That the Insolvency Register is open to abuse has been a problem since its inception, i.e., for almost five years, but only now has the lawmaker attempted to put an end to such practices, in the form of act No. 334/2012 Coll. amending the Insolvency Act (Act No. 182/2006 Coll.).

After all, the fact that all petitions for insolvency are being made public in the Insolvency Register within two hours from filing has been an open invitation to harassment for anyone who wants to exercise unfair pressure on debtors by filing vexatious insolvency petitions (i.e., petitions for no good reason). Filing an insolvency petition sets in motion the commencement of insolvency proceedings, which in turn triggers a prohibition of any actions by the debtor that could substantially compromise the value of their estate. The situation is aggravated by the fact that the insolvency court raises at least six different public authorities from their bureaucratic slumber (Commercial Register, labor office, social security administration, to name but a few).

Also, the public notice of filed insolvency petitions in the Commercial Register and Insolvency Register is of course extremely inconvenient for a debtor who is in fact not at all insolvent, and may have very unpleasant consequences, especially in connection with public tenders (from which the debtor may be barred solely based on the entry in the Insolvency Register), but also in terms of their day-to-day business, for existing debt financing by banks, pending loan requests, leasing contracts, etc. 

Given that insolvency petitions are automatically made public in the Insolvency Register (a practice upheld and preserved by the amendment), the lawmaker was reduced to tinkering with the legal consequences of such petitions, by implementing the following measures:

  • Petitioners may be required to post collateral if there is reason to believe that the debtor may sustain damage due to the unjustified commencement of insolvency proceedings and the measures that come with it;
  • The insolvency court has the authority to dismiss a petition for insolvency if it is manifestly unfounded, though it may only do so within seven days from the day on which it was filed (but apparently no later); 
  • If the petition for insolvency was dismissed for fault of the petitioner, then the petitioner must compensate the debtor for the damage thus caused (whereas in the event of doubt, the petitioner is held to be at fault);
  • Action for damages must be filed within six months from the termination of insolvency proceedings;
  • In the case of manifestly unfounded petitions for insolvency, debtors will now be removed from the Insolvency Register within three months from the moment in which the final decision on setting aside the insolvency proceedings has been handed down, as opposed to the previous time period of five years from the moment in which such decisions became final.

We shall see whether this package of measures will really help curb the number of filings of clearly unfounded petitions for insolvency – but for now, some doubt definitely remains:

  • while the collateral requirement is surely a helpful idea, the new provisions are silent on the specific amount up to which collateral may be demanded, and do not specify what should happen if no collateral is posted;
  • it makes no sense that an insolvency petition may be dismissed as being manifestly unfounded during the first seven days from filing, but not thereafter (e.g. because it is only later revealed that the petition was without good cause);
  • while the petitioner’s obligation to pay compensation for damages is generally a welcome development, we will have to wait and see whether the lawmaker actually overshot the mark in this particular aspect (by always assuming, in case of doubt, that the petitioner was at fault for proceedings that were set aside);
  • it is unclear why a statutory time limit has been imposed for filing the claim for damages; and
  • it is hard to understand why a debtor who became the victim of a manifestly unfounded insolvency motion (which was dismissed with final force) is not immediately removed from the Insolvency Register, but only within three months from the date on which the said dismissal became final. 

It remains to be seen whether the measures that were included in the amendment are powerful enough to fight the phenomenon of vexatious insolvency petitions and effectively deter unfair competitors from engaging in such frivolous practices. Sadly, there is good reason to believe that the amendment falls short of this goal.

Originally published by bnt newsletter, author: Dr. Stephan Heidenhain, Associate.