Extraordinary Moratorium – Protection for Businesses Affected by the Covid-19 Pandemic

Czech insolvency law traditionally provides for a moratorium, which permits a business to apply for protection against creditor actions (e.g. insolvency / bankruptcy petitions, enforcement petitions or payment claims). This gives the business additional time to operate as usual, as well as to provide for a certain amount of time to effect a restructuring, e.g. to find a new investor or customers, adjust its operations or complete a divestment.

As part of the package of measures addressing the pandemic, on 31 March 2020 the Czech Government approved an amendment to Act No. 182/2006 Coll. on Bankruptcy and Settlement (the “Czech Insolvency Act”), which introduces an “extraordinary moratorium”.

This extraordinary moratorium is a measure to address the impact of the recent bans and limitations introduced by the Czech Government on businesses and the approaching economic recession triggered by the Covid-19 pandemic. Many businesses are expected to have negative equity, to lack liquidity, or at least to suffer a drop in revenue. The new insolvency regulation, section 127a, is temporary, meaning that business entities and entrepreneurs have only until 31 August 2020 to file a petition for this extraordinary moratorium.

The court petition for the extraordinary moratorium can be used as a standalone instrument (i.e. it can be filed without initiating an insolvency proceeding) available to debtors that were solvent before 12 March 2020 (the day of declaration of the State of Emergency). In case of pending insolvencies, the extraordinary moratorium is available only if the insolvency was commenced by the creditors.

Those provisions of the Czech Insolvency Act that apply to the standard moratorium also apply to the extraordinary moratorium with a few exceptions. Only businesses whose main centre of interest is in the Czech Republic are eligible to apply for an extraordinary moratorium. Moreover, permission from the majority of creditors is not required.

In addition to the standard requirements, a petition for the extraordinary moratorium must also include the following:

  1. evidence of the local competence of the insolvency court;
  2. a declaration that the debtor filing for the moratorium has its main centre of interest in the Czech Republic;
  3. the total number of employees (i.e. those working under an employment contract) as at the date of the petition;
  4. total turnover in the last financial year.

The petition must also be accompanied by an affidavit of the debtor with the following declarations:

  1. the petition is being filed as a result of the extraordinary precautions adopted as a result of the Covid-19 pandemic;
  2. as at 12 March 2020 the debtor was not insolvent and that all information in the petition is true;
  3. in the two months prior to 12 March 2020 and afterwards the debtor had no distribution of profits or equity (e.g. ordinary or accelerated repayment of intracompany loans) to its shareholders, controlling persons or directors.

The insolvency court will merely review the petition from a formal perspective; i.e. it will not investigate substantive elements of the petition. The petitions can be filed electronically via an electronic form.

Businesses that have filed for the extraordinary moratorium can still benefit from any state subsidies available to mitigate the effects of the Covid-19 pandemic. Furthermore, it also still has the right to priority settlement of all due liabilities related to its operations that have arisen after the extraordinary moratorium was declared (i.e. liabilities related to the business’s operations enjoy priority over any other liabilities with an earlier due date).

During the extraordinary moratorium, the interests of creditors have priority (ahead of the interests of shareholders), and the business is restricted from modifying the structure and value of its assets.

The court can declare the extraordinary moratorium for up to 3 calendar months; this can be extended up to an additional 3 months, with the approval of the majority of the creditors. The application is available either electronically or via the debtor’s electronic mailbox (datová schránka), with a certified signature.

The extraordinary moratorium terminates in a standard way, unless the insolvency petition has been refused. The court is also entitled to apply a standard moratorium on an applicant for an extraordinary moratorium.

Also under the amendment to the Czech Insolvency Act, any insolvency petitions filed by creditors prior to 31 August 2020 will be disregarded.

Under the Czech Insolvency Act, directors have a general duty to file an insolvency petition as soon as they learn about the insolvency (or could have learned while exercising due care), or be sanctioned with personal liability for damage. The amendment, however, further introduces a temporary tolerance for businesses and their directors if the business became insolvent after 12 March 2020 as a result of the government imposing various bans and restrictions affecting businesses. This temporary tolerance is intended to last only for the period of extraordinary measures with an additional six months after such measures expire, but at the latest until the end of 2020.

Tomas Vlasak – Czech Attorney, Solicitor of England and Wales

Pavel Hrdý – Trainee

The information contained in this brochure does not constitute legal advice. PRK Partners and individuals involved in the preparation of this brochure are not responsible for the consequences of actions taken based on the information contained herein, which may not be accurate or comprehensive to a particular situation.You can also send any questions to our designated email address covid@prkpartners.com