Entrepreneurs may be able to avoid bankruptcy by anticipating difficulties - if they keep a close eye on the financial situation of their business.
The reasons for forced winding-up of a company are regulated in the Commercial Code and are the result of a court order.
Bankruptcy and insolvency proceedings are regulated by the Insolvency Act, which specifies:
- the cases in which a debtor becomes insolvent;
- how the debtor settles with creditors;
- individual methods of credit settlement.
You may be declared insolvent if you have creditors whom you are unable to repay. The law specifies under which exact circumstances the debtor is considered incapable of repaying debts. This is often when the business owner has multiple creditors and when the sum of liabilities exceeds the value of the business owner's assets.
The act also sets out the procedure where there is a threat of bankruptcy, in other words a situation where, in view of all the circumstances, there is reason to expect that the debtor will not be able to service a significant portion of his/her debts duly and on time.
The Insolvency Register is a public database (accessible also electronically) providing information on insolvent persons, the status of insolvency proceedings and the delivery of court documents. Creditors should regularly monitor the register.
Entries are made in the Insolvency Register by the relevant Regional Court, and the Ministry of Justice then makes an entry in the insolvency administrators' list.
Ways of addressing bankruptcy
There are several ways of addressing bankruptcy:
- Bankruptcy proceedings involve the gradual sale of the bankrupt's assets, and the sharing out of the revenue generated among the creditors;
- New forms of managing the insolvency procedure, such as reorganisation and discharging the debt.
Bankruptcy is the most frequent method of dealing with a debtor's insolvency. The debtor's assets are sold and the proceeds divided among the creditors based on conditions laid down by law (claims of certain creditors will be given priority).
The court may also decide for a so-called minor bankruptcy, which is a shortened and simplified version of bankruptcy in cases where:
- the debtor is a natural person;
- the debtor is not an entrepreneur;
- the annual turnover of the debtor does not exceed CZK 2 million and the debtor does not have more than 50 creditors.
Corporate insolvency can also be dealt with through a procedure called reorganisation. Reorganisation allows you to meet creditors' claims gradually while keeping your company in operation. To make use of this method, you have to meet a number of legal criteria and have the agreement of the majority of your creditors.
Discharge of debt
Presons not registered as entrepreneurs can use discharge of debt as an alternative method of resolving insolvency. If the court allows debt discharge, it suffices for the debtor to pay back the creditors at least 30% of the liabilities. Debt discharge may take the form either of a payment calendar or of a realisation of underlying assets. The creditors decide on the form of debt discharge. After the completion of debt discharge the court may decide that the debtor does not have to pay back the remaining liabilities.
Entrepreneurs having experienced bankruptcy should not lose confidence in their ability to embark on a new business.
Bankruptcy procedure: a step-by-step guide
The insolvency procedure is initiated by filing an insolvency application with a Regional Court.
The Insolvency Court will announce the start of the procedure with a public notice which must be published in the Insolvency Register within 2 hours.
After publication of the notice in the Insolvency Register the creditors are entitled to file applications for outstanding debts. Lastly, it is possible to file applications for outstanding debts within a time period stated in the bankruptcy ruling (the time period may not be shorter than 30 days or longer than 2 months).
An application for outstanding debts may be filed only on a form which can be obtained on the Internet.
Creditor bodies may also join the procedure. This involves a creditors' meeting, creditors' committee or creditors' representative. If more than 50 creditors apply, a creditors' committee must be set up. These bodies have a strong standing and may influence the course of the entire procedure.
The bankruptcy declaration brings an insolvency procedure to the stage where the bankruptcy is resolved through the sale of the bankrupt's assets.
Outstanding debts in return for underlying assets and outstanding debts to underlying assets at a specified level are always reimbursed in the course of an insolvency procedure from the underlying assets. This includes, for example, the remuneration of the insolvency administrator and employment-related debts owed to the debtor's workforce etc.
Secured outstanding debts are met independently of the item against which they are secured.
Bankruptcy includes the realisation of assets by an insolvency administrator. On completion of the realisation of assets the insolvency administrator issues a final report, in which he must quantify the amount that has been shared out among the creditors.
The Insolvency Court, after approving the final report, approves, at the suggestion of the Insolvency Administrator, a distributive resolution, on the basis of which it then proceeds to satisfy the various creditors.
This is a method of handling bankruptcy that consists of satisfying the claims of creditors while at the same time preserving the business of the debtor. Reorganisation is a remedial form of bankruptcy resolution.
Reorganisation is allowed only for entrepreneurs, and where the debtor has achieved in the last accounting period a turnover of CZK 100 million or employs at least 100 people.
If this is not the case, reorganisation is allowed only where the debtor has submitted to the court, together with the insolvency application, a reorganisation plan approved by at least half of the creditors, including both secured and unsecured creditors.
The reorganisation plan is usually produced by the debtor but it can be produced by a third party. It is a plan that will lead to the restructuring of the debtor's business. The adoption of the reorganisation plan is voted on at a meeting of creditors.
Discharge of debt
This is a remedial method of resolving a bankruptcy, which is intended only for natural persons who are not entrepreneurs.
Applications may be filed only by the debtor. The court will allow discharge of the debt only if the debtor satisfies following basic conditions:
- the debtor guarantees to repay at least 30 % of the outstanding debt;
- the debtor has honourable intentions;
- the applicaion is filed on the appropriate form.
Debt discharge may be handled in two ways; either by realisation of underlying assets or by fulfilment of a payment calendar. The method of debt discharge is decided on at a meeting of creditors.
The following governmental and non-governmental web portals provide further information and useful services on insolvency issues.
A public database containing information on bankruptcies (the Insolvency Register) is available on: