EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 18 October 2005 
at the request of the Czech Ministry of Justice 
on a draft law on insolvency and the means of its resolution and on a draft law amending certain 
laws in connection with the adop tion of the law on insolvency 
(CON/2005/36)  
 1. On 29 July 2005 the European Central Bank (ECB) received a request from the Czech Ministry of 
Justice (hereinafter the ‘Ministry’) for an opinion on a draft law on insolvency and the means of its 
resolution (hereinafter the ‘draft insolvency law’) and a draft law amending certain laws in 
connection with the adoption of the law on insolvency and the means of its resolution (both draft laws hereinafter referred to collectively as the ‘draft laws’). 
2. The ECB’s competence to deliver an opinion is based on the third and sixth indents of Article 2(1) 
of Council Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank 
by national authorities regarding draft legislative provisions
1, as the draft laws affect the powers of 
Česká národní banka ( ČNB) and contain rules applicable to fi nancial institutions which materially 
influence the stability of financial institutions and markets. In accordance w ith the first sentence of 
Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has 
adopted this opinion. 
The draft laws  
3. The draft laws replace the curre nt insolvency framework contai ned in the Act on bankruptcy and 
composition of claims No 328/1991 Coll., as amende d (hereinafter the ‘Bankruptcy Act’). The 
main purpose of the draft laws is to overhaul and modernise Czech insolvency law, by introducing 
new means of resolving insolvency other than bankr uptcy, such as reorganisation, discharge of debt 
and other specialised proceedings for particular types of entities, including financial institutions. 
The provisions on reorganisation proceedings, in particular, are inspired by Chapter 11 of the US Bankruptcy Code of 1978 and similar insolvency law reforms in a number of EU Member States, 
including Germany and France
2. The draft laws also contain provisions on special insolvency 
                                                      
1 OJ L 189, 3.7.1998, p. 42. 
2  See the German Insolvenzordnung (Insolvency Law) of 5 October 1994 and the French Code de commerce  (Commercial 
Code), Article L. 610-1 et seq., as amended by Loi n° 2005-845 du 26 juillet 2005 de sauvegarde des entreprises  (Law 
No 2005-845 of 26 July 2005 on the preservation of undertakings). 
 
2 proceedings for financial institutions3, which are intended to transpose a number of EC directives 
in this area4. The draft laws thus mainly reform corporat e insolvency procedures, but they are also 
relevant to banks and other fi nancial institutions. The draft laws will enter into force on 
1 January 2006.  
Comments on the general framework for cor porate insolvency and creditors’ rights  
4. The Czech legal framework for corporate insolven cy has been closely monitored in recent years by 
the international financial community. The ECB understands that, despite certain constructive 
amendments to the Bankruptcy Act in 2000, interna tional financial institutions such as the World 
Bank5 and the International Monetary Fund (IMF)6 have criticised insolvency proceedings under 
the Bankruptcy Act as being slow, inefficient and dysfunctional7. The ECB understands that the 
Bankruptcy Act is still widely considered to be  unsuitable for current market conditions; Czech 
banks and other public-sector undertakings ha ve been privatised and now compete with 
counterparts from other Member States which have  more highly developed insolvency regimes8. 
The ECB also understands that the current insolvency  regime is seen as hostile to creditors’ rights 
and debt enforcement. The ECB understands that reco very rates in respect of creditors’ security are 
particularly low, largely due to weak debt en forcement and to creditors having little effective 
control over insolvency proceedings, which are la rgely under the control of the courts (with a 
single judge sitting at first instance)9 and the court-appointed bankruptcy administrator. This is of 
particular concern for banks and other financial institutions that have secured claims against a 
debtor. If secured creditors have no confidence that  their security rights will be protected upon a 
                                                      
3  It should be noted that these provisions generally repeat those contained in the most recent ‘harmonisation’ amendment  
of the Bankruptcy Act, which entered into force on 29 September 2005 and is a part  of the Act on financial 
conglomerates No 377/2005 Coll.   
4  These are principally Directive 2001/24/EC of the Europ ean Parliament and of the Council of 4 April 2001 on the 
reorganisation and winding up of credit institutions (OJ L 125, 5.5.2001, p. 15) and Directive 2001/17/EC of the 
European Parliament and of the Council of 19 Marc h 2001 on the reorganisation and winding-up of insurance 
undertakings (OJ L 110, 20.4.2001, p. 28) , as well as certain adaptations require d as a result of Council Regulation (EC) 
No 1346/2000 of 29 May 2000 on insolvency proceedings (O J L 160, 30.6.2000, p. 1), as amended by Council 
Regulation (EC) No 603/2005 of 12 April 2005 amending the lists of insolvency proceedings, winding-up proceedings 
and liquidators in Annexes A, B and C to Regulatio n (EC) No 1346/2000 on insolvency proceedings (OJ L 100, 
20.4.2005, p. 1). 
5  See, for example, the World Bank Country Study, ‘C zech Republic: Completing the Transformation of Banks and 
Enterprises’ (in particular Section 3, entitled ‘The need to  reform the legal framework’, pp. 24-55), November 2000. See 
also ‘Report on Observance of Standards & Codes – In solvency and Creditor Rights Systems: Czech Republic’, 
April 2001. These and other World Bank reports mentioned here in are available or cross-referenced on the World Bank’s 
website (www.worldbank.org). 
6  See IMF Country Report No 04/4, ‘Czech Republic – Re port on the Observance of St andards and Codes – Banking 
Supervision – Update’, p. 3,  Section III.3 (entitled ‘Preconditions for effectiv e banking supervision’), paragraph (ii), 
January 2004; available on the IMF’s website (www.imf.org). 
7  See  also the earlier World Bank Country Study, ‘Czech Repub lic: Toward EU Accession – Main Report’, pp. 118 and 
119 (section entitled ‘Reform of the collateral and bankruptcy framework’), September 1999. 
8  A World Bank comparative study, ‘D oing Business, Topic Report s: Bankruptcy’, of January 2003 found the average 
length of bankruptcy proceedings in the Czech Republic (9.2 years) to be approximately four times that of the EU 
average, including the acceding Member States.  
9  The lack of time constraints on the court’ s performance of its procedural tasks in insolvency cases has also been criticised 
(see the World Bank Policy Note, ‘Czech Republic: Insolvency and Creditor Rights Systems’, p. 20, paragraph 49 (in the 
section entitled ‘Recommendations and Ne xt Steps’) and p. 9, February 2004). 
 
3 debtor’s insolvency, this will have a negative im pact on bank lending terms and heighten systemic 
risks within the banking system. Against this background, the ECB generally welcomes the draft 
laws, which represent a serious attempt to reform  Czech insolvency law and which take into 
account these perceived shortcomings. 
5. One of the key reforms introduced by the draft insolvency law is that large corporate debtors10 
which are insolvent or face the risk of inso lvency are entitled to file for reorganisation11 of their 
business (i.e. a court-approved plan of protection against their creditors) as an alternative to 
bankruptcy. This is an important legal reform as bankruptcy proceedings in the Czech Republic, 
once commenced, currently only provide for the liqui dation of the debtor’s business and the sale of 
assets to satisfy creditors’ claims, leaving no possi bility of saving the debtor’s business. The ECB 
notes that, under the Bankruptcy Act, the vast ma jority of insolvencies lead to bankruptcy 
proceedings and that composition of claims, whic h is the only alternative insolvency procedure 
enabling debtors to enter into voluntary arrangeme nts with their creditors, is rarely used in 
practice12. The ECB understands that, under the present system, bankruptcy involves a generally 
slow process of auctioning off bankruptcy asset s under court supervision, without the active 
involvement of creditors. By enabling bona fide  insolvent undertakings to agree with creditors on a 
reorganisation plan, and have it approved by the courts, and by introducing deadlines by which the 
courts must take individual decisions within the insolvency proceedings, undertakings should 
emerge from insolvency more quickly than u nder the present regime. Additionally, if more 
undertakings are approved for reor ganisation rather than declared  bankrupt, this should over time 
reduce the number of bankruptcies administered by the courts, which already have a considerable backlog of bankruptcy petitions
13. 
6. Another key set of reforms in the draft in solvency law concerns proposed improvements to 
creditors’ rights. For example, under the conditions of the draft insolvency law the courts will only 
be able to refuse a decision by the creditors’ me eting to appoint a new insolvency administrator on 
the limited grounds set out in the draft insolvency law. Also, the courts will now be required to call 
a creditors’ meeting, the basic creditors’ body, not only upon th e request of the insolvency 
administrator or the creditors’ committee (compr ising creditors’ representatives) but also upon the 
request of at least two significant creditors14. In reorganisation proceedings, the creditors’ meeting 
must also approve any reorganisa tion plan presented by the debtor. Secured creditors who have lent 
                                                      
10  Large corporate debtors are entrepreneurs and undertaki ngs which have an annual turnover of at least CZK 100 million 
and at least 100 employees (Article 221(4) of the draft inso lvency law) and are not entities which cannot be subject to 
reorganisation proceedings, such as commodities brokers, securitie s dealers and any legal entity that is in liquidation.  
11  In other words, as a means of rehabilitating the insolv ent business. Reorganisation proc eedings are defined as ‘the 
gradual satisfaction of creditor claims whilst keeping the de btor’s business operational, se cured by measures for the 
rehabilitation of the operations of the business under a court-a pproved reorganisation plan together with regular controls 
on compliance by the creditors with that plan’ (Article 221(1) of the draft insolvency law). 
12  See the explanatory memorandum to the draft insolvency law.  
13  See the World Bank Policy Note entit led ‘Czech Republic: Insolvency and Cred itor Rights Systems’, February 2004.  
14  Article 31(1) of the draft insolvency law. 
 
4 to the debtor against security over the debtors’  assets are entitled to 100 % of their security, 
generally according to their ranking and after deducting the costs of realisation15. The general 
principle that the purpose of insolvency proceed ings is the satisfaction of creditors’ claims16 is 
stated more explicitly in the draft insolvency la w than in the Bankruptcy Act. In line with that 
principle, the provision of the Bankruptcy Act limiting the maximum amount that may be used to 
repay the creditor’s security to 70 % of the value of the realised security is repealed17. The ECB 
generally welcomes these improvements to creditors’ rights. Nonetheless, it is aware that the draft laws will not, on their own, improve the effici ency of insolvency proceedings in the Czech 
Republic. For example, the efficient resolution of any insolvency proceedings continues to depend 
on the high level of integrity and professiona lism of insolvency administrators. The ECB 
understands that the Ministry plans to supplement the draft laws with a separate law on insolvency 
administrators and on the establishment of an ass ociation of insolvency administrators, which 
would include measures to enhance the professi onal requirements applicable to insolvency 
administrators. The ECB is generally supportive of the Ministry’s plans in this regard. 
Special insolvency regime for banks
 
7. Under the draft insolvency law, the app lication of insolvency proceedings to banks18 is strictly 
limited. First, the draft insolvency law is stated  only to apply to a bank whose licence has been 
revoked by ČNB19. Secondly, the draft insolvency law states that the only form of insolvency 
proceedings that the court may apply in respect  of a bank whose licence has been revoked are 
bankruptcy proceedings20. All other forms of insolvency pro ceedings or related measures provided 
for in the draft insolvency law,  such as reorganisation, discharge of debts, moratoria, and 
provisional moratoria, are expressly excluded from applying to a bank whose licence has been revoked. Moreover, the regulatory and administrative powers of ČNB over banks at the pre-
insolvency stage
21 have not been changed under the draf t laws, except insofar as was necessary 
pursuant to Directive 2001/24/EC. 
8. The ECB welcomes the fact that the draft in solvency law excludes banks from insolvency 
proceedings while they are s till licensed to carry on business22. By making revocation of a bank’s 
licence by ČNB a precondition for the start of insolvency proceedings (i.e. the entity has ceased to 
                                                      
15  Under the Bankruptcy Act, secured creditors are entitled to  a maximum 70 % of the amount of any realised asset value; 
the balance of 30 % is treated as an ordinary claim. By contrast, under Article 1(2) of the draft insolvency law, the purpose of insolvency proceedings is stated to be to ‘achie ve the highest degree of … sa tisfaction for the [insolvent] 
debtor’s creditors’ [claims], under the conditions laid down in this law’.  
16  Article 1(2) of the draft insolvency law (see footnote 15 above).  
17  Article 28(4) of the Bankruptcy Act, which is replac ed by Articles 112 and 204 of the draft insolvency law. 
18  As well as other types of financial institution defined th erein (Articles 272(1) and 284(1) of the draft insolvency law). 
19  Article 6(2)(a) of the draft insolvency law. 
20  Articles 272(3) and 273(3) of the draft insolvency law. 
21  Parts Six to Eleven (Articles 25-36) of the Act on ba nks No 21/1992 Coll., as amended,  in particular enforced 
administration under Articl e 27 et seq. thereof. 
22  Article 6(2)(a) of the draft insolvency law. 
 
5 be a bank), the draft insolvency law acknowledges ČNB’s sole responsibility for supervising banks 
that are in financial difficulties, and for d eciding when insolvency proceedings should be 
commenced against such banks. Furthermore, by me ans of this precondition, the draft insolvency 
law effectively insulates the banking supervision regime, which is under ČNB’s responsibility, 
from the general insolvency regime, which remain s under the responsibility of the courts. There is 
consequently little risk of the two le gal regimes overlapping and competing23. 
9. The ECB notes that the question of whether a specia l insolvency regime should apply to banks, or 
whether the general insolvency law should apply to banks and be under the responsibility of the 
courts, is a matter of legitimate  debate among bank insolvency experts. Many Member States have 
adopted the latter approach, as a result of their pa rticular constitutional and legal traditions. In the 
ECB’s view, whatever approach is taken, there are sound reasons for having a clear division of responsibilities between the banking supervisory authority and the courts as regards bank 
insolvency. It is generally accepted that banks pl ay a special role in the economy, and for that 
reason their insolvency cannot be handled in the sa me way as that of other corporate debtors. To 
ensure public confidence in the banking system a nd generally to prevent systemic risks to other 
banks, the banking supervisory authority must be able  to act quickly and decisively when a bank is 
in difficulty, not only in the interest of depositors (who should be protected by a deposit insurance scheme) and other creditors of the bank, but also in  the interests of the stability of the banking and 
financial system as a whole.  
10. In many cases the banking superv isory authority will be best placed to assess whether a distressed 
bank is able to continue in business or must be liquidated. In the specific Czech context, ČNB is 
likely to be better equipped to make such a judgement than the civil courts. ČNB has a wide range 
of regulatory and administrative powers under Czech law
24 that it may use to sanction a bank or 
oblige a bank to remedy any shortcomings in its activities at the pre-insolv ency stage. The draft 
insolvency law correctly assumes that when those statutory powers prove ineffective, ČNB should 
be able to decide whether to refer the distressed bank to the courts. If it decides to do so, the courts 
are then responsible for declaring the ba nk insolvent and for overseeing the bankruptcy 
proceedings, including sale of the bank’s assets and satisfaction of the bank’s depositors and other 
creditors25, as well as for ensuring that the parties are given a fair hearing in the proceedings.  
                                                      
23  Although it is noted that one of the ČNB, the delicensed bank or any one of its creditors may apply to have the bank 
declared insolvent (Articles 273(1) and 60 of the draft insolvency law). 
24  Act on banks No 21/1992 Coll., as amended. 
25  Alhough even in insolvency proceedings the role of the banki ng supervisory authority will be crucial to any solution for 
the bank and its depositors. 
 
6 11. This opinion will be published on the ECB’s website. 
  Done at Frankfurt am Main, 18 October 2005. 
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET