1 Legal framework
1.1 Beyond general commercial and contract laws, what other specific laws and regulations govern secured finance in your jurisdiction?
There is no specific regulation of secured finance as such, except Act 408/2010 Coll on Financial Collateral, which implemented EU Directive 2002/47/EC on financial collateral arrangements. The provision of credit to consumers (by both bank and non-bank providers) is further regulated by Act 257/2016 Coll on Consumer Credit, which implemented EU Directive 2008/48/EC on credit agreements for consumers and EU Directive 2014/17/EU on credit agreements for consumers relating to residential immovable property. Also important are Act 182/2006 Coll on Bankruptcy Methods and (when financing through debt instruments in the form of securities is considered) Act 190/2004 Coll on Bonds.
1.2 Do any bilateral and/or multilateral treaties or trade agreements have particular relevance for secured finance in your jurisdiction?
As in other EU member states, the international aspects of secured financing are primarily impacted by EU Regulation 593/2008 on the law applicable to contractual obligations (‘Rome I Regulation'). In the case of foreign (primarily non-EU) credit providers, bilateral investment protection agreements can have some importance.
1.3 Beyond normal governmental institutions, are there regulatory or tax bodies that play a particular role in secured finance your jurisdiction? What powers do they have?
No. However, the financial arbitrator (established pursuant to Act 229/2002 Coll on the Financial Arbitrator, as amended) is an out-of-court dispute resolution body which is competent to decide disputes between financial institutions and their customers.
1.4 What is the government's general approach to secured finance in your jurisdiction? Are there government guarantee/support schemes available to lenders, and if so what are the qualifications to that support?
There are no government guarantee/support schemes available to lenders. However, state-backed export promotion is provided by Exportní garanční a pojišťovací společnost, as (EGAP) and Česká Exportní Banka, as (ČEB). While EGAP insures state-supported exports, ČEB finances exports of goods and services, and provides additional financing for engineering projects. Both EGAP and ČEB operate on the basis of:
- Act 58/1995 Coll on Insuring and Financing Exports with State Support;
- EU Regulation 1233/2011 on the application of certain guidelines in the field of officially supported export credits, as amended; and
- the Organisation for Economic Co-operation and Development Arrangement on Officially Supported Export Credits.
2 Secured finance market
2.1 How mature is the secured finance market in your jurisdiction? Are the majority of the transactions purely bilateral and domestic, or is there an international syndicated market for secured financing under your domestic law?
Following the privatisation of the banking sector, which was completed in 2001, the secured finance market was stabilised and standardised. The banking sector has played a key role in this regard. Not only has it featured prominently in the EU single market over the medium term, but in 2020 it was also ranked as one of the world's most stable, solidly capitalised, profitable and healthy sectors on an international scale, characterised by an exceptionally low share of non-performing loans. However, given the limited capacities of domestic banks (or rather, the subsidiaries of relevant international bank groups), the Czech market for secured financing is also closely connected to the international syndicated markets and the extent of international syndicated financing is well above the average in other Central and Eastern European countries.
2.2 Are there any bodies in your jurisdiction/region that promote the use of standard documentation and best practices in secured finance transactions? If so, are these widely used and followed?
The Czech Banking Association has published a model contract for syndicated lending (https://cbaonline.cz/syndikovane-uvery) that is widely used in domestic transactions. In international transactions, the Loan Market Association standards are usually used in the Czech Republic.
2.3 What significant secured finance transactions have taken place in your jurisdiction in recent times?
Major lending transactions in the Czech Republic in recent times have included:
- the industrial portfolio syndicated financing of CTP in the amount of €1.9 billion;
- the financing of betting company Sazka; and
- the financing of České dráhy.
3 Secured finance providers
3.1 Who are the key providers of secured finance in your jurisdiction? Is there a thriving alternative credit market (beyond bank lenders)?
The key providers of secured financing are bank lenders – primarily Česká spořitelna, UniCredit bank and Komerční banka. However, the role of debt instrument markets is also increasing; in this regard, the role of J&T Bank – as the manager of a number of bond issuers, such as Energo Pro and 3M Fund – is notable.
3.2 What requirements and restrictions apply to secured finance providers in your jurisdiction? Do these vary depending on (a) the type of entity; (b) whether the lender is domestic or foreign?
There are no specific regulations concerning the provision of credit to businesses. The provision of consumer credit is subject to a licence granted by the Czech National Bank.
4 Secured finance structures
4.1 What secured finance structures are most commonly used in your jurisdiction?
Credit facilities secured by the pledge of property are most commonly used.
4.2 What are the advantages and disadvantages of these different types of structures?
The primary risks are connected to the pledge enforcement procedure – see question 4.
4.3 What other factors should parties bear in mind when deciding on a secured finance structure?
There are no specific factors that are exceptional under Czech law.
5.1 What types of security interests are available in your jurisdiction? Which are most commonly used and which are recommended (if different)?
Under Czech law, a multitude of possible security interests are available. The most common include:
- security transfer of title;
- negative pledge;
- a ban on transfer or encumbrance;
- retention rights;
- reservation of title;
- promissory note; and
- financial guarantee.
These security interests can be established either as rights in rem or as contractual obligations. Generally, security interests established as rights in rem are preferable, as they also bind any other owner of the thing over which the security interest is established and not just the respective contractual parties.
A mortgage/pledge is the most commonly used security on the Czech market. In accordance with the law, the collateral remains the property of the original owner (mortgagor/pledgor). However, the mortgagee/pledgee may initiate a sale of the mortgaged/pledged collateral (or, under certain conditions, may acquire the mortgaged/pledged collateral) if its secured claims are not fulfilled in a due and timely manner.
Under a security transfer of title, which is the second most common security, the collateral is transferred to the creditor as security.
The two quasi-securities (ie, negative pledge and a ban on transfer or encumbrance) are also widely used in secured transactions. In practice, agreements on establishing these two quasi-securities are usually incorporated into mortgaged/pledge agreements.
5.2 What are the formal, documentary and procedural requirements for perfecting these different types of security interests (ensuring that they are enforceable against debtors and third parties)?
In general, the security interests mentioned in question 4.1 are perfected by written agreement between the respective parties (ie, the creditor and the security provider). The security provider can secure another's debts (ie, it need not be the original debtor under the underlying arrangement). In certain situations, the security interest is perfected only when it is registered in a specific register (eg, the Cadastral Register, the Aircraft Register or the Pledge Register). In order to facilitate registration in these registers, the signatures on security agreements are usually verified (and if applicable, apostilled). Where a pledge over a tangible movable asset is created by registration in the Pledge Register, a respective underlying pledge agreement must be executed in the form of a notarial deed.
5.3 What are the main types of collateral used as security in your jurisdiction and what specific points should be borne in mind regarding each?
The main types of collateral in the Czech Republic include:
- real estate;
- shares/ownership interests;
- sets of movable assets; and
In the case of an acquisition, security is commonly taken over several types of collateral.
In certain situations, the security interest is perfected only when it is registered in a specific register related to the respective collateral. If there are multiple pledges, a creditor whose pledge is registered will benefit from favourable satisfaction. If multiple pledges are registered, the point at which the application for registration was submitted will be decisive. If no pledge is registered, the rank will follow creation of the pledge.
5.4 Can security be taken over property, plant and equipment in your jurisdiction? If so, how?
Yes, security can be taken over property, plant and equipment under Czech law. With regard to plant and equipment, please see question 4.6.
The most commonly used instrument in secured transactions involving real estate is a mortgage. Under the law, the mortgaged real estate remains the property of the original owner (mortgagor). Under a security transfer of title, which is the second most commonly used instrument in secured transactions involving real estate, the real estate is transferred to the creditor as security.
In practice, mortgages and security transfers of title to real estate are perfected by a written security agreement with certified signatures between the creditor (as mortgagee or transferee) and the security provider. Although a mortgage agreement constitutes legal title that creates the respective security interest, the security is not enforceable against third parties until it has been registered in the Cadastral Register.
The Civil Code allows for the creation of a priority right in establishing a mortgage. Parties may thus register the mortgage rank before they file the application for registration of the mortgage itself. If a receivable secured by a mortgage is fully paid up, but the mortgage is still registered, the vacant mortgage can be used to secure another receivable not exceeding the amount of the original receivable.
A negative pledge and a ban on transfers or encumbrances over real estate are also widely used in secured transactions. Both of these quasi-securities over real estate can be established as in rem rights (ie, attached to the asset rather than to the contracting person and its obligations under the respective arrangement), and can be registered in the Cadastral Register, which makes them effective against third parties.
5.5 Can security be taken over cash (including bank accounts generally) and receivables in your jurisdiction? If so, how?
Yes, security can be taken over cash and receivables under Czech law. Security over cash is commonly performed as security over receivables from a bank account in which the cash is deposited.
Security over cash deposits or receivables in the Czech Republic may be established in two ways:
- by a written pledge agreement without registration; or
- by the conclusion of a written pledge agreement in the form of notarial deed and its registration in the Pledge Register.
If the security is established without registration, a pledge over a receivable may be enforced against a debtor of the pledged receivable (ie, the sub-debtor) on:
- delivery of the pledgor's (ie, the sub-debtor's creditor) pledge notice; or
- the creditor (ie, the pledgee) proving to the sub-debtor that the pledge has been created.
If a registration in the Pledge Register has taken place, notification of the sub-debtor is not obligatory.
The most common types of claims and receivables over which security is granted are of a contractual nature, such as trade, lease or insurance receivables or receivables arising from inter-company loan arrangements.
A negative pledge and a ban on transfers or encumbrances over receivables are also widely used. Both of these quasi-securities over real estate can be established as in rem rights and registered in the Pledge Register, which makes them effective against third parties.
5.6 Can security be taken over company shares in your jurisdiction? If so, how?
Yes, security can be taken over company shares under Czech law. How a pledge over shares is created differs depending on the form of the respective shares.
If the shares are issued in certified form, a pledge can be created by endorsing the respective securities through a pledge endorsement and transferring possession of the securities to the creditor or custodian by way of handover (together with the original or verified copy of the pledge agreement).
A pledge over certified shares is created on the basis of a pledge agreement, which must be in writing if the pledge is to be created by transferring possession of the certified shares to a custodian. If the pledge is to be created by transferring possession of the certified shares or bonds to the creditor, a written pledge agreement is not required by law, but is common in practice.
However, shares in book entry form are pledged by recording the pledge on the respective owner's account in the Central Depository or in the separate register of securities of a provider of investment services. In the case of book-entered securities, an earlier established pledge has priority over a later one.
In addition, security over shares can also be taken:
- in the form of a pledge over the owner's account in the respective securities register (in the case of book-entry securities); or
- by security transfer of title.
Under Czech law, there are no security interests over securities that have absolute priority.
5.7 Can security be taken over inventory/moveables in your jurisdiction? If so, how?
Yes, security can be taken over inventory/movables (including an enterprise) under Czech law. The most commonly used instrument in secured transactions involving inventory/movables is a pledge created over the inventory/movables. A pledge is conceived as an in rem right of a creditor (pledgee) over assets of the borrower or a third party. This means that the borrower (or a third party) remains the legal owner of the assets until the pledge is enforced (which occurs only if the secured debt is not paid).
Pledges over movables in the Czech Republic may be perfected in three ways:
- registering the pledge in the Pledge Register;
- delivering the movables to the pledgee or to another person for deposit in custody. In such case the agreement need not be concluded in written form; or
- marking the movables with a sign. In such case the agreement does not have to be concluded in written form.
Where a pledge over an individual tangible movable asset is created by registration in the Pledge Register, a respective underlying pledge agreement must be executed in the form of a notarial deed. Otherwise, a simple written agreement will suffice.
A pledge over movable bulk assets, which typically include stock or inventory, is perfected by written agreement in the form of a notarial deed regarding the creation of the pledge and its registration in the Pledge Register.
A pledge over a business enterprise or other bulk assets includes all items belonging to the collateral and extends to all new items that are added to it, and ceases to exist in relation to items that are separated from it. Therefore, once a business enterprise or other bulk asset has been pledged, it is not possible to create a pledge over any particular asset belonging to the collateral.
5.8 What charges, fees and taxes (including notary and similar fees) arise from the perfection of a security interest? Do these vary depending on the type of assets used as collateral?
No stamp or documentary taxes are collected for the execution of a loan, guarantee or security agreement, except for fees charged by notaries for the execution of notarial deeds, signature certification or the issue of excerpts from registers such as the Commercial Register.
Czech law provides that certain types of assets can be pledged under a security document that must be executed solely in the form of a notarial deed (these pledges are subsequently registered in the Pledge Register). Such security includes a pledge over:
- plant (enterprise);
- bulk assets, typically stock; and
- real estate that is not recorded in the Cadastral Register.
The notarial fees for executing a pledge agreement depend on the value of the pledged asset or the amounts of secured debts and can amount to several tens of thousands of Czech crowns. A fee is also payable for subsequent registration of the pledge in the Pledge Register.
Nominal registration fees are payable for registering pledges and other securities in the respective registers. For example, the fee for the application for entry of the right into the Cadastral Register is CZK 2,000.
5.9 What are the respective obligations and liabilities of the parties under the security documents?
The respective obligations and liabilities of the parties will primarily depend on the specific security document chosen. Generally, if a creditor does not properly fulfil its obligations, the lender can use the security for the purpose of replacing such fulfilment.
5.10 What other considerations should be borne in mind by all counterparties when perfecting a security interest in your jurisdiction?
Usually, joint stock companies restrict any encumbrance or transfer of issued shares in their articles of association. Therefore, the requisite formalities must be met for a valid security interest to be created. The prior consent of a majority of the shareholders or the supervisory board is a typical example of the additional formalities required for a valid encumbrance or transfer of the shares. This similarly applies in the case of a limited liability company in relation to the pledge of a respective ownership interest in the company. Therefore, it should be borne in mind whether all additional formalities have been observed. Typically, these corporate consents are set out in the loan agreement as conditions precedent to the loan.
Moreover, Czech law requires that prior notification of the establishment of any upstream or cross-stream intra-group security interest be provided to the board of directors and to the supervisory board or general meeting of the grantor. The supervisory board or general meeting of the grantor may then forbid such transaction. In case of breach of this prohibition or the duty to inform, a director may be held liable for damages. This is applicable to both limited liability companies and joint stock companies, irrespective of whether the security agreement is governed by Czech law or foreign law.
Czech law allows for the contractual subordination of debts (receivables of different lenders). This practice is common, particularly for long-term financing, project finance and acquisition finance; and various forms of subordination agreements are used (frequently incorporated into inter-creditor agreements). The contractual subordination is acknowledged by Act 182/2006 Coll on Bankruptcy Methods as a valid and enforceable institution governing relations between the creditors. Subordination agreements provide that the receivables of one lender (or a group of lenders) must be paid in a preferential manner – that is, before the receivables of other lenders (group of lenders) that are parties to the agreement. On the other hand, structural subordination is not widely used on the Czech market.
Finally, because pledges relate to individual assets which form a collective thing, such as an enterprise, it is not possible for the duration of the pledge over the collective thing to create a new pledge over these individual assets. It should be always reviewed whether the collective thing is pledged. Therefore, if a pledge agreement over an enterprise is to be concluded, this specific agreement should be the last to be concluded.
6.1 What types of guarantees are available in your jurisdiction? Which are most commonly used and which are recommended (if different)?
Guarantees are widely used in financing transactions in the Czech Republic. According to the law, they can be created by a mere written guarantee declaration – that is, a letter of guarantee under which the guarantor declares that it will satisfy the creditor if the debtor fails to perform its obligations under the underlying arrangement (ie, in case of the debtor's default). The creditor must accept the guarantor. Otherwise, the creditor may not claim satisfaction of the receivable. Nevertheless, in usual business practice, guarantees are executed not as a unilateral legal act, but in the form of guarantee agreements between the creditor and the guarantor that reflect the same concept. A guarantor can use the same objections against the creditor that are available to the debtor (eg, pleading the statute of limitations defence), which follows from the accessory nature of a guarantee under the law.
A financial guarantee represents a specific type of guarantee arrangement. It is created by a declaration in writing by the issuer (usually a bank) that the issuer will satisfy the creditor in accordance with the guarantee declaration, provided that the debtor fails to discharge a certain debt or that other conditions specified in the guarantee declaration are met. For the perfection of the financial guarantee, this declaration should be delivered to the creditor. The issuer of a financial guarantee can use against the creditor only those objections that are admissible according to the guarantee declaration, which is the main difference from a regular guarantee. If the guarantor is a bank, the financial guarantee is called a ‘bank guarantee'.
Patronage guarantees/letters of comfort are also common on the Czech market. In usual business practice, guarantees are executed not as a unilateral legal act of a parent company, but in the form of patronage guarantee agreements between the creditor, debtor and patron.
6.2 What are the formal, documentary and procedural requirements to perfect a guarantee?
Under Czech law, any type of guarantee must be made in written form. A guarantee must be notified to the lender.
6.3 What charges, fees and taxes (including notary and similar fees) arise from the perfection of a guarantee?
Perfection of a guarantee is not subject to any charges, fees or taxes.
6.4 What are the respective obligations and liabilities of the parties under the guarantee?
Under a guarantee, the creditor has the right to demand performance from the guarantor if the debtor has not performed the debt within a reasonable time, even though the creditor has requested it to do so in writing. This demand is not necessary if the creditor is unable to issue it or if there is no doubt that the debtor will not perform the debt.
6.5 What other considerations should be borne in mind by all counterparties when taking the benefit of a guarantee in your jurisdiction?
The guarantee is not immediately enforceable. If the guarantor fails to pay under the guarantee, the secured creditor must file a petition with the competent court to obtain an enforceable judgment against the guarantor. Once the secured creditor has obtained an enforceable court judgment on the validity of its claim, it may commence enforcement of the ruling using any method provided for by law. The foreclosure may be performed by either the court or a private bailiff.
Restrictions with regard to upstream and cross-stream security interests also apply where a guarantee is provided.
7 Financial assistance
7.1 What requirements and restrictions apply with regard to the provision of financial assistance in your jurisdiction? What specific implications do these have for secured finance transactions?
The provision of financial assistance is subject to certain rules under Czech law. The basic rule is that the financial assistance (ie, advance payments, loans, security, guarantees and similar instruments provided by a party to the acquirer of a share in such party) must be provided on fair terms – in particular, in terms of interest or the provision of financial assistance for the benefit of the respective company. The financial assistance will be prohibited by law if it would cause the bankruptcy of the financial assistance provider. Specific rules will apply depending on the type of financial assistance provider. The key role here is played by the company's statutory body, which draws up the whitewash report that is subsequently presented to the general meeting. The report in question must justify the financial assistance and highlight the advantages and disadvantages, among other things.
In the case of a joint stock company, the provision of financial assistance must be allowed by the company's articles of association and approved by the general meeting in the course of a specific whitewash procedure. The criteria for this are rather strict – particularly as the creation of a reserve fund corresponding to the financial assistance exposition is required. It is easier for a limited liability company to provide financial assistance, as the whitewash procedure is less stringent and generally not administratively demanding. Unlike for a joint stock company, the provision of financial assistance need not be explicitly allowed in the memorandum of association of a limited liability company.
As any provision of funds or security in breach of the financial assistance rules may be voidable, it is standard practice to include in any upstream or cross-stream guarantee and security document limitation language that excludes any potential financial assistance from the scope of such arrangement.
8 Syndicated lending
8.1 Is the concept of an agent or trustee recognised in your jurisdiction? If not, how is security taken for multiple lenders?
The concept of trustee (security agent) is frequently used in syndicated financing. It is based on an inter-creditor agreement under which joint and several claims of all participating lenders in relation to security rights are created; whereas one of the lenders (or the third party) is appointed by the lenders as a formal holder and administrator of the security on behalf of and in the interest of the (other) lenders. A trustee/security agent is generally registered as the sole mortgagee or pledgee and, therefore, enforces its right in a court on its own behalf. Also, since 2014 (following the civil law reform), the Civil Code expressly stipulates that if a third party administers security in favour of a lender, the administrator can assert against the debtor or against a security provider the same rights as the creditor.
8.2 What requirements and restrictions apply with regard to syndicated lending in your jurisdiction?
There are no specific requirements or limitations.
8.3 What other considerations should be borne in mind by all counterparties when engaging in syndicated lending in your jurisdiction?
The new statutory law concept of a ‘security agent' is not yet widely used in secured transactions, due to a lack of tested cases and certain ambiguities; so the creation of joint and several claims through an inter-creditor agreement is the most common procedure in practice.
9 Taxes, charges and fees
9.1 What taxes and similar charges are levied in the secured finance context in your jurisdiction? Do these vary depending on whether the lender is a domestic or foreign entity?
Repayment of loan principal does not represent taxable income. Interest income constitutes taxable income.
Interest paid to Czech tax non-residents is subject to withholding tax at a rate of 15 %, unless a relevant double tax treaty provides for a lower rate or allocates the right to tax interest income only to the state of tax residence.
Interest paid to non-cooperative countries is subject to withholding tax at a rate of 35 %.
In relation to an associated person, compensation for a guarantee should be charged on the basis of the arm's-length principle. A guarantee for no compensation will give rise to taxable income of the debtor, while the costs of the guarantee will not be deductible for income tax purposes for the guarantor.
9.2 Are any exemptions or incentives available?
There are no exemptions or incentives available.
9.3 What other significant costs will be incurred by the counterparties in entering into a secured finance transaction? Do these vary depending on whether the lender is a domestic or foreign entity?
There are no other significant costs.
9.4 What strategies might the counterparties consider to mitigate their tax and other liabilities in the secured finance context?
Under Czech law, the only significant costs are notarial fees. It is unlikely that these will be reduced any further, as they are prescribed by statute.
10 Judicial enforcement
10.1 In the event of default, what options are available to enforce a security interest or guarantee? Is self-help available in your jurisdiction in connection with the enforcement of security (if so, in what circumstances) or must enforcement action be pursued through the courts?
A security interest can be enforced if a debtor fails to fulfil secured debts in a due and timely manner.
Under the general provisions of Czech law, a pledge can be enforced either by:
- a secured party in a manner agreed in writing with the security provider (pledgor) (private method of enforcement); or
- sale of the pledged asset in a manner prescribed by statutory law (official method of enforcement).
For private methods of enforcement, the secured party need not obtain an enforcement title, as the agreement between the security provider and the secured party governs the enforcement. The methods of enforcement are agreed in the respective security agreement and vary depending on the type of collateral. It could be a direct sale of the collateral or the transfer of collateral to the secured party under the terms and conditions agreed in the relevant security agreement.
However, for judicial forms of enforcement, a secured party must first obtain enforcement title – typically, an enforceable court judgment. As court proceedings against a borrower can last several months (or even longer if the borrower uses all procedural law instruments and defences), a secured party can request that one of the conditions precedent for use is an agreement with consent to direct enforcement of the underlying obligation. A direct enforcement agreement must be executed in the form of a notarial deed and can be used as an original enforcement title, based on which immediate enforcement can be commenced. Therefore, direct enforcement agreements are becoming more popular in institutional lending.
Once enforcement title has been obtained, the secured party can opt for the following methods of enforcement:
- compulsory public auction, administered by a licensed public auctioneer;
- judicial sale of the security, administered by a court; or
- execution sale of the security, administered by a court-appointed bailiff. This alternative is more popular than judicial sale, as execution by a bailiff affords benefits to the secured party. The bailiff can carry out the execution through a single proceeding and can issue several execution orders at the same time.
In the case of a private method of enforcement (there are doubts as to whether this also applies to judicial methods of enforcement), the secured party must deliver to the borrower (ie, the owner of the collateral) prior written notice of the intended method of enforcement. If the pledge is registered, the secured party must also record that enforcement has commenced in the respective public register. Notice must be served on the pledgor and registered in the respective public register for at least 30 days prior to the sale of the collateral. Under the law, the pledgee must proceed with due care and sell the collateral at the price for which comparable collateral can usually be sold.
The same principles apply to the enforcement of a receivable under a guarantee.
10.2 How long does the enforcement process generally take and what steps does this typically involve? Do these vary depending on any applicable requirements or restrictions (eg, requirement for public auction or regulatory consents)? Do these vary depending on whether the lender is a domestic or foreign entity?
The duration of the enforcement process will vary depending on numerous factors – for example:
- whether it is a private method of enforcement or a judicial method of enforcement;
- the respective manner of enforcement; and
- whether the secured party must obtain enforcement title in case of a judicial method of enforcement.
10.3 What other considerations should be borne in mind when enforcing a security interest or guarantee in your jurisdiction?
Private methods of enforcement are less time consuming and usually more effective.
10.4 Are direct agreements with contractual counterparties well understood in your jurisdiction?
Direct agreements establish a direct contractual relationship between the lender and the borrower's counterparties for the purpose of enabling the lender to gain control over the borrower's contracts. Direct agreements are not very common under Czech law, as they are usually replaced by a pledge of receivables arising from contracts with the borrower's counterparties.
10.5 What other avenues are available to a lender to safeguard its position in connection with security or guarantees?
It is recommended to register a pledge in the Pledge Register. The Pledge Register ensures that lenders, when securing their claim, can be certain that if several liens on the same thing exist, the rights of creditors which are registered in the Pledge Register will be satisfied in order of priority (with regard to the order of registration).
11.1 How (if at all) do bankruptcy proceedings impact on the enforcement of security by a creditor?
Insolvency proceedings can begin on a motion filed by the debtor or a creditor. The proceedings begin on the date that the respective court receives the insolvency petition. Following the commencement of insolvency proceedings, a creditor whose receivables are secured by a pledge over an asset owned by the debtor (or other bankruptcy asset) cannot enforce the pledge through judicial or private out-of-insolvency enforcement methods. However, this does not apply to financial collateral arrangements.
Creditors must file insolvency applications (ie, register their claims) within the timeframe specified in the insolvency court's decision on the debtor's insolvency. If a secured creditor fails to file its application (along with evidence of the claim and the security securing the claim) within this period and the collateral is then realised during the insolvency proceedings, the secured creditor's pledge or security ceases to exist and the creditor becomes an unsecured creditor.
Secured creditors – that is, those whose claims are secured by pledge, retention rights, restrictions on transfers of real property, security transfer of title or similar security instruments under foreign law (provided that they have successfully documented that their receivable is secured) – are paid from the proceeds obtained by the insolvency administrator from the sale of the respective collateral. However, the insolvency trustee is bound by the suggestions of the secured creditor on the sale of the respective asset. Secured creditors are entitled to all proceeds from the respective sale of the collateral. The proceeds from the sale may only be reduced by:
- the expenses associated with management and sale; and
- the fee payable to the insolvency trustee.
11.2 In what circumstances can antecedent transactions be unwound for preference? What other similar measures apply in this regard?
Under Czech law, certain acts can be challenged as ineffective with regard to the list of bankruptcy assets, meaning that the beneficiary of the transaction must return the benefit to the insolvency assets. Such transactions include:
- legal acts without reasonable counter-performance;
- preferential legal acts; and
- intentional curtailing acts.
Legal acts without reasonable counter-performance: These include acts by which a debtor undertook performance or performed its obligation with no or significantly marginal consideration (compared to the usual value of the performance), provided that the act was performed while the debtor was insolvent or made the debtor insolvent. However, acts that were performed by the debtor before the one year prior to the commencement of the insolvency proceedings (or three years if the act benefited a connected party) cannot be challenged on this basis.
Preferential legal acts: These are acts under which a creditor's claim was satisfied, to the detriment of other creditors, to a greater extent than it would otherwise have been satisfied in bankruptcy proceedings (unless there was a reasonable counter-performance or other reasonable material benefit for the debtor).
Intentional curtailing acts: These are any legal acts taken by the debtor in the five years preceding the commencement of insolvency proceedings under which the debtor intentionally curtailed the satisfaction of a creditor, provided that this intent was, or must have been, known to the counterparty.
11.3 Are any types of entities excluded from the bankruptcy regime in your jurisdiction? If so, what alternative regimes apply?
The general insolvency (bankruptcy) regime is excluded for the following parties:
- the Czech Republic;
- a territorial self-government unit;
- the Czech National Bank;
- the General Health Insurance Fund of the Czech Republic;
- the Financial Market Guarantee System and funds it manages;
- the Securities Dealers Guarantee Fund;
- a public university;
- a legal person, if the state or a higher territorial self-government unit has assumed or guaranteed all its debts before the insolvency proceedings are opened;
- a financial institution, for as long as it holds a licence or permit;
- a health insurance company established under a special legal regulation; and
- a political party or a political movement during the period of a declared election.
For most of the parties mentioned above, insolvency is completely excluded. However, the bankruptcy of financial institutions, for example, is governed by a special part of the Insolvency Act.
12 Governing law and jurisdiction
12.1 What law typically governs secured finance agreements in your jurisdiction? Do any specific requirements apply in this regard?
In domestic secured financing agreements (ie, agreements concluded between two Czech subjects), Czech law is typically applicable (although the parties to the agreement can agree on a different applicable law).
Without a specific choice of applicable law, the securing of a liability is subject to the same body of laws as the secured liability, unless:
- this involves in rem rights;
- something else arises from the law or from the nature of the item; or
- the party or parties which have provided the security by means of a unilateral expression of their will select a different body of laws.
Pledges over receivables and other rights are subject to the same body of laws as the receivable or any other right which has given rise to the pledge, unless the parties have selected another body of laws.
12.2 Is a choice of foreign law or jurisdiction valid and enforceable? In the case of a choice of foreign law of jurisdiction, will any provisions of local law have mandatory application? Are submission to jurisdiction provisions that operate in favour of one party only enforceable?
A choice of foreign law and/or jurisdiction is valid and enforceable under Czech law. Nevertheless, certain domestic rules will apply regardless of the choice of law. This is the situation, for example, in consumer agreements, where the Czech on consumer protection will apply regardless of the choice.
Any provision that would limit the ability of a party to bring a dispute before an appropriate court (dispute resolution body) will not be enforceable under Czech law.
12.3 Are waivers of immunity enforceable in your jurisdiction?
A waiver of immunity is generally enforceable under Czech law, provided that:
- the subject waiving its immunity is entitled to do so; and
- the waiver is not granted under duress.
12.4 Will foreign judgments or arbitral awards be enforced in your jurisdiction? If so, how?
The rules applicable to the enforcement of foreign judgments will be determined pursuant to law of the country whose courts issued the judgment.
If the foreign judgment was issued by the courts of an EU member state, enforcement will be governed by the Brussels I bis Regulation (EU Regulation 1215/2012). Under the Brussels I bis regime, no special procedure is required for enforcement of foreign judgements.
If the foreign judgment was issued by the courts of a non-EU country, enforcement will be governed either by:
- an international treaty to which the states are parties (eg, one of the treaties prepared by the Hague Convention on Private International Law or a specific bilateral treaty); or
- in the absence of such applicable treaty, Act 91/2012 Coll on Private International Law. Under this act, foreign judgments in legal force are recognised either on the basis of a specific procedure or automatically unless objected to. Recognised foreign judgements can be enforced. The act specifies several situations in which a final foreign decision cannot be recognised and enforced by Czech courts, such as where:
- the matter falls within the exclusive jurisdiction of the Czech courts; or
- recognition would be contrary to public order in the Czech Republic.
The enforcement of arbitral awards will be governed by the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, to which the Czech Republic is a party. The New York Convention imposes strict rules for refusal of recognition or enforcement of the arbitral award – primarily in relation to procedural irregularities and public order issues.
13 Trends and predictions
13.1 How would you describe the current secured finance landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
No significant changes in the area of secured financing are expected in the coming months.
14 Tips and traps
14.1 What are your top tips for the smooth conclusion of a secured finance transaction in your jurisdiction and what potential sticking points would you highlight?
Although Czech law is relatively liberal, some formalities must be observed – especially as concerns the creation of security. In case of doubt, a verified signature is always recommended.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.