Analysts expect that GDP will plummet as a consequence of the restrictions on economic activities imposed as a consequence of the COVID-19 pandemic, and that the global economy, and with it the Czech economy, will slow down considerably. Various entities from across numerous industries are facing, or may soon face, an immediate liquidity shortfall. In order to mitigate the liquidity crisis in the Czech market, a bundle of crisis measures has been brought forward, which includes: (a) a deferment of loan instalments, (b) restrictions on insolvency petitions, and (c) extraordinary moratorium. These crisis measures are to be discussed by the Chamber of Deputies in the form of a fast-tracked bill over the next few days, and are expected to come into effect as of the day of their promulgation, i.e. as soon as in the course of April 2020.
1. Deferment of Loan Instalments
Borrowers may make use of a deferment of instalments on credit facilities and similar financial services until October 31, 2020 (or until July 31, 2020, with the choice being up to the borrower), by way of a unilateral notice to such effect to the lender. In this notice, the borrower simply needs to announce its intention to make use of the protection period because of the adverse economic consequences of the COVID-19 pandemic on the borrower. This will automatically result in the deferment of instalments, whereas the lender has no right to object to the deferment in any way (i.e. the opt-in principle applies).
This option of deferment is available to all borrowers, whether they be consumers, self-employed businesspeople, or legal entities. One requirement is that the "deferred" loan must have been drawn prior to March 26, 2020. In the case of loans secured by real property (including mortgage loans), though, the drawdown need not necessarily have occurred before that date – it suffices that the loan agreement was concluded before March 26. The following financial products are, however, excluded from the deferment measure: overdraft credit, revolving credit, financial guarantees, leases of real property (which is the subject of a separate measure), hire-purchase and leasing arrangements, bonds, notes, and other financial instruments, as well as credit facilities with interest rate hedging, and finally, credits and loans with respect to which the borrower has been in default with their payment obligations for more than 30 days as of March 26, 2020.
During the protection period, no instalments on the loan principal need to be paid, and the final maturity of the loan is thus postponed (i.e. the deferred instalments are tacked onto the instalment plan after the originally agreed final due date). Legal entities will continue to pay interest and other fees as per the terms of the loan agreement during the protection period. Nor is interest being waived in the case of consumers, though for them, interest is being capped, and is made payable only after the end of the protection period. Fees and other non-interest yield accrued during the protection period (outside and above interest), as well as default interest and other penalties, do not accrue for consumers.
Legal entities that make use of the deferment of instalments must, during the deferral, refrain from disposing of assets that could be used to satisfy the lender – this is in reference to substantial changes to the composition of the borrower’s property, the use or designated purpose of such property, or a not insignificant reduction of the property (through transactions known as asset stripping).
2. Restriction on Insolvency Petitions
Submitting insolvency petitions has been made subject to restrictions, both on the part of creditors and with respect to the obligation of debtors to file for insolvency themselves.
Creditors’ petitions filed between the effective date of the bill and August 31, 2020 are automatically ineffective. The obligation of debtors to file an insolvency petition if they find that they have become insolvent has been suspended for six months from the expiry (or abolition) of the government-mandated crisis or emergency measures. This does not apply to cases in which insolvency occurred already before the crisis measures were adopted, or if the insolvency is not prevailingly due to the circumstances related to the crisis measures (in that it is not these measures that make it impossible for the debtor to honor its financial obligations, or substantially hamper the discharge of such obligations). This suspension of the obligation of debtors to file for their insolvency lapses no later than on December 31, 2020, regardless of how long the crisis measures will remain in place.
3. Extraordinary Moratorium
Until August 31, 2020, debtors have the option to request the declaration of an extraordinary moratorium – i.e. to seek protection from the declaration of insolvency and from foreclosure and debt enforcement against its assets. In the request for the extraordinary moratorium, the debtor shall confirm that they were not insolvent as of March 12, 2020 (i.e. that they were not already insolvent at the time at which the state of emergency was declared and the related crisis measures were rolled out), because the extraordinary moratorium is specifically intended to mitigate the consequences of the said crisis measures. The extraordinary moratorium will only commence after the court decision in which it is declared has been published in the insolvency register. However, the court will review the pertinent request merely with respect to whether the formal requirements have been fulfilled. Unlike an "ordinary" moratorium, the extraordinary moratorium does not require creditors’ consent. The extraordinary moratorium will last for three months, with an optional extension by another three months (though such extension is subject to approval by a majority of creditors).
For as long as the extraordinary moratorium lasts, the debtor is permitted to satisfy preferentially its obligations that arise during this moratorium and are directly related to preserving the enterprise as a going concern, i.e. these obligations enjoy priority over obligations with an earlier maturity date. Key suppliers are prohibited from withholding deliveries or continued performance under agreements with the debtor as long as the debtor fulfills its obligations under the moratorium towards them. Financing provided during the extraordinary moratorium in order to keep the debtor’s business afloat enjoys a priority claim for satisfaction during the extraordinary moratorium (and during the insolvency proceedings that may follow).
The declaration of the extraordinary moratorium goes hand in hand with increased liability on the part of the debtor and its statutory bodies. As in the case of an ordinary moratorium, so in this case, the debtor must refrain from operations that would result in substantial changes to the composition of the debtor’s property, the use or designated purpose of such property, or a not insignificant reduction of the property (asset stripping). The members of the debtor’s statutory bodies are personally liable for the damage caused by a breach of obligations during the extraordinary moratorium or by false statements made in the petition for the declaration of such moratorium.
The extraordinary moratorium is in no way a replacement for an ordinary moratorium, of which debtors may avail themselves after the extraordinary moratorium has ended. Such an ordinary moratorium, however, requires the approval of a majority of creditors.
4. Other Related Measures
This first package of measures in response to the COVID-19 pandemic also includes other steps and measures, a detailed description of which would go beyond the framework of this brief alert. Among them are support programs in the form of government loans and guarantees, statutory freezes of lease agreements that prevent the termination of leases on grounds of unpaid rent for the period from March 12, 2020 through June 30, 2020, waivers of various procedural time limits, or the extension of the performance deadlines for previously approved reorganization plans.
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