Changes to Czech Corporate Restructuring Laws During the COVID-19 Pandemic – A Comment

In this post, I summarise some key points made in commentary on a recent paper by Jan Lasák (featured on the OBLB) on the use of Czech restructuring laws during the pandemic period. The onset of the pandemic led to the mandatory or forced closure of many business premises, so that entrepreneurs faced huge cash-flow constraints. Suddenly, many entrepreneurs were required to consider insolvency options, and quickly began to call their counsel a few times a week to discuss whether they were under a duty to file an insolvency petition. In response, a range of extraordinary measures were introduced. In my commentary, I report on the use of the measures, and make some preliminary observations about the outlook for Czech restructuring law. 

1       Selected Measures to Relieve Businesses

In order to alleviate the position of entrepreneurs, the Czech legislature brought about, inter alia, several measures, including the suspension of the duty to file an insolvency petition, suspension of creditors’ right to file an insolvency petition, introduction of an extraordinary moratorium and an option to suspend loan payments. An overview of the selected measures together with their timeframes is given in Fig 1.

Figure 1.  Overview of selected measures and timeframes

As can be seen from the statistics on corporate insolvency filings in Fig 2, there was indeed a significant drop in new insolvency filings until the end of summer 2020. Since it was impossible for creditors to initiate insolvency proceedings, all those filings are based on debtors’ insolvency petitions. After the lapse of the creditors’ insolvency petition ban, corporate insolvency filings slightly increased for a few months. However, no huge wave of insolvency filings could be observed.

Figure 2.  Statistics on corporate insolvency filings

Source: Surveilligence, s.r.o. (data provided to the author on a private basis).

One of the novelties introduced during the pandemic was an extraordinary moratorium. It was based on the provisions of the then (ordinary) moratorium. But in both the pre-pandemic and the post-pandemic era, roughly one ordinary moratorium was issued each month on average, as can be seen from the statistics shown in Fig 3 below. The limited use of the extraordinary moratorium is, I suggest, most likely due primarily to its public nature and potential stigma (the respective court decision being publicly available in the insolvency register), and to the parallel enactment of a legislative option to suspend loan payments.

Figure 3.  Moratoria issued

Source: Surveilligence, s.r.o. (data provided to the author on a private basis).

As can be seen from Fig. 4, a considerable number of entrepreneurs exercised the option to suspend their loan repayments. Overall, approximately 15% of the whole loan portfolio of local banks regulated by the Czech National Bank were affected by the suspension. The Czech National Bank overseeing relevant banks in the Czech Republic concluded that the measure was useful and without significant side effects. As of the end of 2020, less than 8% of those affected loans were registered as so-called non-performing loans.

Figure 4.  Loan repayments

Source: Data provided by the Czech National Bank, with individual edits made by the author.

2       Future Outlook

Looking forward, we are facing difficult challenges associated with the economic consequences of the invasion of Ukraine. What is the future outlook and how it will be shaped? In my commentary, I make three observations in this regard. First, businesses still appear to be seeking formal insolvency solutions too late.  Secondly, the Czech Republic has, unfortunately, not yet implemented the EU Directive on Restructuring and Insolvency. Thirdly, even in the absence of any effective preventive restructuring regime, I would reject calls for a revival of the extraordinary moratorium that was experimented with during the pandemic. Different from the COVID-19 crisis, the current crisis has not arisen so unexpectedly. As such, there is a time for a well-thought out and structured approach.

Petr Sprinz is a Counsel in the Prague office of Allen & Overy.

This post is published as part of the OBLB series 'Corporate Restructuring Laws under Stress' (see our series here).