Are we about to witness yet another amendment to the Insolvency Act?

Talks have been held on the European level for quite some time over the proposal for an EU directive which, if passed, would necessitate another – rather far-reaching – amendment to the domestic Insolvency Act.

The said proposal lays out a framework for preventive restructuring, debt relief for entrepreneurs, and measures that overall increase the efficiency of restructuring, insolvency, and discharge procedures.

From the vantage point of Czech law, preventive restructuring is a wholly new concept. The proposed directive merely draws a framework which member states are invited to then fill with life, in the form of stipulating one or several measures for preventive restructuring, designed to help debtors whose inability to pay has become likely, and thus to protect viable businesses from having to enter insolvency proceedings. In other words, debtors should be allowed to resolve their financial issues before they become actually insolvent or over-indebted (these being the prerequisites for initiating insolvency proceedings).

In order to facilitate effective negotiations with creditors over a restructuring plan, the proposed directive envisions that debtors should be allowed to ask for a temporary stay of individual enforcement actions of up to twelve months.

With a view to the current amendment to the Insolvency Act, and the manifest unwillingness of Czech legislators to compromise on the five-year period for debt relief for natural persons, that part of the proposed directive which deals with the “second chance” is of fundamental significance.

By second chance, the authors of the proposal mean an approach which, according to the explanatory memorandum for the proposal, seeks to ensure that “honest overindebted entrepreneurs have a second chance after a full discharge of debt after a reasonable period of time…”. The maximum duration of this ‘reasonable period of time’ which is to be followed by comprehensive debt relief has been set at three years. The option to make debt relief conditional upon at least partial payment of the debt has been preserved, though it is now coupled with an obligation to take into account the entrepreneur’s individual situation.

It is with respect to this period for full discharge of debt that the proposal clashes particularly hard with the institution of debt discharge in its current manifestation in the Czech Republic. Even though the proposed measure explicitly concerns only entrepreneurs, the proposal does allow for a broader application of second-chance measures also to private individuals outside the commercial sphere.

It will be interesting to see whether, if and when such Directive becomes implemented, a two-tier regime of debt discharge comes into existence, and how the lawmaker will then justify the less accommodating approach towards private individuals who are not entrepreneurs.



Proposal for a Directive of the European Parliament and of the Council on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU

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