Právní rámec selhání developerských projektů

When Insolvency Occurs in Development Projects

In the Czech legal system, such situations are addressed using Act No. 182/2006 Coll., on Bankruptcy and Settlement Methods (the Insolvency Act). This Act defines bankruptcy, which can take two forms. It is essential for developers to understand both definitions.

Insolvency (Inability to Pay) means that you have multiple creditors (at least two), monetary obligations more than 30 days past due, and you are unable to fulfill these obligations, as defined by Section 3(1) of the Insolvency Act. In development, this practically means anything – you are unable to pay suppliers on time, meet loan repayments, pay employee wages, or settle payments to leasing companies.

Over-indebtedness is a situation where a debtor (who is a legal entity or a natural person engaged in business) has multiple creditors and the sum of their liabilities exceeds the value of their assets, as follows from Section 3(4) of the Insolvency Act. When determining the value of assets, the further expected operation of the enterprise is also taken into account. For development projects, this means that even if you were to sell a partially completed project, the proceeds would not suffice to repay all debts.

Managers and statutory bodies have a legal obligation to file an insolvency petition without undue delay after they learned or, with due managerial care, should have learned of the bankruptcy, pursuant to Section 98 of the Insolvency Act. If you fail to fulfill this obligation, you face personal liability for the damage that the failure of your project causes to creditors. In practice, this involves civil liability, but in extreme cases, it may also involve criminal liability.

When a Developer Realizes There Are Problems: What to Do First

As soon as project management senses that the financial situation is deteriorating, it is critical to start acting. This is not a "what to read on the internet" guide. Lawyers from ARROWS Law Firm are aware that every project has its specifics – different financing, contracts with investors, supply chains, and regulatory obligations. Practice shows that time is the decisive factor.

Many developers at this point try to survive the situation on their own – accelerating the sale of units, seeking additional investors, or attempting to renegotiate maturities with suppliers. These are often the correct steps, but only if they are done conceptually and under legal supervision to avoid favoring certain creditors at the expense of others (which is a criminal offense under Section 223 of the Criminal Code).

The second step is to assess whether the project has a chance of being saved. In the Czech legal system, there is the possibility of preventive restructuring. This is a relatively new institute introduced by Act No. 284/2023 Coll., on Preventive Restructuring, which allows you to work with creditors on a solution without having to immediately declare bankruptcy through insolvency proceedings.

Preventive restructuring is an effective tool handled by only a few specialized law firms, and ARROWS lawyers have extensive experience with it.

The third step is to draft a clear financial plan and a list of assets and liabilities. Which debt is the most pressing? Who can provide additional financing? What are the maturity dates for the next three months? All of this must be documented. These are not just internal spreadsheets – these are supporting documents that you may present to courts, creditors, and investors.

Legal Procedures for Resolving Failure: Reorganization vs. Bankruptcy (Liquidation)

If preventive restructuring fails or is not appropriate, you must expect formal insolvency proceedings. In the Czech Republic, there are essentially two ways to resolve bankruptcy for developers (legal entities).

Reorganization is a remedial method of resolving bankruptcy where the operation of the enterprise continues, but under the supervision of an insolvency trustee and according to an approved reorganization plan. In the context of development projects, this means that construction can continue – however, under conditions approved by creditors and the court. This procedure is suitable for larger projects where completing the construction will bring creditors higher satisfaction than the immediate sale of an unfinished shell.

Bankruptcy (Konkurs) is a liquidating method of resolving bankruptcy. The debtor's assets are monetized (sale of real estate, materials, receivables) and the proceeds are distributed among creditors. Given that a development project is usually burdened by bank mortgages (secured creditors), the proceeds go primarily to them. Unsecured creditors are satisfied proportionally from the remaining amount, which is often a fraction of the claim.

Debt relief (Oddlužení) is intended primarily for natural persons and generally does not apply to large development companies.

Each of these procedures has its legal requirements. Reorganization requires the approval of a reorganization plan by creditors. Bankruptcy requires the monetization of assets in accordance with the instructions of the creditors' committee and the court.

Lawyers from ARROWS Law Firm deal with these issues daily and know the pitfalls. For example, retained advance payments from investors, pledges on unfinished units, or contracts with suppliers that have specific clauses for the event of insolvency.

Management Obligations and Personal Liability

This is a point that is often underestimated. In the Czech Republic, statutory bodies have an obligation to file an insolvency petition without undue delay after they learn, or with due care should have learned, that the company is in bankruptcy.

If you fail to fulfill this obligation, you face personal liability for damage or other harm caused to creditors by breaching this duty (pursuant to Section 98 et seq. of the Insolvency Act). In practice, this means a creditor can demand from you the difference between what they received in insolvency and what they would have received had you filed the petition on time.

Furthermore, according to Act No. 90/2012 Coll., on Business Corporations (Section 66), the court may decide on the obligation of a member of the statutory body to surrender to the estate any benefits obtained from the contract on the performance of the function for a period of up to two years back, if they contributed to the bankruptcy by breaching the duty of due managerial care.

In the event that a member of the statutory body knew of the imminent bankruptcy and, in conflict with due managerial care, did not do everything necessary to avert it, the court may even decide that this member is personally liable for the fulfillment of the company's obligations.

How to Avoid Personal Liability

The simplest way is to act in a timely and transparent manner. As soon as you see that things are going in the wrong direction, contact a lawyer. A lawyer will help you assess the factual state and prepare a so-called insolvency test. Having documentation that you acted with due managerial care and sought a solution is key to your defense in the future.

The second step is the formal filing of the petition on time. Once you know you are in bankruptcy and restructuring is not possible, file for insolvency. This protects your legal position better than waiting for a creditor to file a so-called creditor's insolvency petition against you.

Dealing with Creditors: Registration of Claims and Deadlines

Once the court decides on bankruptcy (the so-called bankruptcy decision), the period for registering claims begins to run. Creditors must actively register their claims. In the Czech Republic, this period is set by the court in the bankruptcy decision and ranges from 30 days to 2 months according to Section 136 of the Insolvency Act. Claims filed later are not taken into account in the insolvency proceedings, and these creditors will not be satisfied.

For investors, the situation is more complex because their position depends on the specific contract and form of security. We are considering both external creditors (banks, suppliers) and investors (apartment buyers) who have put money into the project.

Lawyers from ARROWS Law Firm often represent both debtors and creditors, and ensure that the registration is correctly processed, supported by evidence, and filed on time.

Rights of Suppliers and Construction Partners

Suppliers and construction partners are often in a difficult situation. However, under Czech law, they cannot arbitrarily "block the construction" without a legal reason.

It is a myth that a supplier can automatically record a mortgage on a property if the developer has not paid them. The creation of a mortgage requires either a contract or a court decision (judicial mortgage), which follows only after a successful lawsuit.

However, suppliers may utilize a right of retention (if they have the thing – e.g., the construction site or material – in their actual possession) according to Section 1395 of the Civil Code, which can be a powerful negotiating tool. The right of retention gives the creditor a priority right to satisfaction from the proceeds of the monetization of the retained item.

For undisputed claims up to CZK 1,000,000, the institute of an electronic payment order under Section 172 of the Code of Civil Procedure can be used, which is a faster and cheaper way to obtain an enforcement title. For higher amounts, a standard lawsuit or a petition for a payment order (without an amount limit, but with a higher court fee) is filed.

Lawyers from ARROWS Law Firm advise suppliers to act immediately upon the first default, secure evidence of work performed, and not wait until the developer falls into insolvency, where recoverability is significantly lower.

Financing in Crisis: Options and Legal Framework

One way to avoid insolvency is to obtain crisis financing. This may involve a capital injection by an existing partner or the entry of a new investor.

From the moment an insolvency petition is filed, the effects of the commencement of insolvency proceedings are such that the debtor is restricted in disposing of the estate (Section 111 of the Insolvency Act). They must not perform acts that would lead to a reduction of assets or would unjustifiably favor certain creditors.

New financing during insolvency (so-called credit financing) is possible only with the consent of the creditors' committee and the court and has a privileged position in the proceedings (a claim against the estate).

Lawyers from ARROWS Law Firm will help you structure financing so that it is legally sound and not contestable as harming a creditor.

Failure of Development Projects

Preventive Restructuring: A Chance for Rescue

Act No. 284/2023 Coll., on Preventive Restructuring introduced a tool into the Czech legal system that allows businesses to work with creditors on solving problems before the situation becomes critical and falls into insolvency. Preventive restructuring typically includes:

• Remedial Project: A plan on how to heal the business (sale of part of the assets, entry of an investor, change of the repayment schedule).
• Protection from Creditors: The court may declare an individual or general moratorium, which temporarily protects against executions and insolvency petitions from creditors (usually for 3 months with the possibility of extension).
• Negotiation: The goal is to reach an agreement with affected creditors on the adoption of a restructuring plan.

In the case of development projects, this gives the developer time to complete the construction or find an investor without the pressure of executions. However, this process requires that the developer is not yet in formal bankruptcy (especially not in a state of inability to pay), but only in a state of imminent bankruptcy.

Conclusion

The failure of a development project is a demanding situation for all stakeholders. For management, it means personal risks and professional complications. For investors, the threat of losing investments.

Legal procedures in the Czech Republic offer solutions – from preventive restructuring through reorganization to bankruptcy – but they require precise adherence to statutory procedures. Lawyers from ARROWS Law Firm have been dealing with this agenda for a long time and know how to work with creditors, investors, and courts at every stage of the project.

We implement some projects ourselves, so we understand not only the legal part but also the practical steps and typical risks. We can therefore also help clients with the transactional side – buying a project (appropriately structuring the takeover) or preparing and securing its sale, including contractual documentation, negotiation, and setting up liabilities.

If it is becoming clear to you that your project is getting into trouble, do not hesitate. Contact ARROWS Law Firm at consultation@arws.cz for legal advice. The right legal strategy in the early stages can save the project or at least minimize the impact on statutory bodies. ARROWS Law Firm is insured for professional liability up to CZK 350,000,000, which guarantees the security and stability of our services.