In these trying times for entrepreneurs, the government has decided to ease the conditions under which debtors may attain temporary protection from creditors and to make moratoria accessible on a broader basis.
Czech Parliament approved in a fast-track hearing a bill referred to as lex COVID, which addresses the areas of justice, insolvency, and foreclosure. Among other things, this law inserts a concept into the Insolvency Act which will be available to businesses hit by the extreme measures taken in the fight against the coronavirus epidemic. Under the sunset clause, an extraordinary deferment of insolvency measures can be invoked between the date on which this law comes into force and 31 August 2020.
The purpose of the extraordinary moratorium is to make an effective protection from creditors as accessible as possible, as fast as possible. Because of this, the information which debtors must include in their petition for the declaration of an extraordinary moratorium has been reduced to the absolute minimum. More specifically, the petition need not be furnished with the most recent financial statements of the debtor; lists of its assets, liabilities, and staff; or creditors’ consent – whereas all this material would have to be included as mandatory annexes to the petition for a standard moratorium.
By contrast, the petition for an extraordinary moratorium merely needs to state the number of employees as at the date of filing, and the turnover figure for the preceding financial year. This allows businesses to respond quickly and flexibly to the current situation. To make the filing even more straightforward, the Ministry of Justice has issued a template for the petition.
Those who wish to make use of the extraordinary memorandum cannot file for insolvency: the law does not anticipate that the petition for an extraordinary moratorium will be filed within the context of insolvency proceedings that were initiated based upon a debtor’s petition for insolvency. Nor will the extraordinary moratorium be available to businesses which as at 12 March 2020 were insolvent and which recently rendered performances outside the customary course of business to persons close to them, including shareholders.
Entrepreneurs need not submit documentation for, or otherwise evidence in any way, any of the above information. For the extraordinary moratorium to be declared in their favor, it is enough that they make the above-mentioned statements and represent that they meet the conditions for the declaration of the said moratorium. Because of this, one cannot rule out that businesses which are otherwise not eligible might abuse the extraordinary moratorium. However, if it were later found that their representations were false, the insolvency court may lift the extraordinary moratorium.
As for the effects of the extraordinary moratorium, its declaration precludes the creation and enforcement of security over the affected business’s assets as well as foreclosure and debt enforcement. Also, the time periods for exercising creditors’ rights are stayed during the extraordinary moratorium. On the other hand, the extraordinary moratorium represents no obstacle to the filing of claims in court, nor to the continuation of pending litigation.
Further, entrepreneurs may preferentially discharge obligations which are directly related to the preservation of their business as a going concern and which came into existence after the extraordinary moratorium was declared. A related provision stipulates a significantly broader ban on the termination of certain contracts by the undertaking’s business partners, compared to the standard moratorium.
Another advantage of the extraordinary moratorium lies in the fact that it will in its entirety be struck from the record in the insolvency register once the set time period has lapsed (or else upon request by the entrepreneur for whose benefits it was declared).
The extraordinary moratorium may be declared for a period of up to three months, and can be extended by up to another three months upon request. The request for an extension must be accompanied by a complete list of liabilities and, more importantly, a declaration signed by a majority of the creditors (in terms of the size of their claims) to the effect that they agree with the extension of the extraordinary moratorium.
In closing, we ought to mention that the extraordinary moratorium does not prevent businesses from availing themselves of the state aid designed to mitigate the impact of the coronavirus epidemic.
Wording of the bill that was approved by the Senate of Czech Parliament on 16 April 2020