Czech Republic & LEX COVID II & Statutory Measures in Insolvency Law
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In spring 2020, the Czech Republic, like the rest of the world, was severely affected by the coronavirus pandemic. The spread of COVID-19 outbreaks led to drastic shutdowns and reduced operations in almost all sectors of the economy. The loss of income and suspension of payments threatened to lead to the insolvency of thousands of businesses. So in spring 2020 the Czech Parliament approved temporary statutory measures to prevent the collapse of the business sector due to formal insolvency proceedings (the so-called Lex COVID). You can read our overview of the most important changes already introduced by the Lex COVID here.
On 5 October 2020, due to the constantly deteriorating situation of the coronavirus pandemic, the Government declared a state of emergency again, adopted new emergency measures and imposed strict restrictions on business activities. As the validity of a large part of the original Lex COVID provisions had expired, the Parliament adopted new measures and extended some of the existing ones in the area of insolvency (the so-called Lex COVID II). The new insolvency measures came into force on 13 November 2020.
What key changes does the Lex COVID II bring?
Insolvency Petitions
The original Lex COVID suspended the obligation of a business to file an insolvency petition immediately after it becomes aware of its insolvency, or should have become aware of it by exercising due care. This relief was limited by the lapse of six months after the lifting of the emergency measures and the ultimate deadline of validity was originally set at the end of 2020.
The provisions of the Lex COVID II newly extend the application of this measure until mid-year. Debtors whose insolvency occurred during the epidemic emergency measures, or was mostly caused by the circumstances related to the epidemic emergency measures which made it impossible or excessively difficult to fulfil financial obligations, are exempted from the obligation to file an insolvency petition until 30 June 2021. The period during which the debtor's obligation to file an insolvency petition is suspended is not included into the period in which it is possible to challenge the debtor's legal acts under the Insolvency Act, i.e. debtor's legal acts without reasonable consideration or preferential or fraudulent legal acts of the debtor.
In addition to the debtor's insolvency petition, the measures adopted in the first wave of the coronavirus crisis also aimed to protect debtors from creditors' insolvency petitions. So, the Lex COVID explicitly ruled out the possibility of creditors filing an insolvency petition on their debtors until 31 August 2020. Unlike the original provisions, the Lex COVID II does not affect the creditors' right to file insolvency petitions at all, and thus as of 1 September 2020 the courts must process creditors' insolvency petitions.
The Extraordinary Moratorium
The Lex COVID newly introduced the institution of so-called extraordinary moratorium into our legal system. As of 31 August 2020, more than 60 businesses had used the extraordinary moratorium measures, including for instance the impossibility to declare insolvency, suspension of enforcement proceedings, or reversal of the sale of secured assets. The Lex COVID II extends the protection provided by virtue of the extraordinary moratorium and restores its further use until 30 June 2021.
According to the new rules, a business which was not insolvent as at 5 October 2020 will be entitled to apply for the extraordinary moratorium. The application may be submitted prior to the commencement of the insolvency proceedings or after its initiation in the case of a creditor's insolvency petition. However, the Lex COVID II explicitly excludes applying for the protection by businesses whose application for the extraordinary moratorium has already been approved by the insolvency court under the original Lex COVID.
In addition to the prescribed requirements and information on the number of employees in employment, and the amount of turnover for the last accounting period, the debtor must also enclose with the application an affidavit stating that: (i) the debtor seeks the extraordinary moratorium due to the epidemic emergency measures; (ii) the debtor was not insolvent as at 5 October 2020; (iii) within two months before 12 March 2020 or after this date, the debtor neither paid out any extraordinary dividends to shareholders, entities controlled by shareholders or controlling them, or members of corporate bodies, nor otherwise distributed own resources or provided any exceptional performance to such parties, including early repayment of a credit or loan, or that such provided performance has been returned back to the debtor; and (iv) all the information contained in the application is true. If the affidavit turns out to include false information, the debtor is liable to all of its creditors for damage or any other harm it has caused to them. The members of the debtor's statutory body are liable for (will guarantee) such damage or other harm caused in this way.
The duration of the extraordinary moratorium is set at three months, with a possible extension for up to three months, i.e. the maximum protection will be six months. The debtor must enclose with the application for extension of the extraordinary moratorium an up-to-date list of all its liabilities and consent of the creditors' majority (officially verified creditor's signature, recognised electronic signature, or sending consent from the creditor's data mailbox is required). There is an exemption from the requirement to demonstrate the creditors' approvals provided in favour of the extension of the extraordinary moratorium applied for by the debtor before 31 August 2020.
Once the extraordinary moratorium is declared, the debtor is entitled to pay with a priority the obligations directly related to the maintenance of the operation occurred after the extraordinary moratorium was declared, i.e. such obligations cannot be challenged as preferential treatment of certain creditors. Furthermore, the effects of the extraordinary moratorium do not affect the granting of the public support provided to businesses to mitigate the impacts of COVID-19.
Reorganisation and Debt Relief
The Lex COVID II also extends the special measures in relation to reorganisation. Debtors whose reorganisation plan was approved before 12 March 2020 may request an insolvency court to temporarily suspend its performance until 30 June 2021. During the period of the temporary suspension of the performance of the reorganisation plan, the statutory possibility to turn the reorganisation into bankruptcy due to non-compliance with substantial obligations set out in the reorganisation plan will not apply.
Until 30 June 2021, debtors whose insolvency declared before 31 May 2019 was solved by debt relief in the form of a payment schedule, are also protected. The protection includes, in particular, the guarantee that the approved debt relief is preserved also in case the debtor does not meet the substantial part of the payment schedule due to circumstances related to the epidemic emergency measures.
