On 23 September 2023, the new Act on Preventive Restructuring (284/2003 Coll.) entered into effect in the Czech Republic (the “Czech Preventive Restructuring Act”), incorporating the EU Directive 2019/1023 on preventive restructuring frameworks in the Czech legal environment. This legislation has been designed to enable debtors in financial difficulties to continue business by changing the composition, conditions or structure of their assets and their liabilities, by carrying out operational changes or adopting other appropriate financial measures, prepared, and implemented to avoid debtors’ bankruptcy.
In other words, as opposed to the Czech Insolvency Act, the new legislation should address financially distressed situations, in which the debtor’s business could survive without the need to launch formal insolvency proceedings, usually very damaging or even fatal to most of debtors in the Czech Republic.
This article briefly summarises the fundamental principles and statutory rules of the Czech Preventive Restructuring Act.
Who is eligible for preventive restructuring?
A debtor is allowed to initiate preventive restructuring if its financial difficulties reach a “sufficiently serious” level where it could reasonably be expected that, in the absence of restructuring measures, the debtor’s business would run into bankruptcy. The Czech Preventive Restructuring Act sets forth a legal assumption that a debtor is deemed to face a “sufficiently serious” financial situation if its business has failed to generate revenues to cover its financial debts due in a timely manner within the course of the previous year.
Furthermore, the Czech Preventive Restructuring Act explicitly provides that a debtor acting in bad faith is not eligible for the preventive restructuring process. The legislation includes a couple of examples of this, such as presenting incorrect or incomplete financial data or acting in violation of the Czech Preventive Restructuring Act throughout the restructuring process and negotiations with creditors.
The preventive restructuring process in a nutshell
The preventive restructuring process involves the following key steps and phases:
- In order to initiate the process, a debtor sends a request for negotiations to “affected parties,” including creditors or shareholders. These negotiations do not need to involve all creditors of the debtor. For example, the debtor may involve only key creditors with receivables and claims, entirely or predominantly causing financial distress of the debtor (e.g., banking loans, energy suppliers). The debtor’s request for negotiations must be accompanied with the relevant financial and operational data and information regarding the debtor’s business as defined by the Czech Preventive Restructuring Act;
- At the same time, the debtor notifies the relevant bankruptcy court in the Czech Republic;
- The debtor draws up a restructuring plan, which addresses rights of the affected parties and defines the restructuring measures to be implemented by the debtor to avoid bankruptcy;
- The affected parties are divided into groups (e.g., secured creditors, unsecured creditors, or shareholders) who then vote on the restructuring plan. In certain cases, the bankruptcy court has the power to approve the restructuring plan even if it has not been approved by all groups of creditors (cramdown);
- The debtor acts and conducts its business in accordance with the restructuring measures set out in the restructuring plan;
- Once the restructuring measures have been successfully implemented by the debtor, the debtor’s preventive restructuring is completed and terminated.
The preventive restructuring process is generally closed to public and, accordingly, it offers to a debtor an opportunity to resolve its financial difficulties without unnecessary publicity, that might otherwise alert creditors and business partners not involved in the process.
What protection from creditors is available to a debtor?
Under the Czech Preventive Restructuring Act, protection from creditors is available to a debtor through (i) a general moratorium, and/or (ii) an individual moratorium. The relevant bankruptcy court of the Czech Republic grants general and individual moratoria at the request of the debtor.
The main effects of a general moratorium on all affected parties are as follows:
- Creditors cannot initiate insolvency proceedings against the debtor;
- No enforcement proceedings can be ordered, initiated or carried out against the debtor’s property;
- The debtor’s business partners are not entitled to unilaterally terminate or otherwise withhold performance of contracts for the supply of goods, services, energy or any other type of performance necessary for the continuation of the ordinary operation of the debtor’s plant on the grounds of debtor’s default on debts prior to the declaration of the general moratorium, and
- Secured creditors cannot exercise their security rights over the debtor’s assets.
Given its impacts on the affected parties, the court publishes the judicial decision granting the general moratorium in the restructuring register. The restructuring register is not yet operational in the Czech Republic. For the time being it is being temporarily substituted by publication at the court’s official board. The documents to be published in the restructuring register are also deposited in the publicly accessible Collection of Deeds maintained by the Czech Commercial register.
An individual moratorium has the same legal effects as a general moratorium but only with respect to a particular creditor.
Protection of interim and new financing
In times of crisis, cash is the king. In relation to the preventive restructuring, special protection applies to the following types of financing:
- interim financing provided to the debtor during the general moratorium, which is reasonable and necessary to maintain or restore the debtor’s plant or to preserve or increase its value, and
- new financing provided to the debtor following the adoption of the restructuring plan, if it is part of the restructuring plan, and, at the same time, the restructuring plan expressly identifies these funds as new (post-restructuring plan) financing.
The claims arising from interim and new financing will have priority over the claims of the debtor’s non-secured creditors in any subsequent insolvency proceedings.
Only time will tell
The Czech Preventive Restructuring Act strengthens the position and rights of debtors in pre-bankruptcy situations. It surely is a tool which could help companies to overcome their financial difficulties and survive crisis. Only time will tell whether this instrument will truly be a game changer in preventing bankruptcies in the Czech Republic.