Adequate consideration within the meaning of Sec. 240 of the Insolvency Act

Czech Republic: The Supreme Court’s conclusions on what constitutes adequate consideration are not too helpful in practice

One of the defining criteria which renders legal transactions of the debtor invalid under the Insolvency Act is the absence of adequate consideration.

According to Sec. 240 (1) of the Insolvency Act, a legal transaction may be said to lack adequate consideration if the debtor undertakes to render performances for no consideration at all, or for a counterperformance whose value (price) is substantially below the customary price of such performances.

According to the Supreme Court, it is not a straightforward matter to identify the cases in which the ratio between the customary price and the price actually agreed in the contract automatically indicates that the value of the counterperformance is substantially lower than the customary price for the kind of performance undertaken by the debtor. According to the Supreme Court, the primary criterion to help legal practitioners navigate these waters is the strictly quantitative aspect (i.e., the difference between the contractually agreed price and the customary price). However, one must not lose sight of the impact which contentious legal transactions may have on the property within the debtor’s sphere of influence, in terms of creditors’ ability to induce the debtor to pay their receivables (and the debtor’s actual ability to settle these receivables), nor must one ignore the rationale behind the debtor’s decision to engage in certain contentious transactions (e.g., an effort to raise cash funds to settle receivables of creditors which have already fallen due), or the other circumstances under which the debtor engaged in a given transaction.

The upshot of all this is that each case must be reviewed individually, taking into account all the above criteria, when determining what amount represents a price that is “substantially lower than what is customary”.

In other words, the cited Supreme Court judgment again provides no clear answer to the question: “How can I determine what price is substantially lower than the customary price?”

Source: Act No. 182/2006 Coll., on insolvency and the methods for resolving it (Insolvency Act); Czech Supreme Court judgment 29 Cdo 307/2014 of 29 February 2016

 

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