Recovering Corporate Bond Investments Under Czech Law: A Guide for Investors

Legal nature of bonds and investor rights

The terms of the issue are an absolutely key document that determines all your rights and obligations. They contain information on the bond's maturity, the method of interest payment, the possibility of early repayment, security conditions, and other legal requirements. It is important to realize that the terms of the issue may contain provisions that modify your rights.

We do not recommend relying solely on the words of the issuer or distributor. Always read the terms of the issue and the prospectus in detail. If you are unsure about the interpretation of the terms of the issue, we recommend that you contact our Czech legal team, who can explain them to you in the context of your specific situation.

First steps: When and how to act

At the first signs of payment problems, it is important to act promptly and systematically. According to the Czech Bonds Act, the issuer is obliged to convene a meeting of owners without undue delay if they fall into default in satisfying the rights associated with the bonds. A delay of more than 7 days is usually considered a material breach in the terms of the issue.

If the issuer does not communicate or does not convene a meeting, the bondholders themselves can take the initiative. However, this usually requires owners who collectively hold at least 5% of the nominal value of the unpaid part of the issue to join together and request the issuer to convene a meeting. If the issuer does not comply within 15 days, these qualified owners may convene the meeting themselves at the issuer's expense.

However, problems often begin the moment you want to contact other investors. If you do not know the other bondholders, it can be very difficult to identify and connect with them. Our attorneys in Prague have long-term experience in organizing meetings of bondholders and can assist you with the procedure.

Meeting of bondholders

The meeting of bondholders is the highest body of the owners, which decides on fundamental issues and changes to the terms of the issue. Importantly, for the meeting to be validly quorate, it must be attended by bondholders whose nominal value represents at least 30% of the total volume of the unpaid part of the issue.

According to the Czech Bonds Act, a decision of the meeting to change the terms of the issue must be recorded by a notary. Changes to the terms of the issue, repayment schedule agreements, or joint enforcement procedures can be discussed and approved at the meeting. If the meeting was properly convened and conducted, the decision of the meeting is binding on all owners.

In practice, however, meetings of owners often become a source of conflict. The issuer may attempt purposeful changes to the conditions, or disputes may arise regarding the validity of the convening. If the issuer attempts to change the conditions to the detriment of creditors, participation in the meeting and active defense is essential.

Judicial enforcement: Procedure and expectations

If the issuer falls into default but is not yet in insolvency, you can attempt classic judicial enforcement of your claim. This procedure is suitable if the issuer still has some assets that can be seized through execution in the Czech Republic.

The first necessary step is sending a pre-litigation notice, which must be sent at least 7 days before filing a lawsuit. This notice must precisely specify the amount owed, the reason for its incurrence, and a demand for payment. A pre-litigation notice is a condition for the court to award you reimbursement of legal costs in the event of success.

If the issuer does not pay within the additional period, you can file a lawsuit. For monetary debts, Czech courts often issue a so-called electronic payment order or a classic payment order. The court issues an order that becomes final and enforceable if the issuer does not file an opposition within 15 days.

If the issuer files an objection, the matter is resolved in standard litigation in Czech courts. Here, you will need to present all documents proving the existence of the bond and the issuer's default. It is important to realize that court proceedings can be costly and time-consuming.

If you win, you obtain an enforceable judgment (execution title), based on which execution can be levied against the debtor's assets in the Czech Republic. However, if the debtor is over-indebted, the execution will be stayed and the situation will transition into insolvency. Our Prague-based attorneys at ARROWS therefore always first analyze the debtor's creditworthiness so that clients do not expend resources on futile litigation.

Insolvency Proceedings: The Most Common Scenario

When a debtor is bankrupt, judicial recovery of individual claims becomes ineffective. Insolvency proceedings under the Czech Insolvency Act is a process aimed at the proportional satisfaction of creditors from the debtor's estate.

Insolvency proceedings can be initiated by the debtor or the creditors. If you file an insolvency petition as a creditor, you must prove the existence of your claim and the debtor's insolvency to the court, and pay a court fee. The court may also require a deposit for the costs of the insolvency proceedings.

After a decision on bankruptcy is made, the court invites creditors to register their claims. This is the most critical phase of the entire process.

Registering a Claim in Czech Insolvency Proceedings

The deadline for registering claims is set by law at 2 months from the publication of the bankruptcy decision in the Insolvency Register. This deadline is preclusive – if you miss it, your claim will not be satisfied in the insolvency proceedings and late registrations will not be considered.

The registration must be submitted on a prescribed form and must contain an exact specification of the claim. Errors in the registration can lead to it being disregarded or contested by the insolvency trustee. The insolvency trustee then reviews the authenticity, amount, and priority of all registered claims.

If the trustee contests your claim, you must file an incidental lawsuit to determine the authenticity of the claim. The lawsuit must be filed within a short period after the review meeting; otherwise, the contestation becomes effective.

Secured vs. Unsecured Bonds

A fundamental factor for the return on investment is the existence of security. Security means the claim is backed by specific assets, such as real estate, a business share, or receivables.

• Secured Creditors: Have the right to have their claim satisfied from the proceeds of the sale of the asset serving as security. Costs of administration, sale, and the trustee's remuneration are deducted from the proceeds, and the remainder goes to the secured creditor.
• Unsecured Creditors: Are satisfied proportionally from what remains in the estate after the satisfaction of secured creditors and creditors with priority claims.

Statistics and practice show that the recovery rate for unsecured claims in Czech corporate bankruptcies is often in the low single digits.

Security Mechanisms

In bond issues, the institute of a security agent is often used. The agent is a third party who holds the pledge rights for the benefit of all bondholders and exercises them. In the event of insolvency, the agent registers the secured claim for all investors collectively.

The insolvency trustee and creditors can challenge the debtor's legal acts that prejudiced creditors (clawback actions). In practice, we see that assets may be devalued or stripped. Acts can be challenged up to 5 years retrospectively in cases of intentional prejudice to creditors under the Czech Insolvency Act.

Our attorneys at ARROWS have extensive experience in verifying the validity of security and enforcing the rights of secured creditors. If you are unsure whether your security is truly legally effective, we recommend contacting us at consultation@arws.cz.

Collective Recovery and Coordination of Bondholders

Given the fragmentation of bondholders, individual action is often inefficient and expensive. Both Czech law and practice therefore encourage collective action. Associated creditors can elect a common representative to act for the entire group, which significantly reduces costs per investor.

Active participation in the creditors' committee is the best way to maintain control over the insolvency proceedings. In insolvency proceedings in the Czech Republic, the creditors' committee plays a key role, as it supervises the activities of the insolvency trustee and approves important steps, such as the method of asset liquidation.

If you are unsure how to join a collective recovery effort, or if you know that a group of owners of your issue exists, we recommend contacting consultation@arws.cz. Experts from the ARROWS law firm in Prague will help organize you with other investors and ensure you have effective legal representation.

Criminal Complaints and Asset Stripping

If there is suspicion that the issuer acted fraudulently, it is appropriate to file a criminal complaint. The criminal penalty for fraud involving large-scale damage under the Czech Criminal Code is 5 to 10 years of imprisonment. Within the criminal proceedings, you can join with a claim for damages.

Law enforcement agencies in the Czech Republic have broader powers to track and seize the debtor's assets than an ordinary creditor. Assets seized in criminal proceedings can subsequently be used to satisfy the claims of the victims.

Special Situation: "Crown Bonds"

In the past, so-called "crown bonds" (korunové dluhopisy) were popular in the Czech Republic, used for tax optimization. In recent years, the Czech Financial Administration has been intensively auditing these issues and, if an abuse of law is found, assesses additional tax including penalties for the issuers.

Established case law of the Supreme Administrative Court of the Czech Republic confirms the right of the tax authority to assess tax if the bonds had no economic purpose other than a tax advantage. For the investor, this means an increased risk of the issuer's insolvency.

Practical Advice: What to Do from the Start

If you have just failed to receive a due contractual interest payment or principal, proceed as follows:

1. Verify the facts. Check if the issuer is truly in default. Contact the issuer in writing and demand an explanation.
2. Gather all documents. Prepare originals or copies of the bonds, subscription agreements, terms and conditions of the issue, and proof of payment of the purchase price.
3. Check the issuer's status. Consult the Czech Commercial Register and the Insolvency Register (isir.justice.cz). Check if insolvency proceedings have been initiated.
4. Try to find other owners. Joint action is cheaper and more effective. Use internet forums or contact attorneys who already represent other creditors.
5. Consider legal options. Depending on the state of the assets and the stage of default, choose between a pre-litigation notice, an insolvency petition, or a criminal complaint.
6. Consult a lawyer. Timely consultation can save money. Our Prague-based attorneys at ARROWS are available to assist you.

Conclusion

A situation where an issuer fails to repay bonds is critical, but not always hopeless. The key to success is speed, knowledge of your rights, and coordinated action. Insolvency proceedings in the Czech Republic offer a chance for at least partial satisfaction but require strict adherence to deadlines.

Our Czech legal team at ARROWS handles these situations daily. We have a team of specialists in insolvency law, litigation, and securities. We are insured for professional liability up to CZK 400,000,000, which guarantees the security of our services. If you have a problem with bonds, write to us at consultation@arws.cz for a non-binding assessment of your situation.

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