FIVE KEY INSOLVENCY CASE LAW DECISIONS FOR 2021

• Czech Republic

23-06-2022

1) Providing false information in the list of assets as an attachment to the insolvency petition is not punishable under Section 227 of the Criminal Code

The debtor seeking debt relief, as well as her employer's representative, were both found guilty of the offence of breach of the obligation to make a true declaration of assets under Section 227 of the Criminal Code (CC). The debtor filed for insolvency but, because she had to provide proof of future income, she signed a fictitious employment contract with her employer, even though both the debtor and the employer's representative knew that the debtor would never actually perform the job.

The courts of lower instances first assessed this conduct as criminal with reference to Section 227 of the CC. However, after the appeal was filed, the Supreme Court (SC) intervened, according to which it is necessary to differentiate the "list of assets" as an annex to the proposal for debt relief under Section 104(1)(a) of the Insolvency Act (IA) and "declaration of assets", which the debtor makes under Sections 214 to 216 of the IA. According to the Supreme Court, Section 227 of the IA applies only to the latter "declaration"; because, among other things, in the case of the "list of assets" the debtor submits it of their own free will - the debtor does so without any prior interference from a public authority and, above all, they are not informed in advance of the possible consequences of a failure to properly comply with the statutory obligation, as it is in the case of the "declaration of assets".

Therefore, the Supreme Court concluded that the inclusion of false or grossly distorted information in the list of assets as an annex to the insolvency petition cannot be punishable under Section 227 of the CC.

(Supreme Court Decision No. 15 Tdo 525/2021-589 of 22 September 2021)

2) + 3) Reservation of title and right to withdraw from the contract pending a decision on the insolvency resolution procedure

The creditor sought the exclusion of certain assets from the estate because they had withdrawn from the purchase contracts and negotiated a reservation of title with the purchasing debtor. Here, the SC expressly confirmed that as long as the default under the contract continues (the debtor was in default of payment of the purchase price), it is legally irrelevant whether or not the other party withdraws from the contract without undue delay or not.

The insolvency court initially did not recognize the creditor's reservation of title because the arrangement did not meet the requirements of Section 2134 of the Civil Code - it was not negotiated in the form of a public deed or a private deed with certified signatures. The SC chose not to comment on this deficiency and merely stated that it was sufficient for the creditor to allege and prove a stronger title to the disputed items than that of the debtor. In the proceedings, according to the SC, it was proven that the creditor had delivered the disputed items to the debtor, had negotiated a reservation of title with the debtor and had subsequently effectively withdrawn from the purchase contracts, and thus, by virtue of that withdrawal alone, they were entitled to demand the return of the items.

(Supreme Court Decision No. 29 ICdo 81/2019-88 of 25 February 2021)

The conclusions on the reservation of title were further developed by the SC in another, substantially similar decision of the same day. Here, it stated that if the reservation of title is ineffectively negotiated (because it does not bear authenticated signatures), the insolvency administrator is entitled to register the property into the estate and subsequently to argue the ineffectiveness of the reservation of title as a possible defence against an exclusion action. However, even in this case the creditor withdrew from the contract before the decision on the insolvency resolution procedure and could thus able to succeed with the action.

(Supreme Court Decision No. 29 ICdo 21/2019-304 of 25 February 2021)

4) Even a defective reorganisation petition produces effects

The Supreme Court considered a case of impermissible set-off of claims in a situation where a reorganisation petition (albeit defective in this case) was filed. The SC held that even a defective reorganisation petition produces the effects associated with a reorganisation
petition - and thus a set-off was not permissible. The SC also made it clear that the effects of the reorganisation petition expire ex nunc, not retroactively - as a result, if the reorganisation petition is rejected, the impermissible set-off is not "revived" and must be carried out again.

(Supreme Court Decision No. 29 Cdo 2533/2019-257 of 31 May 2021)

5) Payment of debt from attorney's escrow after declaration of bankruptcy

The insolvency administrator filed a lawsuit against an attorney who had concluded an escrow agreement with the debtor despite the debtor's bankruptcy. Subsequently, the debtor's insurance company transferred funds to the escrow account (when it should properly have been paid into the estate), whereupon the attorney then forwarded the funds to the debtor's creditor (when it should also properly have been paid into the estate).

In addition to the debtor, who received a penal order for the abovementioned offences of damaging a creditor and breach of duty in the insolvency proceedings, the attorney also faced an action from the insolvency administrator with reference to the provisions of Section 249(2) of the IA, as the attorney had not freed himself of his obligation by this performance. In the proceedings, the SC formulated four essential conclusions:

1) If a person who has a monetary obligation towards the insolvent debtor fulfils their obligation after the declaration of bankruptcy by transferring funds to the debtor's creditor (in this case, the insurance company paid its obligation towards the debtor into the attorney's escrow from which the attorney transferred the money to the creditor), then in the meaning of Section 249(2) of the IA, the person is providing performance to the debtor, not to the debtor's creditor.

2) An attorney who undertakes to pay an amount as a trustee to the depositor or a person designated by the depositor on the basis of an escrow agreement is obliged, before concluding the escrow agreement, to verify whether insolvency proceedings are pending against the depositor and whether the fulfilment of the obligation under such agreement is prevented by any of the effects of the insolvency proceedings.

3) The SC also considered the issue of limitation, as the insolvency administrator has supposedly brought the action against the attorney after the end of the limitation period. The SC concluded that if it can be assumed that the attorney as a trustee had not freed himself of his obligation by paying the debt to the debtor's creditor pursuant to Section 249(2) of the IA (because he should have properly paid into the estate), the statute of limitations is not connected with the right under Section 249(2) of the IA, but with a right that was not extinguished by the performance of the debtor's debtor (the decisive moment for the purposes of the statute of limitations is therefore not the moment when the attorney as a trustee performed to the debtor's creditor, but the moment when the right to release the object of the escrow could have been asserted against the attorney for the first time).

4) If an attorney as a trustee pays the debtor's creditor funds from the escrow, by the payment of which another person (insurance company) previously did not free themselves of their obligation with regard to the provisions of Section 249(2) of the IA, the attorney is not relieved of his obligation by his payment, again with regard to the provisions of Section 249(2) of the IA. As long as the relevant performance does not reach the estate, the insolvency administrator may demand performance against both the insurance company and the attorney, whereby performance by one of them extinguishes the obligation to perform for the other.

(Supreme Court Decision No. 29 Cdo 2797/2019-178 of 12 November 2021)

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