New Insolvency Act – benefits of temporary protection, conditions for reducing creditors' claims and replacement of creditors' consent
Benefits brought by the Bankruptcy Act to the debtor in the form of temporary protection and reduction of claims without the consent of creditors.
In another of the articles in the series on the new Act No. 111/2022 Coll. on Solving Impending Bankruptcy (hereinafter referred to as the "Act"), we have summarized for you the benefits of temporary protection, the conditions for partial relief of claims and the replacement of creditors' consent by the court.
- Temporary protection
According to the Act, the debtor is entitled, in order to maintain the further operation of the business and its economic recovery to apply to the court for temporary protection. The court grants the debtor temporary protection for a period of three months (with the possibility of extension for a further 3 months).
The effects of temporary protection affect all creditors. These are the 6 most important effects of temporary protection:
- Active bankruptcy immunity –it means that the debtor is not obliged to file for bankruptcy during temporary protection. However, this does not affect the statutory body's obligation to inform the court, the insolvency practitionerand the creditors' committee that the debtor has become insolvent during a public preventive restructuring;
- Passive bankruptcy immunity – that is temporary protection protects the debtor from bankruptcy of his assets or permission for restructuring;
- Immunity from execution – temporary protection of the property of the executor. If the execution is already being carried out, it is suspended;
- Priority of new and unrelated obligations – this allows the debtor to fulfill new obligations before old ones and an unrelated obligation before a related obligation;
- Immunity from the exercise of security rights – that is, that the exercise of a security right (e.g. a lien) cannot be initiated or enforced;
- Immunity from fulfillment of covenants - financing agreed before temporary protection is granted cannot be terminated by the creditor during the protection period, due to the fact that the borrower does not meet the agreed financial indicators.
- Partial waiver by creditors
The forgiveness of the claim by the creditor is one of the restructuring measures according to §35 of the Act. Restructuring measures are intended to help prevent the bankruptcy of the debtor. The condition for granting temporary protection is among other things, also the fact that the partial forgiveness of claims does not exceed 20% of his claim for any of the creditors. Partial forgiveness of a claim for a creditor after the amendment to the Income Tax Act means that such forgiveness of a claim is considered a tax expense.
- Replacement of creditors' consent by a court
At the request of the debtor, the court has the power to replace the consent of the group of creditors to the public plan. The court decides on the replacement of the consent of a group of creditors only if the legal conditions are met, as well as the court may refuse to replace consent only for exhaustively defined reasons. Since the replacement of consent by a court is a relatively large interference with the rights of creditors, the fulfilment of legal conditions serves mainly to protect dissenting creditors.
The court is entitled to replace the consent of the group only if, among other things, such group is treated at least as favorably as any other group of the same class, more favorably than any subordinate group, and no group receives more than the original performance.
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