COVID-19 insolvency emergency measures in the Czech Republic

The draft Lex Covid, which amends insolvency and enforcement laws and draft law on certain measures related to repayment of loans in relation to the COVID-19 pandemic, has been approved by the Czech Parliament and must now be counter-signed by the President.

The insolvency law-related measures include:

Debtor's delay in payments

If a debtor in delay of payment of their debts from 12 March 2020 onward proves that an extraordinary measure connected to the COVID-19 pandemic has made it significantly more difficult or impossible to meet these financial debts on time, the creditor is only entitled to default interest at the statutory interest rate of 9% during the period for which such a measure applies (at the latest, until 30 June 2020). This does not apply to contracts entered into after the effective date of the Lex Covid.

Debtor's filing

The obligation of debtors to file for bankruptcy as soon as they become aware of their insolvency shall be suspended during the period from the effective date of the Lex Covid until 6 months after the end of the extraordinary measures (at the latest, until 31 December 2020). This suspension period shall not be taken into account for time limits during which clawback claims can be made.

However, this suspension does not apply to debtors who were insolvent prior to the extraordinary measure connected to the COVID-19 pandemic, or whose insolvency was not predominantly caused by a circumstance related to the extraordinary measure.

Creditors' filing

An insolvency court will not take into account a creditor filling for their debtor's insolvency if the filing is made during the period from the effective date of the Lex Covid until 31 August 2020. However, this does not prevent the creditor from filing such a motion after 31 August 2020.

Extraordinary Insolvency Moratorium

In the period up to 31 August 2020, a debtor-entrepreneur who was not insolvent on 12 March 2020 is entitled to file an application for an extraordinary moratorium – ie a protection period during which the periods for the exercise of rights against the debtor do not begin or do not continue – under relieved conditions. The maximum duration of the extraordinary moratorium is 3 months, but the debtor is entitled to request an extension for another 3 months.

The debtor must declare that the application was made in connection with state of emergency caused by COVID-19, and that since 12 January 2020, they have not paid any extraordinary dividends or parts of their own resources to their members, shareholders, controlled or controlling persons, members of their corporate bodies, or provided any extraordinary performance (including pre-payment of loans to them), or that all such payments have been repaid to the debtor.

Unlike a "standard" moratorium, debtors are not obliged to obtain the written consent of the majority of their creditors (calculated according to the amount of the claims) in case of an extraordinary moratorium. However, if a debtor requests an extension of the extraordinary moratorium, they must obtain this consent. From a practical viewpoint, it must be considered whether a moratorium and/or a pre-agreed reorganisation/restructuring should be sought.

Reorganisation/restructuring

In the case of a reorganisation/restructuring plan approved in insolvency proceedings up to 12 March 2020, debtors may apply for temporary suspension of performance of the plan. The performance of the plan may be suspended for a period of 6 months following the cancellation of the extraordinary measure (at the latest, until 31 December 2020).

Banking sector

Both consumers and entrepreneurs will be entitled to postpone their loan instalments for a maximum of 6 months – ie until 31 October 2020 or 31 July 2020 (in case the debtor wishes to use a shorter period). However, this option will not be granted to debtors who were more than 30 days in delay with the payment of their financial debts on 26 March 2020.

The loan moratorium period will be generally relevant for loans that were agreed and drawn down prior to 26 March 2020, and loans that were agreed prior to 26 March 2020, provided these are mortgages and other purpose loans, such as for the acquisition, settlement or retention of rights to real estate, construction, or redesign of a building.

On the other hand, it is not possible to apply the moratorium in relation to, for example, an operating lease, revolving facility or loans for trading in investment instruments.