It has been 15 years now since bankruptcy law was reinstated in the Czech Republic. In the course of that period, it has been changed and adapted several times. Now, both businessmen and non-businessmen resident in the Czech Republic may look forward to seeing a brand-new bankruptcy law coming into practice. The modern concept of bankruptcy for both natural and legal persons in the form of the new Insolvency Act has recently passed through the legislative process and will become effective as of 1 July 2007. However, only practise will tell if this fresh and new concept will be capable of assisting in remedying the malaise that the Czech Republic has suffered from in resolving the problems of excessively indebted or insolvent entrepreneurs during the last 15 years.

Reform of bankruptcy law has been loudly called for in the Czech Republic for several years. The new concept attempts to achieve a few goals simultaneously: its first effort is certainly to fix the lamest legs of former bankruptcy proceedings, i.e. to shorten the proceedings and make them much more transparent, give a more influential or stronger position to creditors and render the entire process more efficient. To this end, the new law has been given a more extensive and more accurate structure, the terms it uses have been made more exact, deadlines have been implemented and a number of crucial decisions have been passed directly to creditors. The new and to some degree revolutionary law however, has a higher ambition: it offers a modern way of resolving insolvency by allowing the insolvent or the excessively indebted to conclude an agreement with their creditors on the method of debt settlement by the process of the so-called re-organisation, meaning that the assets of such a company do not necessarily have to be sold out and its enterprise liquidated. One of the purposes of this approach is to force debtors to adopt a much more active attitude during the entire bankruptcy process, motivate them to not procrastinate regarding their own declaration of bankruptcy as they ordinarily have done leaving a motion for the adjudication of bankruptcy to be the “last resort”. In short, to better prevent the situation where the only effect of the adjudication of bankruptcy was to either find out that all the assets have “evaporated” from the debtor’s enterprise or to simply sell out whatever is left and liquidate the enterprise consequently. On the other side of the picture, it is naturally the creditors who are supposed to benefit from this new attitude of the debtors, making it thus more feasible for them to recover to some extent, even if only small, a part of their receivables.

The new bankruptcy law also brings a new chance for natural (non-corporate) persons to resolve their outstanding debts. Individuals will now have the opportunity to resolve their insolvency not only by selling their property but also by means of the so-called debt-clearance. To those who are not entrepreneurs, or to those who in their business did not exceed the amount of CZK 2,000,000 turnover in the previous accounting period, the so-called “minor bankruptcy” shall apply. However, these special simplified proceedings may not apply where a debtor has more than 50 creditors. The relief consists in the fact that in order to take certain steps in the bankruptcy proceedings (such as the requirement for an agreement on the mutual settlement of the common property of spouses to take effect), the consent of the court or the creditors will no longer be necessary. Besides that, the insolvency courts will be entitled to allow other procedural simplifications depending on the nature of each particular case.

It is beyond any doubt that the new insolvency law will improve the position of creditors in many respects. On one hand, the so-called “secured” creditors may rejoice. These are, in the main, banks and other financial institutions that have secured their claims against the risk of a debtors’ non-payment in various ways (such as real estate or securities collateral). These “secured” creditors shall continue to belong in the category of the so-called “separate” creditors, meaning that their claims are to be satisfied exclusively from the sale (realization) of property whereby such claims are secured under bankruptcy. However, under the new bankruptcy law, they will see their claims satisfied from the proceeds of the sale of the pledged (securing) property in full (100%) and not merely to 70% as is the case under the current legislation.

On the other hand, other, “non-secured”, creditors will gain, under the new bankruptcy law, more powers and a stronger position than they have had thus far. As a case in point, the new bankruptcy law gives them the key word in deciding how the bankruptcy of a particular debtor should be resolved, or an entire host of procedural tools which put in their hands much more control over the actions of the insolvency trustee in the course of bankruptcy proceedings. If the creditors are not satisfied with the actions of the insolvency trustee, they will now have the power to remove the trustee practically at any time and propose that the court appoint a new insolvency trustee.

Therefore, it will now be primarily creditors who have the power to decide on the form of their debtors’ bankruptcy. Acting through their elected representative, or the creditors committee, they will decide whether bankruptcy is to be adjudicated against the property of their debtor and, subsequently, the debtor’s property be realized to the creditors’ satisfaction by either their specific position or the determined sequence or, alternatively, there will be the option of a gradual satisfaction of the creditors’ claims by the “re-organisation plan”, as approved by the creditors and the court, while keeping the debtor’s enterprise in operation. The re-organisation will be possible with a debtor who is an entrepreneur whose turnover in the last accounting period exceeds CZK 100,000,000 and who employs more than 100 people. If both the secured and non-secured creditors give their consent, the court may approve the re-organisation as a solution even if the bankrupt does not fall within the above-described parameters. If re-organisation is approved after it has been consented to by the creditors, it shall be carried out according to the so-called “re-organisation plan” which, before it is put into practise, is again subject to the approval of the creditors and the court. Once the obligations of the debtor are fulfilled and the aims of the re-organisation plan achieved, and the debtor’s claims have been settled in the manner and to the extent as agreed, the bankruptcy proceedings are terminated and the debtor’s enterprise can carry on with its ordinary activities as it did before the re-organisation.

In the case of natural (non-corporate) persons, the analogy for the re-organisation is the so-called debt-clearance. Upon a debtor’s motion, and following the preliminary consent of the creditors, the insolvency court will decide whether or not a debtor is to be allowed to settle its debts by debt-clearance. The debt-clearance may either be executed by a single sale of the debtor’s property or by the debtor’s adherence to a pre-agreed schedule of payments. When a debtor applies to the court for approval for debt-clearance, the debtor is obliged to present to the court an estimate of its total income for the next 5 years and a statement of its total income for the past 3 years. Should the return of a debtor’s obligation be lower than 30% of the debt claimed – as long as the debtor is allowed to repay gradually by instalments – the debtor needs to acquire such a non-secured creditor’s consent with the settlement before it may be approved by the court. If the debtor is allowed to repay on the basis of the schedule of regular payments, the debtor shall repay to its creditors the amounts due for a period of 5 years and in proportion to the rates of the registered claims.

The final sections of the new bankruptcy law are dedicated to special bankruptcy proceedings for banks, savings banks, insurance companies and credit co-operatives.

The new law also institutes the new term “insolvency register”. The insolvency register will be a public register kept with the Ministry of Justice listing the names of debtors – both natural and corporate persons, the names of insolvency trustees and insolvency files. The Ministry of Justice will provide any interested party with a certified extract from this register.

The wording of the new insolvency law is certainly amongst the best stock of Czech legislation in recent years. The law gives the feel of a solid, logical and perfected piece, showing relatively few indefinite or unintelligible concepts or terms. Dare it be said that when it comes to effect - in the middle of next year - and after it has been ‘rubbed off’ in practise, the new bankruptcy law will bring a positive change in the field of excessive indebtedness and insolvency resolution.