Czech Republic: LEX COVID – Changes to insolvency proceedings

29 April 2020 | newsletters

The coronavirus pandemic has made life complicated for almost all businesses, especially from the financial point of view. Businesses thus face an increased risk of bankruptcy and subsequent insolvency proceedings.

To help with this challenging situation, an amendment to the Insolvency Act as part of the "Lex Covid" was adopted. Lex Covid became effective on 24 April 2020.

Initiation of insolvency proceedings

Creditor's right to file an insolvency petition

The amendment temporarily suspends a creditor's right to file an insolvency petition. A petition filed until the end of August 2020 will be disregarded. In other words, the insolvency court will not publish the petition in the Insolvency Register and such petitions will not have any procedural consequences. In principle, it is only the debtor who can initiate the insolvency proceedings before the end of August 2020.

Debtor's duty to file an insolvency petition

Another important change is the suspension of the debtor's duty to file an insolvency petition without undue delay after discovering the insolvency. The suspension will last from the effectiveness of Lex Covid, i.e. from 24 April 2020 until the expiration of six months after the termination or cancellation of the extraordinary anti-epidemic measure. Regardless of the duration of the extraordinary anti-epidemic measure, the suspension will end on 31 December 2020 at the latest. However, this will not apply if the insolvency has already occurred before the adoption of the emergency measure, or if the insolvency was not mainly caused by a circumstance related to the emergency measure during the pandemic. The aim is therefore to suspend the managing directors' obligation to file an insolvency petition against their companies when they had to shut down or reduce their business operations due to the crisis measures adopted by the public authorities and enable them to focus on the renewal of their business operations rather than to mitigate the negative impact of the time-consuming and costly insolvency proceedings.

However, these measures will not entirely shield directors from potential liability in connection with financial distress caused by the pandemic, in particular where directors knew or should have known about the likelihood of insolvency and failed to take all necessary and reasonably expected steps to prevent it.

Extraordinary moratorium

The main objective of this new preventive tool is to temporarily protect otherwise competitive companies in times of extraordinary crisis and to enable them to overcome the shortfall in funds by, e.g. suspending the possibility of enforcing collateral or initiating execution. It is also intended to create leeway for the debtor to negotiate with creditors.

Therefore, the extraordinary moratorium allows a debtor who has financial problems due to the COVID-19 crisis, but was not insolvent on 12 March 2020, to apply for a three-month-long extraordinary moratorium by 31 August 2020. If the insolvency proceedings were initiated at the creditor's request before the effectiveness of Lex Covid, the debtor must file an application for an extraordinary moratorium within 15 days from the delivery of the insolvency petition to the debtor. This clearly implies the practical limitation that a debtor whose insolvency proceedings were initiated a long time before the effective date of Lex Covid will not be able to request an extraordinary moratorium. The maximum three-month period for which the extraordinary moratorium can be initially declared can be extended for a maximum of another three months with the prior consent of the majority of the debtor's creditors.

An extraordinary moratorium is based on the concept of a "standard" moratorium. Contrary to the standard moratorium, neither the preliminary consent of the majority creditors nor the filing of an insolvency petition is required. Also, compared to the standard moratorium, set-off is allowed.

It should be possible to apply for entry to the moratorium via the online form and the court examines the fulfilment of the formal requirements of the petition only. One of the requirements particularly worth mentioning is that the debtor has not paid profit shares or other extraordinary benefits to shareholders or persons within the group in the last two months before 12 March 2020 or after this date (unless such payments are returned to the debtor before the filing).

The extraordinary moratorium not only prevents the possibility of enforcement of collateral and the initiation of the execution or commencement of insolvency proceedings, but also allows the debtor to prioritise the payments immediately necessary for the operation of the debtor's business (which have arisen after the declaration of the moratorium) over financial obligations due earlier. During the extraordinary moratorium, the debtor may use the state aid that is provided in connection with the pandemic.

The moratorium also brings limitations. During this period, the debtor is obliged to make every effort to satisfy the creditors and to give priority to the common interest of the creditors over its own interests as well as those of other persons. The debtor also has to refrain from actions that could lead to a substantial change in the composition, use or determination of the debtor's assets or to its not negligible reduction.

Other changes

During the period of extraordinary measures, if a person has missed the deadline set for the performance of acts in insolvency proceedings, the court may waive the missing of the deadline at that person's request.

Due to the suspension of the debtors' duty to file the insolvency petition, Lex Covid also introduces suspension of "hardening periods" that are crucial for challenging certain transactions made by the debtor, if concluded or performed during those hardening periods.

It also provides for other exceptions in the area of debt relief and reorganisations, usually related to mitigating the consequences of non-compliance with the repayment schedule or the adopted reorganisation plan as a result of an emergency measure connected with the pandemic.