Debt Collection in Czech Republic

• Domestic business payment culture is generally good but some delays can be expected when it comes to settling bills.

• The system of justice is complex and criticized for lack of transparency and freedom. Moreover, legal proceedings appear to be overly long and costly when implementing court decisions can also be troublesome.

• When the debtor is insolvent, debt-renegotiation procedures are unsuccessful and liquidation is the default procedure which means that the debt collection chances are extremely poor.

1. Summary

1.1. General financial information

1.1.1. Access relevant and accurate financial information should be accessible insofar as firms need to be reported in a Trade Registry and are obligated to disclose their financial records.

1.2. Key legal structures

1.2.1. Corporate debt responsibility is defined by legal structures listed as follows:

• Limited Liability Companies (Společnost S Ručením Omezeným-SRO) are most widely used for small and medium-sized companies as they can be formed by a sole owner with a minimum capital of CZK 1, and run under very streamlined processes (no board). Shareholders are liable only to the extent of their capital contribution, for the obligations of the company.

• Joint venture entities (Akciová Společnost-AS) are typically used by large corporations. The capital requirements are higher (from CZK 2,000,000) and the setting up of a supervisory board. Shareholders are not accountable for the responsibilities of the Business.

• Instead, foreign investors tend to create branches to serve as the local representative of a foreign parent company in the country. The activities of the branch have to be listed in full with the Commercial Register.

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1.3. Regulatory framework

1.3.1. The Czech court system divides up into a network of County, Provincial and High Courts. Regional and district tribunals (krajský soud) are able to deal with industrial conflicts. In fact, following attempts to improve speed and efficiency, the legal process is extremely sluggish (due to a lack of qualified and skilled judges), and it may take years to obtain a final decision.

2. Receiving payments

2.1. DSO - Days Sales Outstanding

2.1.1. The payment conduct of domestic companies is generally good, and payments normally take place in the Czech Republic within a period of 40 days against payment terms of 30 days.

2.2. Late interests

2.2.1. In June 2013, Recast Directive 2011/7/EU, which stipulates that payments must be produced in the EU within 60 days, was transposed into Czech legislation however, compared to other EU Member States, payments in business-to-business transactions may be prolonged by contract past 30 days, providing that the additional delay is reasonable and acceptable and that payment does not reach 60 days.

2.2.2. Late payment interest may be claimed as the day after the due date of the invoice but interest rates must have been agreed as a contractual matter. The law provides otherwise that interest can be calculated on the basis of the National Czech Bank's ‘pro rate,' which is increased by at least 8 percentage points.

2.3. Costs of debt collection

2.3.1. In fact, borrowers are entitled to receive a fixed CZK 1,200 fee in compliance with EU regulations to cover collection costs and to seek additional compensation for other costs (legal fees, charges for rehabilitation companies, etc.). Transaction costs are usually not paid to the claimant in action, and appear to be used as bargaining devices.

2.4. Protecting ownership

2.4.1. The statute entitles a retailer to retain ownership of the product until the consumer has paid the relevant invoice in full, as long as a written agreement between the parties has been established. More advanced types of Retention of Title (RoT) laws aimed at retaining possession during transfer or sale to third parties would not be accepted in reality, so applying RoT provisions is a time-consuming activity.

2.4.2. If the parties agree to do so, and as long as the conditions of applicability listed above are observed, RoT clauses may be triggered as a means of returning the goods during the pre-legal phase if the debtor fails to fulfill his obligation to pay. When a dispute arises, it would be appropriate to initiate legal action.

2.5. Payments

2.5.1. The most common methods of payment are as follows: Sepa bank transfers are among the most popular means of payment since they are fast, secure, and supported internationally and domestically by an increasingly developed banking network. Transfers are usually guaranteed for export transactions through an Export Credit Insurance policy which helps to minimize the risk of sudden or unforeseen insolvency of customers.

2.5.2. Alternatively, Standby Letters of Credit (a bank guarantees the credit quality and repayment capabilities of the debtor) are reliable guarantees that can be interpreted as a sign of good faith since they can be triggered as a' payment of last resort `` if the client fails to fulfill a contractual obligation.

2.5.3. Also, verified Documentary Letters of Credit (a debtor promises that a certain amount of money will be made available to a borrower through a bank once certain requirements have been met, explicitly decided upon by the parties) can be regarded. Generally, standard bank guarantees can be received fairly efficiently, but down payment agreement remains preferred (on average 20 percent of transactions require such an arrangement).

2.5.4. Left outstanding checks and bills of payment represent debt identification methods and may be executed by the fast-track Payment Order process. Alternatively, domestic companies often offer assurances by blank exchange bills or asset commitments, but these strategies are not always successful due to insufficient reserves or liquidity.

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3. Collecting payments

3.1. Amicable action

3.1.1. Amicable settlement opportunities should always be considered as a strong alternative to formal proceedings, and assessing its solvency and assets is essential before starting legal proceedings against a debtor, as it provides verification as to whether the company is still active and whether recovery opportunities are good.

3.1.2. Nonetheless, after insolvency proceedings have been launched, it often is impossible to enforce a loan (see below) because, in fact, around 60 per cent of insolvency proceedings are terminated before they even begin as there are no assets to be sold. Generally, reaching a mutual settlement agreement by conciliation, consultation or arbitration is the most fair and effective solution as it is enforceable in trial.

3.2. Legal proceedings

3.2.1. Ordinary proceedings. Where the debt is certain and undisputed, fast track proceedings (platební rozkaz) may be instituted to obtain an enforceable payment order. Otherwise, provided that a final call for performance (seven days) has been served on the debtor, ordinary legal proceedings may begin.

3.2.2. In the Czech Republic, the judicial process depends primarily on examining the evidence presented by the plaintiffs, but it may also require proceedings. Typically, the courts would then grant remedies in the form of compensatory damages, performance orders or declaratory judgments, but Czech law does not provide for punitive damages. Having said that, and as has already been said, it is best not to have Czech domestic tribunals as the procedure is usually overly lengthy and expensive.

3.2.3. Required documents. Copies of invoices, account statements, copies of signed delivery lists, POA, business register abstracts, orders (if available), and contact information (if available).

3.2.4. Time limits. As a general rule, commercial cases must be taken before the court within three years (one year for shipping agreements) starting from the day on which the object of the case occurred. Nonetheless, courts tend to interpret exclusion terms flexibly so long as the claimant refuses to complain. Otherwise, they can not accept the argument.

3.2.5. Precautionary measures will help preserve the rights of the borrower until a full, enforceable decision is made. The courts can, in effect, order temporary pre-action steps ex parte (without the participation of both parties) to prevent irreparable damage (deposit, warrant, maintenance of the status quo, security of freedoms, etc.), to obtain evidence (hearsings, audits of documents) or to preserve evidence (records, seizures).

3.2.6. However, demonstration of an emergency situation justifying the granting of such measures is generally required. Interim steps are usually performed by the judge or by a bailiff if directed. The filing of an appeal opinion provided by the Local Courts in the first place may be taken before the High Courts within 15 days of submission. The courts would then rule about non-compliance with legal provisions, loss of authority, violations in law and factual errors. More redress against second-instance judgments is not necessary.

3.2.7. Enforcing court decisions. A verdict shall be enforceable as long as it becomes official (i.e. when all the areas of appeal are exhausted). When the debtor fails to comply with the court's decision, civil action can take the form of an asset seizure.

3.2.8. In practice, enforcing judgments is time-consuming and usually remains inefficient unless it is carried out under the Code of Execution by professional 'executors.' In fact, an amendment to the Code of Civil Procedure and the Code of Execution which came into effect in January 2013 now gives exclusive competence to professional executors to enforce commercial litigation judgements.

3.2.9. Duration of a legal action. Fast-track proceedings may last up to one year, but for ordinary legal proceedings in the Czech Republic, it is otherwise common to spread over two to three years before the courts issue a final and enforceable order. In fact, it may also take several years to implement. Proceedings concerning foreign parties would not inherently require more time than those affecting only domestic parties, but significant periods should be required for the processing of all records.

3.2.10. Costs of a legal action. As a law, the winning party may seek to have the losing party cover its court fees and legal costs (in whole or in part) (Decree 177/1996). Fast-track procedures will cost 4 percent of the stated sum. In addition to court fees covering 5 percent of the argument in ordinary cases, fixed fees (CZK 300) would be charged at each legal stage.

3.2.11. Conditional contracts whereby lawyers are not paid upfront but rather collect a fixed sum on performance and contingency payments whereby lawyers are entitled to receive a proportion of the final prize. It is also popular to use third-party legal financing companies.

3.3. Alternatives to legal action

3.3.1. Alternative Dispute Resolution Methods (ADR). ADR is not commonly used in the Czech Republic despite the introduction of a Mediation Act in 2012 to reduce the caseload of courts.

Through statute, the courts must now allow the parties to reach a compromise before making a decision, but it can not be imposed upon the parties to do so.

3.3.2. Nevertheless, domestic or international arbitration hearings are internationally recognized as an effective means of avoiding ordinary litigation because they provide for discreet mediation options whereas definitive and enforceable arbitral judgments are.

3.3.3. Foreign forums. Choosing a global venue to settle disputes may be another effective alternative to domestic courts. In fact, the Czech Republic is a signatory to the Rome I Regulation, the law relevant to contractual obligations, which stipulates that parties to a contract can, by mutual agreement, choose the law applicable to that contract, and select the court which will have jurisdiction over disputes. International traders may therefore decide to settle their commercial conflicts in an international tribunal (i.e. under foreign law or before a foreign court) as long as their arrangement has been reached in writing. In fact, Czech Republic would be enforceable by the courts of other EU Member States (see below).

3.3.4. Enforcement of international awards. When the parties suggest receiving a verdict from a foreign court to minimize uncertainties, or when a global ruling has to be applied in the Czech Republic because a debtor has properties in the region, it is first of all necessary to insure that the judgment is accepted by domestic courts. Yes, as a general rule, courts have to accept international rulings as domestic actions before implementation, however specific rules apply.

3.3.5. On the one side, decisions taken in an EU country will benefit from especially favourable arrangements for compliance. Apart from EU enforcement judgments which are usually enforceable immediately in domestic courts, the two key ways of imposing an EU judgment in the Czech Republic include the use of a European Compliance Order (EEO, as provided for in Regulation EC No 805/2004) where the allegation is undisputed or the declaration of the judgment under the terms of the Brussels I Regulation (44/2001).

3.3.6. If the judgment qualifies as an uncontested claim, it can be directly enforced (i.e. without registration) through the use of an EEO, provided the debtor has identified assets in the country. Similarly, a European Small Claims Procedure (as provided for in Regulation EC 861/2007) aimed at eliminating intermediate steps can be relied on while enforcing decisions of up to EUR 2000.

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3.3.7. The procedure for registering an EU judgment with domestic courts is relatively simple, if the claim is disputed. To order for the judgment to be recorded, the judgment holder will appeal to the court involved and provide the court with, among other records, a signed copy of the judgment, a verified transcript of the judgment and, if interest is asserted, a notice stating the amount and interest rate at the time of the application and forwards. Once the judgment has been published, it can be applied if it has been given by domestic courts (as per Recast Regulation EC 1215/2012, such an exequatur process is no longer required as from January 2015).

3.3.8. On the other hand, decisions made outside the EU in foreign countries should usually be recognised and applied (as provided for in Private Foreign Law and Procedural Act No. 97/1963 Coll.), so that they were first' recognized' by domestic courts as a domestic decision. Usually, the courts will test whether the international award is valid and enforceable in the awarding nation, but acceptance will basically rely on reciprocity (i.e., the presence of mutual acknowledgement and compliance treaties), implying that Czech courts will not accept and enforce foreign judgments given in countries that do not acknowledge Czech decisions. Upon granting exequatur, the interested party may initiate execution proceedings.

3.3.9. International decisions must be followed by trial rather than executor compliance (for domestic judgments) and the defendant's place of residence / registered office of district court would have authority over such subjects.

3.3.10. Czech Republic is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which means that awards rendered through international arbitration proceedings should be recognized and enforced by its domestic courts. Hence, international arbitration could be an effective solution to structured proceedings..

4. Managing insolvent debtors

4.1. Insolvency in Czech Republic

4.1.1. Insolvency in the Czech Republic is both a question of cash flow and balance sheets: a debtor is deemed insolvent if he has more than one creditor and unpaid loans that he can not compensate for more than 30 days (plurality of creditors and maturity of receivables of money). Additionally, insolvency can be found when the debtors' assets (taking into account the company's expected development) can not offset the debts.

4.1.2. The 2006 Insolvency Act of the Czech Republic (Law n° 182/2006 Coll. as amended) is inspired by U.S. Chapter 11 enhances shareholders ' rights, reduces opportunities for extended court proceedings and gives successful companies the opportunity to continue operation. Insolvency proceedings may only begin once the debtor (or his creditors) has filed for his insolvency (insolvenční návrh) and the edict of the court establishing the insolvency condition of the debtor is issued in the Insolvencies Registry. Three forms of insolvency proceedings may then be discussed but it is for the court to decide on the form of insolvency settlement after a conference of creditors.

4.2. Insolvency proceedings

4.2.1. Out-of-Court proceedings. No clear out-of-court procedures are allowed by statute.

4.2.2. Debt restructuring (reorganization) is a means of addressing insolvency, as it seeks to maintain the debtor's company. A reorganization plan may be undertaken by insolvent debtors (with either at least 50 workers or a deficit of at least CZK 50 million for the last accounting period), but debt restructuring plans must be accepted by the plurality of secured and unsecured creditors.

4.2.3. The directors usually retain the right to run the company and in principle, with the support of the majority of shareholders, a stay on compliance proceedings may be secured. The courts are slow to accept moratoriums in action, and debt renegotiation trials are not recognized for being successful.

4.2.4. Winding up proceedings.  Bankruptcy liquidation (konkurs) is the final process by which creditors ' cases are paid out of the debtor's estate sale profits in a proportionate manner. The court appoints a liquidator in charge of liquidating the company's assets and recovering receivables after it has determined that a firm is to be wound up. Creditors are required to report their receivables with the liquidator within 60 days of the issuance of the edict of the court establishing the insolvency condition of the debtor, so that they can be compensated during the liquidation period.

4.2.5. The 2006 statute has established an accelerated liquidation process open to companies whose revenue does not surpass CZK 2 million, so that less than fifty investors are concerned, but it is difficult to say whether this method is in fact relied upon. Priority rules Generally, priority rules apply when transferring the profits to the creditors. Secured creditors have full preference over other shareholders and can receive 100% of the profits.

4.2.6. Cancelation of suspected transactions. The administrator is normally entitled to review and cancel any suspected legal action deemed to be detrimental to the debtor's creditors up to six months before the bankruptcy declaration is made.

4.2.7. Duration of insolvency process. Insolvency proceedings would normally incur an average of four years.

4.2.8. Required documents. Copies of invoices, financial summary, POA, signed distribution lists, POA, contact details and instructions.