Filing a claim in insolvency proceedings may be the only way for creditors to recover at least part of the amount they are owed. In the Czech legal system, however, creditors face an understated but significant risk: if they overstate the amount of their claim, not only do they risk having it disregarded but they may also be required to pay a penalty to the debtor’s estate. This provision, embedded in the Czech Insolvency Act, acts as a double-edged sword: while it aims to prevent unfounded claims and speculation in insolvency proceedings, it often deters legitimate creditors from fully asserting their claims. This financial penalty has no equivalent in other European countries. So, how can creditors avoid penalties, and what should they know before submitting a claim in insolvency proceedings?
Historical Context: Why is the law so strict?
Czech insolvency law, specifically Sections 178 and 179 of the Insolvency Act, was introduced to counter certain practices by various creditors or even groups of creditors during insolvency proceedings, especially in creditors' meetings. Some creditors deliberately inflated their claims to gain a larger share of voting rights and thereby influence the course of the insolvency proceedings in their favour, whether by securing participation in a creditors' committee or deciding on the method of resolving the insolvency through reorganization or bankruptcy.
The legislature responded by introducing stricter rules and sanctions for creditors who submit overstated claims. While the primary aim of this legislation was to limit abusive and purpose‑driven behaviour by creditors, it also brought new risks for honest creditors. These rules not only affect those who manipulate the amount of their claims but also creditors whose claims are legitimate but whose exact valuation is difficult or disputed. This creates room for unpredictable consequences even in cases where creditors act in good faith.
How do courts approach overstated claims today?
In response to the practices described above, the legislature established significant penalties for creditors whose claims are overstated and ultimately verified to be less than 50% of the submitted value.
This 50% threshold is considered by the Supreme Court to be sufficiently high enough to allow reasonably prudent creditors to estimate the chances of their claim’s success without risking conflict with the sanctions provided for in insolvency law. While today’s law gives courts some discretion in considering the circumstances of a case when evaluating overstated claims, practice has been leaning increasingly towards a strict interpretation. For creditors, the 50% threshold is not just a number—it represents a real risk that influences their decision-making, since submitting an overstated claim poses not just a reputational risk; it comes with strict penalties that can have severe consequences, including criminal law implications.
What penalties are imposed for overstated claims?
a. Automatic Disregard of the Claim: If a claim is found to be valid for less than 50% of its submitted amount, the insolvency court will automatically disregard the entire claim, even the part that was recognized. The claim is effectively rejected, and the creditor's participation in the insolvency proceedings, at least concerning the disputed claim, is thus terminated.
This penalty applies automatically, regardless of the circumstances. Even if the creditor submitted the claim in good faith, without intending to dominate the insolvency proceedings or harm other creditors, this sanction cannot be avoided. The rejection of the claim is a penalty of extraordinary severity, which is unparalleled in Czech civil law.
b. Financial Penalty – a serious financial risk at the court’s discretion: The second sanction for creditors with overstated claims comes in the form of a financial penalty imposed by the insolvency court, requiring payment into the debtor’s estate of an amount up to the difference between the submitted and verified amounts of the claim. The Supreme Court has repeatedly ruled that insolvency courts should only avoid imposing such penalties in exceptional cases.
When deciding on the amount of the financial penalty, the court considers the circumstances under which the claim was submitted and reviewed. It emphasizes whether the overstatement was due to error or was intentional, the reasons for reducing the claim during verification, and the extent to which the creditor’s actions jeopardized protected interests, such as the integrity of the insolvency process or the rights of other creditors. However, clerical errors or negligence in filling out claims are not excusable, as the Supreme Court has noted.
The fact that courts indeed impose penalties is evidenced by a ruling of the Regional Court in České Budějovice, which ordered a creditor with an overstated claim to pay CZK 180,000,000 (approx. EUR 7,165,000). The risk of being subjected to a financial penalty is therefore more than real.
Can sanctions be avoided?
Creditors have several options during insolvency proceedings to minimize the risk of sanctions. A key strategy is to actively correct submitted claims. If a creditor finds that its claim is overstated, it can withdraw part of the claim. Another option is to try and reach a settlement with the disputing party and having it approved by the insolvency court, which is only possible in an incidental dispute. However, it is essential to note that a mere out-of-court agreement between the parties does not have the same effect of avoiding sanctions.
Another critical strategy to avoid financial penalties is to refrain from exercising procedural rights related to an unverified claim. However, according to the Supreme Court, any action taken by a creditor that impacts the insolvency process based on the submitted claim can lead to sanctions. This includes active voting in creditors' meetings, passive attendance if it influences the outcome of a vote, participation in a creditors' committee or as a creditors' representative, or filing objections to the valuation of the assets in the debtor’s estate. It is irrelevant whether the creditor acted in good faith or how significant the impact of its exercise of rights was on the insolvency proceedings. These circumstances are only taken into account when determining the amount that the court orders the creditor to pay into the debtor’s estate.
It is important to note that these measures can only prevent financial penalties; they cannot reverse the automatic disregard of the claim. Correcting submitted claims or refraining from exercising rights during proceedings is effective mainly against financial penalties, not against the sanction that the recognized portion of a claim is disregarded. This distinction is crucial for creditors to consider when planning their strategy in insolvency proceedings.
Recommendations for Creditors
In the Czech insolvency environment, where the rules for submitting claims are strict and the consequences of errors can be severe, it is essential to approach claim submissions with maximum diligence. Submitted claims are initially assessed solely based on written evidence, so any inaccuracy or omission can have far-reaching consequences.
Accurately valuing claims, supported by a thorough legal analysis and sufficient evidence, is not just a formality. Incorrectly submitted claims can easily be challenged, exposing creditors to the risk of losing their rights or facing financial penalties. Penalties for overstated claims do not depend solely on intent but also affect unintentional errors or administrative oversights.
The key to success is thorough preparation, careful processing, and detailed documentation of all claims. This approach not only minimizes the risk of the claim not being recognized in full but also secures the creditor’s position during the proceedings. Attention to accuracy and caution when submitting claims pays off in the Czech insolvency environment—both literally and figuratively.
By Pavla Veselkova, Lawyer, Kocian Solc Balastik
