CzechInvest Information Series No. 20 No. 20
Serial No.: BANK/06/94-20
Date of Issue: June 30, 1994
In the post-war years, bankruptcies hardly existed under Czechoslovakia's centrally-planned economic system -- the state automatically transferred capital from profitable to unprofitable enterprises. With the introduction of a market economy in 1990, however, new legislation became necessary to protect debtors and creditors, and to fuel the transition to an internationally competitive economy. Several new laws were adopted, the most important of which is the Bankruptcy and Composition Act of 1991.
The Bankruptcy and Composition Act
Special Provisions in the Czech Republic
THE BANKRUPTCY AND COMPOSITION ACT
The Bankruptcy and Composition Act (No. 328/1991) was passed through federal Czechoslovak Parliament on July 11, 1991, to become effective as of October 1, 1991. After being deferred one year until October 1, 1992, it was effectively deferred a second time (until April 22, 1993) through a mandate requiring that debtors be "overburdened with debt" (liabilities must exceed assets) before bankruptcy orders could be declared.
The Act has continued to apply in both the Czech and Slovak Republics following the country's split on January 1, 1993.
Unlike bankruptcy laws in most western countries, the Bankruptcy and Composition Act applies to both entrepreneurs and business entities (including partnerships).
The purpose of the bankruptcy proceedings is to ascertain the debtor's assets and then satisfy, at least partially, the creditors. A bankruptcy order can be proposed by the debtor, creditors, or liquidator of a business entity by filing a petition with the appropriate bankruptcy court. Such an order cannot be proposed if the debtor's assets will not cover at least the cost of the proceedings.
A debtor is defined as "bankrupt" under a bankruptcy order when the debtor's property rights are transferred to a court-appointed administrator.
SPECIAL PROVISIONS IN THE CZECH REPUBLIC
The Czech Republic amended the Act in March 1993, introducing a 3-month "protection period" for all debtors, which can be extended for an additional three months. This period is designed to allow the debtor sufficient time to overcome financial difficulties and settle terms with creditors, and may be granted by a bankruptcy court on the basis of a petition filed by the debtor.
The amendment also introduced special criteria for certain groups: insolvent state enterprises, included on a government-approved list published in the Business Bulletin; private farmers, who cannot be declared bankrupt until December 31, 1994 without the farmer's consent; and businessmen whose main activity is agricultural production, who cannot be declared bankrupt between April 1 and September 30 in any year. Lastly, the bankrupt entity's executives were disqualified from acquiring its property.
NOTE: This information is current as of June 1994. Although we have made every effort to ensure the reliability of our sources, CzechInvest does not assume responsibility for its accuracy.