This country-specific Q&A provides an overview of the legal framework and key issues surrounding restructuring and insolvency in Czech Republic.
This Q&A is part of the global guide to Restructuring & Insolvency.
For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/restructuring-insolvency/
What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?
The fundamental types of security instruments include (i) mortgages over real estate, (ii) pledges of movable assets and other kinds of assets, such as receivables, a functioning business in its entirety, securities or intellectual property rights, (iii) security transfers of rights, (iv) guarantees (suretyship), and (v) financial guarantees.
Czech law distinguishes between the creation and perfection of security. While security over assets is created when a security agreement is concluded, the perfection of security usually entails either registration in the relevant registry and/or the handover of the secured assets.
A mortgage over real estate is perfected by means of its registration in the Cadastral Register. Regional Cadastral Offices review both the content and form of the mortgage agreement before deciding whether to register it. The date of registration is decisive in terms of priority of satisfaction; the earlier in time, the higher the priority.
The pledge of movable assets is perfected upon the transfer of possession of the property to the pledgee or a third-party custodian. A pledge of movable assets may also be perfected by virtue of the registration of the pledge in the Register of Pledges, subject to the pledge agreement being concluded in the form of a notarial deed.
A contractual pledge over a business operating as a going concern requires the execution of a pledge agreement in the form of a notarial deed. The pledge is perfected upon its registration in the Register of Pledges.
The pledge of receivables is not effective towards the debtor until the debtor has been notified in writing by the pledgor, or until the pledgee has proven the existence of the pledge to the debtor. If the underlying agreement concerning the pledged receivables restricts the assignment or pledge of such receivable, the consent of the relevant debtor is required for the pledge of the account receivable.
A pledge of a share in a limited liability company is perfected by means of its registration in the Commercial Register. A pledge of shares in a joint-stock company is perfected by (i) pledge endorsement (in Czech: zástavní rubopis) marked on the share certificates, and (ii) handover of the shares (in case of a joint-stock company with certificated shares) or registration with the Central Securities Depository (in case of a joint-stock company with book-entry shares). The Articles of Association of the company at hand may stipulate further conditions for the creation of pledge of its shares.
Furthermore, financial claims may be secured by so-called financial collateral. Directive 2002/47/EC of the European Parliament and of the Council on financial collateral arrangements has been fully implemented in the Czech Republic.
Failure to comply with all formalities may result in the security being deemed invalid or ineffective. In any case, such non-observance may (among other things) significantly decrease the chances for the creditor i) to receive any proceeds from the security or ii) initiate the relevant enforcement proceedings.
What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?
As a general principle of Czech law, a mortgage, pledge and other types of security may be successfully enforced if the corresponding secured obligation is not performed duly and in time. In other words, as a matter of Czech law, it is necessary in cases of loan financings that the loans be declared due and payable before the secured creditor (or, in case of syndicated loan financing, the security agent acting for the benefit of the lenders) may enforce the pledges securing the loans.
In addition, official confirmation of the existence of the secured claims is also required for enforcement of the mortgage/pledge. This may take the form of (i) an enforceable court or arbitrational decision, (ii) an enforceable settlement reached within court or arbitration proceedings or (iii) an agreement on direct enforceability drawn up in the form of a notarial deed between the secured creditor and the debtor.
Provided that the above conditions are met, the secured creditor may seek satisfaction of the secured claims from the proceeds of enforcement of the pledge by virtue of a judicial or public auction (unless a different means of enforcement, e.g. the direct sale of assets, has been agreed between the parties). A judicial auction may be undertaken either by a court (i.e., by the court bailiff) or by a private bailiff chosen by the secured creditor and appointed by the court. A public auction is organized by a private licensed auctioneer. In certain, rather rare, cases, the creditor may be allowed to seize the secured assets.
As of the moment in which an insolvency petition has been filed, the execution and enforcement of any security instrument is automatically stayed for both types of insolvency proceedings, i.e. liquidation bankruptcy and reorganization proceedings.
What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?
Insolvency is tested by means of balance sheet and liquidity tests. If the debtor passes either of them, it is deemed insolvent.
The liquidity test requires the debtor:
a) to have multiple creditors,
b) to have due and payable debts which have been past maturity for more than 30 days, and
c) to be unable to satisfy such debts.
For the purposes of the liquidity test, the debtor is deemed unable to satisfy its monetary obligations if the debtor:
a) has suspended payments with respect to a substantial portion of its payment obligations, or
b) has been in default with such payments for more than three months past the due date, or
c) it is impossible to satisfy certain due and payable obligations of the debtor by the enforcement of a decision or by foreclosure, or
d) the debtor failed to submit a list of assets and liabilities as required by the insolvency court.
The balance sheet test requires the debtor:
a) to have multiple creditors, and
b) the sum of its liabilities exceeds the value of its assets (whereas the further management of such assets, or the further operation of its business, is being taken into account).
In 2017, a new instrument for assessing and evaluating the debtor’s insolvency was implemented into the Insolvency Act. A liquidity gap (in Czech: mezera krytí) is an instrument used for the solvency evaluation of a debtor which indicates whether the debtor is in fact insolvent or whether there has only been a temporary decline in the debtor’s operations which can be surpassed within a short period of time. The liquidity gap may be used as a negative presumption by which the debtor can prove its ability to fulfill its liabilities and as a matter of fact avoid to become subject to insolvency proceedings, i.e., to be deemed insolvent. The liquidity gap assessment may further help to determine (i) the date as of which the debtor was in an insolvency situation or (ii) whether certain decisions made by the statutory body of the debtor are going to cause a liquidity gap.
Directors are obliged to promptly initiate insolvency proceedings with the competent court as soon as they learn of the insolvency (or should have learned of it, had they exercised due care).
If the directors fail to comply with the above obligation, they are liable for any loss suffered by the creditors. It is presumed that the loss is equal to the portion of the claims that was duly registered but was not satisfied in the insolvency proceedings.
A director may be exculpated if they can prove that the breach of duty to file the insolvency petition had no impact on the amount intended for satisfaction of the claim lodged by the creditors in the insolvency proceeding, or that the duty was not fulfilled due to facts that occurred independently of their will and that could not have been averted even if the director had exerted their best efforts.
A grave violation of a director’s duties may amount to a criminal offense punishable by imprisonment.
What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?
The Insolvency Act provides for two types of proceedings for corporations: liquidation bankruptcy and reorganization proceedings. Liquidation bankruptcy is the default procedure for business companies which do not qualify for reorganization procedures or with respect to which the creditors voted for the application of a liquidation bankruptcy procedure.
Liquidation bankruptcy (in Czech: konkurs) predominantly aims to sell off the property of the debtor and distribute the proceeds of the sale to creditors. As of the date of the court decision on the commencement of liquidation bankruptcy proceedings, the debtor is not allowed to dispose of the assets of the estate and all powers pass to the insolvency trustee. The trustee is supervised by the insolvency court and by the creditors’ committee. Liquidation bankruptcy ultimately ends with the liquidation of the insolvent company and usually lasts between two to four years. Creditors may decide at the creditors meeting whether the debtor’s assets should be sold by the insolvency trustee per partes or as a going concern. The trustee is bound by the creditors’ decision. During liquidation bankruptcy, the insolvency trustee regularly reports to the insolvency court and the creditors’ committee on the status of the sale of the debtor’s assets. Creditors may instruct the insolvency trustee to prepare a special report on the status of the sale. At the end of the liquidation bankruptcy proceedings, the insolvency trustee prepares a so-called Final Report, in which they summarize what the proceeds of the sale are and how these are to be distributed among creditors. The Final Report is reviewed by the insolvency court and is published. Creditors are allowed to comment on the Final Report, and their comments are heard by the insolvency court.
Within reorganization (in Czech: reorganizace) the debtor or the creditors prepare, and the creditors approve and the insolvency court confirms, a reorganization plan pursuant to which the debtor is restructured and the creditors’ claims are satisfied. The debtor continues to operate the company as debtor in possession. Reorganization usually lasts between one year to three years. For more info about reorganization proceedings, please see Section 8 below.
How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?
The ranking of claims is in principle the same for both, i.e., liquidation bankruptcy and reorganization proceedings.
Secured claims are satisfied from the debtor’s assets which served as the relevant security. The remaining claims are satisfied depending on their priority. Preferential claims are satisfied first, followed by any remaining unsecured claims, and finally by subordinated claims.
Preferential claims include various administrative costs, taxes, fees, customs duties, social insurance, contributions to the state employment policy and public health insurance payments, claims of creditors stemming from agreements entered into by the debtor in possession or the insolvency trustee, and claims of the debtor’s employees stemming from their labor-law relationship with the debtor.
If the proceeds from the liquidation of the property of the estate do not suffice to satisfy all preferential claims, the remuneration and out-of-pocket expenses of the insolvency trustee shall be paid first, followed by preferential creditors’ claims (including financing of the debtor in possession), followed by the costs of maintenance and management of the estate, and then creditors’ claims in respect of child support under the law. Other preferential claims are satisfied pro rata.
Remaining unsecured claims are satisfied pro rata. Subordinated claims are satisfied according to the status and level of the subordination.
The statutory procedure for how creditors can claim the amounts owed to them is, in principle, the same for both, i.e., liquidation bankruptcy and reorganization proceedings.
Each creditor must register its claim in a due and timely manner by virtue of a statement of claims. The same holds true with respect to contingent as well as secured debts. The statement of claims must be submitted to the insolvency court on a prescribed form that has been filled in within the period of time set forth by the court in the decision on the declaration of insolvency (usually two months as of the declaration on insolvency). Failure to meet the deadline cannot be remedied. Late registrations are disregarded by the insolvency court, and such claims will not be satisfied in the insolvency proceedings. The claims must be stated in Czech Crowns, and the statement of claims must be accompanied by relevant documents to prove that they are legitimate. The insolvency trustee examines the claim submissions, drafts a list of claims, and contests disputable claims at the court review hearing. The debtor and other creditors may also contest a creditor’s claims. Contested claims are litigated before the insolvency court.
Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?
Any action taken by a debtor may be declared “ineffective towards creditors” by an insolvency court, if it were to prejudice the creditors’ rights. Grounds for opposing a transaction arise in the event that (a) a transaction is effected without adequate consideration, i.e., a transaction for which the usual consideration in similar cases would be significantly higher; (b) a transaction results in preferential treatment, i.e., the premature repayment of the obligations of only some creditors, etc.; or (c) a transaction aims to deprive the creditors of certain benefits, provided that the debtor intended to do so and that the counterparty to the transaction had knowledge, or should have had knowledge, of this intention.
The types of transactions under points (a) and (b) above are vulnerable to attack if (i) they were undertaken during a period of one year prior to the commencement of insolvency proceedings, or a three-year period if the transaction was made for the benefit of a person affiliated with the debtor, or (ii) they were undertaken by the debtor when it was insolvent, or caused the debtor to become insolvent. In respect of the transactions listed under point (c) above, a five-year period applies.
The insolvency trustee may commence proceedings against persons who benefited from such transactions within a year from the declaration of insolvency. Individual creditors are not allowed to commence such proceedings, but the creditors committee may instruct the insolvency trustee to do so.
Furthermore, as of the commencement of insolvency proceedings, the debtor is not allowed, among other things, to execute or enforce any security instrument which would be covered by its assets, or dispose of its assets in a way which could substantially alter their composition, or the way in which they are utilized or their designated purpose, or by which their value may be diminished to a non-negligible degree, though certain transactions are exempt, such as transactions pursued in the ordinary course of business or to avert impending damage. Transactions contravening the above restrictions are deemed to be ineffective vis-à-vis creditors.
What form of stay or moratorium applies in insolvency proceedings against the continuation of legal proceedings or the enforcement of creditors’ claims? Does that stay or moratorium have extraterritorial effect? In what circumstances may creditors benefit from any exceptions to such stay or moratorium?
Generally, as of the moment in which the insolvency petition was filed, an automatic stay applies to the enforcement of any decision or foreclosure which would affect property owned by the debtor, as well as other property which forms a part of the estate. The enforcement of a decision or foreclosure may be ordered or commenced but cannot be consummated. However, in certain cases the insolvency court may decide that the enforcement of a decision or foreclosure may go forward.
As to the extraterritorial effect, the EC Regulation on Insolvency Proceedings and international treaties apply.
What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?
Private workouts used to represent a significant alternative to per partes sales for companies in financial distress. In the past, a few large companies were successfully restructured. As in other jurisdictions, the greater value of a going concern as compared to the liquidation value of the business, the involvement of experienced creditors and reasonable prospects for the sale of the business increase the chances of a successful restructuring.
Reorganization is the only court-sanctioned rescue procedure available to corporations in the Czech Republic. Debtors in the process of liquidation, securities traders or commodities traders automatically do not qualify for reorganization proceedings. Furthermore, unless the debtor applies for a pre-packaged reorganization (i.e., a pre-approved reorganization plan by the majority of secured and unsecured creditors), the debtor only qualifies for reorganization procedures if its total revenues in the last accounting period preceding the insolvency petition reached a minimum of CZK 50,000,000, or if it employs more than 50 employees.
Insolvency proceedings are technically divided into two stages. In the first stage, the insolvency court decides whether the debtor is insolvent or whether the debtor is under an imminent threat of insolvency. In the second stage, the insolvency court decides whether liquidation bankruptcy or reorganization procedures should apply.
If the debtor files a duly pre-approved reorganization plan with the insolvency court, the insolvency court allows the reorganization unless other formal requirements have not been satisfied.
In the case of large companies which apply for reorganization and do not have a pre-approved reorganization plan, the insolvency court calls the creditors’ meeting, which may then vote on whether liquidation bankruptcy or reorganization procedures should apply. If a sufficient number of creditors vote for liquidation bankruptcy, the insolvency court is, in principle, bound by the vote and decides on liquidation bankruptcy.
In reorganization, the debtor remains in control of the business as “debtor in possession” unless the insolvency court imposes restrictions on the debtor-in-possession’s rights. The insolvency court may restrict the rights of the debtor in possession rights typically in cases of mismanagement or fraud. The Creditors’ committee approves transactions of the debtor in possession that have a substantial impact on operations.
Shareholders’ general meetings are suspended and their rights are exercised by the insolvency trustee. In principle, the directors of the debtor may only be overruled by a joint decision of the shareholders and the Creditors’ committee.
In reorganization proceedings, the creditors vote on the reorganization plan. For these purposes, the reorganization plan divides claims into classes. Each class of creditor accepts the plan if more than half in number and those holding more than half of the amount of allowed claims approve the plan. Each class of shareholders accepts the plan if more than half in number and those holding more than two thirds of the amount of the allowed claims approve the plan.
It is possible for more than one plan to be filed and accepted, although only one plan may be confirmed by the insolvency court. Standards for the confirmation by the insolvency court vary depending on whether the plan is accepted by every class of creditors.
If the plan is accepted by every class of creditors, the insolvency court confirms the plan if:
a) the plan complies with the Insolvency Act and other applicable laws,
b) the plan is proposed in good faith,
c) the amount which each holder of a claim receives under the plan is not less than the amount that such holder would receive if the debtor were liquidated in liquidation bankruptcy proceedings,
d) all preferential claims are to be paid without undue delay after the effective date of the plan.
If the plan is accepted by fewer classes of creditors, the insolvency court confirms the plan if the confirmation requirements applicable to a plan which is accepted by every class are satisfied and:
a) the plan was accepted by at least one of the unimpaired classes of creditors,
b) the plan is fair and equitable,
c) the plan does not unfairly discriminate,
d) confirmation of the plan is not likely to be followed by insolvency of the debtor.
Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?
In liquidation bankruptcy proceedings, the company finances the costs of the proceedings out of its remaining assets. In theory, the insolvency trustee may enter into new loan agreements, but in practice this will be realistic only if there is a chance to sell the debtor’s business as a going concern.
Within reorganization proceedings the debtor in possession may conclude loan agreements which provide fresh financing, subject to the approval of the Creditors’ committee. Those transactions automatically have “super-priority”, i.e., a lien on encumbered property that is equal to existing liens, and a high priority over other unsecured creditors. The original secured creditors have the right of first refusal to provide “super-prioritized” financing.
Securities issued under a confirmed reorganization plan are exempt from the securities law regulations on public offerings.
Can a restructuring proceeding release claims against non-debtor parties (e.g. guarantees granted by parent entities, claims against directors of the debtor), and, if so, in what circumstances?
Liabilities of non-debtor parties remain unaltered by the reorganization proceedings under Czech laws.
Is it common for creditor committees to be formed in restructuring proceedings and what powers or responsibilities to they have? Are they permitted to retain advisers and, if so, how are they funded?
In principle, all creditors who duly lodged their claims and whose claims were not contested by the insolvency trustee may vote at creditors’ meetings. The insolvency court may decide on a vote exemption for contested creditors. Creditors’ meetings are, among other things, authorized (i) to elect and recall the members of the creditors’ committee (the unsecured creditors elect half of the members, while the other half is elected by the secured creditors), (ii) to replace the insolvency trustee (but only at a certain stage of proceedings), and (iii) to decide on the method of insolvency proceedings (i.e., liquidation bankruptcy or reorganization). Creditors’ meetings may be called by the insolvency trustee, by the insolvency court, by the creditors’ committee or by at least two creditors whose voting rights represent more than 10% of all voting rights. Persons able to exercise control over the debtor (shadow director) and debtor’s related parties (shareholders) in principle do not have the right to vote at the Creditors’ meeting.
It is very common in insolvencies of mid-sized and large corporations that creditors’ committees are formed. A creditors’ committee may have from 3 to 7 members (as may be decided by the creditors’ meeting) and primarily plays an organizational and supervisory role. The number of members on the creditors’ committee nominated by the unsecured creditors must be at least equal to the number of members nominated by the secured creditors.
The creditors’ committee monitors the trustee’s work, approves credit financing, approves the trustee’s expenses, and inspects the debtor’s accounting and documents. In reorganization any transaction which would have a substantial impact on the operations and/or the insolvency estate may only be performed with the approval of the creditors’ committee. In liquidation, the sale of movable and immovable assets (including the sale of assets outside an auction) or the transfer of the debtor’s enterprise through a sole agreement must be approved by the creditors’ committee.
How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any an ability for either party to disclaim the contract?
In principle, if the contract between the debtor and another party is not fully discharged as of the declaration of liquidation bankruptcy/reorganization by the debtor or the other party, the insolvency trustee/debtor in possession may either fulfill the agreement for the benefit of the debtor and demand that the other party fulfill the agreement as well or may withdraw from the agreement.
If the debtor entered into a contract on lending a particular item of his property, the insolvency trustee is entitled to request that the item be returned even before the lapse of the agreed period.
The insolvency trustee/debtor in possession is entitled to rescind a lease contract or sub-lease contract to which the debtor is a party; the notice period shall not exceed three months. On the other hand, if such a contract was made by the debtor as the lessee or sub-lessee, the contract cannot be terminated or rescinded by the other party on grounds of the debtor defaulting on payments prior to the ruling on insolvency or on grounds of the deterioration of the debtor’s financial situation.
Prior to the declaration of insolvency, set-offs may be pursued free of any insolvency constraints.
After the declaration of insolvency, set-offs are also permitted, but are subject to constraints and requirements, such as:
(a) a creditor is not allowed to set off claims that have been acquired through an ineffective legal transaction or claims which the creditor acquired in the knowledge of the debtor’s insolvency;
(b) a claim must be registered prior to the set-off;
(c) a creditor must pay to the estate any sum which exceeds the creditor’s claim qualifying for the set-off.
All set-offs are principally prohibited in reorganization proceedings, and require approval by the insolvency court in the individual case.
Credit bidding has no tradition in Czech reorganizations, but is technically possible, subject to insolvency court consent.
Sale of assets in liquidation
The insolvency estate may only be turned into cash after the court’s declaration on bankruptcy liquidation (and in any case no earlier than the first creditors’ meeting). A sale of movable and immovable assets (including the sale of assets outside an auction) and a transfer of the debtor’s enterprise through a sole agreement must be approved by the creditors’ committee as well as by the insolvency court, as a prerequisite for the effectiveness of the respective transfer/sale/auction agreements. Throughout the entire sale process, the insolvency trustee is under the duty to inform the insolvency court and the creditors’ committee about the progress of the sale and details concerning the allocation of the proceeds.
Secured creditors will be allowed to grant binding instructions to the insolvency trustee in relation to the enforcement of collateral.
The insolvency trustee may only refuse to follow such instructions if they believe that the secured assets can be disposed of under more favorable conditions. In any case, any such action by the trustee would be subject to review by the insolvency court.
Sale of assets in reorganization
Czech reorganizations do not have a tradition of “363 asset sales”, even if they are technically possible. All sales of capital assets and major production assets in reorganization are normally pursued under the terms of the reorganization plan (once confirmed by the insolvency court).
Free and clear title
In principle, the purchaser acquires any assets from the debtor in insolvency free and clear of liabilities (though a different regime may be agreed among the parties).
Pre-packaged sales are allowed but are subject to confirmation of the reorganization plan by the insolvency court.
What conditions apply to the sale of assets/the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted? Are pre-packaged sales possible?
What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?
Primarily, directors are obliged to promptly initiate insolvency proceedings with the competent court as soon as they learn of the insolvency (or should have learned of it, had they exercised due care).
Within reorganization proceedings the directors must exercise due professional care, and are liable for damage caused to creditors in violation of this duty. A director of a company that is being reorganized is held to a higher standard of care regarding their actions, compared to a company outside the insolvency regime. Among other things, directors must prioritize the common interest of the company’s creditors over the interests of the company, their own interest or the interest of any third parties. The reason for such shift in the person to whom fiduciary duties are owed is basically the fact that, under the pecking-order principle, creditors must be paid before the shareholders, secured creditors before unsecured creditors, and preferred creditors before any registered creditors.
Persons able to exercise control over the debtor (shadow directors, entities which can directly or indirectly exercise decisive influence on a debtor) might also be held liable (under certain circumstances) for liabilities of the debtor. Greater demand is placed on the controlling entity in terms of loyal and due performance of its obligations. Under certain circumstances, they may be found liable for the obligations of the bankrupt entity, for instance if they fail to appoint capable professionals to the statutory body of the entity.
Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?
Insolvency proceedings do not have any automatic effect on releasing directors and other stakeholders from their liability for previous actions or decisions.
Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition? Has the UNCITRAL Model Law on Cross Border Insolvency been adopted or is it under consideration in your country?
The EC Regulation on Insolvency Proceedings (including the recognition provisions) applies to companies from other EU member states in the Czech Republic.
If the given company is incorporated under the laws of a non-EU member, the enforcement of foreign court decisions in the Czech Republic, and the enforcement of decisions by the Czech insolvency courts in foreign countries, are in each case subject to the relevant international treaties. Some such decisions may turn out to be unenforceable.
The UNCITRAL Model Law on Cross Border Insolvency has not been adopted in the Czech Republic.
Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?
The EC Regulation on Insolvency Proceedings applies in the Czech Republic (including the provisions relating to the opening of the proceedings) applies to companies from other EU member states in the Czech Republic.
In the case of companies from non-EU member states, questions relating to the opening of insolvency proceedings in the Czech Republic are subject to the relevant international treaties.
How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?
The insolvency of each member of the family is tested based upon the figures of each individual member. This means that positive consolidated results of the family do not provide a safe harbor for those members of the family that meet the insolvency test on a stand-alone basis, while on the other hand, negative consolidated results of the family do not pull the healthy members of the corporate family beneath the surface.
In case of insolvency, each respective member of the family must commence insolvency proceedings for itself. Insolvency proceedings commenced by one member of the corporate family are not acknowledged for the purposes of insolvency proceedings of other members. Those proceedings are completely separate proceedings with separate files, lists of assets and creditors, etc. However, if the insolvency cases of the members of the family are decided by the same insolvency court, all such insolvency cases are assigned to the same judge (i.e., partial procedural consolidation is allowed).
In the case of a corporate family whose members operate in different districts, each member of the family may file the insolvency petition with the district court in the place in which another member of the family already filed its own insolvency petition. This means that the place of the first filing is crucial for the determination of a favorable jurisdiction. On the one hand, this allows the family of companies to engage in forum shopping, i.e., to choose which of the district courts will decide the insolvency case; on the other hand, insolvency cases of the family of companies are consolidated within the same insolvency court or even under the same insolvency judge.
Czech insolvency law provides no specific rules for substantive consolidation as is generally interpreted, since the concept of substantive consolidation is not recognized in the Czech Republic. In other words, creditors of one member of the corporate group do not have a statutory right to claim the consolidation of assets and liabilities with other insolvent member(s) of the corporate group.
Claims of secured creditors with respect to members of the corporate family do not collapse into one claim in insolvency proceedings. If the secured creditor has a security interest in the assets of one member of the family, and a guarantee from another member of the family, both such claims may also be valid in insolvency proceedings. This, however, does not mean that secured creditors are allowed to receive multiple payments for their underlying claim. Czech law distinguishes between primary and secondary claims. Secondary claims, i.e., those that secure a primary claim, exist only for as long as the primary claim exists and only up to the amount of the primary claim. Debtors from secondary and primary claims may obviously be different entities. In principle, any payments received under the secondary claim automatically reduce the primary claim and vice versa. The secured creditor is allowed to submit in the insolvency proceedings of all members of the corporate family all sorts of secured claims (mortgages, pledges, guarantees, etc.) that were duly created and perfected in respect of assets of such corporate members, although payments received under such claims may not exceed the aggregate amount of the primary claim.
Is it a debtor or creditor friendly jurisdiction?
The Czech Republic is a creditor-friendly jurisdiction as to corporate insolvencies and a debtor-friendly jurisdiction as to consumer insolvencies.
Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?
At present sociopolitical factors as well as the government have very limited influence over the restructuring market in the Czech Republic. In principle, state aid is prohibited by EU rules. In recent years, the unemployment rates in the country were very low, which to a substantial degree helped ease potential tensions around major reorganizations in the Czech Republic during the past decade.
What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?
A lot of new laws address past inefficiencies, which is in principle considered a major improvement. The major institutional constraint remains to be the relative slowness of insolvency proceedings (which however has improved significantly over the past decade).