On September 23, 09, Act No. 2023/284 Coll., on preventive restructuring (hereinafter referred to aslaw on preventive restructuring"Or"the law"), which is supposed to help entrepreneurs prevent their bankruptcy and thus avoid the need to initiate insolvency proceedings. The Institute of Preventive Restructuring is introduced into our legal system with a significant delay compared to other European countries. The deadline for the obligation to adjust this institute, which was imposed on the member states by the directive of the European Parliament and the Council of the European Union, has already expired in July 2022, and the Czech Republic is thus facing proceedings for breach of obligation.

Preventive restructuring is a process in which an agreement is reached between an entrepreneur and his key creditors with the aim of saving the company from bankruptcy, preventing the initiation of insolvency proceedings and terminating its activities while maintaining or restoring the operability of the entrepreneur's business plant. It can be used by almost all business corporations, with the exception of the corporations listed in § 3, paragraph 2 of the Act, such as banks, insurance companies, stockbrokers and health insurance companies.

If an entrepreneur wants to start or continue preventive restructuring, he must meet the following conditions in accordance with § 4 of the Preventive Restructuring Act:

1. They must be in good faith in maintaining or restoring the operability of their business plant.

2. It has to face real financial difficulties, which reach such a seriousness that if restructuring measures are not taken, it would go bankrupt.
3. It must not be in bankruptcy in the form of insolvency at the time of the start of the preventive restructuring process.

Preventive restructuring is inadmissible if the entrepreneur pursues a dishonest plan and further, an entrepreneur who

• is in liquidation;
• he has been declared bankrupt by a final court decision in insolvency proceedings in the last 5 years; or
• for whom the preventive restructuring ended in the last 5 years before its restart by declaring the preventive restructuring inadmissible due to dishonest intent.

The Act on Preventive Restructuring assumes a very active role of the entrepreneur. If he wants to participate in preventive restructuring, he will have to regularly monitor his financial situation in order to take appropriate measures in time. To facilitate this, the Ministry of Justice has launched a publicly accessible interactive web application called "Financial Health" https://eformulare.justice.cz/msp-financni-zdravi/form/uvod, which is intended to help entrepreneurs identify potential problems in time and initiate steps leading to averting bankruptcy.

The entire process of preventive restructuring begins with a call to start negotiations on a restructuring plan and a proposal of the so-called rehabilitation project, which the entrepreneur will send to selected creditors and partners, i.e. the affected parties whose rights will be directly affected by the restructuring plan. The entrepreneur shall also notify the restructuring court of the start of preventive restructuring. The rehabilitation project will be further transformed into the so-called restructuring plan, which already contains specific commitments and measures. In this respect, there is a certain similarity with the reorganization plan under the Insolvency Act. In order to facilitate the preparation and negotiation of the restructuring plan, the entrepreneur may enter into an agreement with the creditor that during the duration of the preventive restructuring, in particular:

(a) will not request payment of the entire claim for breach of duty,

(b) does not terminate financing through an existing loan;

(c) does not assign the claim to another person, or

(d) shall not proceed with the enforcement of the debt, the enforcement of the lien, the offsetting of mutual claims, the termination of the financial leasing or the application of the sanction resulting from the breach of the obligation.

Such an agreement can be conditioned by making changes in the composition of the members of the elected bodies of the entrepreneur, while such an agreement in itself is not considered to be influencing or controlling according to the Business Corporations Act, nor does it in itself establish a relationship of persons related to each other.

The restructuring plan will be accepted if accepted by all groups of affected parties, with at least a three-quarters majority vote required in each group. Voting can also be replaced by concluding an agreement on the adoption of the restructuring plan in the form of a notary record. V in the event that one of the groups does not approve the restructuring plan (e.g. due to disagreement with the level of debt forgiveness or postponement of their maturity), the restructuring court can replace its disagreement with its decision. Approval by the restructuring court is also required if the restructuring plan includes the provision of new financing or reduces the number of employees in a basic employment relationship by at least a quarter. In other cases, the restructuring plan will become effective upon its acceptance by the parties concerned. 

Preventive restructuring can end mainly with the fulfillment of the restructuring plan, but also with a court decision not to confirm the restructuring plan or with its later judicial cancellation, or with a decision on the bankruptcy of the entrepreneur issued in insolvency proceedings. 

A specific measure under the Act on Preventive Restructuring can be, for example, asset restructuring. This can consist in the sale of part of the property or in securing new financing. Another measure can be the restructuring of obligations, which extends the maturity of obligations or forgives the debt. Furthermore, there may be the entry of a new investor or an additional payment to existing partners and shareholders as part of the equity restructuring.

This new law is intended to differ from traditional insolvency proceedings primarily in that it enables both entrepreneurs in financial difficulties and creditors to provide space for negotiation and planning of steps that will enable the entrepreneur to continue their activities and creditors to satisfy all or the majority of claims. In contrast, insolvency proceedings tend to lead to the termination of the entrepreneur's activity and lower creditor satisfaction.

Another difference compared to insolvency proceedings is that the entrepreneur does not have to come to an agreement with all creditors, but only with the key ones, directly without the intervention of the court or the restructuring administrator. This administrator is appointed at the proposal of the entrepreneur himself, the majority of creditors concerned or in clearly defined situations. He is appointed for a limited period of time and for a limited range of tasks. The restructuring administrator is appointed from the list of restructuring administrators, which consists of insolvency administrators with a special permit. The function of the restructuring administrator is mainly control and supervision. 

Preventive restructuring is basically a non-public and private process and there is no obligation to publish all documents, including the notification of its initiation, the rehabilitation project and the restructuring plan. The non-publicity of the entire process leads to the fact that there should be no damage to the good name of the entrepreneur and his stigmatization in the eyes of the public and business partners, as is usually the case with insolvency proceedings.

The law also provides a high level of protection for the entrepreneur by the fact that the court can, in justified cases, provide him with protection against individual actions by his creditors. This means, for example, the initiation of insolvency proceedings or enforcement.

Of course, the law also protects the rights of creditors, when it enables the review of disputed claims and the limitation of the entrepreneur's disposal rights. If the entrepreneur does not pursue an honest intention through preventive restructuring, it can be terminated at any time. It follows from the provisions of Section 5, paragraph 2 of the Act, that dishonest intent can be inferred, for example, from failure to provide proper and timely cooperation to the restructuring administrator and from the use of a general or individual moratorium for the purpose of unfairly harming one's creditor.

The lack of legal regulation of preventive restructuring is for example, the fact that it was not possible to achieve the same tax treatment as in the case of insolvency reorganization, i.e. debt forgiveness as part of preventive restructuring can represent taxable income for entrepreneurs. There is not yet a functional publicly accessible restructuring register and all information must be found on the official records of the regional courts. 

Only in practice will it become clear whether preventive restructuring will become a useful tool for solving the financial crises of companies, or, on the contrary, will be a little-used institute. Preventive restructuring should be aimed at averting (preventing) bankruptcy, not solving it, which is addressed by the Insolvency Act. Preventive restructuring should be faster than insolvency proceedings, optimally the restructuring plan should be confirmed within months. Due to the faster process, the financial costs will be lower than, for example, in the case of judicial reorganization.

Source: epravo.cz

JUDr. Lucia Slobodová, Attorney