Typically, enforcement proceedings, which are initiated by creditors, are used to recover debts. In the case of insolvency proceedings, the roles are at first sight reversed and the debtor takes more activity, but this does not mean that the creditor’s role is passive. What is the procedure in insolvency proceedings and what is the position of the creditor?
Insolvency proceedings may be opened either on the debtor’s or the creditor’s motion. However, if only an impending (i.e. not existing) insolvency is at stake, only the debtor may file an insolvency petition. The court shall announce this fact by means of a notice of commencement of insolvency proceedings, which must be published in the Insolvency Register within 2 hours of receipt of the petition. The commencement of insolvency proceedings does not therefore require a court decision and the effects of the commencement of insolvency proceedings begin as soon as the notice is published.
If the debtor is a natural or legal person in business, it is legally obliged to file an insolvency petition as soon as it becomes aware of its insolvency. Otherwise, he would be liable to creditors for damages.
A petition for the commencement of insolvency proceedings can be filed with the court when the debtor has debts with at least two creditors that are more than 30 days overdue. At the same time, he is unable to pay them.
Once the proceedings have been opened, the debtor must subsequently submit a list of assets, liabilities and income to the court.
Tip: You are in complete control of your financial situation, you are not in debt and if you are, you are paying properly. The insolvency record is therefore something you don’t care about at all. But maybe it should. It is a very practical tool that can be useful to you. In our article, we’ve summarised the reasons why you should be interested in it, what you can find in it and how to search it.
In the case of debt collection by the creditor itself, many debtors, for example, play on existing good (family, friend or business) relationships and believe that they will get away with endlessly repeating their promise to pay. The moment you start communicating with the debtor through a law firm, the helpfulness of the debtor will increase manifold, as will the speed of resolving their obligation. Often there may not even be any court proceedings.
After the insolvency proceedings have been opened, the debtor is protected from possible execution and can apply to the court for a debt relief order. Claims against the debtor cannot be litigated if the claim can be filed here.
It is therefore now crucial for a potential creditor to file its claims. The creditor must file the claims no later than 2 months after the publication of the insolvency decision in the insolvency register.
The debtor can only continue to dispose of his assets in a limited fashion, in particular he should not do anything that will reduce their value.
The bankruptcy decision is the last step in the first phase of the insolvency proceedings. The court issues this decision if it concludes that the debtor is indeed insolvent.
An important effect of this decision is that contractual interest, interest on late payments, contractual penalties, etc. no longer accrue.
The law provides for three forms of bankruptcy resolution, namely reorganisation in the case of large companies, bankruptcy, where the debtor’s assets are monetised and sold, and insolvency. The latter is the most interesting form in terms of possible results of insolvency proceedings for non-business debtors.
Its condition is the ability of unsecured creditors (i.e. those whose claims are not secured in some form provided for by law) to pay at least 30% of their claims within five years at the latest. In the case of non-business debtors, the court may exempt the debtor from the rest of the debts even if the 30% threshold has not been reached, as long as the debtor has complied with the repayment schedule for a specified period of time (usually 3 or 5 years).
Whether the creditor is secured or not is crucial at this stage as everyone has a different position.
A secured creditor is a creditor whose claim is secured by property belonging to the estate by way of a pledge, a lien, a restriction on the transfer of real estate, a security interest or an assignment of the secured claim (or a similar right under foreign law).
The secured creditor (who has timely asserted its claim) has the right to be satisfied from the proceeds of the realisation of the collateral (immovable property, movable property, or assigned claim, as the case may be) in the context of the arrangement. Under the insolvency arrangement, the plan may also provide for other means of satisfaction, for example by regular instalments from the debtor’s income. The order of satisfaction is determined by the time of creation of the lien or the time of creation of other security, unless the secured creditors agree otherwise in writing.
The decision on the arrangement shall be taken at a meeting of creditors convened by the court. The creditors who have lodged their claims shall be invited to the meeting. They can then vote on whether the insolvency is to take the form of a repayment plan or the sale of assets from the estate. The court will also take into account the insolvency administrator’s comments on the appropriateness of the insolvency solution.
Another option for resolving insolvency is bankruptcy, whereby, in the case of a natural person, the common property of the spouses is dissolved and all the debtor’s assets are monetised. Importantly, creditors’ claims are extinguished only to the extent that they have been satisfied in the bankruptcy. However, they are not extinguished to the remaining extent.
For the debtor, the most desirable option for resolving his situation is usually a repayment plan. This is a long-term and rather demanding process for the debtor, who is obliged, above all, to work and not to refuse a viable opportunity to earn an income. The extra assets that he acquires (for example, inheritance or lottery winnings) must be monetised and used for extraordinary repayments beyond the repayment plan.
In addition, the debtor shall provide the court, the insolvency administrator and the creditors’ committee with a summary of his income. At all times, he must act in such a way as not to incur unenforceable obligations and not to favour any creditor.
A breach of the debtor’s obligations may lead to the annulment of the approved arrangement and the declaration of bankruptcy. After all, the debtor himself may at some point propose this. However, this rarely happens.
Tip: If a debtor acts in the insolvency proceedings in such a way as to endanger the position of a creditor, he or she may commit one of the crimes against property regulated by the Criminal Code. In our mini-series we will discuss the status of creditors in Czech law. In our article we described these crimes and explained their nature.
The court appoints the insolvency administrator. His or her task is primarily to deal with the assets of the estate, to try to satisfy the claims of creditors and, in the event of bankruptcy, he or she also deals with the monetisation of the debtor’s assets.
Monetization of secured assets listed in the inventory is carried out by the insolvency administrator on the instructions of the secured creditor or secured creditors if their right to the same assets is vested.
After a period of five years, the court may decide to exempt the debtor from paying the outstanding claims included in the arrangement (this also applies to claims of creditors who have not submitted their claims at all or in time). The condition is that the debtor has faithfully complied with the plan and the repayment schedule and, above all, that he has paidat least 30 % of the claims of unsecured creditors.
There is no exemption for secured creditors. Their claim is secured in one of the ways mentioned above. Such persons shall be satisfied in full from that security.
The debtor is removed from the insolvency register after 5 years from the legal effect of the decision on the exemption from payment of the remaining debts.
Insolvency proceedings provide creditors with an opportunity to enforce and partially satisfy their claims against an insolvent debtor. Timely filing of claims and active participation in the proceedings, including a review and possible vote on the insolvency resolution procedure, are key. Creditors are divided into secured and unsecured, and it is now possible for secured creditors to be satisfied not only by the sale of collateral but also by regular payments from the debtor’s income. In the case of insolvency, it is no longer necessary to always achieve a minimum satisfaction of 30 % of claims if the debtor fulfils the conditions of the approved repayment plan. Monitoring the progress of the proceedings and knowing one’s rights is essential for creditors, as insolvency proceedings have strict rules and missing deadlines can mean losing the right to satisfaction.
Collecting a debt through our service will usually guarantee you a faster, more efficient and significantly cheaper solution. You’ll save yourself weeks or months of pleas and reminders to pay, and usually save on costly court settlements.
Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.
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