Major legislative changes in the Czech Republic — why investors must act

Legal treatment of matters related to securing debts (in the old terminology, ‘securing obligations’) will be significantly changed by the new Czech Civil Code effective from 1 January 2014. The new legislation distinguishes between the securing of debts via physical (real) security (by pledge, bank guaranty and so on), and the affirmation of debts (meaning contractual penalties and recognition of debts). In the following, we will remain at this distinction.

The new rules will be more flexible and will allow substantially more contractual freedom of the parties. Up to now, in the case of an unpaid debt that was not directly enforceable (in other words, the borrower did not sign a clause on direct enforceability in the form of a notarial deed), a creditor had only two options: (a) to file a court action for payment and if successful in the proceedings, require the monetisation of the collateral (judicially or by auction by an authorised company), or (b) bring an action for judicial sale of the collateral.

Under the new Civil Code, the parties will be able to negotiate the method of monetising the collateral (in the absence of such agreement, it will be sold at auction). Only arrangements where the creditor can monetise the collateral ‘in any way’ (a manner not specified in more detail) will be prohibited (of course with exceptions), meaning that the method of monetisation will have to be essentially agreed in advance…

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