A more stringent regime for filing insolvency petitions; first impressions as to the impact of the changed rules

In mid-2017, a hotly debated amendment to the Insolvency Act came into force, with the declared goal to eliminate the problem of what is known as frivolous insolvency petitions. Among other tools, the lawmaker chose to change the way in which advance payments are made towards the expenses associated with the insolvency procedure.

Before the Insolvency Act was amended, the insolvency courts had the option to require, in their decision in which they declared the debtor insolvent, that the person who filed the petition for insolvency post bond (within a set period) so as to ensure that the costs of the insolvency procedure would be covered, if it appeared that such bond may be necessary and if there was no other way to secure the needed funds. The courts proceeded correspondingly in cases in which the insolvency debtor was penniless. In other words, the court had some leeway in deciding whether or not it wished the petitioner for insolvency to provide security for the costs of proceedings (irrespective of whether the petitioner was the debtor itself or any of its creditors).

As of July of this year, the court may in this sense act with discretion only in the case of insolvency petitions brought by the debtors themselves. By contrast, in the case of creditor-side insolvency petitions, the petitioner must post bond for the costs of proceedings in the amount of CZK 50,000 (if the petition is aimed against a legal entity operating a business; in the case of non-business legal entities or natural persons, the bond is CZK 10,000). In other words, a creditor who files an insolvency petition must in all cases make an advance payment towards the costs of proceedings, which is due and payable as of the moment in which the insolvency petition is filed.

If the creditor who filed the insolvency petition fails to make due and timely payment of this sum securing the costs of proceedings, the insolvency petition will be dismissed as being manifestly without substance. In the decision in which the insolvency court dismisses the petition as being manifestly without substance, the court may impose a fine on the petitioner for having filed a frivolous petition, in an amount of up to CZK 500,000.

Creditors who file an insolvency petition must prove that they have a due receivable vis-a-vis the debtor, which they must register along with their petition for the declaration of insolvency. If the debtor is a legal entity, then the insolvency petitioner (provided they keep accounts, or keep tax records under a special law) must prove the existence of the receivable by way of an acknowledgement of debt (bearing the debtor’s certified signature), or by way of an enforceable title, or by way of a notarial record with direct enforcement clause, or a bailiff’s protocol furnished with the debtor’s consent with foreclosure, or else by way of a confirmation by a chartered accountant / auditor (under a special law – https://www.zakonyprolidi.cz/cs/2006-182 – f6012852), by a court-appointed expert, or by a tax advisor to the effect that the petitioner indeed accounts for the receivable in its books.

Due to another change regarding the filing of insolvency petitions against natural persons, insolvency petitions which are coupled with a request for approval of debt relief must newly be filed by an attorney-at-law, a notary public, a court bailiff, an insolvency trustee, or (what is known as) an accredited person.

Can the amendment to the Insolvency Act be said to have triggered measurable consequences? According to a press release by the company Creditreform, the number of insolvency petitions, having risen in June, has dropped so massively that the July figures for the total number of insolvency petitions has gone down to 26% of the average half-year figure in 2017. A comparison to the first nine months of 2016 reveals that the total number of insolvency petitions has dropped by 19.87%. In the case of business corporations, the decrease is 23.06 %; for natural persons, it is 19.58%.

Act No. 182/2006 Coll., on insolvency and on the methods for resolving it (Insolvency Act)
Press release by Creditreform – Insolvency trends in the Czech Republic in 3Q 2017


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