New insolvency legislation, a surge in litigation work and some tempting real estate bargains are keeping Czech independents ticking along, reports Jeffrey White

The global financial crisis and a brand new insolvency law are affecting banking, M&A and real estate practices at the Czech Republic's independent law firms.

The new insolvency law, which came into effect on 1 January this year, amounts to the total overhaul of previous legislation that dates back to when the country emerged from behind the Iron Curtain in 1989.

The new law gives the country's secure creditors more say in appointing insolvency trustees, while allowing for distressed entities to secure a moratorium shield against bankruptcy with the consent of 50% of their creditors. Most significantly, it speeds up the entire insolvency process: electronic publication in the Czech insolvency register is now mandated within two hours of an insolvency petition being filed in court. The court then has 15 days to make a decision on bankruptcy and name an insolvency trustee.

One noticeable effect of the new law is a rise in banking institutions seeking the counsel of local law firms on how the changes will affect them.

"What certainly has increased are requests for advice on how to prevent bankruptcy and heal negative equity. As long as I am aware, this is all due to the change in law," says Martin Kriz, a partner at Prochazka Randl Kubr (PRK).

The financial crisis is likely to affect law firms more broadly than any one specific law change. Several large Czech companies have fallen this year. None has been more significant than Czech glass-making group Bohemia Crystalex and Porcela Plus, which entered bankruptcy proceedings in late September with £163.7m in debts and needing to raise an additional £17m for its operations. The group has 5,000 employees through six subsidiaries.

Litigation and arbitration are practice areas that have the potential for increased activity in the months ahead. "The financial crisis will see clients think about the enforcement of their rights on various contracts. If their counterparty falls bankrupt and they want the chance to get something back, that will mean litigation," says Daniel Weinhold, name partner at Weinhold Legal.

His firm is currently representing, among others, Daimler Chrysler's leasing company on a series of arbitrations, 13 of which have been completed this year with undisclosed results.

Prague's bpv Braun Haskovcova (BH) reports a 15% increase in litigation work this year, particularly relating to M&A transactions, which name partner Arthur Braun attributes to uncertainty in the real estate and credit markets.

Many big real estate developers and holding companies that in recent years drove the Czech Republic's property boom are now struggling to finance their properties and bring projects through to fruition.

"In the past years there was a huge surge in development, with financing requiring liquidity of 10%-20%," says Jaroslav Havel, name partner at Havel & Holasek. "Now funds require 35%-40%. It's difficult to complete projects."

Lots of low and middle-market investors – in particular Czech and Eastern European private equity funds – are now circling and waiting for some significant properties to go on sale. "All big real estate groups in the country are under huge pressure," says PRK's Kriz. "If we just wait a little longer then we will see some quite nice deals in real estate."

In the months ahead, look for another trend to continue in the Czech Republic: outside investors snatching up Czech legacy companies that started out in the early 1990s and are now looking to sell out as they enter their second generation.

BH recently represented one such outfit, Eiffage SA, which bought the last independently owned major Czech construction company, Tschas SA.