CMS Expert Guide for taking security in Czech Republic

Yes, the Czech law recognises: (i) a guarantee (in Czech: ručení), and (ii) a financial guarantee (finanční záruka).

There are different default statutory requirements and regimes for each. Both are used with equal frequency in practice. 

Yes.

Yes, a guarantee may be considered as a financial service. However, Czech law expressly defines a financial service as a service provided by an entrepreneur to a consumer. In such case, a special consumer protecting regulation (mainly implemented from EU law) will apply. 

Yes, subject to financial assistance rules, rules on fiduciary duties of a guarantor’s directors, corporate benefit rules and assuming that any potential or actual conflict of interests is properly addressed by the relevant corporate bodies of a guarantor.

Yes, subject to financial assistance rules, rules on fiduciary duties of a guarantor’s directors, corporate benefit rules and assuming that any potential or actual conflict of interest is properly addressed by the relevant corporate bodies of a guarantor.

Yes, subject to financial assistance rules, rules on fiduciary duties of a guarantor’s directors, corporate benefit rules and assuming that any potential or actual conflict of interests is properly addressed by the relevant corporate bodies of a guarantor.

Financial assistance: A Czech company is generally prohibited from providing “financial assistance” in connection with purchase of its own shares or shares of its direct or indirect parent company (i.e. this includes making an advance payment, a loan or credit or granting security to the/for the benefit of the acquiror of these shares). Under Czech law, a limited liability company can provide the financial assistance, if it fulfils the following conditions (referred to as the “whitewash procedure”):

1. financial assistance shall be provided on an arm's-length (especially considering the applicable interest rate and the security package in the structure);
2. the provision of the financial assistance of the company will not cause its insolvency;
3. a written report from the board or other statutory body to be filed in the collection of deeds at the relevant commercial register stating the reasons for giving the assistance, the advantages and risks arising from it, the conditions on which it would be given and why it is in the company’s interest to do so; and
4. the financial assistance is approved by the general meeting of the company. 

These conditions may be extended (but not limited) by the company’s constitutional documents. 

For a joint-stock company, there are additional statutory requirements (in particular, creation of a special fund in amount of the financial assistance provided), which in practice, effectively prevent the joint stock companies from providing the financial assistance. 

Conflict of interests: Czech law is addressing situations where there is a potential or actual conflict of interests between a Czech company and certain persons (including members of the elected bodies of a Czech company, persons influenced or controlled by a member of an elected body of a Czech company, a person which is closely related to a member of an elected body of a Czech company etc.)

A supreme body or a supervisory board of a Czech company may, for example, prohibit execution of:

1. any document to be executed between the company and a member of company´s elected body; and
2. any security document on the basis of which the company shall secure or grant guarantee for a debt of any member of its elected body or on the basis of which it shall become co-debtor to a debt of any member of its elected body,

unless execution of the respective document is in the interest of the company itself. 

In addition, a supreme body or supervisory board of a Czech company may suspend function of a member of its elected body, if such member is in conflict of interest with the interests of the company itself. 

Corporate benefit: The ultra vires concept does not apply under Czech law. Nevertheless, an undervalue guarantee without a corporate benefit may be in violation of the director‘s duties. 

Transfer pricing rules: Transfer pricing rules are also applicable in the Czech Republic and as a member of OECD.

Any guarantee and financial guarantee governed by Czech law shall be executed in a written form. In case of a potential dispute, the Czech court or other authority deciding the dispute will require the document in Czech language or a Czech translation thereof.

Yes, provided that the respective security/guarantee document specifies the secured/guaranteed debt sufficiently (i.e. this must be either existing or determinable). It is a market standard in the Czech Republic to specify the future debts in the security documents by a maximum amount and in a period during which these secured debts may arise. It also corresponds to market standard to include a guarantee limitation amount formula in the guarantee agreement.

There is no principle of over-collateralisation under Czech law.

Yes, the validity of a security and a guarantee (ručení) is, in principle, dependent on the existence of the underlying debt. 

On the other hand, Czech law does not explicitly state that the financial guarantee (finanční záruka) being abstract by default is dependent on the existence of the principal obligation. 

The concept of indemnity (within the meaning of English law) is not expressly recognised under Czech law.

Yes, a security/guarantee (including the financial guarantee) may continue for the period during which the secured debt remains outstanding, if construed properly from the outset. 

Yes.

The Foreign Direct Investment regime might be relevant upon enforcement of certain security instruments. 

Czech law recognises a joint and several creditorship and agency structures, and structures of parallel debt, where established under foreign law. 

The concept of trust (within the meaning of English law) is not expressly recognised under Czech law.

Unless the relevant security or guarantee document provides otherwise, any security and guarantee are transferred automatically with the underlying receivable/agreement to a new creditor.

In general, no additional documents in relation to the security or guarantee are required. However, it is customary to execute the transfer certificate mainly for the purposes of re-registration in the relevant registers in the Czech Republic.  

Changes to guaranteed and secured obligations: Changes to the guaranteed and secured obligations should be assessed individually based on the nature of such changes as these can have various impacts on the security/guarantees provided (e.g. the changes in the amount of the guaranteed or secured obligations do not always require release and retaking the underlying security or guarantee). 

Change of the principal debtor: The security and the guarantee will remain in place only in certain cases of legal succession of the principal debtor and under certain conditions (e.g. legal succession due to a merger or an acquisition of the assets and accession to the finance documents might not affect the provided guarantee/security). However, note that each legal succession will not have such effect and under certain conditions the collateral may even cease to exist (typically ownership interest or shares in may cease in a merger). Therefore, these situations when the original debtor is replaced by a new debtor will usually require a legal analysis run by an advisor.

When creating security as a right in rem, it is recommended that the security document follows the governing law of the underlying asset which is very practicable in an enforcement scenario, in particular.

Submission to jurisdiction: Parties to a guarantee or a security governed by Czech law may generally (subject to exceptions relating e.g. to real estate property) submit to a jurisdiction of a foreign court other than the Czech court, provided that the legal relationship involves a foreign element such as a non-Czech party to the legal relationship. However, such approach seems highly impractical where the guarantee or security is governed by Czech law. 

Submission to arbitration: Parties may include an arbitration clause into their agreement. However, there is still a risk that under certain circumstances, a Czech court may still initiate a proceeding under the Czech procedural rules.

Yes, each payment exceeding the amount of CZK 270,000 made by a person or entity residing in the Czech Republic towards a person or entity residing in a foreign country shall be made by a wire transfer. The same applies to transfers between persons or entities both residing in the Czech Republic. Please note that Czech law stipulates certain exemptions from this restriction such as payment of taxes, payments arising from employment contracts, insurance payments and others. 

In a state of emergency, the Government of the Czech Republic is authorised to impose certain obligations or prohibit certain activities of financial nature or with respect to foreign exchange (e.g. it may prohibit effecting any payments from the Czech Republic abroad, including transfers of funds between banks and other providers of payment services and their branches).

In general, all legal acts (made one year from the date when the decision on declaration of insolvency) based on which the debtor curtails the possibility of satisfying the creditors or favour certain creditors to the detriment of other creditors, may be declared ineffective by the insolvency court. Furthermore, Czech law provides that the following legal acts are ineffective:

1. transfers at undervalue – legal acts without reasonable counter-performance made one year before the commencement of insolvency proceedings, or taken for the benefit of a person affiliated with the debtor or forming a concern with the debtor in the preceding three years before the commencement of insolvency proceedings;
2. preference transfers – legal acts resulting in greater satisfaction of any creditor than that it would otherwise receive in bankruptcy, to the detriment of other creditors, taken by the debtor when insolvent or resulting in the debtor’s insolvency in the one year before the commencement of insolvency proceedings, or taken for the benefit of a person affiliated with the debtor or forming a concern with the debtor in the preceding three years before the commencement of insolvency proceedings; and
3. fraudulent transfers – legal acts taken by the debtor to intentionally curtail the satisfaction of a creditor, provided such debtor’s intent was known or must have been known to the other party or made to a person affiliated with the debtor or forming a concern with the debtor, taken in the preceding five years before the commencement of insolvency proceedings.

In general, it is mandatory to include a precise specification of each type of collateral.

It is possible to create a pledge (a floating charge) over a collective/bulk asset (e.g. inventory or enterprise).

A single security agreement over all assets, however, would be excessively complicated and impractical (due to different statutory formal and perfection requirements). In practice, separate agreements are used for each type of asset.

Yes, please see no. 4 above.

The form of a notarial deed (executed in Czech language only) is required for security agreements over the following assets: (i) a collective/bulk asset (e.g. enterprise, inventory), (ii) real estate not registered in the real estate register; and (iii) if a pledge over a movable property is created by entry in the register of pledges (creation by registration in the registry of pledges can be also agreed contractually – see no. 22). 

The following security agreements require notarised (certified) signatures: (i) mortgage, (ii) pledge over ownership interest (shares in a limited liability company (společnost s ručením omezením or s.r.o.)) and other types of corporations, and (iii) if a security agreement contains negative pledge provisions with in rem effect, which are to be registered in the register of pledges.

Registration is required for creation of a mortgage over real estate property, pledge over collective/bulk asset (including an enterprise), pledge over ownership interest, book-entry shares, IP rights, aircraft, if a pledge over a movable property is created by entry in the register of pledges (can be agreed in the security agreement – see 22) and regarding other assets registered in a public register.

Any security agreement executed in a form of a notarial deed must be in Czech language (see no. 20.1 above). 

Furthermore, a security agreement (and ancillary documents required for the registration process) must be translated into Czech for registration purposes in certain registries (e.g. commercial register, real estate register).

Depending on the collateral and/or contractual terms applicable to it, a prior consent of a sub-debtor (e.g. typically in case of bank accounts’ receivables, insurance receivables) or a corporate body of a security provider might be required. 

A security over receivables is effective once the sub-debtors are notified of its existence or the same is proved to them.

Yes.

It is a common practice to agree on and register a negative pledge in the relevant register (register of pledges, commercial register, real estate register, IP register, etc.). This prevents the security provider from certain disposals with or pledging of the collateral further.

Registered security has a priority over the unregistered one (even if the registered pledge is created after the unregistered). A security created by a right in obligation has the lowest ranking.

On the other hand, ranking insolvency situations is determined by the date/time of the registration. 

Unless otherwise regulated in a bilateral agreement and with certain exceptions (e.g. aircraft), law governing the rights in rem (including security) over tangible assets is law of a country where the asset (collateral) is located at the time of creation of security.

Establishment of security and level of security regulation is generally:

Security is easily established and encumbrances are easily checked

Current market practice is to have the security documents executed by wet-ink signatures.

Security agreements requiring notarised signatures can be signed in electronic form with qualified electronic signatures (QESs) and are deemed equal to written agreements signed with a wet-ink signature. If a security agreement can be signed with a simple signature only (not notarised), simple electronic signature is acceptable.

Since 2021, it is possible to execute an agreement in a form of a notarial deed using QESs and via videoconference. However, there are several practical obstacles and, thus, it is generally not used in practice.

Yes.

The commercial register, real estate register and IP register are publicly available and accessible online. The extracts from these registries can be obtained online or via a notary/registry.

The register of pledges is not publicly accessible and available online and can be to some extent available via a notary.

Generally, a security provider (or a person duly authorised by it).

In case of a negative pledge – secured creditor.

Quick – normally within several hours. 

Low, e.g.: (i) register of pledges – up to EUR 13 per extract, (ii) real estate register – approximately EUR 5 if issued by a notary, (iii) commercial register – digitally stamped original available online free of charge. 

Quick to long depending on the collateral/register, e.g. (i) register of pledges – a matter of hours/days, (ii) real estate register – usually a month, (iii) commercial register – approximately one week.

Nevertheless, the security is released immediately upon the execution of the release document. The deregistration is done only subsequently and for evidentiary purposes only. 

Low, e.g. i) register of pledges – approximately EUR 40, (ii) real estate register – approximately EUR 80, (iii) commercial register – approximately EUR 80.

Low to high. 

The most significant costs are usually notarial fees for issuance of a notarial deed – up to EUR 4,000/notarial deed; the fee is based on the value of the underlying asset/principal obligation. 

Notarisation of a signature is up to EUR 2 per signature depending on the certifying entity (notary/Czech point office/at certain cases attorney-at-law).

N/A.

Yes.

Yes, if agreed by the parties (additionally to a non-payment of the secured due debt).

Yes, if agreed by the parties (additionally to a non-payment of the secured due debt).

Yes, within and subject to the bankruptcy/insolvency proceedings (by lodging a claim).

N/A.

Yes. 

Notification on commencement of enforcement:

A secured creditor may commence an outside of insolvency enforcement of the pledge after the notification of the security provider. The notification must specify the enforcement method. There is a compulsory 30-day period in which a secured creditor must not enforce the security – this period is starting from the receipt by the security provider of the notification of enforcement or publication of the initiation of the enforcement in the relevant public register.

Yes. 

Notification on commencement of enforcement:

A secured creditor may commence an outside of insolvency enforcement of the pledge after the notification of the security provider. The notification must specify the enforcement method. There is a compulsory 30-day period in which a secured creditor must not enforce the security – this period is starting from the receipt by the security provider of the notification of enforcement or publication of the initiation of the enforcement in the relevant public register.

Yes, if parties agreed in writing and under strict statutory conditions; in particular, a value/price of the collateral must be fairly determined (usually by an independent valuer agreed on by the parties) at the time of the enforcement and enforcement may be commenced only once the secured debts are due. 

This method is currently not widely used, mainly due to several practical questions, which have not been settled by practice/case-law yet.

Yes, public auction; direct sale if agreed to by the parties in writing. 

For a public auction, a lender must obtain an “execution title” (i.e. a court decision or an arbitral award declaring that the borrower is required to pay the secured debts). Alternatively, it is possible to execute (as a part of a security package) an agreement in a form of a notarial deed in which a borrower grants a consent to direct enforcement. In such case, the deed may serve as an execution title. 

Conditions for a direct sale agreed by the parties should be sufficiently specific and limit arbitrary decision making of a secured creditor (e.g. a price/value of the collateral should be determined by an independent valuer or otherwise determined on the market).

It is possible to execute (as a part of a security package) an agreement in a form of a notarial deed (referred to as “notarial deed on direct enforcement”) in which a borrower grants consent to direct enforcement of its debts. In such case, the deed may serve as an execution title (see under no. 30 above).

E.g. collection of receivables, typically in case of a pledge over bank account receivables.

Yes, powers of attorney are usually included directly in the security documents. Sometimes, the transfer agreements to facilitate the appropriation of the collateral are included in the security documents as well.

None of the above is mandatory. Powers of attorney are highly recommended.  

The private methods of enforcement remain largely untested in the market. In practice, getting physical access to the collateral, information relating thereto, including arranging independent valuation, may be problematic if the security provider actively prevents the enforcement.

Enforcement by public auction may take several months and enforcement by court (judicial procedure) may be slower.

Court fees are relatively small. 

Fairly easy.

No (as of February 2024). The last major change was in 2014. Since then, a few amendments were made (and new case law introduced), mainly to the extent necessary to correct unclarity/inconsistency revealed during the practical implementation of the new civil law in the Czech Republic.