This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit:

The number of companies facing financial difficulties, or even collapse, has been steadliy growing over the last 12 months. In such an environment, investors with sufficient liquidity are showing an increased interest in acquiring assets in distress, be it an entire enterprise, a part of it, specific assets or shares. What can these investors expect from Czech insolvency law?

The number of distressed M&A deals in the Czech Republic has been modest compared to countries like the US, UK, Germany, or Austria, where a number of largescale distressed M&A transactions have been completed. In particular, there has not been any large, debt-financed M&A transaction lately, but only a few equity-financed mid-sized transactions. Large strategic investors like Agrofert, »EZ, and PPF Group have led the way. Analysts expect that other strategic investors will follow suit.

Pre-insolvency v. post-insolvency M&A

Basically, insolvency law affects the structure of an acquisition of assets in distress depending on the moment when the acquisition is completed. Generally speaking, prior to insolvency, investors and sellers conclude a "classic" M&A transaction. They only need to be aware of the risk that a creditor may challenge the transaction if the seller is insolvent.

Once an insolvency proceeding is initiated upon the filing of an insolvency petition under Section 97 et seq of the Czech Insolvency Act (Act No. 182/2006; Ins Act), the sales process becomes formalised involving, among other things, the insolvency court, the creditors and the insolvency administrator. In this situation, a distressed transaction is carried out either during the so-called moratorium (Section 115 et seq Ins Act) or during the subsequent insolvency proceeding, i.e. in bankruptcy (Section 244 et seq Ins Act) or in reorganisation (Section 316 Ins Act).

Advantages and pitfalls in each phase


The purpose of a moratorium is to protect the debtor from a declaration of insolvency during a limited period of three months, plus an additional 30 days upon request. During this period, the debtor can pay off specific debt on a priority basis.

From the investor's perspective, the acquisition of assets during a moratorium may be appealing because (i) it allows quick control over the target, (ii) it is possible to agree on exclusivity and (iii) it helps preserve existing contracts. On the other hand, (i) the investor runs the risk of assuming liabilities without limit, (ii) the timeframe may be too limited and (iii) there is a risk that the transaction will be challenged. In practice, however, M&A transactions during a moratorium are rather exceptional. Unless an investor has held talks with the debtor prior to insolvency, in most cases it is not realistic to expect that a deal will be closed prior to the expiry of the moratorium.


Bankruptcy is the classic way of liquidating a debtor's assets in order to satisfy a creditor's claims. The insolvency administrator sells the assets, in an auction or directly, within three months of the insolvency decision.

The main advantages of an acquisition in bankruptcy are (i) the possibility to acquire "clean" assets, (ii) a limitation of the risk of a challenge to the transaction and (iii) a favourable price. On the other hand, (i) the investor cannot expect any warranties, (ii) time is limited, (iii) there is no exclusivity, (iv) additional players (insolvency court, insolvency administrator, creditors) get involved and (v) essential contracts and key employees may get lost.

Nevertheless, in practice, acquisition in bankruptcy is still the preferred method of investors. The possibility of acquiring "clean" assets and the limited risk of challenge are particularly appealing, while the risks due to lack of warranties are compensated by a reduced purchase price.


Reorganisation was introduced on 1 January 2008 as a new form of insolvency proceeding. Reorganisation is heavily inspired by similar legal institutions in, for example, US and German insolvency laws. It should allow the ongoing satisfaction of creditors' claims, while the enterprise is to be preserved.

In reorganisation, the debtor basically disposes of the assets within the boundaries set by the reorganisation plan, under the supervision of the creditors' committee and the insolvency administrator. Moreover, the law provides for the possibility of merging the debtor with an investor or an entity controlled by the investor.

Like in bankruptcy, the advantages from an investor's perspective consist in the possibility of (i) acquiring "clean" assets, (ii) restructuring labour law relationships and (iii) facing only limited risks of challenge. The price also tends to be lower than in an acquisition prior to insolvency.

These upsides are (over?) compensated by (i) the involvement of the insolvency bodies, (ii) only very limited warranties (if at all) and (iii) the risk of a loss of essential contracts and key employees.

The disadvantages attributed to an acquisition in reorganisation have so far successfully deterred investors. Based on the latest media reports, only six reorganisation proceedings have been completed to date. And reorganisation has been successfully carried out in only one of these cases.

Why is this?

The players involved simply do not trust this new instrument yet. While Chapter 11 procedures in the US and the German equivalent (and many others) have been successfully completed in the past, there is no track record of success in the Czech Republic yet. It is also possible that the debtors who underwent reorganisations were simply not suited to this course of action.

However, given that the legal framework is now up to date, it should only be a matter of time before reorganisation becomes more popular in the Czech Republic. Until then, investors will go on trying to purchase assets, either prior to insolvency or out of bankruptcy.

The disadvantages attributed to an acquisition in reorganisation have so far successfully deterred investors.

This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.