(In)Effectiveness of the Payment of Interest After the Moment of Factual Insolvency

The judgment of the Supreme Court dated 28 January 2026, Ref. No. 29 ICdo 15/2024, represents an important contribution to the interpretation of the rules under which it is assessed in insolvency proceedings whether a debtor has preferentially satisfied certain creditors at the expense of others. This is one of the key issues of insolvency law, as its fundamental principle is the equal and proportionate satisfaction of all creditors. In the case at hand, the Supreme Court addressed a question that is very common in insolvency practice: whether the payment of interest on a loan made at a time when the debtor is already факtually insolvent automatically constitutes an impermissible preference of a creditor.

In the case in question, the debtor made two payments to its creditor representing interest on a loan in the total amount of CZK 1,050,000. However, these payments were made at a time when the debtor was already факtually insolvent, and the insolvency administrator therefore sought their return, arguing that the creditor had been preferred to the detriment of other creditors. The lower courts agreed with the insolvency administrator’s arguments, which corresponded to the previous decision-making practice, and concluded that the debtor had received no new consideration in return for the payment of the interest, and that it therefore constituted an ineffective legal act within the meaning of Section 241 of the Insolvency Act.

The defendant’s defence in this dispute consisted of invoking and interpreting the exception to preferential legal acts under Section 241(5)(b) of the Insolvency Act. This exception provides (in simplified terms) that a preferential act does not include performance for which the debtor received adequate consideration, typically within the framework of ordinary business relations. The disputed issue was whether such consideration could be represented by the loan itself, which precedes the payment of interest in time, or whether it must be performance provided simultaneously. The lower courts adopted a relatively formalistic interpretation, according to which each individual performance must be assessed in isolation, and in the case of the interest payments they thus concluded that there was no corresponding counter-performance.

The Supreme Court rejected this approach and adopted a significantly more substantive interpretation based on the assessment of the entire contractual relationship. It emphasised that a loan agreement represents a typical example of a mutually equivalent obligation: the creditor provides funds, while the debtor is obliged to return those funds and, where applicable, to pay interest as consideration for their use. Interest is therefore not a separate performance without consideration, but a natural part of the overall economic relationship between the parties. Adequate consideration is thus already provided at the moment the loan is granted, even though it precedes the payment of interest in time.

The key conclusion is therefore that a time gap between performances is not, in itself, a reason to conclude that a legal act is ineffective. In other words, the fact that the debtor receives consideration earlier than it performs is not an obstacle to the application of the statutory exception. This interpretation reflects the reality of ordinary business relations, in which a time mismatch between performances is entirely standard and economically justified. At the same time, the Supreme Court rejected an approach that would lead to the practical conclusion that almost every loan or interest repayment in the period prior to insolvency could automatically be challenged.

The decision has a significant practical impact. It strengthens the legal certainty of creditors entering into ordinary financial relationships with debtors and confirms that standard performance under a contract – if economically balanced – should not be considered preferential without further analysis. At the same time, it constitutes a correction of earlier practice, which tended to assess individual performances in isolation and without regard to the broader context of the contractual relationship.

From a broader perspective, the decision may also be seen as a reminder of the fundamental purpose of avoidance actions in insolvency. This purpose does not lie in rendering every performance provided during insolvency ineffective or invalid, but in preventing truly selective and unfair satisfaction of certain creditors. If a debtor performs its obligations within the framework of an ordinary and equivalent relationship, there is no reason to sanction such performance retrospectively. The judgment thus contributes to a balanced interpretation of insolvency law, which respects both the protection of creditors as a whole and the legitimate expectations of the parties to ordinary commercial transactions. In addition to the issue of ineffectiveness of legal acts, in similar situations it is also appropriate to consider the application of other legal instruments, in particular the general liability of members of the statutory body for breach of the duty of due managerial care, or liability for late filing of an insolvency petition within the meaning of Section 98 et seq. of the Insolvency Act, which may represent more appropriate sanctioning tools in such situations. 

This text was translated by AI.