The court has repeatedly rejected Arca Investments, a.s.’s attempts to undergo insolvency proceedings in the form of restructuring in the Czech Republic. The company will have to undergo insolvency proceedings in Slovakia, where the law, however, imposes stricter conditions.
The problems facing Arca Investments, a.s., a company in the portfolio of the Arca Capital financial group, have been the subject of intense discussion for several months now. We have previously devoted several articles to this issue, in which we pointed out that all indications suggest that Arca Investments, a.s. intends to undergo insolvency proceedings under the laws of the Czech Republic. This has now come to pass, as one of the creditors, IFIS investiční fond, a.s. (hereinafter “IFIS”), filed a petition for the opening of insolvency proceedings, which was, however, dismissed by the Municipal Court in Prague. The Municipal Court’s decision was subsequently upheld by the High Court in Prague as the appellate court. These facts mean that Arca Investments, a.s. will most likely not be able to undergo insolvency proceedings in the Czech Republic and thus under Czech law.
The High Court in Prague addressed this issue in its ruling, file no. VSPH 1319/2020-A-30, addressed the issue at hand, refuting all arguments put forward by IFIS, which had argued that it is the Czech courts, and not the courts of the Slovak Republic, that have jurisdiction over the insolvency proceedings, given that Arca Investments, a.s. has its registered office in the Slovak Republic. The High Court in Prague thus upheld the previous decision of the Municipal Court in Prague, which had addressed the individual grounds intended to establish the jurisdiction of the Czech courts.
IFIS supported its claims in the petition with several arguments, for example, stating that despite the fact that Arca Investments, a.s. has its registered office in the Czech Republic, the center of Arca Investments, a.s.’s interests is in the Czech Republic. Furthermore, they also pointed out that the total assets in which Arca Investments, a.s. has invested within the territory of the Czech Republic are approximately three times greater than those within the territory of the Slovak Republic. According to available information, Arca Investments, a.s. is reported to have invested capital in the Slovak Republic amounting to CZK 135,000,000, while in the Czech Republic only approximately CZK 45,000,000. IFIS also considered it a relevant fact that the key partner of Arca Investments, a.s. is J&T BANKA, a.s., which is also headquartered in the Czech Republic. Similarly, many creditors are headquartered or reside in the Czech Republic, and one of the key members of the board of directors is also a person with permanent residence in Prague. IFIS considered all these arguments sufficient to demonstrate that, in accordance with Regulation (EU) 2015/848 of the European Parliament and of the Council of May 20, 2015, and Czech legal regulations—in particular the Civil Procedure Code—the jurisdiction of the Czech courts should be established.
However, the Municipal Court in Prague did not accept these arguments and pointed out several inconsistencies. First and foremost, it must be noted that, pursuant to Article 3(1) of the cited Regulation, there is a presumption that the courts of the Member State in whose territory the debtor’s main interests are situated have jurisdiction over insolvency proceedings, whereby such a place is considered to be the place from which the debtor manages its affairs and the place known to third parties; however, if the contrary is proven, in the case of legal entities, such place is their registered office. Arca Investments, a.s. has its registered office in the Slovak Republic.
Another important basis for the decision was the fact that, pursuant to the decision of the Trnava District Court, Case No. 21CRe/5/2020 dated June 26, 2020, Arca Investments, a.s. was granted temporary protection against creditors under the so-called LEX CORONA. According to the Municipal Court in Prague, this fact is significant because if Arca Investments, a.s. filed a petition for temporary protection from creditors with a Slovak court, it considers the territory of the Slovak Republic to be the venue for its proceedings, and not the territory of the Czech Republic, as claimed by IFIS. The Municipal Court also addressed the residence of the management, noting that, based on data recorded in the Commercial Register of the District Court Bratislava I, the majority of management members reside in the territory of the Slovak Republic. Thus, neither the fact that one member has permanent residence in the territory of the Czech Republic nor the fact that the majority of Arca Investments, a.s.’s creditors have their registered office or residence in the Czech Republic can contribute to a change in the jurisdiction of the courts.
A formal appeal was filed against the aforementioned decision of the Municipal Court in Prague, which was subsequently decided by the higher court, namely the High Court in Prague. In its appeal, IFIS pointed out other relevant facts, such as that Rastislav Velič himself has his permanent residence in the Czech Republic, and that Arca Investments, a.s. conducted its corporate transactions within the territory of the Czech Republic and in the Czech currency, i.e., in Czech korunas rather than euros. It also again highlighted the registered office of J&T BANKA, as the main partner of Arca Investments, a.s., and requested that the High Court in Prague overturn the contested decision while simultaneously seeking permission to initiate restructuring proceedings.
In its decision, the High Court in Prague addressed the aforementioned issue, noting that the purpose of the aforementioned Regulation is precisely to prevent a debtor from engaging in proceedings aimed at unfair practices that would lead to securing the most advantageous venue for conducting such insolvency proceedings.
By way of comparison, we note here that Arca Investments, a.s.’s conduct and its efforts to undergo restructuring in the Czech Republic and under Czech law may be motivated precisely by the fact that Slovak law requires at least 50% satisfaction of creditors’ claims during restructuring, whereas this condition is absent in Czech law.
In its decision, the High Court in Prague also addressed the question of why, if the interests of Arca Investments, a.s. were honest, noble, and free of ulterior motives, the company did not turn to a Czech court as early as the first half of 2020, when its apparent financial problems arose. According to the court, such conduct exhibits the characteristics of so-called forum shopping, also known as insolvency tourism, the essence of which is the purposeful transfer of insolvency proceedings to a country where conditions are most favorable for the debtor. In the conclusion of its decision, the High Court in Prague stated that, just like the court of first instance, the appellate court is not convinced that the facts cited in the initial petition and subsequently in the appeal would establish the jurisdiction of the courts of the Czech Republic; it also refuted IFIS’s argument regarding the application of the Brussels I BIS Regulation, which, in IFIS’s view, could have been applied analogously or interpretatively to the case at hand, because this Regulation cannot be applied precisely because it does not cover insolvency proceedings. For these reasons, the High Court in Prague upheld the first-instance decision.
A similar attempt to initiate insolvency proceedings in the Czech Republic took place in early 2021, this time, however, at the request of a secured creditor—J&T BANKA. This petition was also dismissed, however, on the same grounds—the Czech courts do not have jurisdiction to hear this matter.
All the facts therefore indicate that Arca Investments, a.s. will likely have to undergo insolvency proceedings, in the form of restructuring or bankruptcy, solely within the territory of the Slovak Republic. Former shareholder Pavol Krúpa shares this view; commenting on the attempt to undergo reorganization in the Czech Republic, he stated: “This is yet another attempt to evade Slovak jurisdiction. In Slovakia, the law on reorganization is stricter and guarantees the payment of more than 50% of claims.”1
The aforementioned statement regarding the minimum level of satisfaction of creditors’ claims is accurate. According to Act No. 7/2005 Coll. on Bankruptcy and Restructuring and on Amendments to Certain Acts, the situation in question can be resolved through restructuring, which, however, would have to guarantee creditors satisfaction of at least 50%, or through bankruptcy, in which, however, the amount recovered generally does not reach half the amount of the claims, as is the case with restructuring.
We consider it important at this point to also address the concepts of debtor insolvency, inability to pay, and over-indebtedness. Debtor insolvency means that the debtor is either insolvent or over-indebted. A person is considered insolvent if they are unable to fulfill at least two monetary obligations to more than one creditor 30 days after the due date. A person is considered over-indebted if they have more than one creditor and the value of their liabilities exceeds the value of their assets. Publicly available information, such as that from the financial statements registry, indicates that the assets of Arca Investments, a.s. exceed its liabilities; therefore, based on this available information, we could not mathematically conclude that the debtor is over-indebted. A legal entity is insolvent if it is unable to fulfill at least two monetary obligations to more than one creditor 30 days after the due date. In this context, it is therefore sufficient for at least two creditors to come forward with outstanding obligations owed by Arca Investments, a.s. that are more than 30 days past due and which Arca Investments, a.s. has not settled.
Restructuring and bankruptcy are legally regulated procedures for handling a debtor’s insolvency, involving the liquidation of its assets and the subsequent satisfaction of creditors to the greatest extent possible. Restructuring is a process of revitalizing a company. Its essence lies in revitalizing the company, and a key element of this process is that the company retains its existence and the ability to continue doing business after successful restructuring. If the court approves the company’s restructuring, the creditor must file its claim within the statutory deadline. If a creditor fails to file a claim, it will lapse, and the creditor will have no further legal recourse to recover their forfeited right. We also note that even during the company’s restructuring process, creditors’ claims may not be fully satisfied (and in the vast majority of cases, they are not). The restructuring plan usually sets a period during which debts will be repaid through installments, with the creditor expected to be satisfied for at least 50% of their claim. This fact is precisely why Arca Investments, a.s. has repeatedly attempted to initiate restructuring in the Czech Republic. The reason is very simple—the requirement to satisfy creditors by at least 50% during restructuring (note: reorganization) does not exist in the Czech Republic. Furthermore, under Slovak law, a fundamental condition for the court’s approval of a restructuring plan is that it must be properly and thoroughly prepared, supported by relevant facts and evidence demonstrating the debtor’s ability to satisfy its debts in the specified amount.
Bankruptcy, commonly referred to as bankruptcy, is, like restructuring, a process aimed at satisfying creditors, but with several significant differences. The objective of bankruptcy proceedings is to liquidate the bankrupt party’s assets and subsequently satisfy creditors’ claims on an equal basis. A creditor must file a claim, but just as in restructuring, a creditor cannot realistically expect full satisfaction of their claim in bankruptcy proceedings either. The result of bankruptcy proceedings is therefore the partial satisfaction of creditors’ claims and the subsequent removal of the company from the Commercial Register, with the satisfaction of claims in bankruptcy proceedings potentially being significantly lower than in restructuring.
Our team of experts in the field of bankruptcy and restructuring guarantees the provision of effective legal services. If you need advice or assistance with any matter related to the enforcement of your claim, please do not hesitate to contact us. The law firm Hronček & Partners, s. r. o. is fully at your disposal.
1 https://finweb.hnonline.sk/ekonomika/ 2284673-arca-investments-filed-a-new-insolvency-petition-in-the-Czech-Republic-the-court-immediately-rejected-it?fbclid=IwAR30SQqk0ZEMOBBVvmIjSKKO-o_XlSNCVq2jUuzMIeS_LQJktBbI4ORePbE
