GENERAL INFORMATION ABOUT CLAIMS AND DEBTS


I
nstruments to secure debts


The fact that I as a creditor have or will have accounts receivable does not automatically mean that I will receive the expected payment. Not all people are honest and in addition there could be a situation when the debtor would like to comply with his obligation, however objectively he is not capable of so doing (as the saying goes "You can't get blood out of a stone."). Therefore, it is very important when entering into any contractual relation to consider not only the existing solvency and credibility of the contractual partner, but ideally to "secure" his liabilities. Such security can be in the form of an instrument securing the debt, with which you will ensure the "recoverability" of debts due to you. One must not confuse the terms "enforceability" and "recoverability". The term of legal enforceability of the claim means that we can successfully exercise our claims (e.g. in court or arbitration proceedings) and acquire the enforceable decision. Although it may seem that you have reached a successful conclusion in this way, often the contrary is true, the recoverability of debts, i.e. actually collecting them, is in many cases a problem, often of such magnitude that it cannot be solved. In most of the cases it is possible to secure the existing liabilities as well as the liabilities, which are to be created or will be created in the future (e.g. typically in a credit contract  -  a bank or a different creditor binds itself to grant a credit, but its payout is tied to the creation of a right on lien on certain valuable assets, and only after the creation of the lien to secure the future liability to return the provided finances, will it provide the credit) or possibly to tie the debt to a condition (e.g. typically in guarantees, when the guarantor in the case of providing the performance instead of the debtor, wishes to have the recoverability of the expended finances secured). The securing of liabilities however does not necessarily result only from voluntary (free) choice (agreement) of the contractual parties or a unilateral act of the debtor or creditor. There are obviously cases when the security arises by operation of law, or possibly on the basis of a decision of a certain body (typically a court or administrative authority).


Usual instruments to secure debts: 

 

-     Mortgage right in real estate 

-     Lien on movables  

-     Lien on accounts receivable 

-     Lien on securities 

-     Second lien 

-     Right of retainer 

-     Contractual fine 

-     Guarantee 

-     Banker's guarantee 

-     Agreement on deductions from wages and other income 

-     Securing the claims by right transfer 

-     Securing by assigning accounts receivable 

-     Collateral 

-     Debt acknowledgement 

 


Debtor's delay 

What happens when the debtor has not complied with his liability properly and on time? 

A debtor's delay is in practice quite a frequent occurrence. One of the basic requirements placed on the debtor is to provide payments to the creditor properly and on time. If the debtor fails to comply with his obligation properly and on time, he is in delay, until the proper payment is made or until the liability ceases to exist in a different way. If the debtor is in delay, the creditor becomes entitled, apart from the original claims, to other rights; however the debtor will not be in delay if the creditor did not accept the payment offered properly and on time or did not provide him with the co-operation necessary to pay the debt. The specification of the debtor's delay is complex both in the Commercial Code and Civil Code. Since they are similar in content, certain specifics of the Commercial Code definition will be highlighted in the explanation. 


What are the creditor's rights? 
 

In the case of the debtor's delay, the creditor has the following rights: 

The creditor is entitled to withdraw from the contract, if the debtor fails to comply with the obligation even in an additional reasonable period of time provided to him by the creditor. In the case of separable performances, the withdrawal by the creditor under these conditions may relate also only to individual performances. Furthermore, with regards to the withdrawal by the creditor the Commercial Code differentiates between withdrawal by the creditor on the grounds of the debtor's delay, which is a gross breach of the contract, and the debtor's delay, which is a minor breach of the contract. In the case of the gross breach of the contract the creditor is not bound to provide the debtor with another reasonable period of time.

If the contract specifies the exact date of performance and it arises from the contract or nature of things that the creditor is not interested in late performance, the creditor must notify the debtor without unnecessary delay that he insists on the performance. Should the creditor fail to do so, the contract will be null and void retroactively. Pursuant to the Commercial Code it is the effects of withdrawal which will occur. The main difference therefore lies in the fact that withdrawal from the contract in accordance with the Commercial Code does not result in the cancellation of the contract retroactively (ex tunc), but from the effective date of withdrawal (upon the delivery), and therefore from now on (ex nunc).

If the debtor is in delay in handing over or retuning an item to the creditor, or should he dispose of an item which he is to hand over or return to the creditor, contrary to the obligations arising from the contractual relation, the risk of damages to the items will pass over to him for the period when he is in delay or breaches these obligations, unless he bore this risk even before. The damage to an item shall be its loss, destruction, damage or loss of value of the item, regardless of the reason for which it occurred. However, the debtor will not be liable for damages to the item, if this damage was caused by the creditor or the owner of the item or it occurred during the performance of obligations of the debtor. 

•   If the debtor is in delay in settling a monetary debt, the creditor shall be entitled to demand from the debtor, not only the actual debt, but also default interest, or more precisely late charges (currently these are set only in relation to rent payments). The late charges amount to 2.5 per mil of the sum owed, per each day of delay, however no less than CZK 25.00 per each started month of delay. The amount of the default interest corresponds to the repo rate p.a. set by ČNB, increased by seven percentage points. Each calendar half-year in which the  debtor is in delay, the amount of the default interest is dependant on the repo rate p.a. set by ČNB and valid for the first day of the relevant calendar half-year. 

•   In respect to relations under commercial law, the specification of default interest, as a result of harmonisation with the relevant EU directives, is more detailed and has its own specifics:

–   If the debtor is in delay in settling a monetary debt or its part, the debtor will be obliged to pay default interest on the outstanding sum, specified in the contract, otherwise such default interest specified by regulations of the Civil Code (see Item d) above). 

–   The creditor will become entitled to the default interest set by the regulations of the Civil Code on the day following the due date or upon the expiration of the period for settlement of the price of the supply determined by the contract. 

–   If the due date or the period for settlement of the price of the supply is not determined by the contract, the entitlement for default interest will arise, without the necessity of reminders, 

-   upon the expiration of 30 days from the day when the debtor received the invoice or a similar request for payment, 

-   if it is not possible to determine the day of receiving the invoice or a similar request for payment, upon the expiration of 30 days from the day of receiving the goods or services, 

-   should the debtor receive the invoice or a similar request for payment before the goods or services, upon the expiration of 30 days from the day of receiving the goods or services, or 

-   if the law or the contract imposes acceptance or check of the compliance of the goods or services with the contract, and if the debtor receives the invoice or a similar request for payment before or during the acceptance or before or during the check of compliance, upon the expiration of 30 days after the later of the dates.

–   The creditor is entitled to demand default interest only at such a degree at which he complied with his statutory and contractual obligations and if he has not received the sum owed by its due date, unless the debtor is not liable for the delay. 

–   An agreement of the parties departing from the previous paragraphs and an agreement about the amount of the interest departing from the above specified regulations of the Civil Code, which also in view of specific circumstances of the case is an established practice between the parties and in business practice clearly exploitive in relation to the creditor, is invalid. If the court ascertains that the agreement is exploitive and there is no objective reason for the different specification in the contract, the provisions of the legal regulations will be applied. 

•   Furthermore the creditor is entitled to damage compensation caused by the debtor's delay. In the case of a delay in settling a monetary debt, it is possible to demand compensation for damages only if it is not covered by the default interest or late charges. 

•   If the creditor makes an agreement with the debtor about the over-due debt being settled in instalments and the creditor wants the debtor to pay the default interest also in instalments it must be explicitly stated in the agreement. 



Order to pay 

An order to pay may be delivered by the court after the initiation of the proceedings even without the explicit request of the petitioner and without hearing the defendant, if the right to be paid a monetary sum is asserted in the action and if the asserted right arises from the facts specified by the petitioner.

There is no direct entitlement to the delivery of the order to pay; it is always up to the deliberation of the court whether it ascertains the conditions for its delivery. Unless it ascertains compliance with these conditions, the court will continue the proceedings as in a normal action. If based on the facts contained in the action, the court finds that the conditions for the delivery of the order to pay have been met, the court may deliver the order to pay even without the request of the petitioner, in which it will impose on the defendant to pay the petitioner the asserted claim and the costs of proceedings within 15 days from the delivery of the order to pay or to lodge a protest within the same period of time with the court, which delivered the order to pay.

In any case it is necessary to point out that the petition for the delivery of the order to pay is a very frequent and suitable method for the initiation of proceedings concerning your claims. If your claim is sufficiently substantiated it is probable that the courts will comply with your petition and it is possible, unless the other party lodges a protest, that you will achieve the legal force and enforceability of your claim in a relatively short period of time. 

 

What are the consequences of the order to pay? 

The order to pay, which was not protested against, has the force of a final judgment and therefore becomes enforceable. 

However, if even one of the defendants lodges a protest on time, the order to pay is null and void at the full scope and the court will order a hearing, which will be conducted and held as usual court proceedings.


Order to pay a note (cheque)

An order to pay a note (cheque) will be delivered by the court on the basis of a petition lodged by the petitioner, if the petitioner simultaneously presents the master promissory note or cheque, the authenticity of which is beyond doubt, and other documents necessary to assert the right.

A significant difference compared with the ordinary order to pay is then the fact that the court is bound, if the petitioner so requests, and other conditions have been met, to deliver the order to pay a note (cheque).

The court will impose on the defendant in the order to pay a note (cheque) to pay the demanded sum and the costs of the proceedings within three days, or to raise objections within the same period, in which he has to state everything that he objects to about the order to pay. 



What are the consequences of an order to pay a note (cheque)? 

If the defendant does not raise objections on time or these do not contain the reasoning, or if the defendant withdraws these, the order to pay a note (cheque) will have the force of a final judgment. 
However, if the defendant raises objections on time, the court will order a hearing to discuss these.

It will though concern only such objections, which were asserted by the defendant within the period of time subject to the order to pay a note (cheque), i.e. within three days from the delivery of such an order to pay. Any objections raised later will not be considered by the court. If a hearing is imposed by the court on the grounds of objections raised on time, subsequently the court will deliver the final judgement stating if it is upholding the validly of the order to pay a note (cheque) or if it is cancelling it and at what scope.

Also in this aspect there is a significant difference in comparison with the ordinary order to pay, because this order is null and void after the lodging of a protest and it is not taken into account in any way in the following proceedings. If the order to pay a note (cheque) is upheld by the subsequent judgement, the claim asserted in the action becomes enforceable from the day of the legal force of such a judgement. If it is not possible to comply with the petition to deliver the order to pay a note (cheque), i.e. the statutory conditions have not been met, the court will order a hearing, which will be conducted and held as usual court proceedings. 



What if the drawee does not accept post? 

One quite significant difference between the ordinary order to pay and the order to pay a note (cheque) is the fact that while the ordinary order to pay must always be delivered to the defendant only (delivery to someone else is out of the question), the order to pay a note (cheque) may also be delivered presumptively (e.g. by being deposited at a post office and upon the expiration of the statutory period for collection). 




Execution of a decision 

If a debtor deliberately fails to comply with the enforceable decision, the entitled party may file a petition for a court execution of the decision subject to Section 261 of the Civil Procedure Rules. 

Individual methods of the execution of the decision subject to Section 258 of the Civil Procedure Rules 

•   by wage deduction, 

•   by an order to settle the claim, 

•   by sale of movables and real estate, 

•   by sale of an enterprise ,

•   by creating judicial lien on real estate. 

 

The execution of a decision, imposing a liability other than paying a monetary sum, is governed by the nature of the imposed liability.

It can be executed by: 

•   eviction, ,

•   seizure of items, 

•   dividing joint items, 

•   performance of work and actions. 


The execution of a decision by selling the collateral is possible to carry out, in relation to a secured claim, by selling pledged and mortgaged movables and real estate, collective items, sets of items and flats or non-residential premises owned under special provisions of law, by ordering the pledged monetary claim and by burdening other pledged asset titles.


Assignment of claims
 
In business practice a relatively frequently used type of contract is the contract of claims assignment. It is a type of contract in which (in simple terms) the entitled party / creditor assigns his rights arising from the claims due from his debtor to a third entity, whereby this third entity will act as the entitled party in relation to this claim.

That is to say the contract is concluded by the original creditor (assignor) and another party (assignee), who will assume the status of the original creditor. It is a bilateral legal act without the participation of the debtor and in principle it is not necessary to obtain his consent or let him know beforehand (see the explanation below - the contractual ban of assigning the claim), because a change in the person of the creditor does not relate to formal rights and obligations of the debtor arisen from the contractual relation. The time, place, scope of performance and other conditions will remain unchanged.

If the object of the claim is divisible, it is possible to consider a partial assignment, i.e. assigning only a part of the claim. Then the original single claim may have more entitled entities. Although at first glance these issues seem to be relatively clear and simple, they deserve great attention, because as with almost anything, this type of contract also has its difficulties, dangers and risks. Although this is a contract used mostly among business entities, it is fully regulated in the Civil Code, which stipulates that a "Creditor may assign his claims to a different party on the basis of a written contract even without the consent of the debtor." 
The above means: 

a)  that the co-operation of the debtor in assigning the claim is not necessary at all. Therefore, if the creditor has an existing claim which can be assigned, he may dispose of it freely without the consent of the debtor. However, the creditor has the so-called notification duty towards the debtor, i.e. the obligation to notify the debtor about the assignment of the claim, without unnecessary delay. 

b)  the contract on the basis of which the claim is assigned must be in writing, (otherwise it is deemed invalid)In business-law relations the principle of a certain informality usually prevails, where in essence all the matters agreed (arranged) between the parties will stand and moreover the majority of concluded contracts (e.g. purchase contract, contract for work - etc.) do not have to be entered into in writing. Obviously, it is highly recommended to conclude all contracts in writing, mainly for the reasons of proving their existence as well as the content in the case of a dispute or substantiation to relevant state authorities, however not always is this formal essential required by law (often the congruent acts of the parties meeting the elements of a particular type of contract are sufficient). Nevertheless, in the case of the contract of assignment of the claim, the contract must be executed in writing. If not, the contract is not created and the claim is not assigned! 

 

How will the debtor learn that he has a new creditor? 

In view of the fact that the claim may be legally assigned to a new creditor without the knowledge of the debtor, it is up to the original creditor to notify the debtor about this fact. He is to do so without unnecessary delay, that is to say he is bound to notify the debtor without unnecessary delay that the claim was assigned.

Only at this point will the assignment of the claim become legally effective in relation to the debtor, and from this point the debtor will be bound to provide the performance to the assignee as the new creditor. Until such a notification is delivered, the debtor must make payments to the original creditor, however after receiving it the proper fulfilment of the debtor's liability is considered to be the performance in favour of the new creditor. The law explicitly states, "If the debtor is informed of the assignment of the claim by the assignor, the debtor will not be entitled to demand substantiation of the assignment contract".  Subsequently, it is added that "if the performance of the assigned claim is secured with the right of lien, guarantee or in a different manner, the assignor will be bound to inform the person providing the security of the liability about the claim assignment".

It is necessary to point out that if after receiving the notification the debtor made performances in favour of the original creditor, he will not fulfil his obligation and his new creditor is entitled to demand other payments from the same title. The debtor would then have to pay for the second time (to the new creditor) and demand from the original creditor the return of unjustly received payments.

The legal successor of the original creditor, and therefore the new creditor will be the assignee upon the claim assignment. The content of the liability is not changed; neither is the course of the periods of limitations. 

 


Statutory limitations 

Accounts receivable and payable exist for a certain period, from their creation until their extinction. Accounts receivable usually become extinct upon their payment. Obviously, if they are not settled, the debtor cannot be bound indefinitely. On the contrary, one of the principles of the civil law is that everyone is bound to look after his property with the due care of a good steward, which also means that the creditor is obliged to ensure settlement of the accounts receivable through statutory steps, which he is entitled and simultaneously bound to take in relation to the debtor.

The existence of the accounts receivable for an unlimited period of time would be burdening not only for the debtor, as a business unit, but also possibly for courts or other bodies, which should then decide about specific obligations with a considerable lapse of time. Sometimes it is problematic to prove the existence of the accounts receivable even after one year let alone after several years or decades, when the parties can remember details only on rare occasions and it is difficult to find documentary evidence in the records.

One of the elements of the stability of legal relations is therefore the institute of limitations. Since ancient times legislators have tried to limit in time the existence of claims as well as other rights and the roots of the statutory limitations date back long ago. Its first wording can be found in Roman law (the objection - exceptio temporis or praescriptio annalis). The content of the institute of limitations has not changed in principle, but due to social developments the periods of limitations were rapidly shortened (in history they sometimes ranged between 30-40 years, particularly in relation to the church). 

 



Statutory limitations subject to the Civil Code - How long are the periods of limitations? 

The general period of limitations subject to the Civil Code is three years and starts its course from the day when the right could have been executed for the first time. Such a day is the day of filing an action with court, i.e. actio nata. The possibility of filing an action arises in most cases upon the due date (maturity) of the accounts receivable. The period for the settlement, usually agreed between the contracting parties, arises from a legal regulation or is imposed (or can be imposed) by court. Unless the period for settlement is determined otherwise, the debtor is obliged to settle his liability the following day after being invited by the creditor to settle the liability, in this case the period of limitations to assert the invitation for the settlement will start from the day of the debt creation.

If it was agreed that the settlement will be performed in instalments, the period of limitations of individual instalments will start from the day of their due dates. If the parties have arranged (or if the court ruling so stipulates) that the whole debt will become due in the case of the failure to make any of the instalments, the period of limitations will start from the due date of the non-settled instalment. However, the creditor may exercise this right no later than by the due date of the following instalment.

If the liability of the debtor lies in the obligation to tolerate or bear a specific circumstance or not to take a specific course of action, the period of limitations will start from the day when the breach of the given obligation occurred.

The Civil Code sets the modifications of the duration and beginnings of the course of the periods of limitations: 

•   Concerning the rights which must first be asserted with the physical or legal entities, the period of limitations will start its course on the day when such a right was asserted. This relates particularly to claims arisen from the liability for defects of the performance. Should the entitled party fail to assert his rights within the statutory time period, these will cease to exist, (are precluded) and the period of limitations will not start its course. 

•   Concerning the claims for indemnification from the insurance contract, the period of limitations will start its course a year after the insured event. In the case of insurance contracts, concluded up to Dec. 31, 2004, the general period of limitations of three years is applied. From Jan. 1, 2005 the newly concluded insurance contracts are subject to the regulations of Act  No. 37/2004 Coll., on Insurance Contract, as amended, which distinguishes claims for indemnification arisen from life insurance (ten year period of limitations) and the rights for indemnification from other types of insurance  (three-year period of limitations). The beginning of the course of the period of limitations will however remain the same. 

•   If it concerns the right of the rightful heir to receive an inheritance, the period of limitations will run from the legal force of the decision, with which the inheritance proceedings were finished. The inheritance proceedings may last a relatively long time and before they are finished the period of limitations could otherwise have passed. 

•   With regards to the entitlement to damage compensation, the so-called subjective and objective periods of limitations are combined. The subjective period of limitations starts its course from the day when the injured party actually learns about the damage and about the party responsible (here the mere possibility of learning about these facts is not sufficient), and this moment does not have to coincide with the moment of the insured event or unlawful conduct. The subjective period of limitations is two years. On the other hand the objective period of limitations will start its course from the event, which resulted in the damage, where in the case of unintentional damage it is three years and in the case of wilful damage it is ten years. The subjective period of limitations may run only within the objective period of limitations, the claims for damage compensation will expire after that period of limitations which will lapse first. If the injured party learns about the damage and about the liable party immediately after the occurrence of the damage, the period of limitations will expire two years after this event regardless of the fact that the objective period of limitations could have continued to run. If however the conditions are met not earlier than the third year from the insured event, the injured party will have less than a year to assert its claim. If the injured party does not learn about the damage or the liable person at all or after the expiration of the objective period of limitations, the claim will come under the statute of limitations regardless of the fact that the inured party could not have exercised it. The above will apply with the following reservations: 

–   The combination of the subjective and objective periods of limitations is not applied in the case of damage to health. In view of the nature of this entitlement, the entitlement for damage compensation will lapse upon the expiration of two years from the day when the injured party learned about the damage and who caused it. 

–   If the damage arose by breaching legal obligations as result of providing, offering or promising a bribe by a person other than the injured party, or as a consequence of a direct or indirect demand for a bribe from the injured party (i.e. "corruption"), the claim for compensation for damages arisen in this way will lapse three years from the date when the injured party learned about the damage and about who is responsible for it, however no later than after ten years from the day, when the act of corruption took place. 

–   Rights arising from transportation (with the exception of entitlements for damage compensation in the case of transportation of persons) will come under the statute of limitations in one year. The period of limitations will start its course on the day of exercising the claim with the carrier. 

•   The combination of the subjective and objective periods of limitations will also be applied in the case of the right for the surrendering of unjust enrichment. The subjective period of limitations (two years) will start from the day when the entitled party learns that the unjust enrichment took place and who gained this unjust enrichment to its detriment. The objective period of limitations (three, or respectively ten years) will start its course from the day when the enrichment occurred. If however the parties to the invalid or cancelled contract are mutually bound to return everything they gained under it, the court will take into consideration the objection to the statutory limitations only if the other party to the contract could also refer to the statutory limitations. 

•   The right corresponding to the real burden will lapse, if it has not been performed for a period of 10 years. The period of limitations will therefore start at the point of the last performance of the right. 

•   If the right was awarded by the final decision of a court or a different body, or the right was acknowledged in writing by the debtor concerning its reason and the amount, it will lapse in ten years from the day, when it was to be performed subject to the decision or respectively when the acknowledgment took place. If the acknowledgment contains the period for performance, the period of limitations will start its course after the expiration of this period. The same period of limitations will also apply for individual instalments, which the payment was divided into in the decision or the right acknowledgment (the periods of limitations for individual instalments will start from their due dates). If as a result of failing to settle any of the instalments the whole debt becomes immediately payable, the ten-year period of limitations will start from the due date of the non-settled instalment. In relation to the debt acknowledgement it is necessary to point out that the acknowledgement of the lapsed debt will have legal effects only provided that the debtor new about the expiration at the point of making the acknowledgement. Also in relation to the creditor, the debt acknowledgement is effective only if the creditor voiced his consent to it. 

•   Interest and recurring payments (e.g. pension, rent) come under the statute of limitations in three years. However, if these rights are lawfully awarded or acknowledged in writing, the three-year period of limitations will apply only for the interest and recurring payments whose due date occurred after the legal force of the decision or the acknowledgement  (if the due date was before the award or acknowledgement, the  period of limitations will be ten years).

 



Statutory limitations subject to the Commercial Code - How long are the periods of limitations?

The general period of limitations is four years. The Commercial Code sets the beginning of the course of the periods of limitations for individual rights and entitlements similarly as the Civil Code. However, it is unnecessarily specific and descriptive. On the other hand, with respect to the duration of the periods of limitations, there is not such a great differentiation:  

•   For the rights enforceable through courts, the period of limitations will start its course on the day when the right could have been asserted with the court. 

•   Concerning the right to perform a legal act, the period of limitations will start its course on the day when the legal act could have been performed. 

•   For the rights of obligation fulfilment, the period of limitations will start its course on the day when this obligation should have been fulfilled or when its fulfilment should have been commenced (from the due date). If the content of the obligation lies in the duty to constantly perform certain activities, refrain from performing certain activities or tolerate a certain circumstance, the period of limitations will start from the point of breaching this obligation. Concerning the rights created on the grounds of a breach of an obligation, the period of limitations will start from the day when this obligation was breached, unless special regulations apply for the statutory limitations of some of these rights. 

•   For the rights of partial performance, the period of limitations will run for each partial performance separately. If for the reason of failing to comply with a partial liability, the entire liability becomes payable immediately, the period of limitations will start from the due date of the non-settled liability. 


Used Literature
  • Vaigert, T.; Philippi, T.; Riško, P.; Navrátilová, H. (2003) Claims and Debts - Creditor's Legal Guidebook Brno: Computer Press, a.s.
  • Horáková, K.; Lemberková, P. (2007) Contract and Petition Templates I.  Brno: Computer Press, a.s.