Personal insolvency a solution for entrepreneurs?

Czech Republic: Private insolvency – a solution also for certain bankrupt individuals who still carry debt from their former business operations

Private insolvency (resulting in partial debt relief) was originally introduced by the Insolvency Act as an option limited to private individuals only. In line with the restrictive interpretation favored by the Prague Upper Court, this tool was not available for resolving debt of private individuals if that debt had its origins in a (since discontinued) business operation of such private individuals (cf. KSPL 29 INS 252/2008). However, as time went by, the Supreme Court eventually developed the view that under certain circumstances, a private insolvency procedure may be approved even in situations in which the bankrupt debtor’s liabilities are in part attributable to their prior entrepreneurial activities (cf., in particular, 29 NSČR 3/2009).

The lawmaker responded to this established decision-making practice of the Supreme Court by bringing an amendment to Sec. 389 of the Insolvency Act on its way which has come into force on 1 January this year. Sec. 389 (2) of the Insolvency Act thus newly stipulates that business debts do not preclude the use of private insolvency proceedings to resolve the (actual or imminent) insolvency of a private individual, provided that (i) the creditor whose receivable is concerned has given consent, or (ii) the receivable was not satisfied in a prior bankruptcy procedure that was set aside due to a lack of assets, or (iii) the creditor is a secured creditor. This makes private insolvency (and the debt relief which it brings) newly available also to those who are currently not entrepreneurs but who are burdened by „inherited“ debt from their past business operations. However, the lawmaker has preserved the higher protection afforded by receivables from business dealings. Debtors (i.e., in particular, self-employed individuals who pursued their business based on a trade license) thus won’t be able to shut down their operations with the self-serving motive of „wriggling themselves out“ of their businesses’ failure through private insolvency, unless the satisfaction of their liabilities from business dealings is ensured, or unless debt relief is the last resort because of the debtor’s utter destitution.

David Fechtner, Associate


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