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1. Insolvency and restructuring procedures
1.1 – What are the main insolvency and restructuring procedures applicable to companies?
Insolvency proceedings are initiated against a company if it is bankrupt (in Czech: v úpadku) or threatened with bankruptcy (in Czech: v hrozícím úpadku). Insolvency means that the company has (i) multiple creditors, (ii) monetary obligations that are more than 30 days past due, and (iii) is unable to meet those monetary obligations. A company is also bankrupt if it is over-indebted, i.e. the company has (i) multiple creditors and (ii) the aggregate of their liabilities exceeds the value of its assets.
As for companies, i.e. legal entities, the main insolvency procedures are:
- Bankruptcy (in Czech: Konkurs) - This is a liquidation-oriented procedure used when the debtor's assets are liquidated to satisfy creditors' claims. In a bankruptcy proceeding, an insolvency administrator manages the company's assets, which are then sold, and the proceeds are distributed among creditors according to the law
- Reorganization - Applicable primarily to larger companies, reorganization allows for the continuation of business operations under a court-approved restructuring plan. This procedure aims to reorganize the company's debt and stabilize its financial position while keeping the business operational. Reorganization is suitable if there’s a realistic plan to satisfy creditors better than through liquidation.
Another possibility is debt relief (in Czech: oddlužení), which is mainly used to resolve the bankruptcy of natural persons. Debt relief consists in the fulfilment of a repayment plan, which may be combined with the sale of the debtor's assets.
Finally, there is the possibility of a preventive restructuring which is a process designed to help financially distressed businesses restructure their debts before formal insolvency proceeding is necessary. This procedure allows companies to negotiate a restructuring plan with creditors, facilitated by a court if needed, to stabilize their financial situation and avoid bankruptcy. The focus is on early intervention to enable recovery and continuation of business operations, providing legal protection against creditor actions during the restructuring process.
1.2 – Can a company obtain a moratorium whilst it prepares a restructuring plan? If so, what is the effect of the moratorium?
Yes, a company can obtain a moratorium under Czech law. A moratorium can be requested within 7 days of filing an insolvency petition (or within 15 days if the petition was filed by a creditor). The insolvency court will declare a moratorium if the legally stipulated conditions are met.
The moratorium lasts for the period specified in the moratorium application, but no longer than 3 months. Under certain conditions, it is also possible to extend the moratorium by up to an additional 30 days.
This period provides the company temporary protection from creditors, allowing time to stabilize operations and prepare a restructuring plan without the immediate pressure of enforcement actions.
1.3 – How long will it generally take for a creditor to achieve the liquidation of an insolvent company, assuming an undisputed claim and no opposition from the company?
The liquidation of an insolvent company through bankruptcy proceedings generally takes several months to initiate, even with an undisputed claim and no opposition from the company. Once a creditor files an insolvency petition, the court typically assesses the petition and, if all conditions are met, initiates insolvency proceedings within a few weeks to a few months, depending on the court’s schedule and workload.
After declaring bankruptcy, the actual liquidation process, including the appointment of an insolvency administrator, asset evaluation, and its sale, can take 1 to 2 years or longer, depending on the complexity of the company’s assets and liabilities. While an undisputed claim and lack of opposition streamline the initial phases, the full liquidation process often remains lengthy due to procedural requirements, including creditor meetings, asset realization, and distribution of proceeds.
1.4 – Does your jurisdiction make use of a distressed sale process by which the business/assets of the company can be sold?
The insolvency proceeding – bankruptcy itself is a distressed sale process that leads to the liquidation of the company either by sale of the company as a going concern (based on one contract between purchaser and insolvency administrator) or by gradual sale of company’s individual assets.
2. Insolvency office-holders and courts
2.1 – Who can act as an insolvency office-holder?
Insolvency office-holder (insolvency administrator) can only be a professionally qualified person with relevant experience, equipment, and the necessary authorization. The role of an insolvency administrator may be filled by an individual or a general partnership, provided they have obtained the license to perform insolvency administration. In the case of a partnership, the function is carried out by a designated partner who holds their own individual license.
An insolvency administrator must meet strict eligibility criteria, including completing a master’s degree program, passing an insolvency administration exams, obtaining insurance, and having at least three years of relevant professional experience in fields such as law, economics, tax advisory, accounting, auditing, or business management. Additionally, the insolvency administrator must possess the personnel and material resources necessary to effectively perform insolvency administration duties.
2.2 – Who decides the identity of the insolvency office-holder, and what restrictions apply?
The identity of the insolvency office-holder (insolvency administrator) is primarily determined by the insolvency court. When insolvency proceedings are initiated, the court appoints a licensed insolvency administrator from the official list of eligible insolvency administrators.
Several restrictions apply to this appointment:
- Licensing and Qualifications: The insolvency administrator must hold a valid license, meet all statutory qualifications, and be free of conflicts of interest.
- Specialization: In complex cases, such as those involving large companies or specific industries, the insolvency court may appoint a insolvency administrator with relevant expertise.
- Creditors Influence: Creditors may have some influence over the insolvency administrator’s appointment. In certain cases, especially in reorganizations, the creditors’ committee may propose a change of insolvency administrator if it’s in the best interest of the proceedings, subject to court approval.
- Conflict of Interest: A insolvency administrator cannot be appointed if there is a conflict of interest, such as prior connections with the debtor or creditors, ensuring impartiality in the administration of the insolvency estate.
2.3 – Are insolvency cases heard by specialist judges, or in the general commercial courts?
Insolvency cases are handled by specialized divisions within general regional courts that have jurisdiction over commercial matters. While these courts do not have judges exclusively designated for insolvency cases, certain judges within the commercial divisions are specialized in insolvency law and primarily handle insolvency and restructuring cases.
3. Position of directors
3.1 – To what extent do the directors of the company remain in control of its affairs during any of the procedures described above?
The scope of activities that a statutory body may perform in insolvency proceedings differs in bankruptcy and reorganisation as follows:
- Bankruptcy (in Czech: Konkurs) - In bankruptcy, the statutory body loses most of its powers, as the insolvency administrator assumes full control over the proceedings. The role of the statutory body is limited to cooperating with the insolvency administrator and providing all relevant information. Therefore, in bankruptcy, the statutory body has no authority to influence the company’s business decisions or its asset management.
- Reorganization – In reorganization, which allows the debtor to continue business operations under the supervision of the insolvency court, insolvency administrator and creditors, the statutory body of the company generally retains more powers than in bankruptcy. Reorganization is based on an approved reorganization plan, which defines how creditors will be satisfied and how the company will be managed going forward. The statutory body may, under certain conditions, continue to manage the company, but its decisions are subject to the approved reorganization plan and supervisory mechanisms, which may include obtaining the consent of creditors or the insolvency administrator for key decisions. In this case, the insolvency administrator performs more of a supervisory role and intervenes primarily when actions are not in line with the reorganization plan.
3.2 – Are there circumstances in which directors are obliged to file for insolvency proceedings? If so, when do those circumstances arise?
The statutory body of the company is obliged to file an insolvency petition as soon as it becomes aware that the company is bankrupt (see Section 1.1). They must do so without undue delay - the law does not define the term "without undue delay", but in practice this will be a period of several weeks/months. At the latest, the statutory body should become aware of the bankruptcy of the company when the financial statements for the calendar year are being prepared, when it must be apparent that the company is in financial difficulties.
3.3 – What are the risks facing the directors of an insolvent company?
If the company, respectively the statutory body, fails to file an insolvency petition or files it late, the members of the statutory body are liable to creditors for damage or other harm caused by the breach of this obligation. The amount of the damage consists of the difference between the amount of the claim registered by the creditor for satisfaction in the insolvency proceedings and the amount received by the creditor in the insolvency proceedings in satisfaction of that claim. Members of the statutory body may be exonerated from liability only if they prove that their conduct had no influence on the amount of the claim submitted by the creditor in the insolvency proceedings or that they failed to fulfil this obligation due to facts which occurred independently of their will and which they could not have avoided even if they had made all the efforts that could be fairly required of them.
Further, if members of the statutory body contribute to the bankruptcy of the company by violating their duties, the court may, upon motion of the insolvency administrator, decide on:
- the obligation of that member to give to the insolvency estate the benefit obtained from the contract on performance of the office (or any other benefit), up to a period of 2 years before the insolvency proceedings were initiated, if the proceedings were not initiated by the debtor; or
- the obligation to give to the insolvency estate a contribution up to the amount of the difference between the aggregate of debts and the value of the assets of the company.
Members of the statutory bodies should also be aware of criminal liability that may arise from commission of insolvency criminal offences. These include, for example, interference in insolvency proceedings, prejudice to a creditor, favouring a creditor, causing bankruptcy or breach of the duty to make a true declaration of assets.
4. Position of creditors
4.1 – What are the main forms of security over movable and immovable property?
Security over movable and immovable property includes pledges, retention rights, security transfers of rights, and bank guarantee. A pledge, such as a mortgage, grants creditors a claim over a debtor's property, allowing satisfaction from the sale proceeds if the debtor defaults. Retention rights enable a creditor to legally retain possession of a debtor’s asset until the debt is fulfilled. In a security transfer of rights, the debtor temporarily transfers ownership of an asset to the creditor, who only becomes the permanent owner if the debtor fails to fulfil their obligations.
4.2 – How does the opening of insolvency proceedings affect the rights of secured creditors?
Once proceedings commence, secured creditors' rights to enforce their security independently are generally suspended. Instead, secured creditors must register their claims within the insolvency process to seek satisfaction.
The secured creditor has an important position in relation to the administration of the secured assets and their subsequent monetisation, especially in bankruptcy proceedings. The secured creditor is entitled to impose binding instructions on the insolvency administrator or other person with powers of disposal as to the manner in which the administration of the assets securing its claim is to be carried out. At the same time, the creditor can influence the manner in which the secured asset is realised, since it is the person who gives the insolvency administrator the instructions for realisation. The insolvency administrator (or another person with a right of disposal) is bound by the instructions given and may refuse them only if they are not directed towards proper administration of insolvency estate.
The secured creditors are entitled to priority satisfaction of their claims from the proceeds of the realisation of the secured asset. The secured creditors also have the right to have their claims satisfied anytime during the insolvency proceedings.
4.3 – Where a debt owed to a secured creditor exceeds the value of the security, is the secured creditor entitled to claim for the shortfall?
If a debt owed to a secured creditor exceeds the value of the secured asset, the secured creditor is entitled to claim the shortfall as an unsecured claim. While secured creditors have priority in being satisfied from the proceeds of the secured asset, any remaining debt amount beyond the security’s value is treated as an unsecured claim, ranking it lower in priority in the insolvency distribution hierarchy. This unsecured portion is thus subject to the same rules and potential reductions as other unsecured claims within the insolvency proceedings.
4.4 – Which classes of creditor are given preferential status? Are any classes subordinated?
Bankruptcy:
In the course of insolvency proceedings, there are classes of claims that can be satisfied any time before, or on the basis of the distribution decision and outside the distribution decision.
At any time during the insolvency proceedings prior to the distribution schedule, secured creditors are satisfied from the proceeds of the realisation of the secured asset, and further claims against the insolvency estate (in Czech: pohledávky za majetkovou podstatou) and claims equal to them (in Czech: pohledávky jim postavené na roveň) can be satisfied. If the proceeds of the insolvency estate are not sufficient to cover these claims in full, the insolvency administrator's remuneration and expenses are satisfied first, followed by the claims of creditors arising during the moratorium, claims arising from loan financing, pro rata the costs of administering and maintaining the insolvency estate, together with employment claims of the debtor's employees arising after the bankruptcy, claims of creditors for maintenance, and then personal injury claims.
If there are any funds left after the monetisation of all the assets listed in the inventory and after the deduction (or settlement) of the claims referred to above, the insolvency court, upon the insolvency administrator's proposal, will decide on the distribution of these funds after the final report has been approved. On the basis of this decision, the debtor's unsecured claims are satisfied in proportion to their amount. Reorganization: In the reorganisation, the creditors are divided into several groups/classes according to the reorganisation plan for the purpose of voting and satisfaction of claims.
The individual types of claims are satisfied in accordance with the adopted and approved reorganisation plan, whereby claims against the insolvency estate and claims equal to them also have priority.
4.5 – Is there a date by which creditors must make claims in the insolvency proceedings? If so, what are the consequences of failing to claim by that date?
Yes, creditors have a deadline for registering their claims. Creditors can register their claims from the date the insolvency proceeding is initiated. Once the debtor is declared bankrupt by the court, a deadline for the final registration of claims is set in the court's decision, which is usually 2 months. Claims submitted later are not considered by the insolvency court and are not satisfied in the insolvency proceedings.
The application for registration of a claim shall be submitted using a form provided for that purpose and shall comply with the statutory requirements.
4.6 – Are contractual rights of set-off and/or netting effective in insolvency?
In general, set-off of mutual receivables of the creditor and the debtor (both unilateral and consensual) is permitted in insolvency proceedings, but it is necessary to distinguish whether the set-off is to take place before the debtor is declared bankrupt or after it.
In the first case, i.e. before the debtor is declared bankrupt, the right of set-off is essentially unlimited except when the debtor is in moratorium (see Section 1.2). In the second case, set-off is only allowed if the legal conditions for such set-off have been fulfilled before the court decision on the method of bankruptcy resolution (in Czech: rozhodnutí o způsobu řešení úpadku). In both cases, however, it is possible for the court, by way of an interim measure, either to allow set-off (where it is generally not possible) or to prohibit it (where it would otherwise be possible).
On the other hand, a set-off is not admissible if the creditor (i) did not become a registered creditor with respect to receivables to be set-off, (ii) acquired the receivable to be set-off by an ineffective legal act, (iii) was aware of the debtor's bankruptcy at the time of acquisition of the set-off receivable, or (iv) has not yet paid the debtor's outstanding receivable to the extent that it exceeds the creditor's receivable to be set-off.
There are special rules in the case of a reorganisation, in particular, that from the moment of publication of the motion for reorganisation in the insolvency register, no set-off of the debtor's and creditor's receivables is allowed (unless the court determines otherwise). However, the reorganisation plan may allow set-off (and, for example, subject to the consent of the creditors' committee, etc.), i.e. from that moment on, set-off is possible provided that the above conditions are met.
4.7 – Are contract terms permitting termination of a contract by reason of insolvency (“ipso facto clauses”) effective?
It is possible to terminate the contract on the basis of an insolvency clause until the decision on the declaration of the debtor bankrupt is made. In such a case, the creditor must then file its claim arising from the termination of the contract in the insolvency proceedings.
The insolvency administrator then has the right to choose whether or not to perform the contract after the bankruptcy decision. There is a period of 30 days to make the decision. If the contract is terminated by the insolvency administrator's refusal to perform, the creditor may have a claim for the performance provided to the debtor. Damages incurred by termination of the contract must be claimed in the insolvency proceedings within a period of 30 days starting from the date on which the creditor receives the insolvency administrator's decision to refuse performance under the contract. Upon the insolvency administrator's declaration of the debtor's intention to perform the contract, the creditor's claim becomes a claim against the insolvency estate.
4.8 – Are retention of title clauses enforceable and (if applicable) what are the main requirements for enforceability?
In insolvency proceedings, the general regulation of retention of title is modified depending on whether the debtor is the seller or the buyer.
If the debtor is the seller and retention of title was agreed before the debtor was declared bankrupt, with the object of purchase delivered but not transferred in ownership to the buyer, the buyer may either return the item to the insolvency estate or keep it and pay the purchase price to the insolvency administrator. The choice lies solely with the buyer.
If the debtor is the buyer and took possession of the item before the debtor was declared bankrupt without fully paying the purchase price, the item belongs to the insolvency estate if the insolvency administrator pays the remaining price promptly upon the seller’s request. If the administrator fails to do so, the seller may demand the return of the item under the retention of title clause. In order for a retention of title to be effective against third parties, it must be executed in the form of a notarial deed or in writing with the signatures of the parties being officially verified. If a retention of title is agreed in respect of an item registered in a public register, it shall be effective against third parties only if it has been recorded in that register.
Should insolvency proceedings begin with respect to the buyer and lead to a bankruptcy declaration, the seller cannot reclaim the item from the debtor (buyer) if the insolvency administrator fulfils the purchase agreement obligations promptly upon the seller’s request.
4.9 – Are foreign creditors treated equally to domestic creditors?
Foreign creditors are treated equally to domestic creditors. Both foreign and domestic creditors have the same rights to submit claims and participate in insolvency proceedings. Czech insolvency law upholds the principle of equal treatment and non-discrimination, ensuring that foreign creditors have access to the same procedures, priority, and protections as domestic creditors. This equal treatment applies to all aspects of the insolvency process, including claim registration, voting rights, and distribution of assets, thereby aligning with EU regulations and international standards for cross-border insolvency.
5. Setting aside transactions
5.1 – What are the main transaction avoidance provisions applicable to the proceedings referred to above?
The insolvency administrator can challenge:
- Transactions made by the debtor with the intent to harm creditors if they occurred within 5 years before the initiation of insolvency proceedings;
- Transactions that provide certain creditors with a better position than they would have in insolvency proceedings if conducted within 1 year prior to insolvency or within 3 years for related parties;
- Transactions where the debtor disposed of assets significantly below market value if conducted within 1 year prior to insolvency or within 3 years for related parties.
5.2 – Who is entitled to challenge transactions under these provisions?
Only the insolvency administrator.
6. Cross-border insolvency
6.1 – Do your courts recognize insolvency proceedings commenced in the courts of other jurisdictions?
Czech courts generally recognize insolvency proceedings commenced in the courts of other jurisdictions, particularly within the European Union. This recognition is primarily based on the EU Insolvency Regulation, which provides for mutual recognition and cooperation among EU member states.
For insolvency proceedings initiated outside the EU, recognition is still possible, though it may require specific court approval to ensure compliance with Czech legal principles. This approach facilitates cross-border insolvency proceedings, allowing foreign insolvency decisions to be effective in the Czech Republic when they meet applicable legal standards.
6.2 – If so, what assistance can your courts provide, following recognition?
Following recognition of foreign insolvency proceedings, Czech courts can provide various forms of assistance to support those proceedings. This includes coordinating with foreign courts and insolvency administrators to ensure that the foreign insolvency decision is effectively implemented in the Czech Republic. The Czech courts may assist by recognizing and enforcing decisions regarding the administration of assets, securing assets located in the Czech Republic, and allowing foreign insolvency administrators to act within Czech territory in relation to the debtor’s assets. Additionally, Czech courts can help facilitate information sharing and procedural cooperation to align with the foreign insolvency process, particularly within the framework of the EU Insolvency Regulation, which mandates extensive cooperation and support in cross-border insolvency cases within the EU.
6.3 – Is it possible to commence insolvency proceedings in relation to a foreign company?
Yes, it is possible to commence insolvency proceedings in the Czech Republic in relation to a foreign company, provided certain conditions are met. Under Czech insolvency law, the Czech courts can assume jurisdiction if the foreign company has its centre of main interests (COMI) in the Czech Republic or, at minimum, a significant establishment or assets located within the country.
7. Other matters
7.1 – Please consider whether there is any other feature of your country’s insolvency regime of which a lender, investor or purchasers of distressed debts or businesses should be aware? For example, are there any mistakes that foreign creditors often make?
Foreign creditors, lenders, and investors should be mindful of several important aspects when dealing with distressed debts or businesses. First, timely registration of claims is essential. Once insolvency proceedings are initiated, creditors typically have a limited period to register their claims (see Section 4.5). Missing this deadline can result in the loss of certain rights, so prompt action is crucial for foreign creditors unfamiliar with the local process.
Additionally, Czech insolvency law grants priority to secured creditors in the distribution of proceeds from the sale of secured assets, although the order and structure of priority may differ from other jurisdictions. This can impact foreign creditors’ expectations of recovery, as they may be unfamiliar with how Czech law handles secured and unsecured claims differently.
Foreign creditors should also be aware of the rules regarding the avoidance of preferential and fraudulent transactions. The insolvency administrator has the power to challenge certain transactions made before insolvency if they unfairly benefit specific creditors, so caution is advised regarding any transactions that might be seen as preferential (see Section 5.1).
7.2 – Are there any other stakeholders or entities (eg governmental or regulatory) which may influence the outcome of any restructuring?
In Czech restructurings, the outcome is largely influenced by major creditors, especially banks, which often finance the companies undergoing restructuring. These creditors hold the majority of voting rights, allowing them to secure the quorums needed for approving the restructuring plan. They are typically part of the creditors' committee.
Additionally, the insolvency court oversees the proceedings, approving key decisions, including the restructuring plan, and resolving disputes that may affect the restructuring’s direction and timeline. Regulatory or governmental bodies can also play a role, particularly if the debtor operates in a regulated sector, such as finance or energy. In such cases, authorities like the Czech National Bank or relevant regulators may influence the process.
7.3 – Are there currently any proposals for significant reform of your insolvency laws?
From 1 October 2024 an amendment to the Insolvency Act is effective, which has brought quite substantial changes for the debt relief (in Czech: oddlužení) of natural persons.
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