The jurisdiction of courts in enforcing and satisfying priority claims in insolvency proceedings

Two court proceedings may be initiated and conducted in parallel in the context of enforcing and satisfying priority claims in insolvency proceedings.

General remarks on priority claims

Insolvency law theory tends to favor a principle that is often interpreted as a fundamental principle of insolvency or bankruptcy proceedings, namely the pari passu (par conditium creditorum) principle, which means equal treatment of creditors, according to which creditors receive an equal share of the debtor's assets.

However, this principle is perceived differently by experts. Keay and Walton see the purpose of this principle as ensuring fairness in the distribution of the debtor's assets, abandoning the medieval principle of first come, first served. Goode states that although the pari passu principle is fundamental to insolvency proceedings, it is not absolute, as there are certain exceptions to it. [2] Mokal's analysis of insolvency proceedings even elevates the pari passu principle to a mythical level and questions its status as a fundamental principle of this branch of law, as unsecured creditors in insolvency proceedings usually receive very little or no satisfaction due to the existence of priority claims. According to Mokal, unsecured creditors receive an average of 7% satisfaction. [3] In contrast to this, Ziegel cites the satisfaction of priority claims at 17.8% and even the staggering satisfaction of priority claims of insolvency administrators, which reaches 99%. [4] Keay, Boraine, and Burdette analyze the legal systems of various countries around the world and distinguish three trends in practice: (i) countries with broad regulation of priority claims in insolvency proceedings (e.g., Spain, France, Italy), (ii) countries where there has been a significant reduction in the legal regulation of priority claims in insolvency proceedings (e.g., the United Kingdom, the United States of America), and (iii) countries where the prioritization of certain creditors has been completely abandoned (e.g., Germany, Austria). [5]

In the Czech Republic, priority claims in insolvency proceedings are enshrined in substantive law, in particular in Section 168 of Act No. 182/2006 Coll., on Insolvency and Methods of its Resolution (hereinafter referred to as the “Insolvency Act”) as claims against the estate, and in Section 169 of the Insolvency Act as claims equivalent to claims against the estate.

This article does not speculate on which claims the legislator should give priority to (and for what reasons), but responds to the procedural aspects of the enforcement and satisfaction of priority claims in insolvency proceedings in the Czech Republic, in particular the question of defining the jurisdiction of courts in the individual stages of satisfying priority claims.

Procedural aspects

In general, priority claims are asserted by creditors in accordance with Section 203 of the Insolvency Act against a person with disposal rights at any time during insolvency proceedings. The person with the right of disposal then satisfies such a claim or (temporarily) refuses to satisfy it, taking into account the status of the proceeds from the liquidation of the estate, or, in the case of bankruptcy, proposes its proportional satisfaction in the final report in accordance with Section 305 of the Insolvency Act. Since the legislator intended that the creditor should not have to wait for the final stage of the insolvency proceedings, it granted the creditor of priority claims standing to sue in Section 203(4) of the Insolvency Act. If their claim is not satisfied in full and on time, creditors with priority claims can sue the person with the right of disposal to get their claim satisfied, but this isn't an incidental dispute. The action thus gives rise to a private law dispute between the creditor and the person with the right of disposal regarding the payment of the priority claim. In accordance with Section 9(1) of Act No. 99/1963 Coll., the Civil Procedure Code (hereinafter referred to as the “CPC”), the district court will have jurisdiction to resolve such a dispute. The dispute over the authenticity and amount of the priority claim is thus removed from the complexity and uniformity of the insolvency proceedings, which are conducted under the supervision of the insolvency court, and placed under the jurisdiction of another court. However, a general court cannot assess and determine the order of the claimed claim, i.e., whether the creditor has a claim with priority status in the insolvency proceedings. On the contrary, it is only the insolvency court that, in accordance with Section 203a of the Insolvency Act, can determine the order of the claim being asserted, i.e., determine whether it is a claim against the estate or a claim equivalent to claims against the estate.

The described legal regulation thus creates a duality of judicial jurisdiction, which, however, ultimately resolves the same issue in a simplified manner – i.e., whether the creditor's claim can and will be satisfied in insolvency proceedings with priority status.

I will attempt to analyze situations that typically arise in insolvency proceedings in connection with the enforcement of priority claims and thus demonstrate the imperfection of the Insolvency Act. I will then consider possible amendments de lege ferenda to address the identified shortcomings.

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