Restructuring and insolvency law in the Czech Republic

1.  What is the primary legislation governing restructuring proceedings in your jurisdiction?

The Insolvency Act (Act No. 182/2006 Coll.) is the primary piece of legislation governing restructuring proceedings. General civil, corporate, labour and tax law also apply to implementing restructuring tools. In addition, on 23 September 2023 the new Act on Preventive Restructuring entered into force. The Act implements the EU Directive on Restructuring and Insolvency of 20 June 2019 (EU) 2019/1023).

2. How are restructuring proceedings initiated?

Only the debtor can initiate preventive restructuring. Restructuring in the form of a reorganisation can be requested by the debtor or a creditor registered in the insolvency proceedings.

3. Which different types of restructuring proceedings exist and what are their characteristics?

Preventive restructuring

Preventive restructuring may be opened if the debtor is in a financially distressed situation when there is a likelihood of insolvency. The debtor may be over-indebted, but it may not be insolvent due to illiquidity. The procedure can be public or private. The aim is to give the debtor the possibility to restructure its debt, assets, capital structure or operations under the protection of law against individual enforcement actions. Restructuring measures are very flexible and tailor-made for various situations. Some of the debt, such as employment-related debt, may not be affected by the restructuring. New financing provided to the debtor to facilitate the restructuring is specifically protected by law.

An enforcement moratorium can be declared by the court for a limited period upon the request of the debtor in the form of either general (applicable to all creditors) or individual (applicable to only certain creditors the debtor intends to include). The management remains in control and should prepare a restructuring plan for the approval of affected creditors and, in some cases, also for confirmation by the court. The court may also appoint a restructuring practitioner from the closed list of insolvency practitioners to oversee the restructuring activities and review of contested claims, if needed.

An online restructuring registry is to be established. However, due to the purpose of preventive restructuring, public access and the scope of published documents shall be limited.

Reorganisation

Reorganisation provides an option for continuing the operation of an insolvent debtor with gradual satisfaction of claims of its creditors, all on the basis of a reorganisation plan accepted by the creditors and confirmed by the court. It can be proposed by the debtor or a creditor registered in the debtor’s insolvency proceeding.

The management remains in control and is authorised to prepare and carry out the reorganisation plan. The role of the insolvency practitioner is reduced to supervisory functions. Reorganisation can be simplified and accelerated by way of a pre-packaged reorganisation, under which the reorganisation plan is be prepared by the debtor and approved by the majority of its creditors prior to the opening of the debtor’s insolvency.

There is no strict statutory requirement related to the measures included in the plan and it may contain, among others, the restructuring of the creditors’ claims (waiver of claims or their part), sale of the enterprise (or its part) to an investor, restructuring of the debtor’s operations, corporate changes or any combination of these measures. To ensure the approval of the plan by the creditors, the debtor should communicate and negotiate the plan with its creditors before submission of the reorganisation plan for approval. At the meeting of creditors, creditors vote on the plan by classes, which should associate creditors with similar legal position and economic interests. Each secured creditor must always form a separate class. The insolvency court approves the plan if at least one class of creditors approved the plan, the plan is fair to each class that did not approve the plan, the implementation of the plan will not lead to another insolvency of the debtor, and if a few other requirements are met.

Upon the effectiveness of the plan, all claims and other rights of creditors shall cease to exist and shall be replaced by claims and other rights as specified in the plan. The reorganisation plan shall be implemented by the management and supervised by the creditors’ committee and the insolvency practitioner.

4. Are there different types of creditors and what is the significance of the differences between them?

Bankruptcy 

There are several classes of creditors: super-senior, secured, unsecured and subordinated. The main difference among them is their ranking and related rights to control the insolvency proceeding. While secured creditors get satisfied from the sale of their collateral by the insolvency practitioner acting upon their instructions, super-senior creditors get satisfied from proceeds from any unsecured assets. The unsecured creditors usually receive very little satisfaction amounting to a few percentages of their claims (if any at all); and the subordinated usually get zero satisfaction, and their influence on the course of the insolvency is practically excluded.

Restructuring 

In preventive restructuring the debtor decides which creditors will become creditors affected by the restructuring measures and those who will not. The non-affected creditors have no specific rights in the preventive restructuring arrangement as their claims will not be affected by the restructuring measures, unless they actively require becoming part of the restructuring. The affected creditors will form different classes of creditors based on the similarities in their legal position and economic interests. No discrimination can be made among creditors in the same class.

5. Is there any obligation to initiate restructuring/insolvency proceedings? For whom does this obligation exist and under what conditions? What are the consequences if this obligation is violated?

There is no obligation to initiate preventive restructuring or reorganisation as both of them are fully voluntary. There is, however, a strict statutory duty for a management to file for insolvency without undue delay once they become aware (or would have been aware had they acted with due care) that the company is insolvent. Failing to do so, the management becomes personally liable for any damage caused to the company’s creditors by their failure to file for insolvency in time.

The existing and former members of any corporate body of the insolvent company may also be required to return to the company any benefit they have received from the company in the period of 2 years before the opening of the company’s insolvency proceeding. The court may also decide that such a member is obliged to pay to the insolvency estate an amount up to the difference between the value of the company and its debts and may disqualify the managers from any similar position in any company for as long as 3 years.

6. What are the main duties of the representative bodies in connection with restructuring proceedings?

In additional to the general requirement to carry out the restructuring with due care and legal requirements, the law requires that the statutory bodies must not use the restructuring in order to achieve a dishonest goal. This means, among other things, that the statutory body must provide true and complete data about the restructuring and state of the debtor’s financial situation to the creditors, restructuring practitioner and the court, and/or may not provide any creditor a benefit not agreed in the restructuring plan. As the directors’ duties relating to the restructuring are unique and rather complex, we recommend that the directors will engage an experienced team of legal and restructuring advisers to help them prepare the restructuring plan, negotiate and win the support of the plan by the creditors and generally guide directors through the entire process safely.

7. What are the main duties of shareholders in connection with restructuring proceedings?

Shareholders may actively participate in restructuring proceeding by restructuring of their equity contributions and may need to provide their shares as collateral to secure claims of the affected creditors under the restructuring plan. Shareholders form a separate creditors’ class voting on the restructuring plan; however they may not achieve approval of the plan against the will of other creditors’ classe

1. What is the primary legislation governing insolvency proceedings in your jurisdiction?

The Insolvency Act (Act No. 182/2006 Coll.) and the European Regulation on Insolvency Proceedings (2015/848) are the primary pieces of legislation governing insolvency proceedings. 

2. How are insolvency proceedings initiated?

Both a debtor and a creditor can petition for insolvency. 

3. What are the legal reasons for insolvency in your country?

A Czech company is insolvent if it fails to pass either of the following two tests of insolvency at any time:

Liquidity test

The liquidity test indicates that a company is insolvent if it:

• has more than one creditor
• has unpaid monetary debts due for more than 30 days, and
• is not able to discharge these debts (i.e. there is an inability to pay debts), in particular if the company has ceased to pay a substantial part of its monetary debts, the company has not paid its overdue monetary debts for more than 3 months; or a creditor cannot satisfy its due claim by way of enforcement proceedings.

Balance sheet test

The balance sheet test indicates that a company is over-indebted and therefore insolvent if it:

• has more than one creditor, and
• the total amount of its debts (whether due or not) exceeds the value of its assets. In order to assess properly the value of the company’s assets for the purposes of the balance sheet test, the value of the company as a running business shall be taken into consideration if it is reasonable to expect that the company will be able to continue conducting its business.

4. Which different types of insolvency proceedings exist and what are their characteristics?

There are two methods to resolve the insolvency of a company:

Bankruptcy liquidation

Bankruptcy liquidation (konkurs) is the most usual method of resolving the insolvency. The aim is to sell the assets of the debtor and satisfy the creditors generally on a pro-rata basis from the proceeds of the sale. All disposal rights and obligations related to the insolvency estate are transferred from the debtor to the insolvency practitioner. The specific manner of the sale is chosen by the insolvency practitioner with the approval of the creditors’ committee and the court. If an asset is subject to a security, the insolvency practitioner must generally follow selling instructions of the secured creditor. Following the distribution, the bankruptcy liquidation is terminated and the debtor will eventually be deleted from the commercial register.

Reorganisation

Reorganisation is a method that provides an option for continuing the operation of an insolvent debtor with gradual satisfaction of claims of its creditors, all on the basis of a reorganisation plan accepted by the creditors and confirmed by the court. For more details, see Restructuring above.

5. Are there different types of creditors and what is the significance of the differences between them?

There are several classes of creditors: super-senior, secured, unsecured and subordinated. For more details, see Bankruptcy under Q4 of Restructuring above.

Super-senior claims do not need to be lodged in the same way as the secured or unsecured claims, but a thorough examination of the claim is recommended on the nature of the claim as failing to meet the 2 months’ lodging period for non-super-senior claims may lead to termination of further chances for their satisfaction.

6. Is a solvent liquidation of the company an alternative to regular insolvency proceedings?

Solvent liquidation is an alternative if the company is not insolvent. However, if a solvent liquidation is opened and it transpires that the company is unable to pay its debts as they fall due or it is overindebted, the liquidator will have to petition the court to open an insolvency (bankruptcy liquidation) procedure. 

1. If a lender wants to monitor its borrower very closely (i.e. more closely than the usual information covenants in the credit agreement require), what options are there?

If a borrower is in financial difficulties, the lender may require that the borrower appoints an independent monitor or an independent restructuring expert. Such person is usually authorised to prepare or verify regular reports on the borrower’s activities and to advise how to restructure the company and its debts in order to avoid insolvency. It is advisable for the lender not to be involved in the appointment and/or recall of such monitor too closely in order to avoid being designated as being affiliated with the borrower, as that may bring all sorts of potential issues in potential insolvency proceedings.

2. What issues arise if a creditor extends credit facilities or offers support conditional on additional or extended guarantees to a company in financial difficulties and/or takes asset security?

A lender considering extending credit facilities to a company in financial difficulties will want to avoid potential clawback risks in potential insolvency proceedings, in particular the additional security being considered as receiving undue preference to the detriment of other creditors. According to Czech case law, a simple extending of a loan or a waiver of default by a creditor is not sufficient benefit for a debtor in difficulties to provide new security from its assets. Therefore if new collateral is to be provided, the lender needs to provide fresh money to such debtor.

The Act on Preventive Restructuring protects new and interim financing, if they are reasonable and necessary for the survival or restart of the business, or preserve or enhance its value. These transactions cannot be declared voidable in a subsequent insolvency. Civil liability for damage to creditors cannot be claimed either.

1. How does a lender sell a loan?

Non-performing loans (NPLS) can be sold by assignment. This means a case-by-case transfer. No formalities are required for an assignment and the debtor need not be notified in order to perfect the assignment. However, notification is required to enforce the assignment because until the debtor is notified, it can still discharge the debt by paying the assignor.

If an NPL is a claim registered in an insolvency proceeding, the assignment agreement requires notarised signatures of the parties and the change in the creditor needs to be registered in the relevant insolvency proceeding. Only the assignor may request such a change in the insolvency proceeding, but if needed, the assignee may act in on behalf of the assignor in the registration process. The registration is a relatively straightforward process which the insolvency court should manage within 3 business days, however in case of a portfolio sale, it takes usually longer.

2. If the underlying credit agreement prohibits transfer or assignment (i.e. a change in the lender of record), how else – if at all – can a lender transfer the economic risk and/or benefit in the loan? For instance, are sub-participation agreements allowed under the law of your jurisdiction?

Yes, a sub-participation agreement is a viable option. If a true sale is prohibited by the underlying agreement (which is rare, but may occur), the lender may enter into a sub-participation agreement with sub-participants (e.g. financial institutions) who take over the underlying risks.

Alternatively, a corporate spin-off of the NPL portfolio, together with any related security to a special purpose vehicle, may be an option to overcome the contractual prohibition of the assignment.

3. Regulatory issues: is any form of licence or prior authorisation from any regulatory authority required for the purchase, sale and/or transfer of loans? Does it fall within the definition of providing banking or financial services in the territory of the assignor or the borrower?

A one-off purchase of an NPL does not require a licence but transfers of NPLs on a continuous basis in the territory of the Czech Republic as part of a business would qualify as a business activity requiring a trade licence. It is not considered as a service requiring a banking or other financial service licence in the Czech Republic.

Loans can currently be serviced by a service provider with a general trade licence. However from 2024 it is expected that such loan servicing activities will require a specific licence from the Czech National Bank, unless the servicer is a bank, a foreign bank or a foreign loan servicer with appropriate licence.