The customer has failed to make payment, and negotiations have reached an impasse.

Three Questions That Will Decide Before the Court Does

In practice, a dispute over an unpaid invoice is not lost in court, but at the moment when a company sues a debtor who has no assets to pay with. A judgment is just a piece of paper. Money is only brought in by enforcement (execution), and that requires assets that can be seized. Therefore, before deciding to file a lawsuit, management needs to answer three questions: whether the claim can be proven, what can be recovered from the debtor, and by how much the recovery will exceed the costs.

The first question is whether you can document the claim with written evidence. The court will not ask who was right in the business relationship, but what the creditor can prove. A signed contract or order, a confirmed delivery note or handover protocol, an invoice, and correspondence in which the customer accepted the delivery or did not dispute the debt are decisive. If the customer rejected the delivery or claimed defects in time, the dispute changes from a payment issue to a dispute over performance and will last longer.

The second question is the debtor's solvency. A customer who has stopped paying you has often stopped paying other suppliers as well. A company that comes to court fifth in line may get a judgment against a company with no assets. Therefore, a debtor background check is done before preparing the lawsuit and takes no more than a day's work. The procedure is described in the following chapter.

The third question is the economics of the dispute. Costs include the court fee, which is based on the amount sued for and is paid in advance, as well as the attorney's fee and the time of the people who will prepare the documents and testify. Against this stands the amount you actually recover and the reimbursement of proceedings costs, which the court awards to the successful party. If the likely yield does not exceed the costs, it is more rational to sell, offset, or write off the claim.

How to Find Out If the Customer Has the Means to Pay

A debtor background check relies on public sources and can be done without their knowledge. It starts with the public register: who the director is, who the shareholder is, whether the registered office or management has changed recently, and whether the company has entered liquidation. Frequent changes of directors, moving the registered office to a virtual address, or transferring a share to an unknown person are warning signs. They point to a company that someone is preparing to wind down.

The collection of deeds, where the company publishes its financial statements, tells the most. The balance sheet shows equity, inventory, receivables, and liabilities. The income statement shows whether the company is profitable. If the debtor has not published its financial statements for recent years, it is a warning sign and also an obstacle to a reliable assessment of its finances. The absence of financial statements alone does not prove insolvency, but it is reasonable to classify such a debtor as risky.

Another source is the insolvency register. It will show whether insolvency proceedings are already underway against the customer or whether they were filed by another creditor in the past. If proceedings are underway, a lawsuit is usually no longer appropriate, and the claim is asserted by filing a proof of claim. The VAT payers register, in turn, shows whether the customer is listed as an unreliable VAT payer under Czech legislation. Such a designation points to serious problems with meeting VAT obligations. In itself, it does not prove insolvency or other debts, but it is a reason to check the customer in more detail.

Look for assets that can be seized in the Land Registry. Real estate without encumbrances is the best news for a creditor, because after the judgment, the claim can be satisfied from it. Conversely, real estate encumbered by a mortgage in favor of a bank will not bring much to an unsecured creditor. The check is completed by the history of the business relationship itself: how long the customer paid on time, when payments started to delay, and whether they asked for installments.

Four Paths to Money and What Each Costs

A creditor has four basic paths: a written pre-action demand, a lawsuit in court, arbitration, and filing a claim in insolvency proceedings. Each costs differently, takes a different amount of time, and is suitable for a different debtor. For a solvent customer who is just delaying payment, a demand with a clear deadline is usually enough. For a debtor with no assets, none of them will help, and the company then deals with a write-off rather than recovery.

A pre-action demand for payment is the cheapest step and also a common condition for the recovery of costs. A plaintiff who wins a payment dispute is generally entitled to reimbursement of proceedings costs only if they sent a demand for performance to the debtor's delivery address, or last known address, at least 7 days before filing the lawsuit. Without a demand, the court can award reimbursement only exceptionally, for reasons worthy of special consideration (Section 142a of the Czech Code of Civil Procedure). A company without a demand thus risks winning the dispute but bearing the attorney's costs itself.

A lawsuit gives the creditor an enforceable title. An enforceable title is a court decision or other document on the basis of which execution can be ordered. Without it, a creditor cannot touch the debtor's assets, even if no one disputed the debt. In a lawsuit for payment, the court can issue a payment order without a hearing; the debtor then has 15 days to pay or file an opposition. Conversely, a dispute over defects or the scope of performance takes longer and often cannot do without an expert opinion.

Arbitration is available only if the contract contains it. An arbitration clause removes the dispute from court and entrusts it to an arbitrator or a permanent arbitral court. The advantage is speed and less formality, the disadvantage is usually a single instance and costs that the company pays in advance. If the customer also has a claim against you, also consider set-off, which does not require arbitration or court proceedings.

Filing a proof of claim in insolvency proceedings is a path that a creditor does not choose but is pushed into. From the publication of the decree on the initiation of insolvency proceedings in the insolvency register, claims that can be asserted by a proof of claim can no longer be asserted by a lawsuit. The creditor then ranks among the others and receives only a proportional share of the proceeds. How set-off works in insolvency is explained in the article on offsetting claims in insolvency. Which of the paths is worthwhile in a specific case is decided by the strength of the evidence and the debtor's assets. The Prague-based Czech legal team at ARROWS therefore assesses them for each claim individually, before the company pays the first costs.

Deadlines That Will Decide for You

The limitation period is the most common reason why a company loses a claim it would otherwise have recovered. The period generally lasts three years (Section 629 of the Czech Civil Code) and, for invoice payments, usually starts running from the due date. The court will take the limitation period into account only if the debtor objects to it; then they do not have to pay the debt. The parties may agree on a shorter or longer period in a business contract, of at least one year and at most fifteen years.

An acknowledgment of debt is the most valuable document a creditor can obtain from a debtor. If the debtor acknowledges the debt, the right is limited to ten years from the date of acknowledgment; if they also specify a performance date in the acknowledgment, the ten years run from that date (Section 639 of the Czech Civil Code). Moreover, a written acknowledgment as to the reason and amount establishes a presumption that the debt existed at the time of acknowledgment. An installment calendar signed by the debtor therefore improves the creditor's position even if the debtor ultimately fails to comply with it.

A lawsuit filed in time stops the limitation period, provided the creditor properly continues the proceedings. Filing a proof of claim in insolvency proceedings has the same effects as a lawsuit, from the day it reaches the insolvency court (Section 173 of the Czech Insolvency Act). Mere negotiation with the debtor does not stop the period. An exception is an agreement on out-of-court negotiations regarding the claim: during the negotiations, the period does not run until one party explicitly refuses to continue (Section 647 of the Czech Civil Code). It is reasonable to have such an agreement in writing so that it can be proven. A company negotiating without it must watch the last day of the period.

In insolvency proceedings, a stricter rule applies: the deadline for filing a proof of claim is fixed. The creditor files a claim from the initiation of the insolvency proceedings until the expiry of the deadline set by the decision on bankruptcy; the law sets it firmly at two months (Section 136 of the Czech Insolvency Act). The court does not take into account claims filed later, and such claims are not satisfied in the proceedings. Claims that are already subject to an ongoing court dispute, as well as contractual penalties, are also filed. How to assert them is described in the text on asserting contractual penalties in insolvency.

An Insolvency Petition Is Not a Lever Against a Single Debtor

Some creditors consider an insolvency petition as a faster and cheaper way to get paid. The reasoning is that the debtor will pay to avoid insolvency. The law and the courts do not support this approach. Bankruptcy assumes that the debtor has multiple creditors, monetary obligations more than 30 days overdue, and is unable to meet them (Section 3 of the Czech Insolvency Act). A company can also be bankrupt if it is over-indebted, i.e., when its liabilities exceed the value of its assets. Even in that case, however, the law anticipates multiple creditors, so a single unpaid supplier will not meet the condition on their own.

A creditor keeping accounts or tax records who files an insolvency petition against a legal entity must document the claim in a qualified manner. An invoice is not enough. The law requires an acknowledgment of debt with a verified signature, an enforceable decision, a notarial or execution deed with consent to enforceability, or a confirmation by an auditor, court expert, or tax advisor that the creditor accounts for the claim (Section 105). Along with a petition against a legal entity that is an entrepreneur, the petitioner must deposit a security for the costs of the proceedings of CZK 50,000; against an individual or a non-business legal entity, CZK 10,000 (Section 108).

The Supreme Court, in judgment 29 Cdo 2501/2021, reiterated that insolvency proceedings do not serve to enforce the claim of an individual creditor. A creditor who can easily recover a claim through execution will not succeed with an insolvency petition. If the petitioner knew or must have known that the debtor had enough assets to pay all due debts, and the court dismisses the petition, they are liable for the damage caused to the debtor by initiating the proceedings. They cannot escape liability even if the debtor pays after the petition is filed.

The court will reject an obviously groundless petition and may impose a fine of up to CZK 500,000 on the petitioner. An obviously groundless petition is considered to be, in particular, a petition by which the petitioner seeks to abuse their rights to the detriment of the debtor (Section 128a of the Czech Insolvency Act). For management, this implies a simple rule: an insolvency petition only makes sense against a debtor who really does not pay multiple creditors. Whether it will stand in your case depends on what you can document about the customer's other debts, which is assessed by the lawyers of the ARROWS law firm before the petition is sent to the court.

When to Write Off a Claim and How to Handle It in Accounting

Not every claim is worth spending more money on. If a check shows a debtor with no assets, it is a rational decision to stop investing in recovery and close the claim. But closing does not mean forgetting. The company should handle it from an accounting and tax perspective so that the loss reduces the tax base and does not distort the balance sheet. At the same time, it should consider whether to sell the claim, because even a low price is more than zero.

Provisions reduce the tax base gradually according to the time past due. A taxpayer who keeps accounts can create a tax-deductible provision for a non-statute-barred claim. When more than 18 months have passed since the due date, they may create it up to 50% of the unpaid value. After more than 30 months, up to 100%. For a claim acquired by assignment with a value over CZK 200,000, this is possible only if court, arbitration, or administrative proceedings are ongoing. A provision does not mean that the creditor waives the claim.

A tax-deductible provision cannot be created for a claim between related parties and is cancelled as soon as the claim becomes statute-barred (Section 8a of the Czech Act on Reserves). Limitation thus deprives the company not only of the claim itself but also of the tax effect. For a debtor in insolvency, a special rule applies: for a claim filed within the deadline, a provision can be created up to its full balance sheet value. Conversely, a mere accounting write-off of a claim is not automatically a tax expense; the Income Taxes Act recognizes it only in specified cases, for example, after an unsuccessful execution or according to the results of insolvency. It is advisable to discuss specific tax impacts with the company's tax advisor.

Mistakes That Make a Creditor Lose Money a Second Time

The first mistake is to sue without a debtor background check. The company pays the court fee and the attorney, gets a judgment, and after months, the executor announces that the debtor has no seizable assets. Thus, the costs of the dispute, which no one will reimburse, are added to the loss from the unpaid invoice. Yet, a one-day check would have shown that it is more reasonable to write off or sell the claim.

The second mistake is to let deadlines run while negotiating. The customer promises payment, sends installments, and begs for patience. Meanwhile, three years pass from the due date, and the debtor raises a statute of limitations defense. The protection is to obtain a written acknowledgment of debt from the debtor or to arrange out-of-court negotiations regarding the claim in writing. If they refuse both, it is a signal that the debtor's goodwill cannot be relied upon.

The third mistake is to underestimate the customer's insolvency proceedings. The creditor overlooks the publication in the insolvency register, files the claim after the deadline, and the court does not take it into account. Also common is a filing without proper documentation, which the insolvency trustee disputes. How to defend oneself in such a situation is described in the article on disputing a claim in insolvency.

The fourth mistake is to use an insolvency petition as a threat. The creditor sends the debtor a draft insolvency petition, stating that they will file it unless they get paid within a week. Against a solvent debtor, the creditor risks liability for damages and a fine if they actually file the petition. Where the line lies between assertive negotiation and illicit pressure depends on how strongly the claim is documented and what the creditor knows about the debtor's assets. The lawyers of the ARROWS law firm therefore always discuss this step with the client in advance.

Risks in Deciding on an Unpaid Claim

Final Summary

The article showed that the decision to sue stands on three questions: whether the creditor can document the claim, whether the debtor has the means to pay, and whether the yield will exceed the costs. The answer will be brought by a debtor background check in public registers and a check of deadlines. An insolvency petition, however, is not a tool to recover a single invoice.

For company management, delay is the most expensive. Every month of waiting shortens the limitation period and gives other creditors a head start in accessing the debtor's assets. If the customer enters insolvency, a creditor who did not act in time will receive only a proportional share of the proceeds, and often none. A quick and well-founded decision is therefore more important than a perfect lawsuit.

Equally important is knowing how to close a claim. A company that finds out in time that the debtor has no assets saves the costs of the dispute and can take advantage of the tax effect of provisions. The decision to write off a claim is just as legitimate as the decision to sue, provided it is based on verified information. The only bad decision is one that no one made, and the claim has since become statute-barred.

The lawyers of the ARROWS law firm will check the debtor, assess the evidence, and calculate what the dispute costs and what it can bring. They represent creditors in court disputes, in settlement negotiations, and in insolvency proceedings, where they watch the filing deadlines. Write to us at consultation@arws.cz or look at our service commercial and court disputes.