During the current economic downturn the number of insolvency proceedings in the Czech Republic continuously increases. The insolvency legislation plays a key role in insolvency proceedings.

Given the tough conditions on the market, we are witnessing higher numbers of bullying insolvency petitions submitted against debtors.

Bullying behavior is a situation where a creditor submits an unjustified insolvency petition against the debtor. The purpose of such an unjustified petition is, in fact, not to solve the debtor's bankruptcy but a means for creditors to get their money back, to eliminate the debtor from the competition (e.g. a debtor cannot participate in public tenders) or to damage the debtor's reputation.

The current insolvency rules do not deal with bullying behavior in insolvency, and the debtor is not protected against this behavior by the creditors. After many cases in which bullying behavior has been used, the insolvency rules need to be changed.

New legislation dealing with bullying behavior in insolvency has been approved by Parliament on 13 July 2012. If this proposal is accepted by the Senate the new rules come into effect in September 2012.

The intention of the new legislation is to strengthen the position of the debtor against the creditors who are submitting the unjustified insolvency petitions and to eliminate this particular type of abuse of the insolvency law.

The most important changes are as follows:

  • The legislation establishes a definition of "unjustified insolvency petition". A petition would fall within this definition where there has been an abuse, by the creditor, of the creditors right to submit an insolvency petition against the debtor;
  • The court has a new right to dismiss an insolvency petition which is obviously unjustified within one week of the delivery of the insolvency petition;
  • The court may expressly state in its decision that the submission of the insolvency petition was unjustified;
  • The court has the  right to impose a fine on a creditor who has submitted an unjustified insolvency petition; and
  • The court will be able to demand a guarantee (in money) from the creditor to secure that the potential damage to the debtor, which may be caused by the unjustified insolvency petition, will be covered.

When the new rules come into effect, debtors in the Czech Republic will be legally protected against creditors abusing their right to submit an insolvency petition. In addition, creditors will run the risk that the court will impose fines if they submit an obviously unjustified insolvency petition against the debtor.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 18/07/2012.