Change of rules concerning the voting of creditors within insolvency proceedings

Yet another amendment to the Insolvency Act, yet another change to the rules by which creditors vote in their own matters and in matters concerning group members and entities close to them. As a consequence, Czech law again deviates from the European trend towards maximum support for solutions which rescue insolvent businesses through restructuring.

Mid-2017 saw the coming into force of a large-scale amendment to the Insolvency Act which among other things has brought another change to the rules by which creditors cast their votes in insolvency proceedings (in particular as regards voting on their own matters, or those of persons close to them and of group members).

This represents the second major turn of tide with respect to the matter of creditors’ votes. The Insolvency Act in its original wording had stipulated that, with the exception of the votes of the creditors’ committee, no creditor may vote if their own matters are concerned, or those of a person close to them, or of a person with whom they form a group of companies. In other words, the original concept generally prohibited creditors from voting in their own affairs.

The first major change to this concept came in 2014, in the form of what is known as the “revision amendment”, preserving the general prohibition of creditors voting on their own matters but newly allowing them to vote on matters of someone with whom they form a group or who is close to them. This paved the way for group entities contributing to the reorganization of the debtor. The new rule also followed the European trend towards maximum support for solutions which rescue the insolvent business through restructuring. The option was widely used in practice by intra-group creditors and helped save a number of businesses.

Three years later, and we are witnessing another about-face. The ban on voting on matters concerning group members or persons close to the debtor has again been written into law. The only exception concerns votes on a creditor-initiated reorganization plan – which is an exceedingly rarely used tool in practice.

A related change brought about by the amendment is supposed to increase creditor transparency. A defined group of creditors newly must provide evidence, along with their request for registration of their receivable (or when assigning their receivable), their ultimate beneficiary within the meaning of the Czech Anti-Money Laundering Act.

The lawmaker argues that the change was necessary because group creditors did not promote their own interest in creditors’ meetings, but the interest of the debtor in its own salvation at the price of the lowest possible creditor satisfaction – an argument which entirely ignores the fact that preserving the existence of the debtor and thus the opportunity to do business with it may be of greater importance to creditors than the degree to which they will be able to satisfy their receivable / recover their claim.

Act No. 182/2006 Coll., on insolvency and the options for resolving it (Insolvency Act)
Act No. 253/2008 Coll., on measures against the legitimization of proceeds from crime and the financing of terrorism

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