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Rights of creditors with non-enforceable receivables and their protection

Creditors put themselves in a weaker position towards debtors, simply by rendering advance performances to them. What are the tools available under the law with which creditors may defend themselves if their receivable is non-enforceable?

The creditor renders performances to the debtor in the expectation that the debtor will repay the debt if and when the agreed conditions are met. This will happen with a higher degree of certainty if the debtor owns assets from which the creditor could take satisfaction in the event that the debtor defaults on its obligation. However, dishonest debtors will often try to cheat the creditor by selling their assets to colluding third parties. The law has thought of this possibility and allows creditors to defend themselves by invoking the invalidity of transactions by which the debtor wanted to curtail the creditor's rights.

In order to thus invalidate transactions of the debtor, the creditor must file a special declaratory action for invalidity ("rescissory action") with the competent court. If the creditor succeeds, they will obtain a court decision in which a specific transaction by the debtor is declared to have no effect towards the plaintiff (= the creditor). Based upon this decision, the creditor may enforce the satisfaction of their receivable by way of a debt enforcement procedure (e.g. foreclosure) which may be aimed even against those assets which the debtor already sold by way of the (now inoperative) transaction – no matter who owns the assets now. If satisfaction out of the debtor's assets proves impossible, the creditor may demand adequate financial compensation.

Compared to the former rules contained in the (since abolished) 1964 Civil Code, the current Civil Code (Act No. 90/2012 Coll.) has introduced certain changes which, sadly, are at the expense of creditors, i.e., they weaken the legal position of those creditors in particular whose receivable is not enforceable. That this is so has been confirmed by the Czech Supreme Court in its case law.

Pursuant to Sec. 593 of the Civil Code, the creditor may "reserve its right" to invoke the invalidity of the debtor's legal transaction through a notary public, a bailiff, or a court. Doing so will stay the limitation period for the above-described rescissory action in which the creditor invokes the relative invalidity of the legal transaction unless and until the creditor's receivable has become enforceable. However, the Supreme Court has now ruled that no rescissory action may be filed if the creditor has no enforceable receivable. What does this mean for the creditor in practice?

In a rather common situation, the debtor owns real property – i.e., assets which are entered in the public record of the land register – and protracted court proceedings are pending over the enforceability of the creditor's (as of yet non-enforceable) receivables, whereas these proceedings have often been initiated long before the debtor's move to perform transfer operations to curtail the creditor's rights. Before the old Civil Code was abolished, an important and fundamental rule applied under which the creditor who filed rescissory action could ask for a clause to be entered in the land register according to which they had invoked the invalidity of a transfer. This had a twofold effect: firstly, subsequent transfers were principally made more difficult and, secondly and more importantly, good faith on the part of third parties was thus ruled out even if the real property did pass to the third party. Provided that the creditor prevailed on the merits, they could then take satisfaction from the real property of the n-th transferee down the line, as long as their acquisition of the property post-dated the entry of the said clause in the land register, informing about the reservation of the right to challenge the effects of a transfer operation.

Under current law, if the creditor has no enforceable receivable they cannot file rescissory action nor attain the entry of a protective clause in the land register to encumber the debtor's real property and thus to ensure that the creditor may take satisfaction also out of real estate which is already in the hands of a legal successor of the debtor (provided that the creditor prevails in court). In other words, the reservation of the creditor's right has no preventative or legally relevant consequences for the creditor's prospects in terms of the realistic possibility to foreclose on the real property of the debtor's legal successors.

It follows that the protection of creditors arising from the reservation of a right pursuant to Sec. 593 of the Civil Code is rather toothless in the case of real property; this statutory provision really only serves the purpose of staying the limitation period for filing rescissory action.

Act No. 89/2012 Coll. (Civil Code); Supreme Court resolution 21 Cdo 3914/2016 of 20 January 2017

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