30
Mon, Jan
80 New Articles

Preventive Restructuring as a Precursor to Insolvency Proceedings

Preventive Restructuring as a Precursor to Insolvency Proceedings

Czech Republic
Tools
Typography
  • Smaller Small Medium Big Bigger
  • Default Helvetica Segoe Georgia Times

A draft of a preventive restructuring act is being discussed in the Czech legal environment to implement the EU directive on restructuring and insolvency (directive (EU) 2019/1023). The aim of the new legal regulation is to introduce an out-of-court restructuring model with shorter times to improve operations and the balance sheets of debtors in financial difficulties. Different forms of out-of-court restructuring are common and frequently used in many foreign jurisdictions, e.g. arrangements in England and Wales. Unlike insolvencies, in preventive restructuring the court is a “mere” supervisor supported by the restructuring trustee in certain situations.

At the outset, I would like to note the draft act may be amended during the legislative process, but the philosophy of the act will remain unaffected.

Advantages for businesses
Currently, businesses can only be restructured in an out-of-court process based on a contract with selected parties, e.g. through a debt-equity swap, delayed or reduced installments, or through equity investment by existing or new parties.

The preventive restructuring mechanism allows the debtor to enforce the restructuring plan for the ‘affected parties’ by majority decision and through a ruling by the restructuring court. Dealing with possible insolvency can also have an advantage for the non-consenting ‘affected parties’ in the form of higher distributions than payments from bankruptcies or in the case of continuity of the debtor’s business.

Unlike in insolvencies, the debtor can select the parties affected by the restructuring, including the creditors. The legal position of the ‘unaffected parties’, including their contractual relationship and claims vis-à-vis the debtor, remain unaffected by the restructuring. The draft act explicitly excludes certain claims from the restructuring, e.g. employment claims, employee retirement insurance claims, personal injury claims, claims resulting from a breach of law, etc. Furthermore, claims subject to a court or arbitration dispute or claims for payment of services (e.g. bank fees) are excluded as well.

Preventive restructuring is an option for the debtor’s business. While a debtor needs to file an insolvency petition in case of insolvency, preventive restructuring is an option as a preventive measure (e.g. in case of the threat of insolvency). However, preventive restructuring is not available to debtors that are insolvent because of illiquidity.

During the preventive restructuring process, the existing directors of the company continue to manage the business and management does not pass on to the insolvency/bankruptcy trustee. The directors can adopt commercial and operative decisions with due care and according to the restructuring plan.

Conditions for preventive restructuring
Preventive restructuring is available only to business entities (excluding banks, savings and credit cooperatives, insurance companies, reinsurers, health insurance companies, etc.) acting in good faith to sustain and to restore the operation of their business with the planned restructuring measures. The draft act provides a list of presumptions that can evidence bad faith among debtors, e.g. incorrect or incomplete information in the restructuring plan, the debtor distributed dividends or other equity to affiliated parties within the past year prior to the commencement of preventive restructuring, etc.

Restructuring is not available to entities subject to liquidation, declared bankrupt, or subject to preventive restructuring in the past five (5) years.

Restructuring plan
The restructuring plan is the fundamental document for the restructuring process and is an outcome of the negotiations between the debtor and the selected / affected parties. The plan provides for measures to prevent financial difficulties and chiefly to restructure the debtors’ assets, liabilities, equity, or to arrange for other changes in the operation of the business. The draft act provides for a list of exemplary restructuring steps for each category of restructuring measures that can be mutually combined or supplemented by other operational, contractual, personal, or balance sheet restructuring steps.

Furthermore, the restructuring plan needs to describe the debtor’s economic situation, the reasons for its financial difficulties, and provide a list of liabilities vis-à-vis the affected and unaffected parties, the situation of the secured creditors, and the reasons to approve the plan. Along with the plan, the debtor needs to provide interim financial statements as to the last day of the month preceding the month when the notification to commence negotiations about the restructuring plan was dispatched to the affected parties, and regular financial statements for the past three (3) financial years.

The restructuring plan is effective once approved by the affected parties. The draft act requires the approval of at least three-quarters of the affected parties of each class, and approval by each of the classes. The plan can be put to a vote at a meeting summoned to the debtor’s registered headquarters or the seat of the restructuring court, or put to a remote vote where the affected parties are invited to vote in a given period. The voting can be replaced by an agreement executed in the form of a notary deed.

In certain situations, there is required confirmation of the restructuring court, e.g. if a claim from an affected party that has not approved the plan is to be restructured; new financing will be provided; or the number of employees is to be reduced by at least one-quarter. The court can also postpone the effective date of the plan.

Conclusions
The proposed preventive restructuring mechanism is not only a suitable instrument to deal with serious operational issues arising from common business activities, but it can also be a business strategy instrument, e.g. new debt or equity investments from private equity firms and (multi-)family offices can be conditional to the completion of preventive restructuring.

By Tomas Vlasak, Attorney, PRK Partners

Czech Republic Knowledge Partner

PRK Partners, one of the leading Central European law firms, has been helping clients achieve their business objectives almost 30 years. Our team of lawyers, based in our Prague, Ostrava, and Bratislava offices, has a unique knowledge of Czech and Slovak law and of the business environment. Our lawyers studied at top law schools in the United States, United Kingdom, Switzerland and elsewhere. They also have experience working for leading international and domestic law firms in a number of jurisdictions. We speak your language, too. Our legal team is fluent in more than 15 languages, including all the key languages of the region.

PRK Partners has one of the most experienced legal teams on the market. We are consistently rated as one of the leading law firms in the region. We have received many significant honours and awards for our work. We represent the interests of international clients operating in the Czech Republic in an efficient way, combining local knowledge with an understanding of their global requirements in a business-friendly approach. We are one of the largest law firms in the Czech Republic and Slovakia. Our specialised teams of lawyers and tax advisors advise major global corporations as well as local companies. We provide comprehensive legal advice drawing on our profound knowledge of local law and markets.

Our legal advice delivers tangible results – as proven by our strong track record. We are the only Czech member firm of Lex Mundi, the world's leading network of independent law firms. As one of the leading law firms in the region, we have received many national and international awards, in some cases several years in a row. Honours include the Chambers Europe Award for Excellence, The Lawyer and Czech and Slovak Law Firm of the Year. Thanks to our close cooperation with leading international law firms and strong local players, we can serve clients in multiple jurisdictions around the globe. Our strong network means that we can meet your needs, wherever you do business.

PRK Partners has been repeatedly voted among the most socially responsible firms in the category of small and mid-sized firms and was awarded the bronze certificate at the annual TOP Responsible Firm of the Year Awards.

Our work is not only “business”: we have participated on a longstanding basis in a wide variety of pro bono projects and supported our partners from the non-profit sector (Kaplicky Centre Endowment Fund, Tereza Maxová Foundation, Czech Donors Forum, etc.).

Firm's website: www.prkpartners.com

Our Latest Issue