If you borrow money from someone and draw up a contract to that effect, or enter into such a contract through another legal or commercial relationship, you become a debtor with an obligation to repay the creditor. Claims can take many forms, but we will focus today on preferential claims.
A claim is an obligation of a debtor to a creditor where the debtor must pay a certain amount or perform another obligation at a certain time. Receivables can take different forms, but since that is not the topic of this article, you can take a closer look at the types of receivables in a second article. We will now take a closer look at a preferential claim
In a legal environment, distinguishing between different types of claims is very important. Even more so when it comes to their recovery. It is in this respect that the category of priority claims is important. These claims have a higher priority than ordinary claims in the event of recovery.
This means that if the debtor does not have sufficient funds to satisfy all its liabilities, creditors with priority claims will be paid first. How does the whole preferential claims system work and who determines which claims will be prioritised and how? Read on to find out everything you want to know about preferential claims. And if there is any information you are missing, don’t hesitate to contact our legal advice service.
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Priority claims are regulated mainly in the laws on insolvency proceedings and enforcement. In the Czech legal system, they can be found in particular in the Insolvency Act and the Act on Executions. It is these laws that determine which claims have priority. Thus, in the case of collective satisfaction of creditors, the order of their claims is determined according to them.
In insolvency proceedings, priority claims are more fundamental than you might think at first glance. But because such claims have a higher priority, they will be settled before the claims of other creditors, even when the debtor is short of funds. Why is this important? To protect certain particularly protected interests, such as maintenance obligations or the rights of employees. Thus, the child of divorced parents will not be left without funds to be paid by the other parent, and so on.
Tip: If you would like to learn more about what a claim is, how it is created and what all types of claims are, read our article that covers this topic in detail.
Senior claims include various types of liabilities. Some of them are based on the law, others are linked to specific situations. Below, we present the main types of preferential claims you would find in the Czech legal system.
One of the most common types of priority claims are claims against the state. These are debts for taxes, duties, health and social insurance. The State has a privileged position in these cases. If the debtor does not have sufficient funds to pay all the debts, then the remaining money will be used to satisfy these debts on a priority basis.
Maintenance obligations, in particular child support, are also a high priority in the legal system. This means that even in the event of insolvency or execution, this claim will be satisfied before other obligations. Maintenance is understood by the Czech legal system as essential to ensure the basic needs of life and the protection of the child. That is why this type of claim has priority over others in satisfaction.
Wages, severance pay and other claims of employees against employers are another category of priority claims. If a company goes bankrupt or is subject to insolvency proceedings, employees are entitled to priority satisfaction of their claims. That is, to be paid for what they have worked, as stated in their contract, etc. This measure protects the rights of employees who find themselves in a difficult situation as a result of their employer’s insolvency.
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We discuss the process of debt recovery in more detail in a separate article. What about the recovery of priority ones? As we have already mentioned, creditors with a priority claim have an advantage over others, as they have a higher chance that their claim will be satisfied despite the debtor’s insolvency. However, this does not mean that they have a 100% automatic guarantee that they will receive their money or other claim. The recovery of priority claims takes place through enforcement or insolvency proceedings.
If the debtor is in foreclosure, then the foreclosing party is obliged to settle priority claims first. For example, if the debtor owes both taxes and child support to his former partner, the bailiff will first satisfy the child support and then deal with the tax liabilities. If there are insufficient funds to satisfy all debts, creditors with ordinary claims are out of luck – they will not see their claim satisfied.
In insolvency, the insolvency administrator decides what happens to the debtor’s finances. Even in the insolvency process, priority claims have a clearly defined place. For example, employees’ wages or, again, child support are always satisfied first. Only afterwards does it come to the satisfaction of other creditors who have priority claims. All other creditors whose claims do not have priority come last.
In practice, if the debtor has not paid taxes to the tax office, has not sent maintenance and has not paid several invoices to his business partners, the dependent child gets the money first, then the tax office, and finally, if there are any funds left, the invoices are paid.
The priority claims system varies from country to country, but mainly in detail. In Slovakia or Germany, for example, the rules on priority claims are very similar. In France, on the other hand, child maintenance is considered an absolutely inviolable priority.
With regard to the recovery of preferential claims, we could mention that debtors have the possibility to defend themselves against recovery in some cases. The most common method used by debtors is to apply for a stay of execution or a request for debt relief.
However, these procedures are subject to their own rules and their approval always depends on the individual circumstances of the case. Thus, even these two avenues do not 100% guarantee that the recovery of priority claims will be suspended or otherwise averted.
Priority claims are an essential element of the Czech legal system that ensures the protection of certain interests, such as maintenance obligations, employees’ wages or claims against the state. For creditors, they are an advantage because their claims have a higher priority, while for debtors they can cause more significant financial difficulties. Priority claims are always satisfied first, with maintenance taking priority, followed by obligations to the state such as taxes and the like. Unpaid invoices and similar debts come last.
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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