This country-specific Q&A provides an overview to lending and secured finance laws and regulations that may occur in Czech Republic.
This Q&A is part of the global guide to Lending & Secured Finance. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/lending-and-secured-finance/
Do foreign lenders require a licence/regulatory approval to lend into your jurisdiction or take the benefit of security over assets located in your jurisdiction?
Banks domiciled and licensed in EUs member states may grant loans or take the benefit of security over assets under Czech jurisdiction in accordance with the principle of single authorization of their home EU member state, either through the establishment of a branch or the free provision of services. Banks without authorization within the EU require license of the Czech National Bank.
Other lenders always require a license from the Czech National Bank in their business relationship with consumers. Transactions between other lenders and entrepreneurs / companies are not subject to licensing requirements of the Czech National Bank.
Are there any laws or regulations limiting the amount of interest that can be charged by lenders?
The amount of interest must be individually assessed on a case-by-case basis. However, according to established case law, the interest rate that exceeds the market standard interest rate that banks are entitled to charge on average for a corresponding loan by a factor of three is considered immoral. Such immorality results in the nullity of the loan agreement. This provision applies to all lenders, whether national or foreign banks or other lenders.
Are there any laws or regulations relating to the disbursement of foreign currency loan proceeds into, or the repayment of principal, interest or fees in foreign currency from, your jurisdiction?
In general, there are no such regulations. Nevertheless, laws protecting consumers (e.g. consumer shall be informed about the consequences of such disbursement or repayment modalities and possible fees) shall be obeyed.
Can security be taken over the following types of asset: i. real property (land), plant and machinery; ii. equipment; iii. inventory; iv. receivables; and v. shares in companies incorporated in your jurisdiction. If so, what is the procedure – and can such security be created under a foreign law governed document?
Securities can be taken over for all of the abovementioned types of assets. The mortgages and pledges over movable tangible property are subject to Czech law only. Czech law does not prohibit the choice of jurisdiction with respect to other types of assets, however, it is advisable to conclude the other pledge agreements under the Czech law as well and benefit from the law institute of Czech law.
In order to perfect security interests, the following rules must be followed:
- mortgage (pledge over real property, land) requires a written contract with certified signatures and a registration in the land register, transfer and encumbrance prohibitions should be established
- pledge over shares / ownership interests requires a written contract with certified signatures and a registration in the commercial register, transfer and encumbrance prohibitions should be established
- pledge over claims (e.g. claims arising under lease agreements, insurance agreements, management agreements, general contractor agreements, pledge over bank accounts etc.), machinery and other movable assets requires either a written contract or a notarial deed with registration in the pledge register, in each case a negative pledge should be established, which has to be listed in the pledge register
- pledge over business enterprise or other collective thing (e.g. inventory) requires a notarial deed with registration of the pledge in the pledge register, a negative pledge should be established and registered in the pledge register as well
Moreover, an agreement on enforceability, including an acknowledgement of debt, is typically demanded as well.
Can a company that is incorporated in your jurisdiction grant security over its future assets or for future obligations?
In general, this is possible. Nevertheless, the future assets or obligations must be specified precisely.
Can a single security agreement be used to take security over all of a company’s assets or are separate agreements required in relation to each type of asset?
A single security agreement over all assets would be excessively complicated and unmanageable. In addition, depending on the security provided, the contracting parties are not always identical. Moreover, the statutory requirements regarding form and registration of pledge differ based on the respective security agreement. This would complicate the drafting and handling of contracts to such an extent that such contracts are not concluded in practice.
However, strictly speaking, it is possible to establish a pledge over the business enterprise or other collective thing (e.g. stock inventory) based on a single pledge agreement in form of a notary deed.
Are there any notarisation or legalisation requirements in your jurisdiction? If so, what is the process for execution?
Yes, certain security documents shall be executed with notarized (certified) signatures. On top of that, security which shall be registered in the Pledge Register held by the Czech Notarial Chamber needs to be executed in form of notarial deed. Notarizing/certifying of signature is a relatively simple procedure: the signatory needs to present his/her ID to a person who is authorized by law to certify the signatures, being as follows: (i) notary, (ii) attorney-at-law in respect to documents prepared by such attorney (iii) Czech Point office (wide coverage at each Municipal Office, Post Office or at foreign embassy of the Czech Republic). If the notarized documents are supposed to be used for official purposes abroad, Apostille issued by Czech Ministry of Justice needs to be obtained for the major part of the world. An Apostille is not required vis-à-vis certain states based on bilateral treaties.
Are there any security registration requirements in your jurisdiction?
Mortgage (lien) over a real property is subject to registration in the Real Estate Register (or, in case the real property is not registered in the Real Estate Register, pledge shall be registered in the Pledge Register held by the Czech Notarial Chamber. Pledge of shareholding interest/shares is subject to registration in the Czech Commercial Register. Pledge of a collective thing (quasi-floating charge) shall be registered in the Pledge Register too. Pledge of an IP right (such as trademark, patent) is subject to registration in the respective register held by Czech Industrial Property Office. Certain pledges are registered in the Pledge Register on a voluntary basis in order to protect the rank of the security.
Are there any material costs that lenders should be aware of when structuring deals (for example, stamp duty on security, notarial fees, registration costs or any other charges or duties), either at the outset or upon enforcement? If so, what are the costs and what are the approaches lenders typically take in respect of such costs (e.g. upstamping)?
The most significant costs tend to be notarial fees for execution of notarial deeds on pledges which shall be registered in the Pledge Register. A fee of the notary for execution of such deed is based on the value of the underlying transaction/asset and may reach up to approx. EUR 4,000 for a notarial deed. A similar amount is applicable to execution of a notarial deed on direct enforceability agreement which is a legal instrument allowing for direct enforcement of the claim without a need to sue the obligor in court.
This amount in roughly a cap on the notarial fees for this kind of transaction.
Can a company guarantee or secure the obligations of another group company; are there limitations in this regard?
Yes, this is possible and also common on the market. In general, providing of security needs to be approved by competent corporate bodies and directors signing the transaction documents shall not be in conflict of interest (e.g. they cannot act to detriment of the company due to external pressure, such as instruction from the parent company). Further, a company may provide financial assistance (i.e. funds or security) for acquisition of shares in the company only subject to a number of statutory limitations. Complicated structures are sometimes developed by the parties to the acquisition (e.g. post-closing mergers) in order to circumvent the applicable legal restrictions.
Are there any issues that lenders should be aware of when requesting guarantees (for example, financial assistance or lack of corporate benefit)?
For financial assistance, please see answer No. 10 above. Guarantees are also subject to corporate approval process which shall be duly evidenced to the other party to verify its compliance. Again, potential conflict of interest of directors who often hold multiple positions within a group needs to be assessed.
Are there any restrictions against providing guarantees and/or security to support borrowings incurred for the purposes of acquiring directly or indirectly: (i) shares of the company; (ii) shares of any company which directly or indirectly owns shares in the company; or (iii) shares in a related company?
The first two cases are covered by Czech statutory rules on financial assistance. Financial assistance means that a company provides advance payment, loan or security for the purpose of acquisition of the shares in the same company. Provision of loans/security in order to acquire a related company falls outside of these rules unless such related entity owns (directly/indirectly) shares in the company providing the loan/security.
Can lenders in a syndicate appoint a trustee or agent to (i) hold security on the syndicate’s behalf, (ii) enforce the syndicate’s rights under the loan documentation and (iii) apply any enforcement proceeds to the claims of all lenders in the syndicate?
Parallel debts or other constructions, where syndicate partners appoint an independent trustee or agent, are not common in Czech Republic. Before the recodification of the Civil Code in 2014, there was no legal basis for such action. The recodification introduced new § 2010 BGB. The role of a third party as security agent was recognised in principle. However, the significance of this Section in practice proved to be negligible. Due to the lack of concretization as well as the lack of jurisprudence regarding this paragraph, no syndication partners wanted to take the risk and test the newly introduced legal institution into Czech law and its unknown consequences. It is therefore only an abstract possibility to use a non-syndicated third party as trustee or agent.
At the beginning of 2019, the possibility of appointing a trustee or agent has been introduced in the Czech Bonds Law. These newly introduced regulations are much more detailed and comprehensive than § 2010 BGB or already existing insolvency rules. In addition, it is explicitly stipulated that these provisions shall apply analogously to security of debts not connected with the covered bonds. This analogous applicability is also stated in the explanatory memorandum to the freshly introduced Bond Law.
It remains to be seen whether syndication partners will make use of this recently created legal instrument in the future or whether they will continue to rely on established legal institutions.
If your jurisdiction does not recognise the role of an agent or trustee, are there any other ways to achieve the same effect and avoid individual lenders having to enforce their security separately?
Another way to achieve a similar effect and avoid individual lenders having to enforce their securities separately is to appoint a member of the syndicate partners as their trustee/representative.
The member will be able to hold securities for the syndicate partners, enforce the rights of the syndicate partners and apply the proceeds of enforcement to the claims of all lenders. However, the so-called Security Agent acts here in his own name and is liable to the other syndicate partners only internally on a contractual basis.
Therefore, the security agent is very well secured, while the other members of the consortium are less secured because they only have contractual claims against the secured party for participation in the syndicated securities and not against the borrower or security giver.
Does withholding tax arise on (i) payments of interest to domestic or foreign lenders, or (ii) the proceeds of enforcing security or claiming under a guarantee?
Withholding tax neither arises on payments of interest to domestic or foreign lenders, nor to the proceeds of enforcing security or claiming under a guarantee.
If payments of interest to foreign lenders are generally subject to withholding tax, what is the standard rate and what is the minimum rate possible under double taxation treaties?
Payments of interest to foreign lenders are not generally subject to withholding tax in Czech Republic.
Are there any other tax issues that foreign lenders should be aware of when lending into your jurisdiction (for example, will any income become taxable in your jurisdiction solely because of a loan to or guarantee and/or grant of security from a company in your jurisdiction)?
There are no such tax issues.
Are there any tax incentives available for foreign lenders lending into your jurisdiction?
Also, there are no such tax incentives.
Is there a history in your jurisdiction of financing structures being challenged by tax authorities, and if so, can you give examples.
No, there is no history of financing structures being challenged by tax authorities.
Do the courts in your jurisdiction generally give effect to the choice of other laws (in particular, English law) to govern the terms of any agreement entered into by a company incorporated in your jurisdiction?
The choice of law in contractual matters is admissible based on and within the limits of the Rome I Regulation. This Regulation also regulates the choice of law and conflict-of-law rules in relation to non-EU states.
Do the courts in your jurisdiction generally enforce the judgments of courts in other jurisdictions (in particular, English and US courts) and is your country a member of The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (i.e. the New York Arbitration Convention)?
Foreign judgements are generally enforceable in the Czech Republic. The procedure for enforcing a foreign judgement in the Czech Republic is divided into the following categories:
- Judgements from EU member states are enforceable in accordance with Council Regulation No. 1215/2012. Additionally, instruments, which are certified as European Enforcement Orders, are enforced without any intermediate proceedings under European Parliament and Council Regulation No. 805/2004;
- Judgements from countries which have entered into reciprocal enforcement conventions with CZ are enforceable in accordance with the relevant convention;
- Judgements from other countries are only enforceable if the principle of reciprocity applies.
- Exceptional Status of the United Kingdom
Before Brexit takes effect, recognition of British judgments is based on the above EU Council Regulations. Post Brexit recognition of the UK judgments primarily depends on the existence of applicable bilateral convention or, as the case may be, reciprocity principle.
The Czech Republic is a member of the New York Arbitration Convention since 30 September 1993. In short, also arbitral awards from countries that have not joined the New York Convention are enforceable in line with the reciprocity principle.
What (briefly) is the insolvency process in your jurisdiction?
Insolvency proceedings are initiated upon filing of insolvency petition by creditor or debtor. In case of imminent insolvency, only the debtor may apply for insolvency.
The proceedings begin on the date when the insolvency petition is filed with a competent insolvency court in electronic or paper form. The court will publish commencement of proceedings within 2 hours (unless it has reasonable doubts about the insolvency merits). The court appoints an insolvency trustee and calls on creditors to register their claims (mostly within 60 days). Typically, it takes the court 5 to 12 months to declare the debtor bankrupt. Such ruling often also decides on a method of resolution of the bankruptcy (this may follow in a separate decision after several months in more complicated cases).
Bankruptcy resolution methods are as follows: (i) bankruptcy by liquidation which is applicable to all debtors, reorganisation (subject to meeting certain economic criteria) or discharge of debt for non-business individuals. Bankruptcy by liquidation is the most frequent method of solving the insolvency. A debtor may qualify for reorganization subject to the following conditions: (ii) it operates a business enterprise and (iii) its net turnover exceeds at least CZK 50m (approx. EUR 1.9m) or has more than 50 employees.
What impact does the insolvency process have on the ability of a lender to enforce its rights as a secured party over the security?
A lender as secured creditor shall register its claims and collateral in the insolvency proceedings. Secured creditors have the right to satisfaction from the assets serving as security according to their rank (usually depending on the time of establishing the security). Secured creditors may give instructions to the insolvency administrators to the disposal of collateral. After liquidation of the collateral, the secured creditor receives the net proceeds (trustee’s fees and costs are approx. 10% of the gross proceeds). Any surplus is left to the junior ranking secured creditors (if any), or as the case may be, to unsecured creditors.
Please comment on transactions voidable upon insolvency.
Basically, legal acts are considered null if the debtor impairs the possibility of satisfying its creditors or favours some creditors to the detriment of other creditors (e. g. legal acts without adequate consideration).
A legal act without appropriate consideration may be subject to the claw back by the trustee if it was performed in favour of a person closely associated with the debtor (including concerns) or affiliated with the debtor in the last three years prior to the opening of insolvency proceedings or in favour of another person one year prior to the opening of insolvency proceedings. Legal acts leading to deliberate diminishing of the creditor’s satisfaction may be subject to the claw back for 5 years prior to the opening of insolvency proceedings.
Is set off recognised on insolvency?
Equal satisfaction of creditors is one of the major principles of insolvency proceedings; set offs within the bankruptcy are thus very limited.
Generally, a unilateral set off is permitted if legal prerequisites for such set off arose already before the bankruptcy ruling.
However, the set off is not possible after the declaration of insolvency if:
- The creditor did not register the claim to be set-off;
- The creditor fails pay the amount by which the debtor’s claim exceeds the creditor’s claim (if any);
- The creditor knew about the debtor´s insolvency at the time of acquiring the claim;
- The creditor acquired the claim as a result of an ineffective legal act.
In addition, set-off may be prohibited by a court by means of a preliminary injunction. Set off is also not possible within the moratorium.
Can you comment generally on the success of foreign creditors in enforcing their security and successfully recovering their outstandings on insolvency?
In general, claims of secured creditors are recognized by the insolvency trustee. In principle, Czech proceedings do not discriminate between domestic and foreign creditors. Known creditors from the EU shall be informed by the court immediately by a special notification of the opening of insolvency proceedings and bankruptcy decision. The period of 60 days for registration of claims of foreign EU creditors starts from the date of receipt of the notification. Governing law and a process of security establishment are subject to a close scrutiny by the trustee/court. Security interest over certain assets located in the Czech Republic may be enforceable only if created in compliance with the Czech law (typically shares in Czech companies, real property, pledge of business etc.). It happens from time to time that (even institutional) foreign lenders fail to reflect this in their global transactions involving assets in multiple-jurisdictions.
In practice, the banks usually seek for restructuring of the loans rather than to engage in uncertain and lengthy insolvency proceedings.
No official statistics in relation to the success of foreign creditors are available.
Are there any impending reforms in your jurisdiction which will make lending into your jurisdiction easier or harder for foreign lenders?
According to our information, there are no attempts to implement such reforms.
What proportion of the lending provided to companies consists of traditional bank debt versus alternative credit providers (including credit funds) and/or capital markets, and do you see any trends emerging in your jurisdiction?
About two thirds of the lending are provided by financing banks. Especially for the operative financing and traditional investments like real estate they are most common lenders. In addition, large funds and private equity are the main sources of capital. In recent years, bonds have become increasingly attractive. Crowd funding projects are also getting more popular, but they are nowadays still marginal at the market.