The pandemic has helped a number of issuers to go bust, which raises the logical question from the creditors' side - how can I claim (at least partial) return of my investment?
Not only the Czech Internet has been resonating significantly in recent months with the topic of bonds, especially the so-called "junk bonds" (high promised yield, high risk) and debts created on the basis of bonds. As I am not an economist, I will not go into too much detail, but it is nevertheless worth highlighting the reasons why bonds are such a hot topic at the moment. As a result of relatively low regulation, especially of so-called subprime bonds, almost everyone issued bonds during the conjuncture. Bond issues were often not backed by real assets of the issuer, nor were they established companies or companies with specific know-how or the ability to innovate. Bonds were issued to quickly and easily raise capital to implement an immediate business idea that might normally have succeeded but for the current pandemic.
Unfortunately, there is no universal answer to the above question. A bond claim is a claim like any other. Therefore, if it is overdue, it can be enforced through the courts - drafting a pre-suit notice, filing a lawsuit, paying court fees, attending court hearings, or pursuing appeals and other remedies. If the issuer of the bond is solvent and has no other liabilities, the claim can be effectively, albeit rather lengthily, enforced in this way.
The situation is different, however, when the issuer is not solvent, foreclosures are pending and it is obvious that it has multiple creditors and is unable to meet its obligations. In such a case, all indications are that the issuer is in so-called bankruptcy, i.e., in simple terms, in a situation where it has A) multiple creditors and B) overdue liabilities, C) which it is unable to pay. In such a state of affairs, a traditional lawsuit can no longer be considered an effective tool. For one thing, it is not at all clear whether the claim will be enforceable. At the same time, it can reasonably be assumed that insolvency proceedings will be initiated against the issuer and that the action would be suspended anyway as a result of the insolvency proceedings. All the costs invested in the legal proceedings could thus be wasted.
Once insolvency proceedings have been opened and the issuer has been adjudged insolvent[1] , there is essentially only one way to pursue your claims - by filing a claim in the insolvency proceedings. This is a specific type of filing on a prescribed form, through which a claim against the issuer is asserted before the insolvency court, even when the claim is not yet due. The Insolvency Act sets strict deadlines for the filing of claims. If you do not file on time, you will lose the possibility to recover your claim in the future.
Filing a bond claim in insolvency proceedings is not a trivial matter, which is why many creditors turn to an attorney to help them. But is it worth it at all? Because in insolvency proceedings, individual creditors are satisfied on a so-called pro rata basis - usually the debtor's assets are sold and the proceeds are distributed among the creditors in proportion to their claims. Below is a model example for easier understanding:
The net proceeds from the sale of the debtor's assets (after deducting costs, insolvency administrator's fees, etc.) amount to CZK 1 million. There are 10 registered creditors, each with a claim of CZK 1 million. In total, therefore, there are claims for CZK 10 million and it is clear that they cannot all be satisfied. Each creditor is therefore entitled to 10 % of the proceeds, so each is entitled to CZK 100 000. The above equation may have a number of variables. Not all claims have the same status and, in particular, claims secured by the debtor's assets have a more favourable position than unsecured creditors. If the proceeds were derived from the sale of secured property (e.g. mortgaged property), then the proceeds would belong to the secured creditor. Only if the secured creditor is fully satisfied would the remainder be distributed to the other unsecured creditors.
As can be seen from the above, the profitability of filing a claim in insolvency proceedings must be carefully considered by the creditor. It is relatively unlikely that the creditor will recover its claim in full, but it can at least minimise the damage already incurred. If a creditor with a smaller claim seeks the assistance of a lawyer as an individual, the costs of legal services may exceed the hypothetical proceeds of the insolvency proceedings, which cannot be effectively estimated in advance.
But what to do when it does not pay to seek counsel as an individual, is there a solution to such a situation? Law practice shows that even such a situation has a solution. The starting point is the collective recovery of debts in insolvency proceedings by one law firm. This eliminates the expense of re-studying the file, a number of filings can be made by only one person on behalf of all creditors, and a number of actions can be similar in content, which again saves time and costs.
There are also other, not so obvious, advantages of collective recovery. If one law firm represents multiple creditors, it can have a significantly greater impact on the course of the insolvency proceedings. Even small creditors can thus be represented on the creditors' committee, where they can task the insolvency administrator and monitor his activities. At the same time, the creditors' associations have much greater negotiating power and the joint representative can also put pressure on the debtor's statutory bodies, guarantors and possibly other persons who can at least partially satisfy the creditors.
Thus, in the case of collective representation, it may be worthwhile to recover even an order of magnitude less debt, as the cost of recovery and the pressure on the debtor is incomparable compared to recovery for an individual "small" creditor. It is important to be proactive and fight for your rights when recovering debts. However, when you are a lone minority creditor, it is often a futile fight. It is not for nothing that the stronger dog ... takes. This is no different in insolvency proceedings.
[1] The court assesses whether the conditions for insolvency are met and decides that the debtor is insolvent, and also decides how the insolvency is to be resolved - by bankruptcy, reorganisation or insolvency.