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 adoption of the law on insolvency (CON/2005/36)
Date: 2005-10-18
Institutions: European Central Bank
Subjects: Czechia, bankruptcy, financial legislation, financial solvency, financial stability, national law

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 adoption 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 provisions1, as the draft laws affect the powers of 

Česká národní banka (ČNB) and contain rules applicable to financial institutions which materially 

influence the stability of financial institutions and markets. In accordance with 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 current insolvency framework contained in the Act on bankruptcy and 

composition  of  claims  No  328/1991  Coll.,  as  amended  (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 bankruptcy, 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  France2.  The  draft  laws  also  contain  provisions  on  special  insolvency 

1 
2  

OJ L 189, 3.7.1998, p. 42. 
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). 

 
 
 
                                                      
proceedings for financial institutions3, which are intended to transpose a number of EC directives 
in this area4. The draft laws thus mainly reform corporate insolvency procedures, but they are also 

relevant  to  banks  and  other  financial  institutions.  The  draft  laws  will  enter  into  force  on 

1 January 2006.  

Comments on the general framework for corporate insolvency and creditors’ rights 

4. 

The Czech legal framework for corporate insolvency 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, international 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  have  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 recovery rates in respect of creditors’ security are 

particularly  low,  largely  due  to  weak  debt  enforcement  and  to  creditors  having  little  effective 

control  over  insolvency  proceedings,  which  are  largely  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 

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9  

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.   
These  are  principally  Directive  2001/24/EC  of  the  European  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  March  2001  on  the  reorganisation  and  winding-up  of  insurance 
undertakings (OJ L 110, 20.4.2001, p. 28), as well as certain adaptations required as a result of Council Regulation (EC) 
No  1346/2000  of  29  May  2000  on  insolvency  proceedings  (OJ  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  Regulation  (EC)  No  1346/2000  on  insolvency  proceedings  (OJ  L  100, 
20.4.2005, p. 1). 
See,  for  example,  the  World  Bank  Country  Study,  ‘Czech  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  –  Insolvency  and  Creditor  Rights  Systems:  Czech  Republic’, 
April 2001. These and other World Bank reports mentioned herein are available or cross-referenced on the World Bank’s 
website (www.worldbank.org). 
See  IMF  Country  Report  No  04/4,  ‘Czech  Republic  –  Report  on  the  Observance  of  Standards  and  Codes  –  Banking 
Supervision  –  Update’,  p.  3,    Section  III.3  (entitled  ‘Preconditions  for  effective  banking  supervision’),  paragraph  (ii), 
January 2004; available on the IMF’s website (www.imf.org). 
See also the earlier World Bank Country Study, ‘Czech Republic: Toward EU Accession – Main Report’, pp. 118 and 
119 (section entitled ‘Reform of the collateral and bankruptcy framework’), September 1999. 
A  World  Bank  comparative  study,  ‘Doing  Business,  Topic  Reports:  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.  
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 Next Steps’) and p. 9, February 2004). 

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debtor’s insolvency, this will have a negative impact 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  insolvency  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 liquidation of the debtor’s business and the sale of 

assets to satisfy creditors’ claims, leaving no possibility of saving the debtor’s business. The ECB 

notes  that,  under  the  Bankruptcy  Act,  the  vast  majority  of  insolvencies  lead  to  bankruptcy 

proceedings  and  that  composition  of  claims,  which  is  the  only  alternative  insolvency  procedure 

enabling  debtors  to  enter  into  voluntary  arrangements  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  assets  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  under  the  present  regime.  Additionally,  if  more 

undertakings are approved for reorganisation 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 petitions13. 

6. 

Another  key  set  of  reforms  in  the  draft  insolvency  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’ meeting 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  the  request  of  the  insolvency 

administrator or the creditors’ committee (comprising creditors’ representatives) but also upon the 
request of at least two significant creditors14. In reorganisation proceedings, the creditors’ meeting 

must also approve any reorganisation plan presented by the debtor. Secured creditors who have lent 

10  

11  

12  
13  
14  

Large corporate debtors are entrepreneurs and undertakings which have an annual turnover of at least CZK 100 million 
and at least 100 employees (Article 221(4) of the draft insolvency law) and are not entities which cannot be subject to 
reorganisation proceedings, such as commodities brokers, securities dealers and any legal entity that is in liquidation.  
In  other  words,  as  a  means  of  rehabilitating  the  insolvent  business.  Reorganisation  proceedings  are  defined  as  ‘the 
gradual  satisfaction  of  creditor  claims  whilst  keeping  the  debtor’s  business  operational,  secured  by  measures  for  the 
rehabilitation of the operations of the business under a court-approved reorganisation plan together with regular controls 
on compliance by the creditors with that plan’ (Article 221(1) of the draft insolvency law). 
See the explanatory memorandum to the draft insolvency law.  
See the World Bank Policy Note entitled ‘Czech Republic: Insolvency and Creditor Rights Systems’, February 2004.  
Article 31(1) of the draft insolvency law. 

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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  proceedings  is  the  satisfaction  of  creditors’  claims16  is 

stated  more  explicitly  in  the  draft  insolvency  law  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  efficiency  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  professionalism  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  association  of  insolvency  administrators,  which 

would  include  measures  to  enhance  the  professional  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  application  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 proceedings 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  stage21  have  not  been  changed  under  the  draft  laws,  except  insofar  as  was  necessary 

pursuant to Directive 2001/24/EC. 

8. 

The  ECB  welcomes  the  fact  that  the  draft  insolvency  law  excludes  banks  from  insolvency 
proceedings while they are still 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  

16  
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18  
19  
20  
21  

22  

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  ‘achieve  the  highest  degree  of  …  satisfaction  for  the  [insolvent] 
debtor’s creditors’ [claims], under the conditions laid down in this law’.  
Article 1(2) of the draft insolvency law (see footnote 15 above).  
Article 28(4) of the Bankruptcy Act, which is replaced by Articles 112 and 204 of the draft insolvency law. 
As well as other types of financial institution defined therein (Articles 272(1) and 284(1) of the draft insolvency law). 
Article 6(2)(a) of the draft insolvency law. 
Articles 272(3) and 273(3) of the draft insolvency law. 
Parts  Six  to  Eleven  (Articles  25-36)  of  the  Act  on  banks  No  21/1992  Coll.,  as  amended,  in  particular  enforced 
administration under Article 27 et seq. thereof. 
Article 6(2)(a) of the draft insolvency law. 

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be a bank), the draft insolvency law acknowledges ČNB’s sole responsibility for supervising banks 

that  are  in  financial  difficulties,  and  for  deciding  when  insolvency  proceedings  should  be 

commenced against such banks. Furthermore, by means 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 remains under the responsibility of the courts. There is 
consequently little risk of the two legal regimes overlapping and competing23. 

9. 

The ECB notes that the question of whether a special 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 particular 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  play  a  special  role  in  the  economy,  and  for  that 

reason their insolvency cannot be handled in the same way as that of other corporate debtors. To 

ensure  public  confidence  in  the  banking  system  and  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 supervisory 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 law24 that it  may use to sanction a bank or 

oblige  a  bank  to  remedy  any  shortcomings  in  its  activities  at  the  pre-insolvency  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  bank  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  

24  
25  

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). 
Act on banks No 21/1992 Coll., as amended. 
Alhough even in insolvency proceedings the role of the banking supervisory authority will be crucial to any solution for 
the bank and its depositors. 

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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 

6