On the face of it, a number of connections between executory proceedings under Act No. 120/2001 Coll., the Execution Code (hereinafter “ExC”) and insolvency proceedings under Act No.186/2006 Coll., the Insolvency Act (hereinafter also “IA”) could undeniably be found. Although both these proceedings relate to the debtor’s assets (estate), they have two totally different objectives and use different means to achieve these ends.
They can often exist side by side, and in their most common form follow one another in that a debtor’s assets are subject to execution, and if the debtor does not have sufficient means to satisfy the claims of its many creditors, either the debtor or one of its creditors files an insolvency petition against the debtor. But what happens when there is a collision of these proceedings?
The Insolvency Act has a clear answer in this matter, and in Section 109 (1) c) states “the enforcement of a judgement or execution that affects property owned by the debtor, and any other property belonging to the estate, can be ordered or commenced, but cannot be executed.” According to the Execution Code, execution can be conducted, for example, through wage deductions, the assignment of a claim, the sale of moveable assets or real estate property, etc.
The only exception stipulated under the Insolvency Act in this case are so-called claims against the estate pursuant to Section 168 of the IA, which include the insolvency administrator’s cash expenses, taxes, fees and social security contributions, and claims on an equal footing thereto according to Section 169 of the IA, which include employee labour claims, compensation claims for damaged health and claims for alimony. Following the commencement of insolvency proceedings, execution for the purposes of recovering these claims is only possible based on the decision of the insolvency court.
However, a situation may arise in which execution is ordered and performed prior to the commencement of insolvency proceedings, however, the allocation of recovered funds is to take place after the commencement of insolvency proceedings. This raises many questions.
How are the funds recovered by the executor handled in such a case? What are the executor’s obligations with regard to his/her own claim for the costs of execution and his/her fee? These and certain other questions are answered in a recent ruling by the Supreme Court of the Czech Republic dated 23 October 2014 under case no. 21 Cdo 3182/2014.
In its ruling, the Supreme Court expressed an understandable view, namely that “following the commencement of insolvency proceedings against the obligated party’s assets in execution, the court executor must surrender funds recovered in execution to the estate without deducting execution costs and register the costs of execution (his/her claim) as a creditor in insolvency proceedings.”
This ties into Section 5 (1) b) of the IA, under which “creditors that have essentially the same or a similar position under this Act, have equal opportunity in insolvency proceedings”. The Supreme Court thus says that this provision applies to all the bankrupt’s creditors, which certainly includes the court executor. He/she is then obliged to follow the same rules in insolvency proceedings as ordinary creditors, and it is unacceptable for the executor to surrender recovered funds to the insolvency administrator less the costs of execution and his/her own fee; this would “lead to the undue advantage of one of the bankrupt’s creditors.” The executor is therefore obliged to surrender all funds recovered in execution to the bankrupt’s estate, with a quantification of the costs of execution and his/her fee, however he/she must not deduct the actual payment of these costs.
This decision throws a new light on frequent cases of competition between the court executor and insolvency administrator and places the former in a position alongside other creditors. In essence, this equates to the consistent application of Section 109 (1) c) of the IA, and had the Supreme Court recognised an alternate solution, this would have de facto circumvented this provision. We can therefore expect subsequent judgements to follow this decision, facilitating mutual relations between execution and insolvency, so that there are no conflicts between these proceedings in the future.
For more information, please contact our office’s partner, Mgr. Jiří Kučera, e-mail: jkucera@kuceralegal.cz ; tel.: +420604242241.