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Novelization of the Czech Insolvency Act 2017 (part two)

Novelization of the Czech Insolvency Act 2017 (part two)

The article is devoted to most important changes brought by the novelization of the Czech Insolvency Act, i.e. the Act No. 64/2017 Coll., by which the Act No. 182/2008 Coll., the Insolvency Act („the IA“), is amended, which became effective as of 1st July 2017.

In part two we bring deeper insight into the changes relating to the higher transparency of the Czech insolvency proceedings, which is one of three fundamental aims of this novelization.

III. Higher transparency of insolvency proceedings

Among important measures serving to this aim belongs the establishment of the ban on the voting right of a creditor who constitutes a business group with a debtor or who is a close person to a debtor (Section 53 (1) IA). Such a creditor will not be allowed to vote on the meeting of creditors, unless explicitly provided by the Insolvency Act. The main motivation for implementation of this ban is the fact that the above stated creditors are usually in a conflict of interest and on the meeting of creditors they often protect the interests of debtors instead of supporting their interests from the position of creditors.

The existing ban on the voting right of a creditor regarding „his own issue“ remains still in the Insolvency Act (Section 53 (2) IA). However, the novelization replaces the term „his own issue“ by the list of specific cases, when the creditor is not allowed to vote. Pursuant to the new legislation the creditor cannot vote in cases, in which he is active or is or should be a party to, such as (i) an acquisition of property or another fulfilment from the insolvency assets, (ii) a legal acts regarding the right that is or can be the part of the insolvency assets, (iii) an incidental dispute, or (iv) a decision about the voting right.

The creditors of assigned claims are newly obliged to reveal their beneficial owners (Section 177 (2) IA). The new obligation relates to the creditors who have acquired their claims via assignment or another similar procedure after the commencement of the insolvency proceedings or in the period of six-month prior to its commencement. These creditors will have to add to the submission of their claims a sworn affidavit, in which they have to reveal, who is their beneficial owner according to the AML Act, i.e. the Act No. 253/2008 Coll., on the prevention of money laundering and terrorist financing, and give the reason, and why this person should be considered as the beneficial owner; (claims not exceeding the value of EUR 10,000 will be exempt).

The novelization furthermore establishes a measure against a possible manipulation with the local jurisdiction of insolvency proceedings – so-called fixation of the local jurisdiction (Section 7b (1) IA). The relevant court will be the court, in whose territory the debtor – the businessmen registered in the Commercial Register – has his registered seat on the day preceding 6 months prior to the commencement of the insolvency proceedings. The aim of this rule is to eliminate the calculated change of debtor’s seat, which may lead to difficulties when performing creditor’s rights (e.g. creditors will have to travel to the court proceedings) and to the factual infringement of the Rule of the lawful judge.

At the same time the court has to continue in the insolvency proceedings and take urgent actions before making decision about the local jurisdiction (Section 7b (5) IA). It is an exception from the rule that only the relevant court with local jurisdiction is entitled to make decisions in the proceedings proceedings. According to the new legislation, the court will be obliged to decide e.g. about the appointment of the preliminary creditor committee, the appointment of preliminary insolvency trustee, the fact that the insolvency petition will not be published in the Insolvency Register, the refusal of the insolvency petition or its refusal due to its flagrant groundlessness.

The novelization emphasizes the delivery of documents to data boxes of the court and embodies mandatory use of electronic forms (Section 80a IA). For example the inventory of the insolvency assets, the list of registered claims, the final report and the report about the performance of the reorganization plan must be submitted by the insolvency trustee only via electronic forms.

Certain competences of the insolvency courts in insolvency proceedings, where the bankruptcy will be solved by debt relief, will be transferred from courts to insolvency trustees. This should ease the administrative burden of courts and allow the courts to focus on more complicated bankruptcy proceedings and reorganisation.

Great impact in practise will represent the change in system of distribution of insolvency cases to insolvency trustees in the field of debt relief. The novelization cancels the district principle, i.e. distribution of insolvency cases to insolvency trustees according to district courts (the debtor’s general court), and installs the application of the principle of region courts (Section 25 (2) (b) IA). This means that the list of insolvency trustees who are specialized on solving the bankruptcy by the debt relief will be newly kept pursuant to the territory of region courts. Insolvency trustees will not need to have their registered seat or establishment in every particular district, but it will be sufficient to have one in the region. It is expected that this change will lead to the decrease in number of establishments (often fictional) by big insolvency trustees in order to increase the number of newly distributed insolvency issues and to the more evenly distribution of insolvency cases among all insolvency trustees.

Finally, the new legislation brings the reinforcement of the general supervision of the Czech Ministry of Justice over the performance of the function of an insolvency trustee (the Ministry of Justice will gain the right to cancel the authorization of an insolvency trustee, if he breaks his duties seriously or repeatedly).

By Jiří Spousta & Magda Stárková

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