Debt clearance is one of the ways of resolving a debtor’s insolvency, which can take one of two forms. The first involves the one-off settlement of the debtor’s debts by realising the debtor’s assets and dividing the proceeds between creditors, which is in essence similar to bankruptcy.
The second option is a repayment calendar, under which the debtor must pay at least 30% of its debts over five years. If the debtor meets these conditions, the remainder of its debt may be discharged. Debt repayment then takes place in the form of wage deductions, in much the same way as in distraint; secured creditors however, will also always be satisfied through the realisation of security/collateral. This option is more favourable for debtors as there is a less significant intervention in their financial circumstances compared to the realisation of all their assets.
The method of debt clearance is decided by the debtor’s creditors at a meeting of creditors, which means that the choice of debt clearance is primarily dependent on the will of creditors and their agreement with the debtor. As a rule, the decision of creditors is based on the extent of the debtor’s assets from which they would be satisfied on their realisation, and the amount of the debtor’s anticipated income from which they would be satisfied in the case of a repayment calendar.
Debt clearance is currently only possible for persons (both natural and legal) who are not entrepreneurs. The option of debt clearance thus excludes natural persons – entrepreneurs who have no debts in relation to their business, but who are insolvent due to an inability to pay their personal debts, i.e. exactly the type of situation debt clearance is meant to address.
On 1 January 2014, however, the amendment of Act No. 182/2006 Coll., the Insolvency Act, will come into effect, bringing a breakthrough in this principle. Debt clearance will newly be open to non-business legal entities who have no business debts and any natural person (i.e. including entrepreneurs), who have no business debts. The above restrictions for natural persons – entrepreneurs will therefore be lifted and these entrepreneurs will be able to apply for debt clearance.
However, the amendment goes even further. Subject to certain conditions, it also enables debt clearance for legal and natural persons who have business debts. According to the amendment, the existence of business debts does not preclude debt clearance provided that (i) the creditor agrees to debt clearance, or (ii) this is a debt that remains unsettled following previous insolvency proceedings in which the court cancelled bankruptcy due to a lack of assets or the fulfilment of an allocation order, or (iii) this is the claim of a secured creditor.
Under the above conditions, it is therefore possible to also clear the debts of natural persons – entrepreneurs who have business debts and legal entities that may no longer be in business, but which have unpaid debts from their previous business activity.
The amendment of the Insolvency Act thus brings a fundamental change in the manner of debt clearance by offering the option of a repayment calendar and the discharge of remaining debts following their partial payment to natural persons – entrepreneurs, including, under certain conditions, their business debts.
For more information, please contact K&A partner, Mgr. Jiří Kučera, e-mail: jkucera@kuceralegal.cz; tel.: +420604242241.