Changes to Corporate Restructuring Laws in the Czech Republic during the COVID-19 Pandemic

In a recently published paper, I analyse the use of Czech restructuring laws during the pandemic period, concluding that if governmental programmes are generous enough, insolvency law becomes largely irrelevant during crises.   

In the course of the COVID-19 pandemic, corporate restructuring laws worldwide underwent a stress test as the financial health of companies was significantly impaired. The emergency measures introduced because of the pandemic in the Czech Republic had a major impact on businesses in many sectors, with not only small and medium-sized businesses (SMEs) but also large companies running into financial problems, such as ČSA, Smartwings airlines and FIRO-tour (one of the largest travel agencies in the Czech Republic). A number of industries (especially restaurants, hotels and retail shops) came to a complete standstill as these businesses experienced significant reductions in their revenue or stopped being economically viable at all. Calls for a swift response from the government started to come from all parts of the economy in terms of (i) financial support and (ii) changes to the standard legal framework for corporate governance and insolvency/restructuring laws.

In a ‘healthy’ economy, restructuring and insolvency law helps to ‘cleanse’ the business environment of failed businesses and serves to efficiently allocate assets in the economy. However, if there is a ‘black swan’ type of event, restructuring and insolvency law may not properly fulfil this purpose, notably because too many assets may come onto the market at the same time for which there is no corresponding demand, which can have a significant impact on the assets’ sale price, sinking it below its fundamental value and, accordingly, this can have a detrimental effect on both debtors and their creditors (risk of fire-sale outcomes). In addition, financial problems of a large part of the economy can also pose a systemic kind of risk which may threaten society as a whole.

In order to face the ongoing crisis, the Czech government took a variety of steps to mitigate the impact of the COVID-19 pandemic. In addition to the various bail-in and bail-out measures that were introduced in the Czech Republic during the critical phase of the pandemic in 2020-2021, the government considered the standard regulatory framework to be institutionally insufficient to adequately respond to the ongoing crisis. In response to public demand, a set of temporary regulatory measures were adopted in the area of company restructuring laws. These included the following: for a transitional period, creditors were stripped of the opportunity to initiate insolvency proceedings by filing an insolvency petition against their debtor; the obligation of a debtor to file an insolvency petition was suspended; and an extraordinary moratorium was introduced in order to provide debtors that ran into temporary problems in connection with the pandemic with protection against individual creditors and to solve their financial difficulties. The latter was not used as much as commentators expected: 40 companies used the moratorium during what I term ‘the first phase’ (until the end of August 2020), during which time creditors were restricted in initiating insolvency proceedings and the debtor’s obligation to file was suspended, and around the same number used the procedure during the next phase (until June 2021), although creditors were no longer subject to the restriction on initiation.

The protective measures (both the financial support and the regulatory changes to the law) were only temporary. After the pandemic, once the temporary emergency measures were lifted, the number of insolvency petitions and proceedings surprisingly decreased in the Czech Republic in comparison to previous years, while the increased wave of company insolvencies taking place at the end of 2022 was rather related to the energy crisis resulting from the Russian invasion of Ukraine. As the number of insolvency petitions actually decreased after the pandemic in comparison to previous years and, contrary to general expectations, distressed sales have (so far) not become the main driver of the M&A market in the Czech Republic, one may argue that these financial aid programmes may have been too generous in the Czech Republic. The low use of the extraordinary moratorium even after the change in creditors’ ability to initiate insolvency proceedings is consistent with this interpretation.  At the same time, Czech public debt has dramatically increased after the pandemic, and the ‘helicopter money’ provided under the governmental bail-out/financial aid programmes has significantly accelerated the rise in the inflation rate in the Czech Republic. And the impacts of the ongoing energy crisis are already on our doorstep.

Jan Lasák is an Assistant Professor at the Commercial Law Department, Masaryk University, Czech Republic and Partner at Kocián Šolc Balaštík.

This post is part of an OBLB series on Corporate Restructuring Laws Under Stress. The introductory post of the series is available here. Other posts in the series can be accessed from the OBLB series page.