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  • Writer's pictureĽudmila Porubová

Insolvency in Czech law

Introduction:

Are you an individual facing financial difficulties? Or are you a creditor suspecting that your debtor might be going bankrupt? Read on for more information on insolvency under the Czech law.


Just as anywhere else, individuals and businesses in the Czech Republic may find themselves facing complex financial challenges. When the burden of debt becomes overwhelming, understanding the available legal options is important. The Czech Insolvency Act (no. 182/2006 Coll.) provides a structured framework for addressing financial crises through insolvency proceedings. In this article, we will explore the key aspects of bankruptcy under the Czech law, shedding light on when and how insolvency proceedings can be initiated, the legal reasons for insolvency, and the available ways for its resolution.


Initiating Insolvency Proceedings:

Insolvency proceedings in the Czech Republic can be initiated through a formal process starting with the submission of an insolvency petition. Importantly, either the insolvent debtor or one of its creditors can initiate this process, offering flexibility and protection to both parties.


Legal Reasons for Insolvency:

Under the Czech law, insolvency typically arises from two primary legal reasons: illiquidity and over-indebtedness.


Illiquidity: Illiquidity occurs when a debtor, facing multiple creditors and payment obligations, fails to meet these obligations for an extended period of more than 30 days. This inability to meet financial commitments is often characterized by the suspension of significant payments or debts that remain overdue for more than three months.


Over-indebtedness: Over-indebtedness, on the other hand, applies primarily to legal entities and individuals operating as entrepreneurs. Under this criterion, over-indebtedness is deemed to exist when the debtor's assets, taking into account potential positive going-concern prospects, no longer cover its liabilities, as assessed through the balance sheet test.


Resolving Debt Under Czech Insolvency Act:

The Czech Insolvency Act offers various methods for resolving a debtor's insolvency situation:


1. Bankruptcy Liquidation (Konkurs):

Bankruptcy liquidation involves the orderly liquidation of the insolvent debtor's assets to repay creditors. This method aims to distribute the debtor's assets fairly among creditors according to their priority and the nature of their claims.


2. Formal Reorganisation (Reorganizace):

Formal reorganisation provides a lifeline to debtors who wish to continue their business operations. This approach allows the debtor to propose a restructuring plan that can lead to debt reduction, extended payment terms, or other arrangements, allowing them to regain financial stability.


3. Discharge of Debts (Oddlužení):

The discharge of debts is a specialized method primarily applicable to individuals. It offers a path to eliminate debts and make a fresh financial start. This process involves reduced debt repayment.


Conclusion:

The Czech Insolvency Act provides a comprehensive framework to address insolvency situations through bankruptcy liquidation, formal reorganisation, or the discharge of debts, whether you are an individual or a business entity. Whether you're a creditor seeking to recover debts from a potentially insolvent debtor or a debtor facing financial challenges, seeking legal counsel from experienced professionals can be the first step toward regaining control. Don't hesitate to get in touch with us at info@expatlaw.cz for assistance.

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