Uplatnění smluvních pokut v insolvenci

What happens to contractual penalties when a debtor enters insolvency?

Contractual penalties are not an accessory to a claim, but a separate claim that must be filed as a principal amount. This distinction has a major practical impact. While default interest or costs of proceedings can often be included as accessories, a contractual penalty must be listed separately in the claim application with its own reason for arising.

The Czech Insolvency Act distinguishes between two key moments that determine the fate of a contractual penalty:

The right to the contractual penalty arises before the decision on bankruptcy: If the right to the contractual penalty arose before the insolvency court issued a decision on the debtor's bankruptcy, it can generally be filed in the insolvency proceedings. However, you must respect specific rules, especially regarding debt relief for natural persons.

The right to the contractual penalty arises after the decision on bankruptcy: Contractual penalties for which the right arose only after the decision on bankruptcy are not satisfied at all in insolvency proceedings. These are claims excluded under Section 170(e) of the Insolvency Act. This principle applies regardless of whether the bankruptcy is resolved through bankruptcy proceedings, reorganization, or debt relief.

Subordinated Claims: When a contractual penalty falls to the back of the line of creditors

One of the most significant risks when enforcing contractual penalties in insolvency is their classification as so-called subordinated claims under Section 172 of the Insolvency Act. This rule applies mainly in the debt relief of natural persons and has major implications for the likelihood of your claim being satisfied.

In debt relief, a contractual penalty agreed for default on a claim becomes a subordinated claim to the extent that, together with interest, default interest, and late payment fees, it exceeds the principal amount of the filed claim at the time it arose. 

In practice, this means that if, for example, the principal is CZK 100,000 and the total claim for interest, default interest, late payment fees, and contractual penalties for default amounts to CZK 150,000, then the amount exceeding CZK 100,000 (i.e., CZK 50,000) becomes a subordinated claim.

Subordinated claims are satisfied only after all other claims subject to the insolvency proceedings have been fully paid. In practice, this means that the chance of a subordinated claim being satisfied is minimal, as the debtor's assets in debt relief are usually not even sufficient to fully satisfy ordinary unsecured creditors. Moreover, creditors of subordinated claims do not have voting rights at the creditors' meeting.

How to avoid or minimize this risk?

When negotiating contracts with business partners, it is advisable to structure contractual sanctions so that they do not exceed the limit leading to subordination in the event of insolvency. You can achieve this, for example, by:

• A contractual penalty for a breach of obligation other than default: Contractual penalties agreed for a breach of obligation other than default on payment do not become subordinated, even if they exceed the principal.

• Securing the claim, including the contractual penalty: Secured creditors have a preferential right to satisfaction from the security in insolvency, and this subordination rule does not apply to them in its full extent.

• A contractual penalty as a debt from business activities: If the contractual penalty is considered a debt from business activities, the subordination rule does not apply to it.

The lawyers at ARROWS have extensive experience in drafting and reviewing contractual terms to maximize the chance of satisfying your claims, including penalties, in the event of a business partner's insolvency. We will ensure that your contracts build a solid legal foundation for future enforcement.

How to correctly file a contractual penalty in insolvency proceedings

Filing a claim in insolvency proceedings is a procedural act with strict rules and deadlines. Any mistake can lead to your application being disregarded or your claim being denied by the insolvency administrator or the debtor.

When and where to file the claim

You can file a claim application from the commencement of the insolvency proceedings, but no later than the expiry of the deadline set in the decision on bankruptcy. This deadline is typically 2 months from the publication of the decision on bankruptcy in the Insolvency Register. This is a preclusive period – late applications are disregarded, and claims filed in this way are not satisfied in the insolvency proceedings.

You file the claim application with the insolvency court that is conducting the debtor's insolvency proceedings. Information about commenced insolvency proceedings can be found in the Insolvency Register at https://isir.justice.cz.

Mandatory elements of the application

A claim application can only be filed on the prescribed form, the requirements of which are set by an implementing legal regulation. The form can be found at https://insolvence.justice.cz. The application must contain:

• the name of the insolvency court and the case file number of the insolvency proceedings

• identification of the debtor (name/company name, registered office/residence, ID number)

• identification of the creditor, including any legal representative

• the amount of the claim – it is crucial that you state the principal (the underlying debt) and the contractual penalty separately as two different principal amounts, not as a principal and an accessory

• the reason for the claim's origin – for the principal, this will typically be a contract (purchase, work, loan, etc.); for the contractual penalty, it will be the specific breach of the contractual obligation for which the penalty was agreed

• a description of the facts that are the reason for the claim's origin

• the nature of the claim (whether it is enforceable, due, secured, subordinated)

• the signature of the creditor or their legal representative

If you are an entrepreneur with a data box, filing the application electronically via the data box is mandatory.

Mandatory attachments to the application

You must attach to the claim application the documents to which the application refers. Without these attachments, the application may be rejected or the claim denied. For a contractual penalty, this includes:

• The contract in which the contractual penalty is agreed – it must clearly state the obligation whose breach leads to the contractual penalty, and the amount or method of determining the amount of the contractual penalty

• Proof of the breach of obligation – for example, unpaid invoices with proof of their delivery and the expiry of the due date, records of non-delivery of goods, protocols of defective performance

• Calculation of the contractual penalty – if the contractual penalty is variable (e.g., daily), you should attach a detailed calculation stating the period and the rate used

• Communication with the debtor regarding the contractual penalty, if any (reminders, payment demands)

If the claim is enforceable (for example, you have already obtained a final court judgment), you must prove its enforceability with a public document, i.e., typically a final and enforceable court decision or a notarial deed with consent to direct enforceability. Enforceable claims have a more advantageous position in insolvency proceedings because the grounds for their denial are limited.

The lawyers at ARROWS will ensure the complete preparation of the claim application, including all attachments, correct calculation, and adherence to deadlines. Thanks to our experience from regularly representing more than 150 joint-stock companies, 250 limited liability companies, and other clients, we know how important speed and precision are.

Review of Claims: Where a denial can occur and how to defend against it

After the claim is filed, a review phase follows, conducted by the insolvency administrator together with the debtor. It is in this phase that it is decided whether your claim, including the contractual penalty, will be recognized (established) or denied. A denied claim is not automatically lost, but you must be prepared to defend it in an incidental dispute, which is a demanding and costly process in terms of both time and money.

How the review of claims proceeds

The insolvency administrator reviews the claim applications mainly based on the attached documents and the debtor's accounting or records. The administrator invites the debtor to comment on the filed claims. Subsequently, they compile a list of filed claims, in which they explicitly state for each claim whether they recognize or deny it, and if they deny it, to what extent (authenticity, amount, or ranking).

In the debt relief of natural persons, the review takes the form of a personal meeting between the insolvency administrator and the debtor, at which the debtor has the last opportunity to deny claims. The administrator then prepares a review report, which contains a list of filed claims with the positions of both the administrator and the debtor indicated.

Reasons why a contractual penalty may be denied

The insolvency administrator, the debtor, or another creditor may deny a claim as to its authenticity, amount, or ranking. For a contractual penalty, the most common reasons for denial are:

Denial of authenticity means disputing that the claim ever arose or that it has already been extinguished. For a contractual penalty, this could involve assertions that:

• the contractual penalty was not validly agreed in the contract (vagueness, contrary to good morals)

• the debtor did not breach the obligation to which the contractual penalty was related

• the contractual penalty has already been paid or otherwise extinguished (e.g., by waiver)

• the right to the contractual penalty is statute-barred

Denial of the amount means that the amount of the filed claim is disputed. For a contractual penalty, this typically involves:

• disagreement with the calculation (different number of days of default, different rate)

• objections that the contractual penalty is unreasonably high and should be moderated (reduced) by the court

Enforceable claims have an advantage in this regard – if they are awarded by a final decision of a court or other competent authority, they can only be denied on very limited grounds under Section 199(2) of the Insolvency Act. The denying party is not permitted a different legal assessment of the matter, but only new facts that were not and could not have been raised in the original proceedings (for example, a forged signature).

How to defend against the denial of a claim

If your claim, including the contractual penalty, is denied, you have two options:

A) Incidental dispute to determine the authenticity, amount, or ranking of the claim

If a non-enforceable claim has been denied, you as the creditor must file an action with the insolvency court to determine that the denied claim is legitimate. The deadline for filing the action is 30 days from the review hearing. If you do not file the action in time, your claim will no longer be considered in the insolvency proceedings.

In an incidental dispute, you bear the burden of proof that your claim is authentic and in the correct amount. This means you must prove to the court all the facts establishing the existence of the claim – the conclusion of the contract, the agreement of the contractual penalty, the debtor's breach of obligation, and the occurrence of damage (if the contractual penalty serves a compensatory function).

If an enforceable claim has been denied, the action is filed by the insolvency administrator (not the creditor) to determine that the claim is not legitimate. In this case, it is the administrator who must prove the grounds for denial.

B) Withdrawal of the denial

In some cases, the insolvency administrator may withdraw their denial, for example, if the creditor subsequently provides the necessary evidence. The withdrawal of the denial results in the claim being established without the need for an incidental dispute.

Incidental disputes are procedurally and substantively demanding, and their outcome can fundamentally affect whether you receive even a portion of your claims. The lawyers at ARROWS have extensive experience in representing clients in incidental disputes and will provide you with expert legal argumentation and evidence management.

Moderation of a Contractual Penalty: How a court can reduce your claim

Another risk that can significantly reduce the amount of satisfaction of a contractual penalty is its moderation (reduction) by the court. Under Section 2051 of the Civil Code, a court may, at the debtor's request, reduce an unreasonably high contractual penalty.

How to avoid the risk of moderation

When agreeing on contractual penalties in contracts with business partners, it is advisable to:

• Choose a reasonable amount for the contractual penalty – reasonableness depends on the circumstances of the case, but a limit of approx. 0.5% per day is generally considered reasonable; higher rates may be considered risky in terms of 

• Clearly define the function of the contractual penalty – if it is intended to serve as a lump-sum compensation for damages, this can be explicitly stated in the contract

• Include a mechanism in the contract for reducing the penalty under certain circumstances, so that the court does not have to resort to moderation at all

• Enforce contractual penalties actively and without undue delay – long-term passivity on the part of the creditor may be taken into account by the court as a mitigating circumstance for the debtor during moderation

The lawyers at ARROWS will help you set up contractual penalties so that they are legally robust, yet reasonable and enforceable. Thanks to our experience, we know which formulations and rates will stand up to judicial review.

Penalty for Overstating a Claim: When you face a fine instead of satisfaction

One of the lesser-known but important provisions of the Insolvency Act is Section 179(1), which allows the insolvency court to penalize the overstatement of the actual amount of a filed claim.

If the actual amount of the established claim (including the contractual penalty) is less than 50% of the filed amount, the court may, at the request of the insolvency administrator, order the creditor to pay a certain amount into the insolvency estate. The court will determine this amount with regard to all the circumstances of the filing and review of the claim, but not exceeding the amount by which the filed claim exceeded the extent to which it was established.

In other words, if you filed a claim for CZK 1,000,000, but after review or an incidental dispute, it was established at only CZK 300,000 (i.e., 30% of the filed amount), the court may order you to pay up to CZK 700,000 into the insolvency estate.

How to avoid the penalty for overstatement

• Carefully calculate the claim, including the contractual penalty, and ensure the calculations are correct

• Attach all necessary evidence to the application to make it clear that the amount of the claim is justified

• If in doubt about the amount, consult a lawyer – if there is legal or factual uncertainty about part of the claim, it is better not to file it at all than to risk a penalty

• Do not file claims that are deliberately inflated with the intention of obtaining higher voting rights or greater satisfaction at the expense of other creditors

The lawyers at ARROWS will ensure the precise calculation of your claims, including contractual penalties, and minimize the risk of a penalty for overstatement. We pride ourselves on precision and a detailed knowledge of insolvency law.

Why turn to the ARROWS law firm

Enforcing claims, including contractual penalties, in insolvency is a legally complex process full of pitfalls. Any mistake, missed deadline, or incomplete documentation can lead to you losing the entire claim. Even if you comply with all formalities, there is a risk of the claim being denied, the contractual penalty being moderated by the court, or the claim being subordinated with a minimal chance of satisfaction.

To maximize your chances of success, you need expert legal advice and representation from lawyers with direct experience in insolvency law. The ARROWS law firm is a specialized firm that regularly handles insolvency cases and debt collection for a wide range of clients – from medium and large companies to investors and property owners.

Our services include:

• Drafting and reviewing contracts with properly structured contractual penalties that minimize the risk of subordination or exclusion in insolvency

• Legal consultations on your options in the event of a business partner's insolvency, including an analysis of the advantages of various procedures

• Complete preparation of the claim application, including all mandatory attachments, correct calculation, and formulation of the reasons for its origin

• Representation at the review hearing and defense of your claims against denial actions by the insolvency administrator or the debtor

• Conducting incidental disputes at the insolvency court to determine the authenticity, amount, or ranking of a claim

• Monitoring the insolvencies of your business partners and providing timely notification of the need to file a claim

• Representation before supervisory authorities and regulators if the insolvency affects your licenses or permits

• International advice and provision of legal services abroad through the ARROWS International network

We also regularly partner with in-house counsel to resolve special matters, such as complex insolvencies, international cases, or the collection of claims in the millions of crowns.

We can also connect clients with each other – if you are looking for investment or business opportunities, a partner for the purchase or sale of a share, or, conversely, need financing for your projects, we would be happy to listen to interesting business ideas and possibly connect you with suitable partners from our portfolio.

Conclusion

The enforcement of contractual penalties in insolvency is a complex legal issue requiring detailed knowledge not only of the Insolvency Act, but also of civil law, contract law, and court case law. Each case has its own specifics and risks that can significantly affect whether and to what extent you will be able to satisfy your claims, including contractual penalties.

If you do not want to risk mistakes, damages, or fines, you can safely entrust the entire matter to the ARROWS law firm. Thanks to our experience in providing long-term services to our clients – more than 150 joint-stock companies, 250 limited liability companies, and 50 municipalities and regions – we can significantly reduce time and minimize the risk of errors. We are insured for damages up to CZK 500,000,000, so it is safer for you to have the matter professionally handled.

Contact us and get a tailor-made legal solution for enforcing your claims in insolvency.