Do you remember the major advertising campaign by the Arca Investments financial group, which promoted its “Predator of Investments” through Arca Capital Slovakia, a.s.? It was a promissory note that you could purchase for €25,000, with the company guaranteeing an annual return of 6.082%. You might think—an offer you can’t refuse. However, reality has shown that by investing in Arca Capital’s promissory notes, investors are treading on very thin ice. Less than six months had passed when information surfaced about financial problems with paying creditors.
Arca Capital Slovakia, a.s. attributes its insolvency and inability to meet its obligations to the adverse situation caused by the ongoing COVID-19 pandemic.
The pandemic may have impacted the company’s financial situation; however, we note that it is precisely the coronavirus and the legislation enacted in response to it that are the reason why this company is not currently in bankruptcy or undergoing restructuring. Specifically, this refers to the so-called “Lex Corona,” i.e., Act No. 62/2020 Coll. on certain extraordinary measures in connection with the spread of the dangerous infectious human disease COVID-19 and in the judiciary, and amending and supplementing certain laws, which provides entrepreneurs with temporary protection in the sense that it suspends proceedings on creditors’ petitions for bankruptcy filed after March 12, 2020. As a result, it is not possible to declare bankruptcy on the debtor’s assets in the current situation. This situation will continue at least until December 31, 2020. However, Arca Capital Slovakia, a.s. also has creditors in the Czech Republic, which led to the filing of a petition with the Municipal Court in Prague on September 18, 2020, to initiate insolvency proceedings. The Municipal Court in Prague, however, stayed the insolvency proceedings, citing in its reasoning the Slovak Lex Corona, which also protects Arca Capital Slovakia, a.s., and which courts in other Member States should also respect.
So what should be done if a company fails to meet its obligations and is unable to pay its creditors? If a debtor becomes insolvent and is unable to fulfill its obligations, the creditor has several options for proceeding, whether under civil or criminal law. If you are interested in what options a creditor has in the event of a debtor’s insolvency, this article is intended specifically for you. The description below of the available courses of action against debtors is a general outline of the solutions available to aggrieved creditors in the described cases under applicable law and has no direct connection to Arca Capital Slovakia, a.s., given that we currently do not have specific factual information on which to base a specific course of action in the matter.
Options for Action Under Civil Law
If a company is insolvent and unable to meet its obligations, restructuring and bankruptcy represent two methods of settling the company’s debts, through which creditors may recover their funds. Czech law provides a similar solution in the form of so-called insolvency proceedings (“insolvenční řízení”).
Both restructuring and bankruptcy are legally regulated procedures for managing a debtor’s insolvency through the liquidation of its assets and the subsequent satisfaction of creditors to the greatest extent possible. Restructuring is the process of revitalizing a company. The 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 their claim within the statutory deadline. If the creditor fails to file the claim, it generally expires, and the creditor may lose their money. We note, however, that even during the company’s restructuring process, creditors’ claims are not necessarily, and generally do not, get fully satisfied. 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.
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 debtor’s assets and subsequently satisfy creditors’ claims on an equal basis. A creditor must file a claim, but just as with restructuring, in practice a creditor cannot expect full satisfaction of their claim even within bankruptcy proceedings. The result of bankruptcy proceedings is therefore the partial satisfaction of creditors’ claims and the subsequent removal of the company from the Commercial Register.
Creditors may thus seek satisfaction through civil proceedings. Generally speaking, if the debtor’s conduct exhibits signs of illegality, and provided that other facts accompanying the debtor’s activities are also present, this may constitute one of the elements of a property-related criminal offense. However, we note here that any suspicion of unlawful activity must be well-founded and must be based on factual circumstances, the assessment of which falls within the purview of the relevant state authorities.
In the context of economic crime, Act No. 300/2005 Coll., the Criminal Code (hereinafter the “Criminal Code”), recognizes several elements of property crimes. For example, the crime of fraud under Section 221, the crime of breach of duty in the administration of another’s property under Sections 237 and 238 of the Criminal Code, and the crime of harming a creditor under Section 239 of the Criminal Code. The crime of fraud is committed by anyone who enriches themselves or another person to the detriment of another’s property by misleading someone or taking advantage of someone’s mistake, thereby causing damage to that property exceeding €266. The crime of breach of duty in the administration of another’s property is committed by anyone who violates an obligation established by generally binding legal regulations or an obligation imposed by a final court decision or arising from a contract to safeguard or manage another person’s property, and thereby causes damage to the managed property exceeding €266. The crime of harming a creditor is committed by anyone who even partially frustrates the satisfaction of their creditor by destroying, damaging, rendering unusable, concealing, selling, exchanging, or otherwise disposing of even a part of their property, encumbers an item that is the subject of an obligation, or leases it; feigns or acknowledges a non-existent right or obligation; assigns their claim; or assumes another’s debt, even if they were neither obligated nor authorized to do so; or feigns a reduction in their assets or their extinction. In all cases, these are intentional criminal offenses.
In the event that any of the aforementioned elements of criminal offenses are fulfilled by commercial companies that are legal entities, it should be noted that none of them are listed in Section 3 of Act No. 91/2016 Coll. on the Criminal Liability of Legal Entities, which means that only a natural person may be held liable for these acts. If the culpability of any person acting on behalf of such a legal entity were proven in this matter, a court decision in criminal proceedings could establish a claim for damages that the injured parties would have directly against the persons acting on behalf of the legal entity. Such a decision would in itself constitute an enforceable title directly against the natural person, the enforcement of which would not be affected by bankruptcy or restructuring proceedings conducted against the legal entity—the debtor
In conclusion, we would like to note that in such complex cases, the correct choice of legal counsel is of utmost importance; such counsel must, on the one hand, meet the qualifications required to address these issues, which combine knowledge and experience in the fields of economics, commercial and criminal law, and at the same time should not be in a conflict of interest between their clients and other parties involved, which include both the debtor itself and entities acting in its interest or on its behalf. The team of experts at the law firm Hronček & Partners, s. r. o., with several years of experience in the fields of bankruptcy and restructuring law, commercial law, and criminal law, guarantees the reliability, expertise, and efficiency of the legal services provided. Please do not hesitate to contact us if you require any advice or assistance in the areas of law mentioned above.
