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EU affairs Euro–Czech Forum
A Reform of Bankruptcy Law and
Foto: Zdeněk Tichý
Commercial Registry in 2004
The Euro–Czech Forum (ECF) viewed the 2004 as a year of prospects for positive changes in terms of reforms of legal–business environment in the Czech Republic, and its representatives were convinced that the reforms simplifying the creation and extinction of business entities would be successfully accomplished at last. For representatives of European investors and business circles the reform of the Commercial Register and of bankruptcy law became one of the main priorities, and ECF stressed this in its key document of recommen– dations called Agenda 2003. However, looking back at 2004, I must express Euro–Czech Forum’s disappoint– ment that our hopes did not fully materialise. To tell the truth, commercial registry matters has been favourably solved by the Draft Amendment to the Commercial Code, prepared by Civil Democrats (ODS) deputy and Shadow Justice Minister Jiří Pospíšil. As a step in the right direction, European investors view an introduction of short obligatory periods for judges, during which they will be bound to decide on an entry into the register if the submitted form is filled in pro– perly. I consider the existence of transparent forms for the particular types of entries into the Commercial Register as an important innovation, which will help facilitate the registration proceedings. While I regard the reforms of commercial registers as satisfactory, situation in bankruptcy law deserves much more severe criticism. I dare say that business circles and investors view the situation surrounding the insolvency law as literally critical. For a long time, ECF has been pointing out the current unacceptable situation, which governments have been trying to put right by an endless number of specific amendments. However,
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these amendments often had negative rather than positive effects in terms of the interpretation of individual law provisions. The bankruptcy law was also repeatedly criticised by renowned international institutions including the OECD and the European Commission. The validity of the criticism is clearly documented by the World Bank’s latest report, which indicates that the Czech Republic is the very last in the list of evaluated European countries as for the length of bankruptcy proceedings (which last incredible 9 years on average). The failure of the pro–reform bridging amendment (“Amendment 635”) to the Act on Bankruptcy and Settlement in the Chamber of Deputies is literally tragic news. The main purpose of the amendment was to eliminate the most urgent problems of bankruptcy law until the new re–codification comes into force. Unfor– tunately, the voices opposing the reform of bankruptcy procedures prevailed in the Chamber of Deputies and blocked the modernisation of Czech insolvency law. The last version of the proposal, which was submitted for a final vote (and was subsequently rejected), differed completely from the text introduced by the MPs in the first reading because it had been modified by anti–reform amendments. The new version of the proposed bill actually preserved the current unsatisfactory situation and could not logically be approved by the MPs representing the right–wing and centre parties. ECF supported the amendment in a version that was very similar to the one passed by the Chamber of Deputies in its first reading, which aimed to strengthen creditor rights in the entire bankruptcy process, mainly through the appointment of bankruptcy administrators and the extension of the powers of creditor committees. The result of the vote seems to be further proof of the impossibility of reforming Czech bankruptcy law, which will undoubtedly have a negative impact on the Czech economy. Why? For example, the insufficient satisfaction of secured creditors will continue to be allowed. In effect, this provision leads to the banks’ seeking additional security for the loans they grant, and this negatively influences the availability of loan money for enterprises. Expensive loans have the worst impact on small and medium–size enterprises, and it is precisely these companies that form the basis of all modern economies. Another step made by the government in this legal area must be the introduction of a high–quality re–codification draft of the insolvency law. The new re–codification must particularly reflect the needs of business and industrial circles. These require modern, transparent and effective enactment, which will lay emphasis on economic aspects of bankruptcy law and respect the rhythm of modern eco– nomies and the business world. I must say, however, that the current version of the bill, which was submitted for comments in January 2005, can hardly have the ambi– tion to become a real re–codification of bankruptcy law.
What leads me to a proposition like this? The draft is again based on the dominant role of court and the super– fluous extent of the powers of insolvency administrator, altogether to the detriment of the position of creditors and their bodies. Although I appreciate the introduction of so–called reorganisation, as a non– liquidation manner of carrying out recovery measures while maintaining company’s activities, I strongly disagree with its regulation in the draft code. I assume that the basic principles of reorganisation are not complete, there are no statutory limitations in the framework of the reorganisation process that may result in inefficient and application of reorga– nisation in practice. Another serious drawback of the proposal is the way the appraisal of collateral by expert is regulated. I also perceive the financing of an enterprise during the insolvency proceedings, including the preferential participation of secured creditors, as a serious problem. The draft regulation, while generally describing the basic institutes, is absolutely inadequate and again docu– ments the underestimation of the economic context of insolvency law by the authors of the Draft. Furthermore, I do not consider certain provisions of the Draft rendering legal acts in commercial relations ineffective to be beneficial, as they limit the legal certainty within established legal relationships, even though these were concluded in good faith and under legitimate terms. In accordance with modern European and world trends, I think that enacting the assertion of the inefficiency by an administrator’s counter–plea would be more appropriate. I am also convinced that the draft, in many regards, denies creditors the rights which they should have during the proceedings due to their receivables and values of assets. Given the experience with the performance of some bankruptcy judges, I believe that a decision on the actual manner of insolvency should be made by the creditors provided that a decision on a certain approach is made by a majority of both secured and unsecured creditors. Moreover, I think it would be standard and desirable if the decision–making on appointment of the receiver should be entrusted primarily to the creditors body where, save for a few exceptions, the chairman of the court would respect the person identified in the proposal. This article includes a lot of critical words about the reform of legal–business environment in the Czech Republic. Nevertheless, ECF strongly believes that it will be able to say about 2005 that it was a year of the imple– mentation of the major reforms governing business activities at last. European investors are convinced that the Czech Republic can no longer afford to continue to lag behind the neighbouring EU countries because this might have really serious consequences for it. By Jan Mraček, ECF Legal Analyst I českou verzi naleznete na www.clubmagazine.cz
