This article deals with the issue whether a
declaration of bankruptcy against the property of a foreign entity which is a
partner in a Czech limited liability company (or a limited partner in a limited
partnership or a legal entity in a cooperative) has the effects under s148(2)
of the Commercial Code, meaning whether the participation of this partner in
the company is extinguished and whether the receivable of this partner
representing the settlement share pertains to the bankruptcy estate.
First, the conditions for recognising
foreign insolvency proceedings in the Czech Republic and their effects
under the law must be defined.
If insolvency proceedings are opened in one EU
member state (except for Denmark), Council (EC) Regulation No. 1346/2000 on
insolvency proceedings
(“Regulation”) is applied. The provisions of Act No. 182/2006 Coll. on
Insolvency and its Resolution, as amended, (Insolvency Act) are considered only
supplementary to the Regulation and completely omit the non-European aspect of
international insolvency.
A) In relation to EU member states
The Regulation sets out the automatic recognition
of a decision on opened, on-going and terminated insolvency proceedings in
other member states.
Under s4 of the Regulation the determination of
international jurisdiction is of primary concern for the course of insolvency
proceedings. Insolvency proceedings are governed (with exceptions) by the
laws of the state in which they were commenced (the principle of lex concursus). Consequently, a foreign decision has
no effect under local law. On the contrary, all procedural and substantive
effects on entities and legal regulations are determined by lex concursus.
The Regulation distinguishes main and secondary
insolvency proceedings. The courts of the member state in which the major
interests of the debtor are concentrated (the seat of a legal entity is
considered such a place, unless the contrary is proved) have jurisdiction to
commence main insolvency proceedings. Secondary insolvency proceedings may be
commenced in any EU member state where the debtor’s establishment
is located (the fact that the debtor is a partner and has a business interest
in an independent legal entity is not sufficient). The effects of secondary
proceedings are limited to property located in the relevant state.
As implied from the above, if main insolvency
proceedings are opened, for example, against a company whose major interests
are concentrated in France, the effects of the decision are governed by
French and not Czech law. The participation of this company in a Czech limited
liability company is extinguished only if this is the case under French law.
Czech law (and the effects of s148(2) of the
Commercial Code) may be applied
only to a debtor whose major interests are concentrated in the Czech Republic
(main insolvency proceedings) or a debtor who has an establishment in the Czech
Republic and if other conditions for opening secondary insolvency proceedings
are observed.
B) In relation to third
countries (for example, USA, Denmark, Switzerland)
Generally we can say that the property of a
foreign entity located in the Czech Republic may be included in the bankruptcy
estate, if the following prerequisites are fulfilled: (i) foreign legislation allows
the inclusion of property in a bankruptcy estate and (ii) Czech law recognises
the relevant affects of the foreign bankruptcy.
The recognition of foreign insolvency
proceedings is of primary concern for legislation governing international
insolvency proceedings as these proceedings have effect in the Czech Republic
only if the insolvency proceedings are recognised in the Czech Republic.
The Insolvency Act and the Act on International
Private Law (“AIPL”) do not stipulate special rules for recognising foreign
insolvency proceedings (except in relation to EU member states). It is thus
more than contentious whether in this situation in relation to states which are
not EU members the general regulation governing the recognition of decisions
included in the AIPL should be applied. The major professionals take the view
that this general regulation may not be applied mainly because the recognition
of insolvency proceedings has many special features not connected to usual
decisions in civil or commercial matters. In any case it is certain that the
relevant bodies will search for rules to be observed in the relevant case with
difficulty.
Under Act No. 328/1991 Coll., on Bankruptcy and
Composition, as amended, which at least partly governed bankruptcies with a
foreign element (s69), it was implied that a foreign bankruptcy may not affect
the rights of foreign entities to their business interests in a limited
liability company with its registered seat in the Czech Republic, as this
possibility was not permitted by Czech law.
Due to the absence of any legislation related
to insolvency proceedings held in states which are not EU members it might
hardly be deduced that a business interest in a Czech limited liability company
may be included in the bankruptcy estate of a bankrupt abroad and that their
business interest in the Czech limited liability company thus analogously
becomes extinguished.
For the sake of completeness, we can say that under
certain conditions bankruptcy may be declared (and the Regulation may be applied) in any member state
against a company established under the laws of a third state where the company
also has its registered seat, if its major interests are concentrated in any
member state.
It follows from all this that it would be
appropriate if the non-European aspect of international insolvency was the subject-matter
of an amendment to the Insolvency Act for which the UNCITRAL Model Law on
Cross-Border Insolvency
may be an inspiration.
This article is for information
purposes only. Should you need any further information on the issues addressed
in this article, please contact PETERKA & PARTNERS Law Offices.
