Unaware your employee is in bankruptcy? It could be very expensive.

In its decision-making practice, the Supreme Court concluded that the employer should be aware of a decision declaring bankruptcy against one of its employees posted in the insolvency register, and that it is its problem if it was not aware of the decision. The insolvency administrator is not obligated to inform the employer of the bankruptcy and it is the employer’s duty to start paying the employee’s wages to the insolvency administrator. If the employer paid this to the employee, it is obliged to pay it again to the administrator.

So, in such a case, the employer would have to pay wages twice, and by the time it becomes aware of the bankruptcy, the deadline for submitting claim application has usually expired, so it would be unable to seek the repayment of already paid wages from the employee.

Find out how the Supreme Court reached this strict conclusion here in this article.

If the employee’s bankruptcy (insolvency) is settled in insolvency proceedings, the employer is obliged to pay the employee’s wages (less the minimum exempt from garnishment) to the insolvency administrator. This obligation is generally known and accepted by the employer.

However, what happens if the employer is not aware that the employee has been declared bankrupt because it was not told by the employee, the court or the insolvency administrator, and the employer continues to pay the employee his/her wages?

One of the key judgments of the Supreme Court addressing this issue can be considered its judgment of 20 January 2011 in case no.: 21 Cdo 726/2010

In this case, the insolvency administrator sued the employer (a school) for the payment of CZK 82,030 in wages that the school should have paid into the bankruptcy estate, but paid directly to the employee.

The school defended itself by stating it was not aware of the bankruptcy and paid the wages to the employee, whereby its obligation to pay wages was discharged. The school further argued that the insolvency administrator had not informed it about the bankruptcy or communicated any payment information, and therefore the school could not be faulted for paying the wages directly to the employee.

The court of first instance upheld the school’s argument and concluded that the school’s obligation to pay the wages was discharged when the wages were paid to the employee, so the insolvency administrator no longer had any claim against the school.

However, this decision was overturned by the court of appeal, which concluded that the obligation to pay the wages could only be discharged by payment to the insolvency administrator.

The school filed an appellate review, and so, the case had to be finally decided by the Supreme Court.

The Supreme Court concluded that by posting a decision on bankruptcy in the insolvency register, the employee’s wages became part of the bankruptcy estate and therefore had to be paid exclusively to the insolvency administrator.

If a decision on bankruptcy was published in this way, no one can infer they were unaware of the bankruptcy.

The Supreme Court therefore concluded that every employer must actively monitor whether any of its employees are in bankruptcy and subsequently actively contact the insolvency administrator and start paying him/her the employee’s wages.

Paying wages directly to the employee can be quite expensive for the employer in such a case, because if the employee does not pay his/her wages to the insolvency administrator him/herself, the administrator will seek their payment from the employer.

The employer will then pay wages twice in this case. Due to the fact the employee is in bankruptcy, of which the employer was not aware, the deadline for submitting claim application has also most likely expired. Thus, even if the employer was entitled to reimbursement of unduly paid wages from the employee, it would not have been able to submit this claim in insolvency proceedings and would therefore fail to be satisfied.

Every employer should therefore continuously check that insolvency proceedings are not initiated against its employees and then contact the insolvency administrator and pay the employee’s wages exclusively thereto. In the opposite case, it runs the risk of paying twice.

It is therefore advisable to monitor insolvencies either internally, or to refer this matter to a qualified external provider, who will arrange such monitoring.

For more information, please contact our office’s partner, Mgr. Jiří Kučera, e-mail: jkucera@kuceralegal.cz ; tel.: +420604242241.

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