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Covid-19 coronavirus: Impending changes to Czech insolvency law

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Robert Pavlu

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Prague

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Petra Mysakova

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Petr Vybiral

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03 April 2020

The Czech government has submitted to the Parliament a proposal for temporary changes to Czech insolvency law aiming to mitigate the impact of the measures adopted in combating the coronavirus SARS CoV-2 epidemic (the Covid Bill).

The Covid Bill, which is likely to become law in short order, would amend or supplement the Czech Insolvency Act no. 182/2006 Coll. (the Insolvency Act), among other laws.

In this respect, the Covid Bill aims to provide much needed breathing space to affected businesses, including by: (i) suspending the right of creditors and the obligation of debtors to file for insolvency; and (ii) allowing debtors to apply for an extraordinary moratorium protecting them from certain creditor actions, in each case with appropriate safeguards.

Insolvency petitions suspended

  • The affected debtor's obligation to file for insolvency if statutory conditions are met would be suspended for the duration of the relevant measures taken by the Czech government, as well as for six months following their expiry, but no longer than until the end of 2020;
  • Directors of the affected debtor would not be liable for a failure to file for insolvency; however, their duties and related liabilities under the Corporations Act would remain unaffected by the Covid Bill.
  • Debtors would be temporarily protected from insolvency petitions filed by their creditors: any such petitions filed until the end of August 2020 would be disregarded and no entries of commencement of insolvency proceedings would be made in the on-line Insolvency Register; creditors would have to file a new insolvency petition after the end of August 2020 to effectively commence insolvency proceedings

Extraordinary moratorium

Any debtor with its centre of main interests in the Czech Republic that was solvent on 12 March 2020 would have the opportunity, until end of August 2020, to file for an extraordinary moratorium. This would apply regardless of the governing law of the debtor's contracts.

No evidence would need to be provided together with the filing, other than an affidavit confirming certain matters. These would include, most notably, that the applicant seeks protection in connection with Covid-19 related governmental measures and that it has not made any distributions to shareholders or other related parties since 12 January 2020 (or that such distributions have been returned). The court would automatically grant the protection if the application satisfied formal requirements. Information about the granting of the extraordinary moratorium would be published in the on-line insolvency register.

The extraordinary moratorium would last for three months, but could be extended by another three months with the consent of creditors.

The effects of the extraordinary moratorium would be similar to, but not identical with, the effects of an ordinary moratorium under Czech insolvency law. In particular, while the extraordinary moratorium would be in place:

  • the debtor would have to prefer the common interest of creditors over its own interest;
  • the debtor could be sued but judgments could not be enforced against it;
  • it would not be possible to create new security over the debtor's assets or to enforce existing security;
  • set-off would generally be permitted;
  • significant disposals with assets would generally be prohibited, except in the usual course of business, and the court could impose further limitations in individual cases;
  • the debtor could prioritize payment of debts incurred while the extraordinary moratorium was in place (these debts would have priority ranking in any subsequent insolvency proceedings); and
  • counterparties would not be entitled to terminate or refuse to perform certain essential pre-existing contacts as long as the debtor continued to pay at least its obligations arising during the moratorium (this could apply also to drawdowns under credit facilities, unless the lender could refuse drawdown for a reason that existed before the granting of the extraordinary moratorium).

The extraordinary moratorium is not notified as an eligible proceeding under the Insolvency Regulation (No. 2015/848) and therefore does not enjoy automatic recognition in other EU Member States.

Close-out netting and financial collateral

The protection enjoyed under Czech insolvency law by close-out netting and financial collateral arrangements would remain unaffected by proposed changes.

Undervalues, preferences and fraudulent transfers

All suspect periods in connection with transfers at undervalue, preferences and fraudulent transfers would be suspended for the same period as the obligation to file for insolvency.

What's next?

The government has asked the Parliament to debate the Covid Bill in an emergency regime. It can therefore be expected to become law fairly quickly.

 

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