Changes to the Insolvency Act as of 1 July 2017

Czech Republic: Yet another “Major” Amendment to Insolvency Law

The amendment bill (Act No. 64/2017) to the Insolvency Act, rather grandly referred to as “major amendment”, comes into force on 1 July 2017. The various changes bring clarification as to the international and local jurisdiction of insolvency courts, a legal assumption of solvency, new rules concerning unsubstantiated (i.e., frivolous) insolvency petitions, and new rules for debt relief procedures. The latter changes concerning debt relief (i.e., the insolvency of consumers – private individuals) are in and by themselves very far-reaching. We have decided to present them in greater detail in a second article, which will appear in the next issue of our bnt journal.

Note that the changes brought about by the amendment concern even those procedures for which the insolvency petition was filed prior to 1 July 2017 – in other words, after 1 July 2017 all (new or pending) insolvency procedures must conducted according to the new rules. Having said that, all legal transactions carried out prior to the effective date of the amendment remain valid and effective – in particular the effectiveness of insolvency petitions and any and all resolutions by insolvency courts and insolvency trustees which were handed down before 1 July 2017.

Clarification regarding the jurisdiction of insolvency courts

The amendment provides a new framework for international jurisdiction (Sec. 427 Insolvency Act), newly referring to the directly applicable (as of mid-2017) new Regulation 2015/848/EU, which governs proper international jurisdiction in insolvency matters. Thus, the decision on which court has jurisdiction over a matter with an international element lies with the Czech insolvency court, which shall hand down a resolution wherever such an international element is present. As to the national level, the rules on territorial jurisdiction have also changed – venue is now derived from the seat of the debtor which was entered in the Commercial Register six months before the insolvency petition was filed (Sec. 7 (1) Insolvency Act), an arrangement designed to prevent “forum shopping”. However, the effects of this six-month rule will presumably be limited to the Czech Republic, seeing as it runs counter to the rules of Regulation 2015/848/EU, which provides for a three-month rule for relocations within three months prior to initiation of the insolvency procedure (Article 3 (1) Sentence Two of the Regulation).

New solvency assumption

For businesses which keep proper accounts, an assumption is being introduced (in the new Sec. 3 (3) Insolvency Act) under which the business is assumed to be actually solvent as long as the difference between debt and liquid funds is less than 10% of the due liabilities. In other words, where this condition is met, an insolvency petition would be dismissed. We may doubt whether the highly convoluted rule will pass the practice test. In any case, if a business can demonstrate that the above condition is met, they will be considered solvent.

More stringent rules regarding unsubstantiated insolvency petitions

Where there exist “good grounds to doubt the legitimacy” of an insolvency petition submitted by creditors, the insolvency court is now expected to conduct a preliminary review – instead of publishing the insolvency petition within two hours in the publicly accessible insolvency register, publication (which can have devastating consequences for the entity considered the insolvency debtor) will be held off until the end of the second day. If the review reveals no manifest lack of cause, the petition will be published on the morning of the third day. This is meant to curb the deplorable custom of creditors exploiting the transparent character of insolvency proceedings in order to enforce the settlement of their receivables (instead of bringing a proper claim in court). It appears that the rules which were introduced several years ago to put an end to such frivolous insolvency petitions failed to attain the intended effect.

New rules for the registration of claims

As of 1 July 2017, new evidentiary duties must be observed when registering receivables in insolvency proceedings – secured claims in particular must be proven with greater specificity (and enhanced documentation).

Far-reaching changes affecting the debt relief procedure

We will take a look at the changes to the debt relief procedure introduced by the amendment bill in the next bnt journal; in the future, only attorneys-at-law and licensed other advisors may prepare and submit petitions for debt relief, whereas the fee which attorneys may claim for drafting such petitions is limited by law to CZK 4,000 (and to CZK 6,000 by petitions jointly filed by spouses). This interference with the contractual freedom of the legal profession is almost reminiscent of a planned economy.

All changes introduced by the amendment bill to the Insolvency Act and other laws come into force and effect as of mid-year this year, i.e., as of 1 July 2017.

Source: Insolvency Act (Act No. 182/2006 Coll.), as amended by Act No. 64/2017 Coll.



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