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.
