Extraordinary changes to the Insolvency Act, alias Lex Covid Justice II, providing further assistance to businesses in crisis

11. 11. 2020

Authors: Dušan Sedláček, Jan Králíček

Initially, Act No. 191/2020 Coll., also known as Lex Covid Justice, responded to the crisis caused by the SARS CoV-2 virus. The Act caused a number of significant changes in the field of insolvency law. We published a basic overview of information on this law in our article of 1 April 2020, which is available at this link. A new Act called Lex Covid Justice II which was presently approved, follows to previous legislation and renews a number of previously available measures aimed to relieve businesses in financial distress. On 10 November 2020, the Chamber of Deputies of the Parliament approved the draft Act after its return by the Senate in the original wording. Therefore, the signing by the President and the entry into force of the Act can be expected in the upcoming days.

Lex Covid Justice II

From the variety of measures, we draw attention in particular to the renewal of extraordinary moratorium, i.e. debtor´s protection against creditors declared by the insolvency court on the basis of the mere debtor´s form request, without factual review. According to the explanatory memorandum, this measure has allegedly proved itself. The low number of previously announced extraordinary moratoriums is supposed to indicate that this institute was not overused.

However, a significant increase of extraordinary moratoriums can now be expected, especially within the sectors most affected by the loss of demand. An extension of previously granted extraordinary moratoriums can also be expected, as creditors' consent will not be required (see below). As before, the debtor´s obligation to file an insolvency petition is suspended if the insolvency situation is caused due to COVID-19 and government emergency measures.

An early identification of the problem is crucial for creditors. Debtors, on the other hand, should not delay filing an insolvency petition even if the deferral is theoretically applicable in their situation. Even in such a case, the management of the debtor is obliged to proceed with due managerial care. Therefore, if the negative financial situation is not only temporary and there is no prospect of its improvement, all that remains is to resort to insolvency proceedings.

The individual measures contained within Lex Covid Justice II can be described as follows:

A. Extraordinary moratorium

Under the original legislation, debtors who got into problems in connection with the COVID-19 and were not declared insolvent before the announcement of emergency measures (i.e. 12 March 2020) could file a petition for judicial protection against creditors in the form of a so-called ‘extraordinary moratorium’. Petitions could be filed until 31 August 2020.

Lex Covid Justice II aims to renew this measure, the deadline for submitting a proposal for an extraordinary moratorium is extended until 30 June 2021. As before, this option will be open to debtors who have experienced temporary problems in connection with COVID-19 and were not declared insolvent before 5 October 2020. Protection under the extraordinary moratorium consists in the fact that during its duration it is not possible to decide on the debtor's bankruptcy and it is also not possible to carry out execution on his property.

Debtors who have been granted protection under the previous legislation will not be able to apply for a new extraordinary moratorium. So far, a total of 61 extraordinary moratoriums have been declared. This limitation is intended to prevent the potential chaining of extraordinary moratoriums.

However, for these debtors, its extension is still possible. Due to the risk that debtors will not be able to obtain the creditors´ consent to extend the existing extraordinary moratoriums, the new legislation stipulates that the creditors´ consent to extend previously declared extraordinary moratoriums (i.e. in relation to petitions filed before 31 August 2020) is no longer required. This change was at first rejected by the Senate. However, the Chamber of Deputies approved the original draft Act including the change that allows the extension of existing extraordinary moratoriums without the consent of creditors and thus retroactively changes the rules of this measure.

The new extraordinary moratoriums will be limited again to 3 months, with the possibility of extension for another 3 months. The extension will require the consent of the majority of the debtor’s creditors, calculated according to the amount of their claims.

B. Protection of the debtor’s management

The original Lex Covid Justice brought a change in relation to the basic obligation of the debtor’s management to file an insolvency petition without delay, which was suspended until 31 December 2020 – in case the debtor found himself in crisis due to COVID-19 and government emergency measures.Due to the pandemic, a higher risk of poor payment morale of business partners is expected, therefore overdue liabilities may be piling up. The original Lex Covid Justice was intended to prevent otherwise viable businesses from filing insolvency petitions prematurely. Lex Covid Justice II is now extending this period, in which the debtors obligation to file for insolvency is suspended, until 30 June 2021.

C. The current restriction on the rights of creditors to file insolvency petitions does not renew

The measure by which creditors were restricted in filing creditor insolvency petitions from 17 April 2020 to 31 August 2020 is no longer renewed. Consequently, the creditor's right to file insolvency petition is not affected by the new regulation.

D. Other selected changes

In the area of debt relief and reorganisations, Lex Covid Justice II extends the grounds for preservation of approved debt relief even where there are grounds for its cancellation and extends the possibility to suspend the implementation of the reorganisation plan without the threat of turning reorganisation into bankruptcy liquidation.

E. Prohibition of court enforcement of decisions (and enforcement by bailiffs) by sale of movable and immovable property

Under the original Lex Covid Justice, the court enforcement of a decision (and enforcement by bailiffs) could not be carried out by the sale of movable property or the sale of immovable property where the obliged person had his/her permanent residence (with the exception of, for example, maintenance claims).

The government’s Lex Covid Justice II draft provided for the extension of this measure only for movable property. Due to an amendment submitted in the Chamber of Deputies, it was eventually approved that the prohibition of enforcement shall apply to both movable and immovable property until 31 January 2021. Regarding immovable property, the prohibition again applies only to immovable property where the debtor has a permanent residence.

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