The new law transposing the Restructuring and Insolvency Directive[1] should provide assistance to businesses in temporary financial difficulties and enable them to avoid bankruptcy. It was approved by the Senate on Wednesday 23 August this year. The text includes a related amendment to the Insolvency Act. The proposals will be sent to the President for signature.
During the discussion, the Chamber of Deputies made changes to the original government proposal, refining the procedure for preparing the preventive restructuring and defining the area of unaffected parties. These changes were made to remove potential ambiguities and errors in the original text. As the discussion and approval of the law in the Senate took place on Wednesday 23 August this year and the legislative deadline is set at one day, the effective date can be expected within a month. However, transposition is one year late, on the basis of which the Czech Republic is facing infringement proceedings.
The main objective of the precautionary restructuring concept is to enable entrepreneurs to reach an agreement with their key creditors while keeping their business running. This process aims at avoiding bankruptcy and preserving or restoring the viability of the business. The entrepreneur himself will seek to stabilise his business by negotiating a restructuring plan with his creditors. The entrepreneur is free to choose which creditors to deal with. It should be stressed that the rights of the so-called ‘unaffected creditors’, i.e. those that the entrepreneur does not approach (for example because of the smaller amount of its claims), will remain unaffected.
The restructuring process starts with the issuance of a written invitation to enter into negotiations on a restructuring plan, which is delivered to all parties. At the same time, the entrepreneur provides the rehabilitation project and notifies the restructuring court of this initiative and, in case of participation of public authorities, sends them the necessary documents. In addition to the rehabilitation project, the restructuring plan itself must be drawn up for further negotiations.
While a rehabilitation project focuses on presenting a plan for maintaining the viability of the company on the basis of realistic assumptions, a restructuring plan focuses on specific measures and commitments to be implemented as part of a preventive restructuring. The rehabilitation project is part of the restructuring plan, even if it has changed after it has been disclosed to the parties concerned, as it provides important information on the state of the company and its future.
Once the project is developed, there is an acceptance process that involves several steps. First, the entrepreneur submits the restructuring plan for a vote of all the parties concerned. The vote cannot take place before the claims review period has expired and the plan cannot be amended once it has been submitted. The plan shall be accepted by the group of affected parties if a three-quarters majority of the votes are in favour of the plan or if it is accepted by all groups of affected parties.
If the plan directly affects the rights of the dissenting parties by interfering with their finances or employment, it is only effective once it has been confirmed by the restructuring court. Otherwise, it shall be effective as soon as it is adopted in respect of all the parties concerned. If the plan is annulled by a court or in connection with the insolvency of the undertaking, the effects of such annulment shall be those provided for in Section 103. The entrepreneur shall furthermore inform the parties concerned of the implementation of the restructuring plan and related measures, the financial plan and the costs of the restructuring, except where other provisions or agreements are provided for.
Precautionary restructuring ends in several situations, such as when the firm notifies the parties concerned that it will not continue negotiations on a restructuring plan, a draft restructuring plan has not been put to a vote or an agreement to accept it has not been reached within 6 months of the start of the restructuring, the plan has been implemented or not implemented, or the firm goes bankrupt. The termination of the preventive restructuring shall be notified by the entrepreneur in writing to the parties concerned. The restructuring plan shall be deemed to have been fulfilled if its conditions are met and the undertaking has discharged its obligations towards the parties concerned or if they no longer insist on compliance.
A significant difference from the insolvency proceedings, or the reorganisation institute within these proceedings, is that only key creditors, the “affected parties” that the entrepreneur addresses, will be included in the preventive restructuring process. The other creditors will have their claims resolved in a phased manner according to set deadlines. In addition, the court will not publicly disclose information about the ongoing restructuring in order to minimise the negative impact of public opinion. Another important difference is that during the period of the preventive restructuring process the entrepreneur will continue to have the right to manage his assets, except in situations where the law or the preventive measure prescribes a different procedure. There will also be an obligation on the entrepreneur to suspend his or her dispositions in the event of a general moratorium being declared, which, however, always requires the approval of the court on application. Preliminarily, however, there will be no restrictions on the entrepreneur in the management of his assets.
The parties concerned play a key role in preventive restructuring. They are the actors directly affected by the changes and measures during the restructuring process. This category includes creditors, employees, shareholders, suppliers and other entities with a legal or commercial relationship to the business undergoing restructuring. Their role is essential with regard to
- voting, where affected parties can vote to approve a restructuring plan that may change aspects of the business, including finances and jobs, their vote is a key element in confirming the plan;
- information, whereby the entrepreneur is obliged to inform the parties concerned of the changes and measures taken during the restructuring, including the financial plan, the measures taken and the costs;
- cooperation, as the parties concerned can be involved in the development of the plan and work together to create it, and their support is necessary for successful implementation;
- rights, because the law guarantees that the rights of the parties concerned will be respected and the process will be transparent and fair.
In contrast, unaffected parties have a less direct role than affected parties in relation to preventive restructuring, but their position is also significant. They are those who are not directly affected by the changes and measures that are part of the restructuring process, although they may be affected by the consequences of these changes.
The personal scope of the Act on Preventive Restructuring is deliberately limited to commercial corporations, i.e. to companies and cooperatives. This limitation is derived from the Czech legal framework, where business corporations are legal entities with the primary purpose of doing business and creating business establishments. Only these entities are registered in the Commercial Register and considered as entrepreneurs regardless of their actual activity. Other entities that may engage in economic activity but not primarily for profit (e.g., associations) are excluded from this law. At the same time, financial institutions and other financial entities are excluded in accordance with the transposed Directive. Due to the specific characteristics and needs of these entities, the legal regulation of preventive restructuring is limited to legal persons only. In contrast, the negative definition of the personal scope of the Insolvency Act, which deals with insolvencies of both business and non-business entities, makes a crucial difference. The Preventive Restructuring Act also excludes state authorities, local government units and other institutions exercising public power and agenda. On the contrary, state-owned enterprises that carry out entrepreneurial activities fall within the personal scope of the Act, as they meet the definition of an entrepreneur and have a business establishment. This deliberate limitation to business corporations and the nature of economic entities ensures that preventive restructuring is applied to entities with a real business purpose and the ability to bear the costs of restructuring. The Act will be applicable to business corporations outside:
- Securities Dealers Guarantee Funds and Financial Market Guarantee Schemes and funds managed by them,
- These entities are excluded from the law because they are linked to the financial market and have a special status in the context of securities trading. Their activities relate to ensuring the integrity and stability of the financial market, a matter which goes beyond the scope of preventive restructuring.
- Banks, credit unions and other credit institutions (according to Article 4(1)(1) of Regulation 575/2013 on prudential requirements for credit institutions),
- These financial institutions play a key role in the financial system and have special regulations and bailouts set by law that differ from the principles of preventive restructuring. Their exclusion from the law allows the stability of the financial sector to be preserved.
- securities dealers and investment firms (as referred to in Article 4(1)(2) of Regulation 575/2013) or collective investment undertakings (as referred to in Article 4(1)(7) of Regulation 575/2013),
- These entities are closely linked to the financial markets and have specific activities. Taking into account their activities and obligations in the context of securities trading goes beyond the scope of preventive restructuring.
- central securities depositories (as referred to in Article 2(1)(1) of Regulation 909/2014 on improving EU securities settlement and central securities depositories)
- CSDs play a key role in the functioning of securities and have specific legal and technical requirements. Their exclusion from preventive restructuring ensures the stability and integrity of the securities processing and custody system.
- central counterparties (as defined in Article 2(1) of Regulation 648/2012 on OTC derivatives, central counterparties and trade repositories),
- CCPs are responsible for executing derivatives trades and have specific functions and responsibilities. Due to the complexity of this area, they are excluded from the precautionary restructuring.
- persons who are an institution, financial institution or financial holding company, mixed financial holding company or mixed holding company (as defined in the Act on Recovery and Resolution Procedures in the Financial Market),
- These exclusions apply to entities that are regulated by specific rules and have a key impact on financial stability. Their exclusion from precautionary restructuring takes into account the specific nature of these entities.
- health insurance companies (established under the Act on departmental, branch, company and other health insurance companies) and the General Health Insurance Company of the Czech Republic,
- Health insurance companies have a specific character in the health system and have defined obligations towards the health system and the insured. They are excluded from preventive restructuring because of their specific interests and position within the public health system.
- an insurance or reinsurance company (under the Insurance Act).
- Insurance and reinsurance companies play a key role in risk underwriting and have specific regulations and obligations. Their exclusion from precautionary restructuring reflects the complexity and severity of the financial and insurance sector.
The Preventive Restructuring Act represents a significant step towards supporting entrepreneurs in temporary financial difficulties. It aims to enable entrepreneurs to reach agreements with their key creditors to avoid bankruptcy, which can lead to the preservation of their businesses and the restoration of their ability to operate. However, the new law may also bring some problems and challenges. These problems may include potential creditor opposition to the proposed plan, which could slow down or complicate the restructuring process. In addition, there may be controversy regarding the balancing of the rights and interests of the various parties involved. In addition, even if the personal scope is limited to commercial corporations, there may be questions as to whether this tool should be extended to other entities with economic activity.
In conclusion, preventive restructuring has the potential to make a significant contribution to supporting entrepreneurs in difficult situations and to maintaining economic stability. However, its success will depend on effective cooperation between all parties involved and on the ability to overcome potential problems and challenges that may arise during the process.
[1] Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, insolvency and bans and measures to improve the effectiveness of restructuring, insolvency and resolution procedures and amending Directive (EU) 2017/1132
