In today’s globalised world, businesses often face challenges that can lead to temporary financial difficulties. To support the resolution of such problems, Act No. 284/2023 Coll., on Preventive Restructuring, was adopted with effect from 23 September 2023. It’s aim is to transpose Directive (EU) 2019/1023[1] on restructuring and insolvency (the “Directive”) into Czech law, which offers legal entities in financial difficulties an effective tool for timely resolution of problems in the operation of a previously viable business enterprise.
Directive and its transposition
The Directive seeks to improve restructuring, insolvency and resolution procedures within the European Union. It provides businesses with the tools to deal effectively with financial problems in order to avert bankruptcy, which would not only negatively affect their business activities and reputation, but invariably involves a major interference with the rights of third parties.
Article 34 of the Directive required the Czech Republic to adopt and publish the laws, regulations and administrative provisions necessary to comply with the Directive by 17 July 2021. The Czech legislator failed to comply with this deadline and, as a result, infringement proceedings were initiated against the Czech Republic. The transposition law, with a two-year delay, therefore brings the Directive into the Czech legal environment and thus introduces a new institution of preventive restructuring for us.
Preventive restructuring or reorganisation, what is the difference?
Reorganisation as one of the methods of bankruptcy resolution is a well-established institution of insolvency law, to which the restructuring presented above is similar in many respects. The essential difference between these institutes (except for the focus on the arrangement of the debtor’s relations with its creditors after it is already bankrupt or threatened with bankruptcy) is that the aim of reorganisation is primarily to satisfy creditors and only secondarily, if at all, to rescue the enterprise itself.
On the contrary, preventive restructuring focuses on still operational enterprises whose financial situation has not yet reached such a level that it has to be resolved within the limits of the Insolvency Act. Its main objective is to save the businesses and enable to negotiate a restructuring plan with its creditors. This means that a preventive restructuring allows the company to act in time and avoid bankruptcy and its associated negative consequences, such as public disclosure of bankruptcy information and restrictions on the disposal of assets. The aim of restructuring is thus to satisfy the claims of creditors as well as to maintain the business of the company and thus contribute to a more stable market and ultimately to the protection of the rights of third parties, whether creditors, employees or business partners.
Restructuring is on the borderline between free private negotiation and mandatory insolvency proceedings. This is particularly evident in the principles that accompany the process. Compared to reorganisation, restructuring should be less time-consuming and less formal, based on the nomination principle, where the company chooses key creditors, and above all free of negative influences such as disclosure of information, deprivation of the company’s dispositive rights, limitation of the effects of contracts, etc.
Conditions for initiation, duration and termination of restructuring
As mentioned above, the restructuring is intended only for commercial corporations and is therefore not applicable to natural persons. Similarly, the restructuring institute can only be used by a person who is not in bankruptcy in the form of insolvency, but at the same time its economic situation indicates that the company will go bankrupt if restructuring measures are not adopted. Here, the law provides for a legal presumption of such a state in the case where the operation of the company’s enterprise does not produce income sufficient to cover the monetary debts arising during the last year in due time. At the same time, the law provides a negative condition for restructuring in the form of a company’s dishonest intention, which it provides a demonstrative list of risks to detect such intention.
However, if the company in question meets the above, initiating a preventive restructuring is the optimal choice with the following procedure:
- Initiation of preventive restructuring
The preventive restructuring process starts with the company inviting selected creditors to start negotiations on a restructuring plan. The company has the possibility to select the creditors that are key to the success of the restructuring, i.e. the group of creditors whose claims or other rights need to be restructured. The company is obliged to present the creditors with a so-called rehabilitation project, which contains basic information on the financial situation of the company, the causes of the difficulties and the proposed measures.
For the above purposes and as an initial determination of the financial situation of the company, it is recommended (in addition to using the services of professional auditors and financial advisors, etc.) to use, for example, the “Financial Health” application, which was developed by the University of Economics and is freely available online[2] . It is an early warning tool which, by specifying the required economic indicators and using complex assessment mechanisms, determines the level of risk and highlights problematic areas of the company’s financial situation.
From the creditor’s perspective, it is then essential to note that a creditor who is not interested in being included in the restructuring has only a minimum of options to get out of the process. Such is the case with the disputability of the claim defined in the rehabilitation project. Should any party concerned disagree with the amount, authenticity, order of the claim defined in the rehabilitation project, it may, within 15 days from the delivery of the rehabilitation project, object to the incorrectness of such claim before the court. The owner of the claim shall subsequently be excluded from the project if there is even a reasonable doubt that the specification of the claim is not in accordance with the actual situation.
- Preparation and approval of the restructuring plan
Achieving approval of the restructuring plan is the objective of the entire restructuring process. The restructuring plan is a key document containing detailed information on assets, employees, creditors and, in particular, specific proposed measures to restore the company’s financial stability.
As a starting point for negotiations on the restructuring plan, the rehabilitation project is presented to the creditors at the start of the process. The manner and course of negotiation of the plan then depends purely on each specific situation (i.e. the number of selected creditors, the chosen solution, etc.) and is more of a private negotiation of terms where the company’s objective is to achieve sufficiently high creditor support.
The plan must be adopted by a majority vote of all the groups of creditors concerned, where creditors are divided into groups according to the nature of their legal status and economic interests. In order for the restructuring plan to be adopted, it must be adopted in all groups by at least a three-quarters majority vote, with each creditor having one vote for every CZK 1,- of its claim.
- Confirmation of the restructuring plan
A restructuring plan may be subject to court approval if it affects the rights of dissenting parties, envisages new financing or redundancies for more than 25% of employees, or if objections are lodged. Otherwise, it becomes effective upon approval under point 2 above. However, it can be assumed that only a minimum of restructuring plans will already be effective upon adoption.
- Implementation of the restructuring plan
This is the phase of actual implementation of the approved plan, on the progress of which the company is obliged to regularly inform the parties concerned.
- End of restructuring
The objective of any restructuring and one of the ways of its completion is to fulfil the approved plan, which should optimally lead to both the recovery of the company and the reimbursement of its creditors’ claims. Furthermore, the law provides for a number of cases where restructuring ends in failure. These are in particular cases of failure to implement the restructuring plan, failure of the court to approve the plan (if approval is required) or court annulment of the restructuring, declaration of bankruptcy of the company or failure to submit the restructuring plan to a vote within 6 months of the start of the restructuring process. Similarly, the company is then entitled to terminate the negotiations on the restructuring plan at any time of its own volition.
Other aspects of preventive restructuring
Preventive restructuring is a process that emphasises private negotiations between the company and its creditors, who then decide whether or not to give restructuring a chance. This imposes quite substantial requirements and responsibility on the creditors in the form of their own assessment of the financial viability or riskiness of the plan submitted. This is nothing new from the point of view of the large banking institutions, but it is a major (and often time-consuming) decision on the part of creditors of individuals, for example.
Throughout the process, judicial intervention is reserved only for cases where it is necessary to strengthen the position of the company or to protect creditors from abusive conduct by the company. As in similar situations, the company is then entitled to take advantage of the possibility of a moratorium, which should give it sufficient protection to negotiate a restructuring plan, for up to 6 months (up to 12 months in certain specific cases). The moratorium must be approved by the restructuring court.
Important safeguards have been included in the transposition law to protect creditors. If any of the parties concerned disagree with the restructuring plan, this triggers the need for a judicial review of the plan, with the so-called restructuring court being the Regional Courts in the first instance. This judicial review is carried out on the basis of strict criteria and ensures that the plan is fair and in line with the law. There is also the institution of a restructuring administrator, who can assist in individual tasks during the process. This increases the credibility and expertise of the decision-making process. A restructuring administrator is an insolvency administrator with a special authorisation registered in the list of restructuring administrators.
At the same time, for the purposes of restructuring, the legislator introduces new Restructuring Register under the Ministry of Justice, which is intended to simplify the delivery of important documents and record information about the process, where, unlike in insolvency proceedings, only the most important documents will be published. To date, this register has not been put into operation and its role has been fulfilled in the meantime by the electronic official boards of the Regional Courts and the collections of documents of the companies concerned.
The implementation process of the Directive has produced some key differences that are worth noting. One of these differences is the process of adopting the restructuring plan and the grouping of the creditors for vote. While the Directive only requires grouping according to the collateral criteria, the transposing law introduced a more detailed diversification of voting groups. One of the arguments for this diversification is to protect the interests of the parties concerned. According to the transposition act, the similarity of economic interests should play a key role in determining the voting groups. This decision is intended to minimise the possibility of purposeful manipulation of voting and to ensure that the restructuring plan is adopted not only on the basis of votes of persons related to the undertaking. This is to ensure that the plan is genuinely in line with economic reality and does not merely serve to protect individual interests.
Summary
The Act on Preventive Restructuring brings a new framework for solving financial difficulties of companies to the Czech legal environment. This institute enables effective and quick resolution of problems without having to undergo complex and costly insolvency proceedings. This promotes business activity and the preservation of jobs. However, for the effective use of this concept, it is absolutely crucial to detect the risky situation in early stage and to start the whole process without delay before the negative financial situation turns into a bankruptcy scenario, which will have to be resolved within the limits of the Insolvency Act.
1] Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency).
[2] Available at: https://eformulare.justice.cz/msp-financni-zdravi/form/uvod.
Mgr. Martin Heinzel, senior attorney-at-law – heinzel@plegal.cz
Mgr. Ondřej Růžička, attorney-at-law – ruzicka@plegal.cz
Mgr. Vojtěch Mikšík, junior lawyer – miksik@plegal.cz
29. 11. 2023