The Czech Ministry of Justice recently published a bill on preventive restructurings (the "Bill") implementing the directive on preventive restructuring frameworks which will introduce a brand-new legal tool preventing the insolvency of viable enterprises in temporary financial difficulties.
The Bill is now heading to the legislative process and should become effective from July 2022. Although it may still undergo some changes, it is already obvious that it will revolutionise Czech insolvency law.
This article aims to introduce the main features of this new tool and to explain which entities preventive restructuring is available to and which situations it will tackle.
Today a distressed company may try to achieve an out-of-court arrangement with its creditors, this being a contract-based solution requiring the consent of all affected creditors with the terms of the restructuring. If a timely agreement with all affected parties cannot be achieved, the distressed company risks the deterioration of its financial situation or even insolvency, which can only be resolved in the context of formal insolvency proceedings.
The aim of the Bill is to enable debtors to restructure effectively at an early stage and to avoid insolvency, preventing the unnecessary liquidation of viable enterprises and restoring them to health since, compared to the current state, it will be possible to accomplish preventive restructuring with the involvement of key creditors only.
Access to preventive restructuring is limited to legal entities that meet the following conditions:
- the entity should be in good faith that its restructuring plan, as a key document of the whole process, will prevent the likelihood of insolvency;
- the entity is not insolvent in the form of illiquidity – preventive restructuring is not intended to be an alternative to insolvency proceedings and should not apply in case of serious insolvency situations where the entity has delayed the solution of its financial issues, but is primarily aimed at enabling the entity to continue to do business by changing the structure of its assets and liabilities and by implementing operational changes; and
- the financial difficulties are significant enough that declining the adoption of restructuring measures would by mere passing of time result in the entity's insolvency; this condition should exclude the preventive restructuring of financially healthy entities manipulating their creditors or business partners to provide advantages or relief beyond the ordinary course of business.
Exclusion of preventive restructuring
Apart from the positive conditions to be met to be able to access preventive restructuring, the Bill also aims to introduce conditions that will exclude the commencement or continuation of preventive restructuring.
Generally, preventive restructuring is excluded in cases where the business entity has a dishonest intention (nepoctivý záměr) (the Bill clarifies this vague term by providing a demonstrative list of these situations, such as manipulation of voting groups, unfair preference of certain creditors, etc.) or the exclusion is due to the debtor's ongoing liquidation or the existence of previous insolvency proceedings.
Main new features
Since the Bill will introduce a wide range of new measures of preventive restructuring, I will mention only some of the most distinctive aspects illustrating the preventive restructuring framework to be introduced in the Czech Republic, especially in the context of existing insolvency laws:
Restructuring with key creditors only
Compared to insolvency proceedings, preventive restructuring does not have to involve all the existing creditors of the business entity. The circle of creditors (affected parties) is chosen by the entity itself. Claims of the unaffected parties will be set aside as unaffected and will be satisfied within the due dates.
Although preventive restructuring is based on the broadest possible consensus between the business entity and its creditors when it comes to intended restructuring measures indicated in the restructuring plan, it is possible, subject to certain conditions, to "impose" the agreement on dissenting creditor(s).
Limited court involvement
During preventive restructuring the court will be involved only partially and subject to specific conditions in case of some sort of "partial proceedings", compared to insolvency proceedings where the entity is constantly a party to the court proceedings.
In the aftermath of the COVID-19 pandemic, which has caused some businesses to fall into hard times, the preventive restructuring process to be introduced by the Bill is more needed than ever in the Czech Republic.
Although preventive restructuring clearly will not be for everyone, more sophisticated market participants will take the new legal framework of preventive restructuring into account even before the effectiveness of the Bill is seen.