Upon declaration of bankruptcy, set-offs are possible only to a very limited extent.
Secured creditors, property and employees Secured creditors do not have to, but are well advised to, register their claims if they also wish to have any say in insolvency proceedings. The new act removed the former rules stipulating that such creditors were to receive only 70% of the proceeds of sale of the reg- istered property of the estate, and they will now receive at least 91%. Nevertheless, they should not rely too much on the opinion that the trustee will discover their rights, in particular if the debtor, in the usually chaotic time before the insolvency, manipu- lated its bookkeeping and contractual documenta- tion. Liquidation proceeds are used first for settlement
of claims against the property of the estate as well as the costs of administration of the property of the estate. The state does not have any priority rights; however, the state is usually quite fast in establishing pledges on the property of the indebted estate before the insolvency begins and thus obtains the advantage of having the position of a secured creditor. For the insolvency trustee, selling the property of
the estate as an enterprise (meaning including employees and their contractual relations, assets, contracts) is the preferred method for the sale of property of the estate as he will only sign one con- tract and save considerable additional work and expense. Persons connected with the debtor must not obtain any of these assets from the estate within three years from the end of the bankruptcy proceedings. Any sale of an enterprise will require approval of
both the court and the creditors’ committee, often mere formalities and much influenced by the trustee. Any such enterprise will be debt-free and free of
encumbrances. Another great advantage compared to a standard purchase is that it is possible to acquire property from a non-owner; on the other hand, the trustee will not give any representations and war- ranties in the contract. Employees’ salary claims are guaranteed by the
state for three months. In addition, employees have the right to hand in notice with immediate effect, should their wages be more than 15 days late, giving them a claim for severance payment of up to three months’ salary.
Effects of insolvency of a foreign shareholder The Czech Commercial Code has quite undesirable consequences in the event of the insolvency of a shareholder in a limited liability company (s.r.o.), the most common legal entity in business. Upon decla- ration of insolvency on the shareholder, the partici-
026 IFLR|RESTRUCTURING & INSOLVENCY
have been modernised but the people applying it remain the same
“ ”
The law may
pation in a Czech limited liability company ends (unless it is the only shareholder) and the trustee of the shareholder only has a claim for the settlement payment. Such payment might or might not corre- spond to the actual value of the share, as a rule being calculated according to the equity in the company. The payment is due within six months after the dec- laration of insolvency. This consequence is worsened by the prohibition
of the so-called chaining in Czech limited liability companies, meaning that a Czech s.r.o must not have as a shareholder another (even if foreign) limited lia- bility company. This often leads to a 99%:1% con- stellation. If the majority shareholder falls into bank- ruptcy, the s.r.o. is usually unable to satisfy the claim for settlement, which leads to a secondary insolvency of the Czech company. It is highly recommended to keep this effect in
mind in the case of financial difficulties of a share- holder, even if it is domiciled in another country. Very often, the foreign parent company is also in
insolvency. The courts have already heard the first cases of cross-border insolvencies where an EU-par- ent company is a party to insolvency proceedings under its national law and such proceedings also cover Czech subsidiaries under the EU regulation 1346/2000.
Be prepared Foreign creditors must be aware of several significant differences to other international insolvency laws and practices: the term for registration of claims is very short and final. Exaggerated claims must be avoided. Proceedings require much stronger creditors’ involvement than in other jurisdictions. They are fast but not always as transparent as the idea of the online insolvency register seems to convey. The practice of insolvency proceedings in the
Czech Republic is the greatest difference experienced by many foreigners. The law may have been mod- ernised but the people applying it remain the same, even if the administrators now have to pass a compe- tence test. Quite often, non-Czech creditors will find out that other creditors, frontmen of the debtor, the trustee and the court, seem to have made a deal already, or that they simply failed to react in time and their receivable is simply lost. Good preparation, local presence and a fighting
spirit is still advisable, particularly if someone intends to buy property from an estate. Nevertheless, the first five years of the new Insolvency Act have brought more improvement to the Czech business environ- ment than the prior 17 years of post-communist insolvency law, in particular by speeding up proceed- ings to an average duration of something between one and two years.
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