In practice, when filing creditors‘ claims in insolvency proceedings, it is not uncommon to encounter the issue of simultaneous application of a causal and a promissory note claim, where the promissory note secures the causal obligation. On the part of insolvency administrators or debtors themselves, it is possible to encounter the argumentation that such a procedure is not possible, as double performance cannot be claimed. Let us explain how this works and why such an argumentation does not hold up in court.

What is the difference between a causal claim and a promissory note claim?

A causal claim is a claim that has arisen on the basis of a specific legal reason (cause). It may have arisen from a contract, a court decision or other legal fact. It is therefore important that it is linked to a specific legal fact. In order to be successful in bringing a claim in court, a creditor must be able to prove the existence of a specific cause of action from which the claim arose. The burden of proof lies with the creditor.

A bill of exchange claim is a specific type of claim that is closely linked to the existence of a bill of exchange. Unlike the aforementioned causal claims, which are always linked to a concrete legal fact (e.g. a contract), a promissory note claim is an abstract type, which is reflected in the fact that the legal reason for the existence of the promissory note (the cause) is not important and does not follow from the promissory note. This means that its validity does not depend on any specific cause that would have to justify the creation of the promissory note. The Supreme Court is settled in its conclusions regarding the so-called secured promissory notes that a promissory note can be defined as a debtor’s perfect security which, provided that strict formalities are met, creates a direct, unconditional, undisputed and abstract obligation of a certain person to pay the holder of the note a specified sum of money at a certain place and time. The promissory note obligation is entirely separate and distinct from any obligation which gave rise to it. The circumstance that, according to the agreement of the parties, the purpose of the promissory note is to secure the fulfilment of a certain obligation is then reflected in the range of so-called causal objections by which the debtor of a security promissory note may defend the obligation to perform under the promissory note (cf. e.g. the judgment of the Supreme Court of 26 February 2014, Case No. 29 ICdo 4/2012).

Is it possible to file both types of claims simultaneously in insolvency proceedings?

Yes, it’s possible. From the creditor’s point of view, the simultaneous filing of a bond and a promissory note claim in insolvency proceedings is a perfectly legitimate and legally approved procedure.

In the case of a promissory note claim, neither the principle of accessoriality applies, it is not dependent on the existence of the claim it secures, nor the principle of subsidiarity, i.e. the creditor does not have to first seek satisfaction from the claim secured by the note, but can directly seek satisfaction from the note claim. It follows from the above-defined nature of the secured promissory note that the secured claim is not extinguished by the performance on the secured promissory note (unlike performance under a surety or pledge), nor is the secured claim extinguished by the performance on the secured claim (cf. e.g. the judgment of the Supreme Court of 28 August 2008, Case No. 29 Odo 1141/2006).

The creditor has the right to assert both types of claims, as the causal and promissory note claims are separate obligations arising from their own legal basis. They are not duplicate claims based on one legal cause of action, but are entirely separate and independent legal claims with different legal regimes, which are cumulative. This does not mean, however, that the creditor should receive double benefit from an economic point of view. The promissory note serves as a higher security for the creditor’s rights and, although it is independent of the claim secured by the promissory note, it acts in effect as a substitute benefit. The debtor performs on the promissory note which secured the causal claim. Thus, the debt on the causal claim is thereby vicariously discharged by the ‚substitute performance‘ of the promissory note.

It is possible to file both claims simultaneously in insolvency proceedings, and to the extent that these claims „overlap“, they are treated as one claim in the insolvency proceedings and are not added together for the purposes of voting at the meeting of creditors or for the purposes of the distribution (cf. the Supreme Court judgment of 27 May 2009, Case No. 29 Cdo 3716/2007).

At the same time, we can also file a claim from a secured promissory note and a causal claim, which is also secured by a lien, in insolvency proceedings. However, if a creditor files only an unsecured promissory note claim and then wishes to satisfy the lien securing the causal claim, this will not be possible because the creditor has not filed the causal claim in the proceedings and has no valid legal title to satisfy the lien in the proceedings. The promissory note claim is separate and entirely distinct from the bailee’s obligation and is not subject to the lien.

Is it necessary to specify the cause of the promissory note in the application?

The promissory note is, as already mentioned, an abstract legal act in which the cause is not expressly expressed, nor does it follow from it. In practice, we often encounter a situation where insolvency administrators call on registered creditors to supplement their promissory note claims with a bond. They explain this by claiming that they need sufficient information to be able to assess the claim properly. The Insolvency Act requires an assessment of the factual description of the cause of the claim, but this cannot be interpreted as meaning that the cause of the promissory note should be assessed. The explanation of the cause of the claim may be relevant in assessing the existence of the claim, but this does not apply to abstract claims.

In the case of abstract claims, the pure existence or non-existence of the claim will be examined. The insolvency administrator will thus only need factual information that enables him to conclude whether the promissory note claim in question has been created and whether it is entitled to be enforced. The bill creditor is thus not obliged to assert facts that shed light on the cause of the bill or to prove the factual basis for the obligation.

Do I need to produce the original promissory note?

The question arises whether it is necessary to submit the original promissory note as an attachment to the application for a promissory note in insolvency proceedings. What is relevant for the assessment of this situation is whether the claim is enforceable or unenforceable.

We will first stop with the unenforceable claim. A security is a document to which a right is attached in such a way that if the document is absent, the right cannot be exercised or transferred. For this reason, in the case of so-called unenforceable promissory note claims, the original note must always be attached as an annex to the application or produced afterwards, but this must always be done before the start of the examination procedure. If the creditor fails to do so, the insolvency administrator will be forced to deny the claim, as there is no certainty as to the authenticity of the promissory note or its owner. The High Court in Prague added the following in its resolution of 6 January 2017, Case No. 101 VSPH 126/2016: „If the creditor does not present the promissory note even in an in-court litigation to determine the authenticity of the claim under the promissory note, the creditor cannot succeed in this in-court litigation. In such a case, there is no room for a challenge under Section 114b CCC. And it is not possible to rule in favour of the plaintiff by a judgment for recognition issued pursuant to Article 114b(5) of the Civil Procedure Code.„

The only exception to the obligation to submit the original promissory note to the insolvency court is the procedural situation where court proceedings for payment of the promissory note are already underway and the note is therefore deposited in court custody. In such a case, it is up to the insolvency administrator to verify the deposit of the original promissory note with the competent court.

If we look at the situation with the so-called enforceable promissory note claims, we find that a creditor should only need a final decision of the competent authority by which the claimed claim was granted to successfully submit the claim (cf. e.g. the judgment of the Supreme Court of the Czech Republic Case No. 29 ICdo 99/2015 of 21 December 2017). The creditor is not obliged to prove the original promissory note. However, the opinion that resulted from the above-mentioned decision may not hold in all circumstances. If the insolvency administrator denies an enforceable claim as to the authenticity or amount of such claim, there will be a need to produce the original bill of exchange also in the case of an enforceable claim.

Bělina & Partners law firm s.r.o.

Our services also focus on debt recovery and representation in insolvency proceedings.

Constitutional Court ruling of 11 September 2024, Pl. Constitutional Court 23/24 became a groundbreaking decision on the issue of valorisation of contributions to the community property of spouses. It is significant not only for the post-divorce settlement of SJM, but also for the conditions for the admissibility of the creation of law when courts fill in gaps in the law.

The complainant and the intervener had been married since 1988. The husband owned the property, which he had sole possession of. Shortly after the marriage, he sold it and together with his wife they bought a property which was already part of the matrimonial property (value of the property approximately CZK 200 000). However, the marriage was divorced in 2017 and proceedings for the division of the matrimonial property followed. The main subject of the dispute was the real estate, which, however, was worth many times more at the time of the divorce (the value of the real estate at the time of the division of the community property was approximately CZK 10 million).

The civil courts ordered the property to be sold and divided the proceeds equally between the former spouses. In addition, they awarded the complainant the amount he had spent out of his sole assets to purchase the joint property in accordance with the provisions of Section 742(1) of the Civil Code (approximately CZK 170 thousand). Despite the complainant’s objections, the civil courts did not apply Section 742(1) of the Civil Code to the purchase of the property. 2 of the Civil Code, according to which, in the settlement of the dissolved community property, the contribution of the spouse from the sole to the community property is so-called valorised (increased or decreased according to the change in the value of the part of the property on which it was spent)․ They referred to the earlier judgment of the Supreme Court in Case No. No 22 Cdo 1172/2022 of 29 July 2022 (R 64/2023), which held in another case that this provision can only be applied if the spouses have agreed on the indexation in advance. However, in the present proceedings it was established that the complainant and his wife had not agreed on any such thing. The complainant appealed to the Constitutional Court, claiming that the municipal courts had infringed his right to a fair trial and his right to own property, as they had ruled in manifest contravention of Article 742(2) of the Civil Code.

Has the Supreme Court’s shaping of the law gone beyond the pale?

The courts, as one of the basic components of state (and public) power, have the task of interpreting and applying the law. In this process, however, the court must take into account the purpose and history of the law and its context in the legal order as a whole.

The Constitutional Court recalled that as regards the linguistic meaning of a text, interpretation of the law, shaping of the law and creation of the law can be distinguished from each other. Interpretation of the law aims at completing a vague part of the law with a clear linguistic core. However, when the interpretation of law goes beyond the boundaries of an expansive interpretation, it is a completion of law or its creation. Courts may cross that line provided they respect generally accepted methods of making law. This is possible because the legislator cannot foresee every single situation, and therefore the courts‘ shaping of the law is acceptable under certain conditions.

In its decision, the Constitutional Court defined the conditions under which the court’s creation of law is permissible. The court may allow itself to supplement the law if 1) there is a gap in the relevant provision, 2) it is an unconscious gap, 3) the gap is not unconscious, but there must be a fundamental change in the relevant (e.g. social) circumstances.

According to the Supreme Court’s reasoning, this is an unconscious loophole in the law and the language of this provision is broader than the purpose of the law. Hence, it chose to complete the law by teleological reduction. However, the Supreme Court did not give proper reasons for its decision, which the Constitutional Court reproached it for in its ruling.

The Constitutional Court stated that the wording in the provisions of Section 742(2) of the Civil Code is so clear and unambiguous that there is no room for any interpretation of the law by the court. At the same time, the Constitutional Court is of the opinion that there is a conscious gap in the law and therefore, if the Supreme Court wanted to shape the law, it should have sufficiently addressed the question whether there was a significant change in social or other relevant circumstances that would justify such a change, which it did not do.

Therefore, according to the Constitutional Court, based on the language of this provision, the spouse is entitled to claim in the event of divorce not only the funds from his/her sole property that he/she spent on the purchase of the community property, but also the increased value of that part of the property.

The old Civil Code had no provision similar to Section 742(2) of the Civil Code. Previously, this situation was resolved by case law applying the so-called principle of reduction, which took into account only the reduction in the value of the thing in question. In contrast, today’s statutory regulation is governed by the principle of enrichment. This is intended to ensure that the decisive factor in the contribution to the community property is not the amount of the value of the property invested, but how the investment results in an increase in the value of the community property. The Explanatory Memorandum justifies this change on the grounds that the period in which the Civil Code came into force was characterised by fluctuations in prices in both directions, which is why the legislator decided to work with the option of increasing the value of the common property, not just reducing it.

Therefore, the Constitutional Court concluded that the Supreme Court violated the complainant’s right to judicial and other protection. It did so by departing from established methods of interpretation and the obvious intention of the legislator. Despite the fact that there were no relevant reasons for doing so, it decided to shape the law. He thus substituted his mere idea of a more appropriate rule of law for the literal wording of the statute and the will of the legislature.

At the end of its ruling, the Constitutional Court stressed that it does not deny that the court may encounter application difficulties when applying the provisions of Section 742(2) of the Civil Code. It expressed the possibility for the Supreme Court to elaborate the conditions under which the general courts may apply this provision to individual situations. However, to deny the general principle of enrichment altogether and to reduce it only to cases where the spouses expressly agree on it goes beyond the limits of judicial law-making.

Bělina & Partners law firm s.r.o.

Our services also focus, among other things, on family law, division of matrimonial property and representation before the Constitutional Court