PREVENTIVE RESTRUCTURING

New legislation

On 23 September 2023, the new Act No. 284/2023 Coll. on Preventive Restructuring (hereinafter referred to as the “Act”) entered into force, which transposes Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 (Directive on Restructuring and Insolvency), the introductory provisions of which state: “Restructuring should enable debtors in financial difficulties to continue business, in whole or in part, by changing the composition, conditions or structure of their assets and their liabilities or any part of their capital structure, including by sales of assets or parts of the business or, where so provided under national law, the business as a whole, as well as by carrying out operational changes. (…) Preventive restructuring frameworks should, above all, enable debtors to restructure effectively at an early stage and to avoid insolvency, thus limiting the unnecessary liquidation of viable enterprises.” Unlike a reorganisation under insolvency proceedings, which is only permissible for larger companies, a preventive restructuring allows more entities to resolve their financial difficulties and in some respects resembles a reorganisation under insolvency.

Prerequisites for preventive restructuring

Only business corporations (i.e. commercial companies and cooperatives) have the option of using preventive restructuring.

The Act sets out three positive qualifying prerequisites for an entrepreneur (company) that aspires to preventive restructuring. First, the entrepreneur must have a good faith belief that his restructuring plan will prevent bankruptcy and save its business. Secondly, the company has to face real financial difficulties which adversely affect the operation of the business and which have the potential to reach bankruptcy intensity with the mere passage of time. Thirdly, the entrepreneur must not be in bankruptcy in the form of financial insolvency.

General characteristics of preventive restructuring

Preventive restructuring is a voluntary process and is based on a restructuring plan (accompanied by a recovery project) which includes an economic restructuring strategy, cost-saving measures and proposals for solutions that the entrepreneur consults with key creditors.

At the same time, the entrepreneur himself selects from his creditors (or other persons specified in the Act) those he needs for his successful preventive restructuring. Therefore, in order to successfully restructure, the entrepreneur does not have to reach a consensus with all creditors, but only with the key ones (especially financial institutions and the most important business partners). Thus, there is no need to include small creditors and business partners in the negotiation process. The entrepreneur will address only certain entities with an offer to enter into negotiations and at the same time indicates which of their rights will be the subject of negotiations.

Compared to insolvency proceedings, preventive restructuring is characterised by its significant procedural simplicity, especially because most of it takes place at the level of civil law negotiations outside formal court proceedings. Procedural informality is manifested especially in the initial stages by the fact that the process takes place outside the standard court proceedings.

Unlike insolvency proceedings, the course of which is completely and in full detail recorded in the public insolvency register with the participation of all creditors, preventive restructuring allows the entrepreneur to resolve the entire process only with selected creditors and thus protect sensitive information about his business. For example, the recovery project and restructuring plan will not be published in the register due to the extremely sensitive content and details of the entrepreneur and his business establishment. The degree of publicity of the process is determined by the entrepreneur himself and may remain low if maximum consensus with the creditors is reached and if the entrepreneur himself does not require intervention by the restructuring court. Limited publicity of the restructuring proceedings is ensured by the newly established Restructuring Register, which will operate on similar principles as the current Insolvency Register. The Act also establishes a system of restructuring justice, again similar to the system of the already functioning insolvency justice. Another parallel to insolvency proceedings is the institute of a restructuring administrator, who, however, is appointed by the court only in certain specified cases (e.g. if proposed by the entrepreneur or the majority of the parties concerned etc.).

Preventive restructuring is therefore, unlike restructuring under insolvency proceedings, less formalised. In the course of the restructuring, the entrepreneur also retains the right to dispose of his assets and the management of the company remains the responsibility of the existing management and does not pass into the competence of the restructuring administrator.

Process of preventive restructuring

Preventive restructuring is initiated by the entrepreneur by a written request addressed to selected creditors (parties concerned) inviting them to start negotiations on the content of the restructuring plan. At the same time, the entrepreneur shall notify the restructuring court of the commencement of the preventive restructuring.

The entrepreneur (company) will discuss the restructuring proposal in the form of a restructuring plan with important creditors and persons concerned (negotiation phase), then subject it to the creditors´ approval test (voting phase) and in certain situations (but not necessarily) also to the restructuring court´s approval test (approval phase). The Act allows the approval of the restructuring plan even in the event of partial disagreement of the parties concerned (a 75% majority is sufficient for the vote). In the framework of preventive restructuring, instruments of protection against creditors (collective and individual moratorium) are also available to prevent the disruption of restructuring by destructive interventions of creditors not supporting the process.

Restructuring plan, recovery project

The restructuring plan (divided into a descriptive and a binding part) is the basic document of the entire preventive restructuring. The plan describes and evaluates the results of the business and operation of the enterprise, analyses the causes of the financial difficulties encountered and presents a proposal for their solution, i.e. specifically defines changes in the rights and obligations of the parties concerned, in particular interventions in the property rights of the creditors (e.g. deferment of debt maturity, debt forgiveness), changes in the structure of the entrepreneur’s assets (sale of surplus assets), changes in the capital structure of the entrepreneur, acquisition of new financial resources (contribution of existing shareholders, entry of an investor), or changes in operating conditions (cost-saving measures).

In the restructuring plan, the entrepreneur shall classify the parties concerned into voting groups according to their economic and legal status. The purpose of dividing the concerned creditors into groups is to approve (vote) on the restructuring plan. The Restructuring Plan shall be adopted if the necessary majority of the parties concerned in all voting groups vote in favour of its adoption. Alternatively, voting may be replaced by an agreement concluded in the form of a notarial deed.

The recovery project then constitutes a basis that contains, at least in essential features, restructuring measures aimed at maintaining or restoring the operational capacity of the enterprise, a business plan for the period during which the preventive restructuring will take place, as well as a description and justification of the ability to ensure the proper functioning of the enterprise and the fulfilment of current and future obligations at least until the expected effective date of the restructuring plan.

The purpose of the recovery project is therefore to define the scope of the restructuring measures and to provide sufficient information to the parties concerned about the functioning of the entrepreneur (company) and the perspective of its rescue. In principle, it is therefore fundamentally impossible to initiate or continue preventive restructuring without the entrepreneur himself actively presenting his vision and strategy to the parties concerned, supported by detailed information about his situation.

Methodological guidelines

The legal regulation of preventive restructuring is quite extensive and complex (121 sections of the Act). This is probably why the Act contains an authorization, according to which the Ministry of Justice will make available a list containing practical information and guidelines for the purpose of developing a recovery project and a restructuring plan tailored to the needs of micro-enterprises in a manner allowing remote access.

 

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Team WTS Alfery, Alfery Hrdina Advokáti