Doing business with entities under strain after the COVID-19 stimuli expire

Once the COVID-19 related stimuli and moratoria expire, a wave of insolvencies can be expected and creditors will be looking for ways to get at least something out of their insolvent debtors. They will probably also invoke rules on the voidability of legal acts in the hope that some past performance by the debtor will be returned to the insolvent estate.

At the same time, these creditors will deal with entities under strain and will think hard about how best to protect their interest should those entities later face insolvency and should their legal acts be challenged as void. So which legal acts can be challenged, be that for the benefit of the creditors or to their detriment?

Which acts can be challenged?

In general, the following legal acts resulting in a reduction in the insolvency estate or unequal treatment between creditors will be voidable under Czech insolvency law:

• undervalues, where the debtor receives significantly less for the performance than what it ought to;
• preferences, where the debtor gives preferential treatment to one of the creditors, typically by fulfilling its debt before it falls due;
• fraudulent transfers, where the debtor intentionally reduces the satisfaction of a creditor.

Undervalues and preferences are voidable if effected when the debtor was insolvent or if they resulted in its insolvency. When the debtor deals with its affiliates, its insolvency is presumed. Undervalues and preferences can be challenged if made within one year before the commencement of insolvency proceedings, or within three years when dealing with affiliates. The parties’ intentions are irrelevant.

Fraudulent transfers can be challenged only if the contracting party was aware of the debtor’s fraudulent intention or could and should have been aware of such intention. Such knowledge is presumed when the debtor deals with its affiliates. Fraudulent transfers can be challenged if made as far as five years before the commencement of insolvency proceedings. The debtor’s solvency is irrelevant.

To increase the value of the insolvency estate, the administrator will file a petition against the party that entered into the voidable act or against the entity benefiting from such voidable act. Such claim may be brought within one year after the debtor is declared insolvent and will be decided by the insolvency court.

The insolvency court may declare a legal act void and order that the performance received from the debtor or its equivalent be returned to the insolvency estate. After returning the performance to the insolvency estate, the creditor will typically be left only with a general claim on the insolvency estate, i.e. practically nothing.

How to minimise the risk?

When doing business in the COVID-19 era, parties should be wary of any non-standard pricing and contractual provisions. This is especially true when dealing with a new entity or when dealing with an entity that is in an industry severely hit by the pandemic.

To minimise the risks further, adroit creditors will consult their lawyers so they can review the arrangement, identify any pitfalls and amend the contractual documentation to minimise the risks. If the creditors have already contracted with a now-insolvent debtor, the creditor should seek legal representation in proceedings where the legal act is challenged as void.

CMS will go above and beyond to protect you should you experience any of these challenges.