Company Insolvency and the Director's Duty to File an Insolvency Petition in the Czech Republic
The question of when a company falls into insolvency, and when its statutory body becomes legally obliged to file an insolvency petition, is one of the most practically significant issues for the personal assets of a managing director or board member. Under Czech law, this area is governed primarily by Act No. 182/2006 Coll., on Insolvency and Methods of Its Resolution (the Insolvency Act, hereinafter "IA"), and Act No. 90/2012 Coll., on Business Corporations (hereinafter "BCA"). This article summarises the current legal framework and relevant case law on when the duty to file an insolvency petition arises, and the liability a statutory body faces if it fails to do so.
What Constitutes Insolvency
The basic definition is set out in Section 3 IA. The law distinguishes between two forms of insolvency.
First Form: Inability to Pay
A debtor is insolvent if it has more than one creditor, at least two monetary debts overdue by more than 30 days, and is unable to meet these debts (Section 3(1) IA). So that creditors and courts do not have to prove what is actually happening in the debtor's accounts, Section 3(2) IA sets out four rebuttable presumptions of inability to pay: the debtor has stopped paying a substantial part of its debts, has failed to pay them for more than three months after maturity, a claim cannot be satisfied through execution or enforcement of a judgment, or the debtor has failed to submit the required lists of assets, debts and employees to the court. It is enough for one of these presumptions to be met, and the burden then shifts to the debtor to prove otherwise.
Second Form: Over Indebtedness
Over indebtedness applies only to legal entities and self employed individuals and is governed by Section 3(3) IA. It describes a situation where the total of the debtor's liabilities exceeds the value of its assets, provided there is more than one creditor. The law also requires that ongoing asset management or business operations be taken into account: if, given all the circumstances, it can be assumed that the debtor will be able to continue managing its assets or running its business in the foreseeable future, there is no over indebtedness within the meaning of the law.
Impending Insolvency
Alongside actual insolvency, Section 3(4) IA also regulates the concept of impending insolvency, which arises when, given all the circumstances, it can reasonably be assumed that the debtor will not be able to properly and timely meet a substantial part of its monetary debts. Under Section 97(2) IA, only the debtor, not a creditor, may file an insolvency petition on the grounds of impending insolvency. The practical significance of this provision lies in the possibility of addressing an unfavourable financial situation in advance, including through the preventive restructuring procedure under Act No. 284/2023 Coll., on Preventive Restructuring, which transposed Directive (EU) 2019/1023 of the European Parliament and of the Council into Czech law.
The Duty to File an Insolvency Petition
Section 98(1) IA obliges a debtor that is a legal entity or a self employed individual to file an insolvency petition without undue delay after becoming aware, or after it should have become aware with due diligence, of its own insolvency. For a legal entity, this duty is carried out by its statutory body under Section 98(2) IA, meaning typically the managing director of a limited liability company, the board of directors, or the statutory director of a joint stock company, or the liquidator if the legal entity is in liquidation. Where more than one person is authorised to act independently on the debtor's behalf, each of them bears this duty.
This duty arises only once two conditions are cumulatively met: the objective existence of insolvency and subjective awareness of it, with courts also assessing whether the statutory body should have known and could have known about the insolvency had it exercised due diligence. In its judgment file no. 29 Cdo 4180/2016, the Supreme Court confirmed that the duty under Section 98 IA is a continuing, not a one off, obligation, meaning a statutory body cannot escape liability simply because it missed a single opportunity to file the petition.
Instead of a fixed deadline, the law uses the vague term "without undue delay". This period covers the time genuinely needed to prepare the insolvency petition and its mandatory attachments, or to convene a general meeting to address the company's financing. Case law also repeatedly stresses that a statutory body cannot avoid liability by relying on an instruction from a sole shareholder or majority shareholder unless that instruction takes the legally required form of a general meeting resolution adopted in accordance with the law.
Liability for Damages
A breach of the duty under Section 98 IA triggers liability for damages under Section 99 IA. Under Section 99(1) IA, a person who fails to file an insolvency petition in breach of Section 98 IA is liable to the creditor for damage or other harm caused by that breach. This is a special form of general civil liability for damages with presumed fault, where the creditor need only allege and prove the debtor's insolvency, the late or missing insolvency petition, and the resulting damage, while the burden of exculpation falls on the defendant statutory body.
The amount of damage is set out in Section 99(2) IA as the difference between the creditor's claim as established in the insolvency proceedings and the amount the creditor actually received in satisfaction of that claim in those proceedings. The Supreme Court confirmed this interpretation in its judgment of 29 June 2016, file no. 29 Cdo 1212/2016, and the Constitutional Court subsequently dismissed a constitutional complaint against that decision as manifestly unfounded in its resolution file no. II. ÚS 3230/16. A statutory body still has room for partial or full exculpation if it proves the breach had no bearing on the resulting damage, typically where the creditor would have entered into the relationship with the debtor regardless of the insolvency. On the limitation period for damages claims, the Supreme Court held in judgment file no. 29 Cdo 1212/2016 that the ten year objective limitation period begins to run on the day the insolvency petition is filed, a conclusion later refined in subsequent case law, for example in judgment file no. 29 Cdo 339/2018.
Action to Supplement Liabilities
A major amendment to the Business Corporations Act, introduced by Act No. 33/2020 Coll, has been in force since 1 January 2021. It abolished the previous, and in practice rarely used, unlimited liability of the statutory body under the old Section 68 BCA and replaced it with a more effective tool: the so called action to supplement liabilities under Section 66(1)(b) BCA. If a member of the statutory body contributed, through a breach of duty, to the company's insolvency, and the insolvency proceedings have already resulted in a decision on how the insolvency will be resolved, the insolvency court may, on a motion by the insolvency administrator, order that member (whether current, former, or a de facto director, see Section 69 BCA) to contribute from their own funds to the insolvency estate an amount corresponding to the difference between the company's total debts and the value of its assets. Only the insolvency administrator has standing to bring this action, and the proceedings take the form of an incidental dispute.
The High Court in Olomouc addressed the application of this instrument, or rather its predecessor under the previous legislation, in judgment file no. 8 Cmo 55/2025 of 20 August 2025. The court examined a case in which the company's directors, after losing the company's main source of income when the lease on its premises ended, responded to the impending insolvency by resigning from their positions and transferring the business shares to a person who formally held the position of director in dozens of other companies. The court found that this conduct amounted to a fundamental breach of the duty of due managerial care, since the defendants did nothing to avert the impending insolvency and their only response was to leave office, which established their liability for the company's debts. Similarly, in a judgment of 3 May 2024, case no. 103 VSPH 735/2023, the High Court in Prague upheld a judgment of the Regional Court in Ústí nad Labem of 11 August 2023, case no. 24 ICm 74/2023, which ordered former members of the statutory body to make payment under Section 66(1)(b) BCA because, despite the debtor's prolonged state of insolvency, they failed to file an insolvency petition in time and instead continued business operations to the detriment of creditors.
Disqualification of a Statutory Body Member
In addition to financial liability, the Business Corporations Act also provides for a sanction involving the loss of eligibility to act as a member of a statutory body, referred to in legal literature as disqualification. Under Section 64 BCA, the insolvency court may, during insolvency proceedings and even without a motion, decide that a member of the statutory body whose conduct in office, considering all the circumstances of the case, led to the company's insolvency may not act as a statutory body member of any company for three years from the date the decision becomes final. Under Section 65 BCA, a person who became a member of the statutory body only after the insolvency proceedings began, and whose conduct clearly contributed to reducing the insolvency estate and harming creditors, may be disqualified under similar conditions. A separate ground, not tied to insolvency proceedings, is set out in the general clause under Section 63 BCA, under which a court may order the disqualification of a statutory body member who, within the three years before proceedings began, repeatedly or seriously breached their duties in office.
Criminal Law Implications
Deepening a company's insolvency can also fulfil the elements of property offences under Title Five of Act No. 40/2009 Coll., the Criminal Code. The broadest offence is set out in Section 224 of the Criminal Code, causing insolvency, which penalises a person who, even through gross negligence, brings about insolvency through expenses grossly disproportionate to their financial situation, uneconomical asset management, misuse of credit, or a business transaction grossly disproportionate to their financial situation, or who, while already insolvent, knowingly takes on a new debt or creates a pledge, thereby worsening the position of existing creditors. According to the Supreme Court's resolution file no. 5 Tdo 972/2020 of 22 October 2020, the damage within the meaning of Section 224(3) and (4) of the Criminal Code is generally the total amount of creditors' claims, since it is assumed that, before the offender's unlawful conduct, the debtor was able to pay its debts as they fell due.
Criminal liability may also arise for harming a creditor under Section 222 of the Criminal Code, meaning frustrating a creditor's satisfaction by destroying, damaging, concealing or disposing of assets, and for favouring a creditor under Section 223 of the Criminal Code, where an insolvent debtor frustrates one creditor's satisfaction by favouring another. Separate offences relate directly to the conduct of insolvency proceedings: Section 225 of the Criminal Code covers breach of duty in insolvency proceedings, Section 226 covers collusive practices in insolvency proceedings, and Section 227 covers failure to make a truthful statement of assets.
Conclusion
The above shows that the moment when the duty to file an insolvency petition arises is a question that cannot be left unattended. A statutory body that becomes aware, or should have become aware, of the company's insolvency or impending insolvency bears responsibility for addressing the situation promptly and properly, whether through an insolvency petition or, where appropriate, through preventive restructuring. Failure to meet this duty creates a risk of liability for damages under Section 99 IA, a risk of an action to supplement liabilities under Section 66 BCA, a risk of disqualification under Sections 63 to 65 BCA, and, in extreme cases, a risk of criminal liability. Current case law clearly points to the conclusion that formal steps, such as resigning from office or transferring a business share to a straw person, do not on their own remove the liability of former statutory body members.
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