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New methods how to stay protected against unfounded insolvency petitions in the Czech Republic

New methods how to stay protected against unfounded insolvency petitions in the Czech Republic

The Insolvency Act (Act No. 182/2006 Coll., on insolvency and its solving methods, effective as of 1st January 2008) has already been amended a few times during the five-year term of its existence.

The last of its major novelizations, effective as of 1st November 2012, is a reaction to the unwanted effect that became a general practice and often-used tool among competitors. It concentrates on insolvency petitions, which are often filled for no obvious reason, with the aim to harm a competitor by the initiation of an insolvency proceeding, which may, in many cases, lead to the economic liquidation of that competitor. Simple information that an insolvency proceeding had been initiated against somebody may often cause a negative impression about the financial situation of the debtor among its business partners and the public.

According to the Insolvency Act, the insolvency court must announce the initiation of an insolvency proceeding by way of publication of a court decree issued within the time limit of two hours from its filing with the respective court. Initiation of an insolvency proceeding brings adverse effects on the assets of the debtor. The Insolvency Act defines the actions of the insolvency court and introduces different ways for the termination of the insolvency proceeding.

One of the ways the court may terminate the insolvency proceeding is by the rejection of the insolvency petition (for its formal defects) or its dismissal (due to the failure to prove the actual insolvency of the debtor). However, until now none of the above said methods allowed the court to terminate the insolvency proceeding initiated by a formally compliant, but obviously for no given reason filled, application, within a short time period and without the actual need to order a court hearing and formal engagement of the involved parties. The legislation prior to the novelization therefore was not able to offer any effective and fast tool to terminate such proceedings.

The main aim of today´s novelization is to introduce new method for termination of insolvency proceedings, so-called rejection of insolvency petition due to evidently unfounded petition. The insolvency court must assess the petition on the basis of information contained therein and any appending information. Provided the insolvency petition is assessed as evidently unfounded, it will be rejected within a short time period, no later than within 7 days from the filing date. The court may also impose a penalty to the initiating party up to the amount of CZK 50,000.

The novelization provides for definition of evidently unfounded petitions. It will apply particularly to situations in which: the initiating party supports its application by an immature claim; the insolvency petition is filled repeatedly while the applicant fails to prove that it duly complied with obligations imposed in previous court decisions (payment of court fees, payment of imposed penalties, etc.); or the initiating party is evidently misusing its other rights against the rights of the debtor.

Another tool that should limit filing of evidently unfounded petitions is the possibility of the court to order to the initiating party to deposit a certain payment that will serve as a security for the compensation of damages or harm that may be suffered by the debtor by the initiation of the unfounded insolvency proceeding. The court may order so upon the invitation of the debtor, who will be able to prove that it is under a real threat to incur such damages or harm. The novelization also allows the court to limit, by way of preliminary ruling, certain other aspects imposed by the initiation of insolvency proceeding, by suspending these till the point of due decision on the acceptance of the insolvency petition.

Benefits of some of the above described changes are already being questioned (such as too low penalties or complicated process for evidencing the possible damages, which entitle the debtor to obtain the preliminary ruling). However, the novelization is overall accepted positively and it is expected that the number of evidently unfounded petitions should decrease.

Jiri Spousta

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