Criminal offences related to insolvency proceedings

In our miniseries we focus on the position of creditors in Czech law. This time, we will focus on crimes that a debtor may commit against creditors in an attempt to improve his or her position.

korupce, věřitel v insolvenčním řízení, trestný čin
7 minutes of reading

Chapters of the article

Offences relating to the relationship between creditors and debtors or failure to comply with certain obligations in insolvency proceedings fall under offences against property.

These include:

  • damage to creditors
  • favouring a creditor
  • credit fraud
  • causing bankruptcy
  • breach of duty in insolvency proceedings
  • misrepresentations in insolvency proceedings
  • breach of the obligation to make a true declaration of assets

The amount of the damage caused is usually the key factor and is defined in the following categories:

  • not insignificant damage: damage amounting to at least CZK 10,000,
  • not minor damage: damage amounting to at least CZK 50 000,
  • major damage: damage amounting to at least CZK 100 000,
  • substantial damage: damage amounting to at least CZK 1000000, and
  • major damage: damage amounting to at least CZK 10000000.

Tip: You don’t have to be the perpetrator of the crime, or even plan it, and you may still be directly affected by the criminal proceedings. All it takes is for someone to steal a bike of greater value and you are already part of it as a victim. While any role in the criminal process is unenviable, it is worthwhile for everyone involved to know the different stages of the process.

Damage to the creditor

When a creditor is prejudiced, the debtor intentionally reduces his assets to such an extent that the creditor is no longer able to obtain full satisfaction of his claim, even from other assets of the debtor. At the same time, the condition that the debtor causes damage to creditors of at least CZK 50 000 applies.

According to the Criminal Code, such an act may occur, for example, when the debtordestroys part of his property, assigns his claim or pretends to fulfil an obligation. For example, he pretends to have lost or donated a valuable item. A contractual relationship must exist between the debtor and the creditor at the time of the offence. As the amount of the damage caused increases, the penalty may increase, up to eight years’ imprisonment.

Are you trying in vain to recover your debt?

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.

Advantage to the creditor

The offence of favouring a creditor can only occur in a specific situation where the assets of the debtor, who is bankrupt, are insufficient to satisfy all creditors. The correct procedure would be to satisfy all creditors in the same proportion. However, if the debtor, for example, repays the debt to one creditor in full and thus fails to meet its obligations to other creditors, or not in the proportion in which it should have done so, this may result in an advantage to the creditor. Again, it is crucial that there is damage of at least CZK 50 000.

Unlike the offence of damage to a creditor, the total assets of the offender to be used to satisfy creditors are not altered, but the debtor’s assets are used to satisfy creditors unevenly in this case.

Credit fraud

Committing credit fraud is not as difficult as it seems. Many people commit it without knowing that it is a crime. They need to get a mortgage to buy a home or a loan for a car, so they exaggerate their income a bit, have a few invoices in their name to fictitiously increase their income, falsify their tax returns or conceal some debts. Or, for example, they may use a building society loan for a purpose other than that for which it was granted.

According to the Criminal Code, anyone who provides false or grossly misrepresented information when negotiating a loan agreement, or conceals material information, may be punished by up to two years’ imprisonment or a ban on activity.

If the information is false, it does not correspond to the actual situation at all. On the other hand, grossly distorted data are data that are incomplete or only partly based on the truth. For example, debts may be essential information that is withheld. If the creditor had known of their existence, he would not have concluded the credit agreement.

Causing bankruptcy

The offence of bankruptcy is committed by anyone who, even through gross negligence, causes bankruptcy, i.e. a situation where the debtor has at least two creditors, his debts are at least 30 days overdue and it is obvious that he is unable to meet them.

Various forms of conduct described in the law may lead to bankruptcy, for example, when the debtor makes huge expenses, borrows money or carries out risky business operations in gross disproportion to his assets.

This is the key wording, i.e. grossly disproportionate to the debtor’s assets. Thus, if the debtor commits to something believing that he will be able to perform it, and he backs up his beliefs with realistic evidence, then the offence will not be one.
The same punishment can be expected if a debtor who is already bankrupt and yet acts unreasonably, for example by lending money or creating a charge over his property, thereby worsening the position of existing creditors.

Again, the amount of the penalty corresponds above all to the amount of the damage caused.

Breach of duty in insolvency proceedings

This offence is directed against the creditor rather indirectly. First and foremost, it concerns the relationship with the insolvency administrator or the disruption of the insolvency administrator’s activities. However, this also disrupts the insolvency proceedings as a whole. Therefore, if the perpetrator obstructs or grossly hinders the activities of the insolvency administrator, the substance of this offence is fulfilled. However, the purpose of the insolvency proceedings need not be frustrated, it is sufficient if it is jeopardised.

Confusion in insolvency proceedings

The offence of misrepresentation in insolvency proceedings is similar to the offence of favouring a creditor. They are acts that can be laconically described as bribery in insolvency proceedings. It involves the obtaining of a financial benefit by a particular entity in contravention of the rules and principles of insolvency proceedings.

Unlike the advantage to a creditor, the perpetrator does not have to be the debtor. On the contrary, the offence may also be committed by the creditor itself, who, for example, accepts a certain material advantage (contrary to the rules of the insolvency proceedings) in connection with the creditors’ vote in the insolvency proceedings. Similarly, the person who offers or provides such an advantage may be punished.

Tip: In the case of criminal offences, we may encounter a situation where the offender’s conduct meets all the elements that the law requires for the offence, yet the offence is not or cannot be punished in any way because too much time has elapsed since the offence was committed. We are talking about the statute of limitations on the offence. You can read exactly how it works in our article.

Breach of the obligation to make a true declaration of assets

This offence punishes failure to make a true declaration of assets in insolvency proceedings, but also in all proceedings in which a person may be ordered to make such a declaration.

It shall be committed by a person who, in proceedings before a court or other public authority, refuses to comply with a legal obligation to make a declaration of his assets or of the assets of a legal person for whom he is authorised to act, or evades such an obligation, or makes false or grossly misleading statements in such a declaration.

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Author of the article

JUDr. Ondřej Preuss, Ph.D.

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.

Education
  • Law, Ph.D, Pf UK in Prague
  • Law, L’université Nancy-II, Nancy
  • Law, Master’s degree (Mgr.), Pf UK in Prague
  • International Territorial Studies (Bc.), FSV UK in Prague

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