On 23 September 2023, the Act on Preventive Restructuring came into force, which brought a new legal institute into the Czech legal environment – preventive restructuring, through which companies will be able to resolve their unfavorable economic situation.
The purpose of preventive restructuring is to resolve the unfavorable economic situation of a company in cases where it has not yet reached insolvency, but it can reasonably be assumed that it would eventually go bankrupt without taking the necessary measures. It is therefore a statutory procedure designed to avert imminent bankruptcy and revitalize a viable company.
Preventive restructuring does not replace insolvency proceeding but seeks to prevent it and is therefore only permissible if the company is not insolvent. Once a company would be insolvent, the preventive restructuring must be replaced by insolvency proceeding.
Preventive restructuring is only for certain legal entities, i.e. companies and cooperatives. Financial institutions, financial service providers and other financial entities, as well as all natural persons, including those in business, are not able to use this new institute.
In order to use preventive restructuring, certain qualifying criteria must be met. These are the condition of good faith, the existence of real financial difficulties and the absence of bankruptcy. In addition to the qualification criteria, the law also introduced disqualification criteria. The key disqualifying criterion is dishonest intent. Other disqualification criteria include the situation where the entrepreneur is in liquidation, has been finally declared bankrupt in the last 5 years or has had a previous preventive restructuring in the last 5 years.
Preventive restructuring is carried out on a voluntary basis. The company itself, for which the preventive restructuring is planned, draws up a rehabilitation project, after which, following approval by the company's creditors, a restructuring plan is drawn up on its basis.
The creditors of the company to be preventively restructured are divided into groups according to their legal status and economic interest and have a decisive say in the approval of the restructuring plan. At least a three-fourths majority vote in each group of affected parties is required for its adoption and the restructuring plan must be adopted by all groups at the same time.
The institute of preventive restructuring provides companies with a tool to resolve their adverse economic situation and avoid possible insolvency proceedings. The question remains how widely companies will use this tool, as the costs will be relatively high given the complexity and difficulty of preparation; for smaller companies in economic difficulties, such an expense could even be liquidating. However, this question will only be resolved by future practice.
By Tomas Jelinek, Senior Associate, and Jan Cermak, Junior Associate, Eversheds Sutherland