Czech Republic: Sneaky Revolution In The Sale Of Pledged Assets

The act on public auctions stipulates that a secured party may sell pledged assets in non-voluntary public auctions only based on the execution title, ie, enforceable judicial or arbitral decision, notarial or executory deed, or any other enforceable decision whose judicial enforcement is allowed by law. It therefore seems that there is no room to discuss whether the secured party can sell the pledged assets in a non-voluntary auction without an execution title. But a recent Czech Supreme Court decision offered a surprising interpretation.

The decision, published in May 2011, held that a secured party may sell pledged assets in non voluntary auction even without having an execution title. The case concerned a different question, and the court's comment on no need of execution title in non-voluntary auctions is only briefl y mentioned in the reasoning of the judgment without elaboration.

The reasoning

The only available reasoning comes from specialised seminars held by a judge of the Czech Supreme Court and member of the senate deciding the above case. He has repeatedly mentioned that, in his view, one of the amendments to the Czech Civil Code effective from 1 January 2001 indirectly amended the act on public auctions effective from 1 May 2000. Therefore, the respective provision of the Czech Civil Code prevails over general provisions in the act on public auctions based on the rule lex posterior derogat legi priori. However, according to government legislative rules, only direct amendments are allowed in the Czech legal system. As per the reasoning of the judgment, the protective measure for the pledgor is to sue the secured party and auctioneer for inadmissibility of the sale of pledged assets according to Czech Civil Code by an action filed within the statutory time period.

Constitutional Court interpretations

On the other hand, in 2005, the Czech Constitutional Court declared one provision of the act on public auctions unconstitutional. At that time, the act on public auctions had two different regimes for realising a pledge depending on when the pledge was created. If the pledge was created before the effectiveness of the act on public auctions (1 May 2000) and the secured party issued an affi davit in proper form stating that it has a receivable against the debtor that is due but not paid and that is secured by a pledge, then no execution title was required. If the pledge was created after the act on public auctions became effective, the execution title for the sale in public auctions was always required.

The Czech Constitutional Court concluded that such a distinction is not rationally grounded and contradicts the principles of equality, and thus cancelled the provision allowing a sale without execution title. The Czech Constitutional Court also considered whether it is in line with the principles of rule of law if the sale of pledged assets does not require an execution title. It concluded that it is not in line with the constitutional principles or principles of the rule of law if the determination of whether the secured receivable exists, in which amount, and whether it is due, rests only with the auctioneer as an entrepreneur. It concluded that such a decision should be made only by a court or by a joint declaration of the creditor and debtor.

However, the Czech Constitutional Court left aside the question of whether the pledgor may sue the secured party and auctioneer for inadmissibility of the sale of pledged assets under the Czech Civil Code. The outcome of both court proceedings is basically the same. The Czech Constitutional Court only mentioned that this measure does not render the same intensity of protection, without offering an explanation.

Will the Supreme Court interpretation stand?

It is therefore questionable whether the interpretation of the Czech Supreme Court on the sale of pledged assets in public auctions will hold up before the Czech Constitutional Court.

Additional significant changes can be expected in the near future from the recodification of civil law, currently in the legislature. According to latest information, the new Czech Civil Code may be effective from 1 January 2014. Unlike the current legal regulation which allows the enforcement of the pledge only by the manners stipulated in the statute, the new Czech Civil Code includes the possibility that the creditor agrees with the pledgor on how the pledge can be realised by the secured party. Only time will tell whether the recent decision of the Czech Supreme Court will allow secured parties to exercise their rights more efficiently.

This article was originally published in the schoenherr roadmap`11 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.

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