The Chamber of Deputies is currently discussing the second reading of the amendment to Act No. 182/2006 Coll., the Insolvency Act (“IA”). The purpose of this amendment is to place restrictions on fraudulent companies which offer debt discharge services and profit from debtors in difficult situations, prevent malicious insolvency petitions and generally make insolvency proceedings more transparent. Through this amendment the Ministry of Justice also wants to tighten up the conditions governing consultancy services relating to the discharge of debts.

I. Discharge of debts

a) Petition to permit the discharge of debts

The amendment mostly concerns discharge of debts as a means of resolving bankruptcy cases, changes the manner in which petitions to permit the discharge of debts are filed, and introduces the concept of accredited service provider in relation to the discharge of debts.

In accordance with Section 389 of the IA, a debtor may petition the insolvency court to resolve his bankruptcy or imminent bankruptcy through the discharge of debt, if the debtor is a legal entity or natural person who has no business debts. The debtor is obliged to accompany the insolvency petition with a petition to permit the discharge of the debt. If the insolvency petition is filed by a different person, the debtor is also entitled to file a petition to permit the discharge of the debt himself, within 30 days of receiving the insolvency petition.

The amendment introduces a new Section 390a, according to which a petition to permit the discharge of debts must be drawn up on behalf of the debtor and filed by a lawyer, notary, insolvency administrator or accredited person (see below). The amendment also requires that such a petition be filed using the prescribed form.

Nevertheless, the debtor is entitled to file a petition to permit the discharge of a debt himself, provided that he has a Master’s degree in law or economics or if he has passed an insolvency administrator examination. If the debtor is a legal entity, these conditions must also be met by the debtor’s representative.

Assuming that, under the amendment, the petition to permit the discharge of a debt is drawn up on behalf of the debtor by a lawyer, notary or insolvency administrator, that person is entitled to remuneration amounting to a maximum of 4 000 CZK (6 000 CZK for the discharge of a married couple’s debts). If these actions are taken by an accredited person, that person is not entitled to claim remuneration.

b) Bankruptcy instead of the discharge of debts

In the event that the insolvency court rejects a petition to permit the discharge of debts, takes the withdrawal of such a petition into account or denies it, the previous Section 396 of the IA states that it is obliged to decide that the debtor’s situation be resolved through bankruptcy.

After the amendment, if the insolvency court rejects a petition to permit the discharge of debts, it will take the withdrawal of such a petition into account and may decide that the debtor’s situation be resolved through bankruptcy. Therefore, according to the amendment, in such a case the insolvency court will now be obliged to rule the debtor bankrupt, but the choice of method will be entirely at the court’s discretion. If the court does not decide that the debtor’s situation be resolved through bankruptcy, it will suspend the proceedings.

However, the court cannot decide on the choice of bankruptcy if the petition to permit the discharge of debts has not been filed together with the insolvency petition (i.e. if it is not a debtor insolvency petition) and if the insolvency court finds that the debtor’s assets are completely insufficient to satisfy creditors.

If, during the course of insolvency proceedings, facts come to light which would otherwise constitute grounds for the rejection or denial of a petition to permit the discharge of debts, in accordance with Section 405 of the IA during the proceedings the court will not approve the discharge of debts and will decide that the debtor’s situation be resolved through bankruptcy. According to the amendment, it will also still be obliged to decide on this form of resolving the bankruptcy without consideration, although will still be bound by the same conditions as if would be if it were to reject or deny the petition (see above).

In accordance with Section 418 of the IA, the insolvency court will repeal the consent to the discharge of debts and will also decide that the debtor’s situation be resolved through bankruptcy, particularly if the debtor fails to comply with the substantial arising from the approved means of discharging the debt or if it proves that the debtor will be unable to make a significant proportion of the payments given in the repayment schedule.

After this amendment the court will also be able to take the same course of action even if the above conditions have been met, i.e. if no petition to permit the discharge of debts has been filed with the insolvency petition and the court finds that the debtor’s assets are insufficient to satisfy creditors.

c) Accredited persons

The amendment introduces the institute of accredited persons for the provision of debt-related services; only a legal entity may be an accredited person.

In accordance with Section 418a, debt discharge services are as follows: drawing up and filing a petition to permit the discharge of debts or an insolvency petition in accordance with Section 390(1) and other necessary related activities, particularly consultancy with the client and rectifying shortcomings in the petition.

The Ministry of Justice decides on the granting of accreditation on request; applicants must particularly prove that persons with whom they have a contractual relationship have a clean criminal record and are professionally competent, and must also submit proof of their own public benefit. A person who has been convicted of a crime in connection with the provision of debt discharge services or comparable services is not classed as a person with a clean criminal record. A person is deemed professionally competent if they have obtained a Master’s degree in law or economics at a university in the Czech Republic or eligible university abroad.

When providing services to debtors, accredited persons are obliged to act conscientiously and with due diligence, while their activities are supervised by the Ministry of Justice. Any breach of obligations by an accredited person may constitute an administrative offence, which may result in a fine of up to 200 th. CZK or a ban on activities relating to the discharge of debts for up to 5 years. The amendment also introduces administrative offences and misdemeanours in the provision of services related to the discharge of debts without accreditation or unlawfully, which may result in a fine of up to 500 th. CZK.

The aim of the proposed legislation is to prevent commercial entities (“debt discharge companies”) from offering assistance to debtors prior to insolvency proceedings held to decide whether or not to permit the discharge of debts, or to subsequently issue a decision to approve the discharge of debts, in order to profit from debtors who are in difficult situations and inadequately informed.

d) Meeting of creditors

If bankruptcy is to be resolved through the discharge of debts, Section 47(1) of the 1 IA specifies the following as general conditions for convening a meeting of creditors (i) a petition by an absolute majority of all creditors counted “by head” as well as by registered receivables, (ii) a petition by the insolvency administrator or (iii) a petition by the creditors’ committee. The amendment now also allows the court to convene a meeting of creditors ex officio, if it deems necessary.

II. Other significant changes

a) Deposit on the costs of insolvency proceedings

So far the Insolvency Act has allowed the insolvency court to order that an insolvency petitioner pay a deposit of up to 50 000 CZK to cover the costs of the insolvency proceedings, payable by a set deadline. After this amendment the deposit will be mandatory, both for creditors and for the insolvency petitioner.

The creditor will thus be obliged to pay a deposit amounting to 500 000 CZK, if the debtor is an entrepreneur, a legal entity, or 100 000 CZK in other cases. The only exception granted by the amendment is for the labour-law receivables of employees and consumer receivables.

Under the new law, the insolvency court will also reject an insolvency petition if it is clearly unjustified in accordance with Section 128a if the deposit on the costs of the insolvency proceedings has not been paid by the creditor in a due and timely manner.

However, the amendment retains the insolvency court’s right to order the petitioner to pay a deposit of up to 50 000 CZK. The court will thus still be entitled to order a deposit to be paid at its discretion, but only if the insolvency petitioner is a debtor.

b) Preliminary assessment of the petition

The amendment also contains a new Section 100a, which introduces the institute of a preliminary assessment of an insolvency petition filed by a creditor. If, under this section, the insolvency court has reasonable grounds to doubt the justification of an insolvency petition filed by a creditor, it will decide not to publish the insolvency petition or other documents in the insolvency file in the insolvency register until seven days after the delivery of the petition to the court. If the court decides to reject the petition during this period on the grounds that it is clearly unjustified, the details are not published until that decision has become legally effective.

According to the explanatory memorandum, one great benefit of the proposed legislation is particularly the fact that in this primary phase of the insolvency proceedings it is possible for the competing entity, as the debtor, to void incurring losses, as a deliberate malicious insolvency petition is not announced in the form of a decree.

III. Conclusion

This amendment to the Insolvency Act will bring significant changes concerning the discharge of debts with the aim of protecting debtors against debt discharge companies who attempt to profit from debtors in difficult situations.

The amendment makes it mandatory that debtors be represented when filing a petition to permit the discharge of a debt (with justified exceptions) and prohibits debtors from being represented by anyone other than lawyers, notaries, insolvency administrators and entities accredited by the Ministry of Justice, under penalty of a fine of up to half a million crowns.

The amendment also limits the courts in ordering bankruptcy against debtors whose petitions to permit the discharge of debts have been rejected or refused, or which did not meet the conditions required to permit the discharge of debts, and enables these debtors to resolve their situation through bankruptcy only provided that they possess sufficient assets to satisfy creditors.

The amendment also protects debtors against malicious insolvency petitions and requires that a mandatory deposit to cover the costs of insolvency proceedings be paid by creditors who file an insolvency petition against a debtor. In order to protect the weaker party, this obligation does not apply to the debtor’s employees who have receivables from unpaid wages, or consumers.

Led by the effort to reduce the number of malicious insolvency petitions, the legislator also introduced the so-called preliminary assessment of an insolvency petition. Under this amendment, the court, if it doubts the justification of an insolvency petition filed by a creditor, will be able to decide not to publish the petition and other documents in the insolvency register. The aim of this change is to protect competition against the practices of certain competitors who, by initiating insolvency proceedings against their competitors, strive to give the impression that the given entity is insolvent and to reduce the credibility of that competitor in the eyes of business partners.

The amendment can also be seen as beneficial in that creditors’ option to file malicious insolvency petitions and the large number of fraudulent companies that profit from debtors in difficulties are major shortcomings of the current legislation and the legislator is making definite efforts to eliminate them.

For more information, please contact our office’s partner, Mgr. Jiří Kučera, e-mail: jkucera@kuceralegal.cz ; tel.: +420604242241.