SMED JORGENSEN

Attorneys at Law / Prague / Czech republic

Insolvency Law Amendment

The new amendment to insolvency act no. 182/2006 which recently came into effect brought some significant changes in law of insolvency. The new legislation is designed to protect debtors more as well as strengthen the position of the Ministry of Justice and make insolvency proceedings more effective and just.

Coverage gap

The new defense for the debtor against creditor’s proposals was introduced such that if the difference between the amount of payable debts and the amount of available funds, called coverage gap, is less than 10% of debts due, or if the debtor is able to prove that it has a decreasing trend, then the debtor is considered to be able to meet its financial obligations. By proving this the debtor is able to rebut the presumption of insolvency which was imposed upon him. This can also be used as an instrument to protect debtors against unjustified petitions.

Preliminary assessment of insolvency proposals

In order to control the eligibility of insolvency petitions and to protect debtors against the reduction of their credibility caused by unjustified petitions, legislators created preliminary assessment of insolvency proposals submitted by the creditor. Before the amendment, courts did not asses the proposals before publication in the Insolvency Register. Now, the court should examine the proposal and in cases of uncertainty may decide not to publish such information. The insolvency proceeding can last for a months and publication of the information about the insolvency proceedings against the subject may have a negative impact on its business and creditworthiness. This used to be misused by the petitioners in order to recover the claim. However, under the new law, if the court decides to reject the claim as unjustified, they may penalize the petitioner.

Only an accredited person can submit the petition

Under the amendment, the petition for the debt relief has to be drafted by an accredited person which holds the accreditation of the Ministry of Justice, an attorney, or a notary. The fee for providing such services should not exceed 4000 CZK.  This could also be considered as one of the ways in which to improve the effectiveness of the insolvency proceedings.

Restriction of forum shopping

The competent court for insolvency proceedings against a debtor enrolled in the Commercial Register is to be the district court which was the debtor´s general court six months before the day of commencement of the insolvency proceeding. After the amendment, the court will not consider a change of business address in the last six months when commencing the insolvency proceeding as a means to prevent debtors from confusing creditors by changing the place of business and consequently making the process of insolvency proposal more difficult for creditors.