengthen the transparency of insolvency proceedings; reduce paperwork in the insolvency courts; and change the system of allocation of insolvency cases in the area of debt relief.
The following highlights the most fundamental changes introduced last month.
Allocating insolvency cases
Debt relief is by far the most frequent way of resolving insolvency under Czech law. According to statistics, as many as 26,482 insolvency petitions proposing debt relief (approximately 90% of all insolvency petitions) were filed in 2016. However, with the current headcount of judicial personnel, courts are substantially loaded with the high number of debt-relief cases. In this respect, the amendment to the Insolvency Act – that came into effect on 1 July 2017 – aims, among other things, to decrease the work load of the courts.
One very serious problem associated with insolvency proceedings in the Czech Republic is submitting ‘vexatious’ insolvency petitions. In general, insolvency petitions are considered to be vexatious if they, in fact, pursue a goal other than that of resolving the debtor’s insolvency. Such petitions are often filed against financially sound entities in order to harm them in the eyes of their business partners and customers.
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.
The Insolvency Act has significantly strengthened the position of creditors in comparison with the former Bankruptcy and Composition Act. Nevertheless, the position of a creditor is fundamentally affected by its voting rights, by which it may influence countless decisions.
However, many disputed issues arise in practice, for example, whether a creditor with a contested claim or a creditor affiliated with a debtor may vote. In this context, the new rules regarding voting rights cannot be ignored.
New regulation of voting rights for disputed claims
Introduction
Under Czech law, a parent company, controlling entity or influential entity may be liable for the obligations of a bankrupt corporation under its control. Respective controlling entities' liability is a frequently discussed issue and closely related to the common law doctrine known as 'piercing the corporate veil'. The judiciary and legal academic community are torn when it comes to applying particular provisions of the Corporations Act in such situations.
Victoria, Samnuggur and Titaghur
The Scottish Court of Session considers the interaction of Indian insolvency proceedings for three Scottish Companies that had also been placed into Administration in Scotland.
Background
The Victoria Jute Company Limited ("Victoria"), The Samnuggur Jute Factory Limited ("Samnuggur") and Titaghur plc ("Titaghur") were all incorporated in Scotland, but had been carrying out their business in India.
A syndicated loan involving several lenders requires a plain and transparent security structure that will be easy to enforce if an event of default occurs. For this purpose a security agent is often appointed, who holds all of the established security interests. In these cases a parallel debt is typically created according to which any amounts owed from time to time by any of the borrowers and/or guarantors to the lenders are also owed to the security agent (abstract acknowledgement of debt).
On 14 February 2017 the President of the Czech Republic signed an extensive amendment to the Insolvency Act. The amendment brings significant changes to a number of aspects pertaining to insolvency proceedings, including security of contingent claims (including bank guarantees), the assessment of a company's insolvency and insolvency petitions, and discharge of debts. The amendment, inter alia, seeks to provide better protection against illegitimate insolvency petitions, and to clarify when a firm is actually insolvent.