New preventive restructuring framework finally arrived in the Czech Republic

Who can use it?

Access to preventive restructuring is limited to corporate debtors that (i) are in good faith regarding the restructuring, viability and restoration of the business, (ii) are not insolvent in the form of illiquidity (cash-flow insolvency), (iii) are facing financial difficulties so serious that failure to implement the proposed restructuring would render the company insolvent, and (iv) are excluded from preventive restructuring in cases where the business entity has a dishonest intention.

Main features

The Act enables distressed companies to apply for a wide range of restructuring measures, ranging from maturity extension/haircut to operational changes. It also introduces certain new features into the Czech restructuring legal framework, most notably restructuring with key creditors only, protection for new and interim financing, cram-down, and limited court involvement and publicity.

Restructuring with key creditors only

Compared to insolvency proceedings, preventive restructuring does not have to involve all the existing creditors of the distressed company. The circle of creditors (affected parties) is chosen by the company itself and may be limited to key creditors only, typically financial creditors and top business partners. The claims of the unaffected parties will be set aside as unaffected and will be satisfied within the due dates in full.

Protection for new and interim financing

The Act provides for special protection of new and interim financing (such as protection against avoidance and claw-back in case of future potential insolvency) provided in the context of preventive restructuring proceedings, a legislative tool aimed at facilitating the provision of bridge financing to distressed companies.

Cram-down

Although preventive restructuring is generally premised on consensus between the company and its creditors, subject to certain conditions (notably, consent by a sufficient majority of affected creditors), restructuring measures may be imposed on dissenting creditors, i.e. cram-down.

Limited court involvement and limited publicity

During preventive restructuring, the court will only have a limited supervisory role. To avoid stigmatising the company, the publicity of the whole process is significantly limited compared to insolvency proceedings.

Protection of distressed companies

The Act also gives companies powerful tools in the form of general or individual moratoria (general/individual stay) providing protection against enforcement actions of secured and unsecured creditors and against discontinuation of key contracts. In extreme scenarios, such moratoria may theoretically last up to 12 months.

Weaknesses

Despite the exceptionally long legislative process, it is already clear that the preventive restructuring framework in the Czech Republic has not avoided some shortcomings. Compared to reorganisation under the Insolvency Act, there is no tax exemption for profits from debt relief, i.e. the income of the debtor generated by debt relief based on the restructuring plan may constitute taxable income.

It remains to be seen what changes preventive restructuring will really bring to Czech insolvency law and market players, and whether and how it will be used in practice. Clearly it will create opportunities for debtors and creditors, but also challenges, especially for creditors affected by the restructuring plan and potential financing parties.

author: Natálie Rosová