Insolvency is often perceived in the Czech business environment as the de facto end of business. If an insolvency petition (creditor’s or debtor’s) is filed against an entrepreneur, it is often seen as something, from which there is no way out. However, this is a fundamental error. Even in such a situation, the entrepreneur still has some means to save his business. One of them is a moratorium.

What is a moratorium

A moratorium is a legal institution that allows a debtor-entrepreneur to overcome a difficult financial situation and preserve his business. It is not possible to issue a bankruptcy order during the moratorium period. This enables the debtor to find a solution to their financial problems and avert bankruptcy.

How does the moratorium work

A moratorium consists of protecting the debtor from his creditors for a specified period of time. During the moratorium, the debtor is allowed to pay some of his debts in priority to his other debts previously due for the duration of the moratorium. The moratorium normally lasts 3 months and may be extended once for a further 30 days.

If the debtor is interested in taking advantage of the moratorium, it is essential that he acts quickly. If the insolvency proceedings have been opened on the application of a creditor, the debtor must file an application for a moratorium within 15 days. If the debtor has filed an insolvency petition on his/her own, he/she must file a petition for a moratorium within only 7 days. Together with the proposal, the debtor is then obliged to attach written consent of the majority of his creditors.

For the duration of the moratorium, the effects associated with the commencement of insolvency proceedings remain. During the moratorium period, the debtor cannot be foreclosed or collateral enforced.

Main advantages of the moratorium

The moratorium is a suitable tool to temporarily protect the entrepreneur, who can revitalise his business in the meantime and avert bankruptcy or negotiate the terms of a future reorganisation with creditors. This is the most common way to proceed in practice, where the entrepreneur buys time to arrange a prepackaged reorganisation with his creditors.

When does it make sense to attempt a moratorium?

Going down the moratorium route makes sense if the entrepreneur has a clear plan to save their business. The entrepreneur should have a definite idea of what he wants to achieve, or how he can avert bankruptcy, and what legal, economic and other means he will need to use to do so. A moratorium may also be an appropriate remedy in the event of a simple cash flow shortfall.

Recapitulation

In the case of a clear vision, a moratorium is a good tool to temporarily protect an entrepreneur from bankruptcy. The key is to start addressing the situation early, not to delay in filing and to have a definite rescue plan.

Since the drafting of a moratorium petition and the successful revitalisation of business activity requires the perfect interplay of legal, economic and tax advisors, the ideal partner for entrepreneurs seeking to successfully avert bankruptcy (or impending bankruptcy) is a strong advisory group where the entrepreneur receives all services under one roof.

That is exactly what we at Grant Thornton can offer you. Our team of experts with extensive experience is therefore ready to help you at any time.