CHAMBER OF DEPUTIES APPROVED CHANGES OF THE INSOLVENCY ACT
On April 9, 2020, the Chamber of Deputies of the Czech Republic approved the Act on certain measures to mitigate the effects of the SARS CoV-2 coronavirus epidemic on persons involved in legal proceedings, crime victims and legal entities and on changes of the Insolvency Act and the Enforcement Act (hereinafter referred to as the “Act”). The Act, drafted by the Ministry of Justice, introduces significant changes in the area of insolvency law in response to the current situation and the anticipated economic impact of the coronavirus epidemic.
Below, we bring you a basic overview of the most fundamental changes that will affect the abovementioned areas if the Act becomes effective in the current wording.
- CHANGES IN THE DEBTOR’S OBLIGATION TO SUBMIT INSOLVENCY PETITION
In general, a debtor who is a legal person or a natural person – entrepreneur is obliged to file an insolvency petition without undue delay after it realized or should have realized its insolvency with due care. Given the current situation, however, the abovementioned shall not apply for the period starting from the date of entry into force of the Act, until 6 months after the termination of the anti-epidemic emergency measures, as defined by the Act. The aforementioned relief is primarily aimed at relieving the situation of statutory bodies of business corporations that might currently be afraid of personal liability for their company’s debts. This, however, assumes that the insolvency has not occurred before the adoption of extraordinary measures or if the insolvency has not been largely caused by a circumstance related to the extraordinary measure which would make it impossible or substantially more difficult for the debtor to meet its monetary obligations. At the same time, irrespective of the duration of the emergency measure, this relief shall expire on December 31, 2020, at the latest.
- CREDITOR´S INSOLVENCY PETITIONS
The Act newly introduces a provision according to which the insolvency petitions filed by creditors between the date of entry into force of the Act and 31 August 2020 are not taken into account. If the creditor does so, the insolvency court shall notify the creditor by deciding that its petition is disregarded. No remedies shall be admissible against such a decision. However, after August 31, 2020, it will be possible to file another insolvency petition, as the previous one will not be discussed automatically.
- IMPOSSIBILITY OF REVOCATION OF DEBT RELIEF DUE TO NEWLY INCURRED DEBT WITH PERIOD LONGER THAN 30 DAYS AFTER MATURITY
The Act sets out that in insolvency proceedings that were initiated and in which a debtor’s insolvency was declared by May 31, 2019, the insolvency court may not revoke the approved debt relief as a result of the debtor´s default in repayment (for more than 30 days after maturity) of a newly incurred monetary obligation. However, this shall apply only under the condition that the failure to meet a substantial part of the repayment schedule was largely caused by the circumstances of the anti-epidemic emergency measure.
- RELEASE OF THE DEBTOR FROM PAYMENT OF ITS DEBTS
The changes also affect the issue of the debtor’s exemption from payment of its debts. According to the Act, in the case of debt relief by performing the repayment schedule, the insolvency court may exempt the debtor from paying debts included in the payment schedule to the extent that they have not yet been settled, even if the value of the repayment received by unsecured creditors is:
i. less than 30% of their claims; o
ii. less than 50% of their claims if the court has decided pursuant to Section 398 (4) or Section 407 (3) of the Insolvency Act; or
iii. below the value of the repayment agreed between the creditors and the debtor.
However, the debtor is obliged to prove that such value of repayment was not achieved due to circumstances beyond its control. However, the Act introduces a rebuttable presumption that it is considered that it the debtor did not cause the circumstances that arose as a result of the restriction resulting from the emergency measures taken by the Czech Republic in response to the spread of Covid-19 that made difficult to fulfill obligations according to the approved debt relief method.
- EXTRAORDINARY MORATORIUM
We consider the newly introduced extraordinary moratorium, which aims to respond to the current situation regarding the Covid-19 disease, as a significant change in the field of insolvency law. It proposes that a debtor – entrepreneur, who was not insolvent up to March 12, 2020, should be allowed to apply (by 31 August 2020 at the latest) for an extraordinary moratorium, both before and after the insolvency proceedings have started based on the petition of another person. However, the application for an extraordinary moratorium must be filed within 15 days from the delivery of the insolvency petition to the debtor.
Pursuant to the Act, the application for an extraordinary moratorium must include, in addition to the general requirements for filing, the number of debtors employees at the date of filing, the amount of the debtor’s turnover for the last accounting period, the debtor’s affidavit stating that (i) the application for an extraordinary moratorium is filed as a result of anti-epidemic extraordinary measures, (ii) on March 12, 2020, the debtor was not insolvent, (iii) that all the information contained in the application was true and, finally, (iv) an affidavit stating that during the two months before or after March 12, 2020, the applicant had not paid out to the shareholders an extraordinary share of the profit, nor has it otherwise distributed its own resources, including early repayment of loans, or, if it did, an affidavit stating that all such monetary benefits have been returned.
After submission of the application, the debtor is obliged to make every effort, which can be reasonably required to satisfy creditors to the maximum extent possible. However, over the duration of the moratorium, the debtor is entitled to pay certain obligations preferentially (i.e. the obligations that are directly related to the maintenance of the business), over other, previously due obligations.
It should be mentioned that the debtor will be able to benefit from the public support granted to entrepreneurs to mitigate the economic effects of Covid-19. On the other hand, great caution will be appropriate in the case of the application itself (or its annexes), as the liability of the debtor and the liability of the members of the statutory body also applies to damage caused by a false affidavit.
The electronic form of the application for an extraordinary moratorium will be published by the Ministry of Justice.
- DEBT RELIEF AVAILABLE TO NATURAL PERSONS – ENTREPRENEURS WITHOUT OTHER CONDITIONS
The very important change concerns the area of debt relief for natural persons – entrepreneurs. The Act newly proposes to delete in Section 389 par. b) of the Insolvency Act, the words “which has no business debts”, which means that debt relief, as one of the methods of insolvency solution, will be newly accessible to natural persons – entrepreneurs without any other conditions.
- REMISSION OF MISSED DEADLINE IN INSOLVENCY PROCEEDING
The Act will allow a person, who has missed the deadline (during the duration of extraordinary measures) set for a performance of the action in an insolvency proceeding, to apply for a remission of the deadline by the insolvency court. The insolvency court will decide to waive the failure to meet the deadline if it was missed due to restrictions resulting from extraordinary measures that prevented or substantially made it difficult for the applicant from doing so. At the same time, however, the Act defines conditions under which it will not be possible to waive the missed deadline.
The applicant must apply for remission of the deadline within 7 days from the termination of the extraordinary measure, which resulted in a restriction preventing or significantly impeding the required action in the insolvency proceeding, alongside with the missed action. However, the time limit for the submission of an application under the first sentence shall not expire earlier than 7 days after the termination of the state of emergency.
If the insolvency court approves the request, the decision shall be delivered only by publication in the insolvency register. In the event that the application is rejected, the decision shall be delivered both by publication in the insolvency register and separately to the applicant.
For more information on this subject, please feel free to contact:
Mgr. Vojtěch Makovec, partner
rutland & partners, law firm
tel: +420 226 226 026
email: vojtech.makovec@rutlands.cz
