The case law of the Czech courts is quite rich on the issue of the disproportionateness of default interest, as regards its agreed amount. The Constitutional Court has repeatedly stated that the intention of disproportionately high default interest is to acquire the debtor's property, the value of which will be significantly disproportionate to the original debt. At the same time, it is true that default interest can never completely deviate from the limits of reasonableness in relation to the property sphere of the creditor, but also of the debtor. But what if the enforcement proceedings last a considerable time and the default interest has meanwhile grown to enormous proportions? I will focus on the question of the reasonableness or unreasonableness of default interest for these cases in this article.
Method of counting proceeds in execution
The disproportionate nature of interest on late payment in the event of a significant length of enforcement proceedings is also relevant in view of the previous legal regulation, according to which funds recovered in execution were first counted towards interest and only then towards the principalBecause of this, the principal was not primarily amortized and the mandatory amount of debt, especially in longer-lasting executions, continued to increase, even though repayment was taking place.
From 1 January 1, the money recovered in execution is first used for the costs of execution, then for the (oldest) principal, then for interest on arrears, and finally for the costs of the beneficiary., see the provisions of Section 265a Act No. 99/1963 Coll., Civil Procedure CodeIt should not happen that interest increases faster than the borrower is able to repay.
With regard to the previous legal regulation of the offset of proceeds, in the case of longer-lasting executions, the default interest for these executions often exceeds the principal by many times, even if the rate of this interest was agreed at a reasonable amount or determined using the repo rate of the Czech National Bank for the statutory default interest.
Supreme Court case law and the disproportionate nature of default interest
The question of the adequacy of default interest in relation to the duration of the execution and the method of prior setting off of the recovered amount in relation to the principal and accessories was the subject of objections by the appellant in a recently resolved case. Supreme Court under file no. 20 Cdo 1023/2020.
In this case, the appellant was on old-age pension and also had a psychiatric illness. According to his claim, under current conditions, he would only be able to pay the remaining amount of the already paid principal amount after 84 years. In its decision of 26 January 1, the Supreme Court stated that execution is and may continue to be carried out by deductions from the debtor's undisputed income, regardless of the previous length of the proceedings, without the Supreme Court in this case examining in detail the possible abuse of law with regard to the increase in default interest due to the considerable length of the given execution proceedings.
Similarly, the Supreme Court expressed itself in resolution under file no. 20 Cdo 442/2022 dated 16. 8. 2022, in which he stated that The fact that the amount of the accessory claim, taking into account the length of the execution that has been ongoing since 2004, exceeds the recovered principal several times cannot be a reason to stop the execution. pursuant to the provisions of Section 268, paragraph 1, letter h) of Act No. 99/1963 Coll., the Code of Civil Procedure. The case subsequently reached the Constitutional Court, which in resolution under file no. IV. ÚS 3035/22 He said that the amount of the accessory claim was determined by a legal regulation that the Constitutional Court had already found to be constitutional in the past, and is primarily dependent on the relevant length of the enforcement proceedings.
Inappropriateness of default interest in the case law of the Constitutional Court
The topic of the general adequacy or disproportionateness of interest on late payment has been the subject of examination by the Constitutional Court for a long time. In the ruling of 1 July 7, announced under file number I. ÚS 728/10 The Constitutional Court stated that The meaning of late payment interest can be found in its motivational and sanctioning function, if the debtor is in default with the timely and proper repayment of the debt. However, here too – in the opinion of the Constitutional Court – it is necessary to take into account the principle of proportionality, one of the key principles of constitutional justice, observed in democratic states governed by the rule of law, understood not only formally, but especially materially, whereby such proportionality must be confronted from the perspective of an objective assessment of the given case.
According to the finding dated 1. 4. 2019 under file number II.ÚS 3194/18 are According to the Constitutional Court, general courts are obliged to at least partially suspend the execution of the decision according to the provisions of Section 268, paragraph 1, letter h) of the Code of Civil Procedure in cases where the enforcement of the decision would lead to manifest injustice or would even be contrary to the principles of the rule of law, while in each case a fair balance must be ensured in protecting the property sphere of both the debtor and the creditor.
The Constitutional Court has also expressed itself in the past in the following way: the debtor cannot be fairly required to assume that the total amount repaid will exceed the principal amount several times over, see the finding below file number I. ÚS 199/11 of 26/1/2012.
Limitation of the interest period in the previous public law regulation
As can be seen The Supreme Court does not intend to allow too much in its decision-making practice the disproportionateness of the default interest with regard to the duration of the contractual relationship and therefore the enforcement proceedings. and the given issue was only dealt with strictly in the past. In order to assess the possible disproportionate nature of the accessory claim in the event of a significant length of the enforcement proceedings, we must therefore base ourselves on general case law conclusions regarding the disproportionate nature of interest.
When considering de lege ferende We can draw inspiration from public law. According to the provisions of Section 252, paragraph 2 Act No. 280/2009 Coll., Tax Code, as amended from 1 January 1 to 2011 December 31 It was valid that the default interest that a taxpayer incurs when the tax due is not paid, shall apply no later than 5 years after the delayThe limitation on the interest period was subsequently abolished by Act No. 267/2014 Coll. with effect from 1 January 1.
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I believe that the disproportionate nature of default interest with regard to the duration of the contractual relationship and therefore the enforcement proceedings is insufficiently addressed in Czech law. Any legal regulation is completely absent and the case law addresses this issue only marginally without being willing to acknowledge the problem.
This topic is all the more relevant with reference to the recently implemented amendment Act No. 120/2001 Coll., Enforcement Code, with the incorporation of an inconspicuous but important provision of Section 265a into Act No. 99/1963 Coll., the Code of Civil Procedure, which established the rules for the crediting of proceeds so that the proceeds obtained from the execution are primarily offset against the costs of the execution proceedings and the principalBefore this amendment, the end of the execution could seem like it would never be possible, when, as a result of the preferential settlement of the accessory claims, at least part of the principal could no longer be paid, as a result of which the accessory claims grew to astronomical heights.
As a guide for assessing the unreasonable attachment of a claim due to the considerable length of the enforcement proceedings, the following should be considered in particular: material adequacy test, so that the recovered accessory is still in balance with the property and earning capabilities of the debtor (obligor) and the justified financial claim of the creditor (entitled party).
A more specific guide to when the interest is disproportionate after a significant length of enforcement proceedings has already taken place may be: significant discrepancy to the original principal in a way that it even exceeds it several times. We can also be inspired by the already ineffective legal regulation contained in Act No. 280/2009 Coll., the Tax Code, which limited the possible interest period to 5 years. However, in contrast to the public law regulation, I would propose that the 5-year interest period should be the lowest possible time limit for assessing the reasonableness of the interest in the event of an objection to the significant length of the enforcement proceedings. Such unreasonable interest would then have to be the subject of a motion for partial suspension of the enforcement pursuant to the provisions of Section 268, paragraph 1, letter h) of Act No. 99/1963 Coll., the Code of Civil Procedure.
Alternative solutions for the obligor in adverse situations are also considered, and in this regard, in connection with the performance of my legal practice, I am thinking of possibility of agreement between the obligated party and the authorized partywhen the debtor agrees to stop the execution of the part of the disproportionate accessory, for example in return for a one-time repayment of the remaining part of the principal or a more significant part thereof.
Source: epravo.cz
