Solution for issues relating to possible cash flow disruption

The COVID-19 pandemic and the related preventive measures have started impacting entrepreneurs in the Czech Republic. Economists predict a slowdown in the Czech economy growth and problems with liquidity. This may result in a number of challenges in financial management and legal matters. As part of the series of practical legal recommendations on how to deal with COVID-19 impacts in financial risk management, we describe below and comment on several basic situations that may arise in the weeks to come from the legal perspective.

If economic prognoses get confirmed, we can expect liquidity failure on the Czech market in the following weeks, resulting in customers’ deteriorated payment discipline. Such a situation may lead to insolvency.

We recommend namely strengthening communication with your customers and intensively monitoring their current financial health. If a customer proves to be insolvent and is declared bankrupt by the court, such a situation requires a flexible response. Any possible receivable from the customer should be claimed in the insolvency proceedings within the statutory deadline. This is the only way to protect your statutory options to collect your receivable and keep your influence over the method in which your customer’s bankruptcy is solved.

If your customer’s situation is not that serious, temporary extension of receivable maturity is one of the possible solutions so that the customer is prevented from the risk of meeting conditions of insolvency testing (multiple past due receivables).

In this situation, it is understandable that a supplier will require a certain form of assurance from the customer for the extension, which may give rise to some issues. For example, if a customer collateralises its assets as consideration for the extension of maturity for the benefit of a supplier and, subsequently, the customer goes bankrupt, this act could be objectionable in the insolvency proceedings and the supplier might lose the collateral. It is more advisable to require collaterals from third parties if possible (e.g. parent company, bank guarantee, etc.) rather than from the customer.

The current situation may escalate the competitive environment and certain businessmen will strive to eliminate their competitors through unjustified or bullying insolvency petitions.

If you face such a petition, we recommend responding proactively and as fast as possible. The Insolvency Act offers a relatively wide range of tools to defend against this procedure or possibly disprove any insolvency presumption established on formalistic grounds. For example, the ability to meet obligations should be assessed taking into consideration a company’s future profit. In addition, the instrument of coverage gap may be applied, which is aimed at a short-term liquidity failure. In certain situations, the court may decide that an insolvency petition will not be published in the insolvency register for a certain period to eliminate any adverse impact on business credibility and uncontrolled customer outflow.

Making decisions in a crisis period places much greater demands on company managers who are obliged to make a number of decisions under pressure. It is obvious that the pressure on making the right decisions has increased significantly at present.

It is necessary for the management of companies impacted by the current crisis to thoroughly monitor the situation. It should be taken into consideration that if a company is on the verge of bankruptcy it is not possible to prefer only certain creditors (usually the most aggressive or the key ones) in receivable settlement. Such an approach may be classified as giving preferential treatment to those creditors and may have criminal consequences. If the insolvency test is positive, management is obliged to file an insolvency petition; otherwise, it is exposed to the risk of liability for damage. If company management files an insolvency petition, the possibility of imposing a moratorium should be taken into consideration. This may postpone bankruptcy declaration and provide the time needed to negotiate a recovery approach to solving bankruptcy with creditors in order to preserve business operations and jobs.

In general, management is recommended to start solving the situation as soon as its doubts on a business’s financial health arise and seek out professional assistance. Nearly any crisis has a solution if preventive measures are adopted in time and with professional care. Our team is ready to assist you in this respect.

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