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Czech Republic: Preventive Restructuring Introduced

Czech Republic: Preventive Restructuring Introduced

Issue 10.12
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On September 23, 2023, the Act on Preventive Restructuring came into force in the Czech Republic. It transposes EU Directive 2019/2023 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132.

Objectives of the Act

The aim of the new act is to enable entrepreneurs to solve financial difficulties at a time when they’re not yet in insolvency and when it’s realistic that they can restore and maintain the effective operation of the entrepreneur’s business enterprise (going concern). Preventive restructuring will be open to all entrepreneurs regardless of their size and form of business. 

Initiation of Preventive Restructuring

The entrepreneur initiates preventive restructuring by sending out an invitation and rehabilitation plan to its selected creditors (affected parties). The purpose of the rehabilitation plan is to define the scope of the intended restructuring measures, to determine the extent of the interference with the rights of the affected parties, and to provide sufficient information on the operation of the undertaking and the prospects for rescue. Initiating a preventive restructuring must be notified to the restructuring court, but the notification is not public.

Moratoria

Preventive restructuring can be accompanied by a general moratorium of up to three months, with the possibility of extending it for a further three months. During the moratorium period, no insolvency proceedings can be initiated. And creditors can’t take any other formal enforcement action. If the necessary contracts are performed during the moratorium period, the relevant business relationships will be protected from termination. However, by declaring a general moratorium, the entrepreneur will lose the advantage of the non-public nature of the preventive restructuring. Entrepreneurs will also be able to apply for an individual moratorium against specific (a maximum of three) creditors.

Restructuring Plan and Approval

The entrepreneur has to describe the detailed form of restructuring proposed in a restructuring plan. They then have to submit the plan to the affected parties (i.e., the creditors identified by the entrepreneur in the rehabilitation plan) for a vote within six months of the start of the process.

The affected parties will vote on the restructuring plan within the groups defined by the entrepreneur.  A restructuring plan is approved if it’s accepted by all groups, and within groups it’s approved if 75% of the affected parties of the relevant group vote in favor of it. Voting can be replaced by an agreement accepting the restructuring plan in the form of a notarial deed.

The Imposition of a Restructuring Plan (Cram-Down)

If a creditor votes against the restructuring plan (or abstains) but the restructuring plan is accepted by all creditor groups, the restructuring plan must be confirmed by the court under the regime of the accepted restructuring plan. Confirmation is required even if a single creditor disagrees, irrespective of the amount or nature of their claim. If the restructuring plan is not accepted by all creditor groups, it must always be confirmed by the court under the non-accepted restructuring plan regime. In both cases, the court typically assesses whether the restructuring plan complies with the law, whether the process preceding its non-acceptance was proper, or whether the entrepreneur pursued a dishonest intention. The court also assesses any objection by a dissenting creditor according to which it will be in a less favorable position than if the situation of the entrepreneur is resolved in insolvency proceedings.

In addition, in the case of an unaccepted restructuring plan, the court assesses whether: each claim is treated equally within the groups that voted against; any of the groups will not receive more than the total nominal value of their claims; and the restructuring plan is fair to creditors (best interest test). Court approval is also required if the restructuring plan includes the provision of new financing or reduces the number of employees by at least a quarter.

Restructuring Trustee

A restructuring trustee can be appointed. The role of the restructuring trustee is primarily that of control and supervisory.

Tax Aspects

Failure to achieve corresponding tax changes during the legislative process creates a risk that the forgiveness of part of the debt during the preventive restructuring may constitute taxable income for the entrepreneur.

By Petr Sabatka, Partner, DLA Piper

This article was originally published in Issue 10.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.