A new Directive on Restructuring and Insolvency (hereinafter the “Directive”) [1] entered into force on 16 July 2019. Not even three months after the large-scale domestic regulation concerning discharge of debt came into effect it is sure that there will be further changes in this area in the next two years.[2] The expected adjustments will barely be of just a cosmetic nature.
First, it must be outlined that the Directive is aimed exclusively at legal persons and individuals conducting business (entrepreneurs – individuals). Apart from other exceptions, individuals who do not exercise a trade, business, craft or profession are excluded from its scope, therefore the Directive does not directly affect the debtors – consumers. The two main objectives of the Directive are (i) to establish preventive restructuring frameworks, including early warning mechanisms against the impending economic failure of the debtor, and (ii) to ensure that entrepreneurs – individuals have a possibility to achieve a full discharge of debt.
This article deals with the second area under which the Directive obliges the Member States to establish at least one way for entrepreneurs – individuals in bankruptcy – to achieve full discharge of debt. In the context of the Directive, full discharge of debt means that enforcement against entrepreneurs – individuals of their outstanding debts is precluded or that outstanding debts as such are cancelled, as part of a procedure which could include a realisation of assets or a repayment plan or both. Another important aspect introduced by the Directive is the limitation of the maximum period after which entrepreneurs – individuals must be fully debt-discharged. This period may not exceed three years from the date of the court decision confirming the repayment schedule or from the date of the court’s decision to initiate a procedure other than the performance of the repayment schedule.
It follows from the general nature of the directives that each Member State has a discretion which measures it will take to achieve the Directive’s objectives and what legislative changes it will conduct in order to implement the Directive into national law. Considering recent development in the field of legislation and case law concerning the possibility of discharge of debt in case of debts arising out of business, it will surely be a hot topic in the domestic legal environment to ensure the full discharge of debt in case of entrepreneurs – individuals. The main part of the transposition of the Directive into national legislation is due to take place by 17 July 2021, some selected parts by 17 July 2024, respectively by 17 July 2026.
As already mentioned, the Directive explicitly excludes non-entrepreneurial individuals from its scope (consumers). Since it is often not possible to draw a clear distinction between the debts incurred by entrepreneurs – individuals in the course of their trade, business, craft or profession and those incurred outside those activities, the Directive calls on the Member States to apply this Directive also on consumer’s discharge of debt as soon as possible. Indeed, it would be undesirable if entrepreneurs – individuals had to go through separate procedures, with different access conditions and discharge periods, to discharge their business debts and other debts incurred outside their business.[3]
Given that, the Directive clearly prefers to establish only one procedure throughout which an entrepreneur – individuals can be fully discharged regardless of whether a part of his debts arises out of his business activities or any consumer debts are at hand. This “business” discharge of debt must be subject to the three-year limitation, under which a full discharge of debt must be achievable for those entrepreneurs.
Thus, the Czech legislator may benefit from two possibilities of transposing the Directive – firstly, a completely new institute of “business” discharge of debt may be introduced in addition to the current debt discharge regulation, or, secondly, the existing regulation of debt discharge may be extended to entrepreneurs – individuals. However, both options require that the duration of such a procedure will be limited to three years in line with the Directive.
Regardless of the way the legislator goes at the end, it will also be necessary to deal with the fact that a “mechanical” transposition of the Directive would create a situation where a standard discharge of debt for non-entrepreneurs, including consumers, could take five and, according to the current legislation, in specific cases even more years, while entrepreneurs – individuals could already be discharged in three years. Such a discrepancy could result in motivation for consumers to purposefully start a business activity and “create” business debts in order to fulfil the conditions for “business” discharge of debt taking only up to three years.
Considering both options, it seems more appropriate to incorporate a new regulation concerning entrepreneurs – individuals into the existing procedure stipulated in the Czech Insolvency Act. In such a case, a full discharge of debt for entrepreneurs – individuals would be granted by partial exemptions from the general unified procedure while limiting duration of such proceedings up to a maximum of three years.
Should you have any questions regarding the news Directive or the general issues of the insolvency law in the light of the above-mentioned and current legislation, we are at your disposal. Please, do not hesitate to contact us.
Mgr. Martin Heinzel, attorney-at-law – heinzel@plegal.cz
30. 07. 2019
[1] Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency)
[2] The Member States are obliged to implement the Directive into national law except for several provisions by 17 July 2021 at the latest
[3] Point 21 of the Directive´s Preamble