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Long-awaited Bill on Preventive Restructurings Finally Released. What Changes Will It Bring to Czech Insolvency Law?

Long-awaited Bill on Preventive Restructurings Finally Released.

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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.

Objective

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.

Scope

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.

Cross-class cram-down

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.

Conclusion

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.

By Natalie Rosova, Attorney at Law, Schoenherr

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.

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