Any favouritism or detrimental acts by the debtor may be penalised in insolvency proceedings.
Legal acts by the debtor to reduce the chances that creditors will be satisfied or to favour certain creditors over others are unenforceable. Any omission by the debtor in this respect is also treated as a legal act. There are three categories of ineffective acts: (1) legal acts without adequate consideration; (2) preferential legal acts resulting in a situation where one creditor, to the detriment of other creditors, receives greater satisfaction than they would otherwise have obtained in bankruptcy procedure; (3) legal acts where the debtor intentionally curtails the satisfaction of a creditor, if this intention was known or, in view of all of the circumstances, must have been known to the counterparty.
The unenforceability of the debtor’s legal acts is established by an insolvency court ruling on an action brought by the insolvency practitioner protesting the debtor’s legal acts (i.e. an action to set a transaction aside). The insolvency practitioner may bring an action to set a transaction aside within 1 year of the date on which the insolvency decision takes effect. If an action is not brought within that time limit, a claim to have a transaction set aside lapses. The debtor’s consideration from unenforceable legal acts belongs to the estate after the ruling upholding the action to set a transaction aside becomes final.
The unenforceability of a legal act does not prejudice its validity. However, in insolvency proceedings, any consideration received by the debtor on the basis of unenforceable legal acts belongs to the estate. If the debtor’s original consideration from an unenforceable legal act cannot be surrendered to the estate, equivalent compensation must be provided.
The insolvency court is not bound by the decision of another court or another authority or by any other procedure that finds, in the course of insolvency proceedings, that a legal act relating to the assets or liabilities of the debtor is null and void. In the course of insolvency proceedings, only the insolvency court examines the invalidity of such a legal act, either in the form of a reference for a preliminary ruling or in an incidental dispute on that issue. An action in this dispute may be brought by parties to the insolvency proceedings other than the debtor, unless this is a debtor in possession, and by the insolvency practitioner or the public prosecutor’s office. The insolvency practitioner must always be either the plaintiff or the defendant. If the final ruling subsequently finds that a legal act relating to the assets or liabilities of the debtor is null and void, the economic benefit gained from it must be surrendered back to the estate.
If a legal act relating to the assets or liabilities of the debtor is found to be null and void by a court ruling that became final before the opening of insolvency proceedings, the legal act addressed by the ruling is also treated as null and void in the insolvency proceedings.read more
Reference to legal acts
Sections 231 to 243 of Act No 182/2006 on bankruptcy and the management thereof (the Insolvency Act), as amended
Responsible Public Authority
Ministry of Justice of the Czech Republic
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