Czech Republic What you need to know
Arthur Braun and David Vosol of bpv Braun Partners provide a comprehensive practical guide to insolvency in the Czech Republic
F
oreign investors may be affected by Czech insolvency laws in many different ways: as secured creditors, unsecured creditors, business partners, shareholders or, last but not least, potential buyers of real estate. They must be aware of the fact that Czech insol-
vency laws were completely re-codified in a new Insolvency Code (Act no. 182/2006 Coll.) which has been in effect since 2008. In its short existence, the Code has already had to cope with the financial crisis as a significant stress test of the new legislation. First experiences with the law have led to several amendments.
Bankruptcy and its resolution Bankruptcy as defined by the Insolvency Code may have two key forms: insolvency and over- indebtedness (which applies only to legal entities or individual entrepreneurs). The test for insolvency is: (i) the existence of multiple creditors; (ii) outstanding financial liabilities more than 30 days overdue; and (iii) the inability to satisfy such obligations, which may be shown by • the debtor’s suspension of a substantial portion of its payment obligations, • outstanding financial liabilities which are more than three months overdue, or • the satisfaction of any outstanding financial receivables against the debtor being unable to be made simply by the enforcement of a decision or execution against property.
The over-indebtedness test requires the existence of multiple creditors and looks at whether
the sum of all liabilities exceeds the value of the debtor’s assets. For this test, the continuing operation of business is taken into account if there is a justified presumption that the debtor will be able to continue operation of his business and so trade through his financial difficul- ties.
A third cause of bankruptcy – impending bankruptcy – may only be applied for by the
debtor. Such cause would be given if it can reasonably be assumed that the debtor will not be able to duly and timely fulfil a substantial portion of the debtor’s financial liabilities. There are several methods of resolution. The first is reorganisation, which corresponds to
US Chapter 11 protection. Here, an early start to bankruptcy proceedings in the case of impending bankruptcy has particular importance. The debtor, and creditors who wish to avoid liquidation, may apply for reorganisation, usually combined with an application for a protection period (moratorium). If they get court approval, they have 120 days to prepare a reorganisation plan, which again has to be submitted to the court for approval. The debtor must either have more than 100 employees, a turnover of CZK100 million ($5.3 million) or obtain approval from the majority of both its secured and unsecured creditors. The number of successful reorganisations is still quite small: very often they turn into
insolvent liquidation, which is still by far the prevailing method and basically provides for the sale of the debtor’s assets.
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The number of successful reorganisations is still quite small
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