Czech insolvency law provides multiple options for resolving corporate insolvency. Alongside liquidation and reorganisation—which aim to wind down or rehabilitate a business—the law also offers preventive restructuring tools. These early intervention mechanisms allow a company to address temporary financial difficulties without initiating formal insolvency proceedings.
This article briefly summarises the different methods of insolvency resolution, the basic features of the liability of statutory bodies and the role of creditors in insolvency proceedings.
Insolvency resolution methods
Insolvency proceedings are initiated when a company is insolvent or threatened with insolvency. Insolvency signifies that the company has multiple creditors and has monetary obligations that are more than 30 days overdue which it is unable to fulfill. A company is also bankrupt if it is over-indebted, i.e. the company has multiple creditors and the aggregate of their liabilities exceeds the value of its assets.
The two main ways of resolving insolvency are bankruptcy and reorganisation.
Bankruptcy is a liquidation procedure in which the debtor's assets are monetised to satisfy creditors' claims. In bankruptcy proceedings, the company's assets are dealt with by the insolvency administrator, who subsequently sells them and distributes the proceeds to creditors according to the rules set out in the Insolvency Act.
Reorganisation, on the other hand, is a rehabilitation procedure that allows the company to continue its activities on the basis of a court-approved restructuring plan. This procedure aims to reorganise the company's debts and stabilise its financial situation while maintaining its operations. Reorganisation is particularly appropriate if there is a realistic plan to satisfy creditors rather than proceeding with bankruptcy.
Within 7 days of filing the insolvency petition (or within 15 days if the petition is filed by a creditor), the insolvency court may also be asked to declare a time-limited moratorium if the statutory conditions are met, which provides the company with temporary protection from creditors by giving it time to stabilise its operations and possibly prepare a reorganisation plan without the immediate pressure of lawsuits and enforcement measures on the part of its creditors.
In addition to bankruptcy and reorganisation, there is also insolvency, which mainly concerns natural persons and consists of the fulfilment of a payment plan or the sale of part of the assets.
Furthermore, preventive restructuring is a relatively new process designed to help companies in financial difficulties restructure their debts before insolvency (bankruptcy) proceedings have to be initiated. This procedure allows companies to negotiate a restructuring plan with their creditors in order to stabilise their financial situation and avoid bankruptcy. The emphasis is on early intervention to allow the company to recover and continue its operations and to provide legal protection against creditor claims during the process of preventive restructuring.
Duration of insolvency proceedings
Insolvency proceedings begin with the filing of a petition, which—particularly when filed by the debtor—typically proposes a method for resolving the insolvency, either through liquidation or reorganisation.After insolvency proceedings begin, the court typically takes several months to declare bankruptcy and decide how the insolvency will be resolved.In bankruptcy, the proceedings often extend over a significant period while the company’s assets are sold and liquidated. This typically takes at least 1-2 years but can last significantly longer in more complex cases.
In reorganisation, the duration depends on the conditions set and approved in the reorganisation plan and on the company's ability to comply with the given plan. Failure to comply with the essential points of the approved reorganisation plan may cause the reorganisation to turn into bankruptcy.
Liability of the statutory bodies in insolvency
If a company or its statutory body fails to file an insolvency petition or files it late, the members of the statutory body are liable for damages or other harms incurred by creditors due to the breach of this obligation. The amount of the damages is the difference between the amount of the claim filed by the creditor for satisfaction in the insolvency proceedings and the amount actually received by the creditor in the insolvency proceedings in satisfaction of the claim.
If a statutory body member contributes to the company’s insolvency by breaching their duties, the court may—on the insolvency administrator’s motion—order the member to return benefits received under an office agreement (or any other benefit) to the estate for up to two years before the proceedings began, unless the debtor initiated them. Alternatively, the court may order the member to cover the shortfall between the company’s total debts and the value of its assets.Members of the statutory bodies should also be aware of the potential criminal liability that may arise as a result of the commission of insolvency offences such as damaging or favouring a creditor.
Status of creditors in insolvency proceedings
Creditors in insolvency proceedings may have the status of a secured creditor, an unsecured creditor or a so-called preferential (priority) creditor.
Secured creditors have claims that are secured in some way against the debtor's assets. Security may take the form of a pledge, a lien, a security interest, a bank guarantee or a reservation of title. Once insolvency proceedings have been initiated, secured creditors lose the right to separate enforcement and must file their claims properly. However, in the context of insolvency, they have a preferential right to be satisfied from the proceeds of the secured assets and can influence the way they are administered and monetised, e.g. through instructions given to the insolvency administrator. If the value of the collateral does not cover the entire debt, the remaining part is filed as an unsecured claim.
The second—and usually largest—group of creditors are unsecured creditors. They are paid in the final phase of bankruptcy, only after secured and priority creditors have been satisfied, and in proportion to the amount of their claims.The third group includes creditors with claims against the assets—or claims of equivalent status—such as the insolvency administrator, employees, and creditors who provided goods or services to the debtor after the bankruptcy was declared.Under the reorganisation, creditors are divided into groups according to the reorganisation plan and their claims are satisfied according to the rules defined in the approved plan.
Filing of claims
As a rule, creditors have a two-month period after the bankruptcy decision to file their claims, but they can file claims as soon as the insolvency proceedings are opened by filing an insolvency petition. If they miss this deadline set by the court, the claims not filed are not taken into account, and the creditors are not entitled to their satisfaction.
The application for a claim is made using a special form and must comply with the statutory requirements to be accepted. The claim application must also be accompanied by all documents proving the origin and existence of the claim (e.g. it is not sufficient to only attach the invoice, but also the contract with the debtor, orders, etc.).
Cross-border aspects of insolvency proceedings
Foreign creditors have the same rights as domestic creditors, and Czech law guarantees them equal treatment in all aspects of insolvency proceedings. They can file their claims and participate in the insolvency proceedings (e.g. vote at a meeting of creditors) under the same conditions as domestic creditors.
Czech courts automatically recognise insolvency proceedings opened in other EU Member States under the EU Insolvency Regulation. For insolvency proceedings opened outside the EU, recognition is also possible, but usually requires specific court approval to ensure compliance with Czech legal principles. This approach facilitates cross-border insolvency proceedings and allows foreign insolvency decisions to be effective in the Czech Republic if they comply with the applicable legal standards.
Once foreign insolvency proceedings are recognised, Czech courts can cooperate with foreign administrators, seize assets in the Czech Republic and mediate the enforcement of judgments.
Czech insolvency proceedings can also be initiated against a foreign company if it has a centre of main interest (COMI), establishment or assets in the Czech Republic.
International comparison of insolvency rules in practice
As companies are increasingly conducting business internationally, understanding the differences between the various insolvency laws is becoming more important. Although there has been significant progress in many countries, particularly within the EU, in recognising foreign insolvency proceedings, complete compatibility and accommodation have not been achieved yet. Insolvency regimens can vary across jurisdictions, and these differences can have a significant impact on how companies manage their risks and business strategies.
By Tomas Jelinek, Senior Associate, Eversheds Sutherland