Enforcement in the Czech Republic: Amended Law
December 2012
Amendments to Czech laws on enforcement give banks and other creditors new enforcement options for certain types of assets. The amendments1 will come into effect from 1 January 2013 and bring about the most significant changes to the Czech law enforcement process since 2009.
Those which are likely to be of particular interest to banks are described below.New enforcement options
New enforcement options will be available in relation to enforcement against a debtor’s receivables, shareholdings in limited liability companies and real property:
- Receivables: Prior to the amendment, if a creditor wished to enforce against a debtor ’s receivables, the only option was to apply for an order ordering the debtor’s debtor to pay the relevant amount to the enforcing creditor. The amendment introduces the possibility of selling the receivable in an auction instead.
- Shareholdings: Enforcement against a debtor’s shareholding in a limited liability company is currently quite a cumbersome process. It involves a transfer of a debtor’s shareholding to the company, which would then sell it, decrease its registered capital or (if the above was not possible or the debtor was a sole participant) be liquidated, and then would pay the proceeds to the enforcing creditor. The amendment allows the sale of a debtor’s shareholding as a primary method of enforcement.
- Administration of real property: The amendment introduces administration of real property as an alternative to a sale of a property in an auction. The court or executor would administer the property or appoint a professional administrator and will be able to terminate and enter into leases and utility agreements. All income from the property would be paid to the enforcing creditor after deducting costs. The amendment also introduces a number of smaller changes to already existing enforcement procedures outside the scope of this article. It should also be noted that, if the asset in question were provided as security for an unpaid debt, the above changes would not affect the enforcement of that security in the usual way. The only change to enforcement of security appears to be that it might now be possible to sell a pledged receivable in an auction.
Pre-petition notice
Whilst most creditors would send a letter demanding payment before instigating legal proceedings, from 1 January 2013 it will be a legal requirement. Unless a creditor sends to the debtor, at least seven days prior to filing the petition in court, such a letter, the court will not award the creditor costs of proceedings even if the creditor is otherwise fully successful in the dispute. Exceptions will be available only at the discretion of the court and in truly exceptional cases. The creditor will, however, not be required to ensure that the debtor has actually received the request – he will merely have to dispatch the request to the debtor’s official delivery address or his last known address. Official delivery address includes the debtor’s official registered address or the address of a process agent named in the contract from which the dispute arose.
Strengthening the role of private executors
A creditor wishing to enforce a judgment debt has generally had a choice of two separate actions: enforcement carried out by a court under the Civil Procedure Code or enforcement by a private executor under the Execution Code. The amendments favour the latter process. Courts will remain competent to enforce judgments in a strictly limited range of matters, including certain family and housing matters, certain administrative decisions and, most notably, judgments of foreign courts. Whilst the competence of the courts in most of the above matters will be exclusive, creditors will retain the option to use a private executor under the Execution Code for the enforcement of certain judgments of foreign courts. These include judgments of courts of other EU Member States declared enforceable under the Brussels Regulation (Council Regulation (EC) No 44/2001), judgments enforceable under a treaty and other judgments already recognised by Czech courts in accordance with the Act on Private International Law.2
Comment
Banks should take note of these amendments when dealing with Czech borrowers. While sending a final request to pay prior to filing a petition in court is, in most cases, good practice anyway, there are situations where a bank might want to sue a borrower without first giving such notice because he might seek to obstruct proceedings. This will, however, no longer be possible if the bank wishes to recover the costs of proceedings. The new enforcement options in relation to receivables, shareholdings in limited liability companies and real property, are likely to enable speedier and higher recovery for banks in appropriate circumstances. For example, where the debtor’s debtor is likely to not be able to pay a receivable, which he might be ordered to pay directly to the enforcing bank, in full when due, it may be more effective to offer the receivable for sale to specialised debt collection agencies. A sale of a shareholding in a limited liability company, where possible, will certainly be much quicker compared with the existing process. The administration of real property may be an attractive option especially when the property market is down.
Footnotes
1. Amendments were made primarily to the Civil Procedure Code (Act No 99/1963 Coll, as amended) and the Execution Code (Act No 120/2001 Coll, as amended) and certain other related laws have also been amended.
2. Act No 97/1963 Coll, as amended.
