Preventive restructuring – a rescue for entrepreneurs in difficulties

Entrepreneurs will soon have a new tool to solve their financial problems. The long-prepared law on preventive restructuring was signed by the President last week and will soon be published in the Collection of Laws.

What is preventive restructuring

Preventive restructuring is intended to be a procedure aimed at preventing bankruptcy and preserving or restoring the viability of an entrepreneur’s business. It is therefore a way of solving the financial problems of an entrepreneur in a timely manner with the aim of economic recovery of the commercial establishment.

Time is a key element in the entire process. Preventive restructuring is not meant to be a tool for solving bankruptcy, but a solution that the entrepreneur reaches for in a timely, preventive manner. Meaning at the moment when the entrepreneur starts to have certain financial problems, which, however, do not reach such intensity that they would have to be solved through insolvency proceedings.

Who is it intended for

Preventive restructuring will be reserved only for entrepreneurs – business corporations. In order to successfully enter into preventive restructuring, an entrepreneur must not be insolvent or in liquidation. At the same time, however, his financial difficulties must be of such severity that, if the proposed restructuring measures were not adopted, he would go bankrupt.

How to start it

Preventive restructuring can be initiated by a written invitation to start negotiations on a restructuring plan to the so-called affected parties. These are the creditors or shareholders whose rights will be directly affected by the restructuring plan.

Together with the invitation, the entrepreneur will be obliged to send a so-called remediation project to the affected parties. In this document, the entrepreneur presents, at least in outline, the measures to be taken to maintain or restore the viability of his commercial establishment, his business plan for the future and other basic information.

The entrepreneur shall also notify the restructuring court of the commencement of the preventive restructuring. However, in the event of a smooth and conflict-free restructuring, the role of the court will be significantly smaller than, for example, in insolvency proceedings.

How to perform the restructuring

In principle, the entrepreneur is not limited in the restructuring measures and it is entirely up to the entrepreneur what form of restructuring he chooses. The entrepreneur will be obliged to describe all prepared measures in detail in the so-called restructuring plan. The plan will then be submitted to the creditors for approval.

Creditors’ consent

As part of the restructuring plan, the entrepreneur divides the creditors into groups, in which they will vote to approve the plan. Each group should include creditors with substantially the same legal status and economic interests. For certain creditors (e.g. secured creditors), the bill provides for a separate group.

When voting, the creditors will have one vote for every CZK 1 of their claim and the approval of the restructuring plan will require the acceptance of all groups of creditors. A group will have accepted the plan if the creditors with at least a three-quarters majority vote in favour of it.

What are the advantages

The legislator wants to motivate entrepreneurs to use preventive restructuring by means of several aspects. First and foremost, the restructuring process under the new law should be fast and flexible. Compared to insolvency proceedings, there is no need for cumbersome procedures such as the determination of bankruptcy, filing of claims, their review, etc. Assuming that the restructuring process runs smoothly and the so-called affected parties approve the restructuring plan without problems, the role of the court, which will not have a dominant position as in insolvency proceedings, will be limited as much as possible.

Furthermore, the restructuring process should be primarily private. Thus, the negative publicity known from the insolvency register is completely absent.

The key advantage of preventive restructuring is to be the possibility for the entrepreneur to choose the so-called affected parties, i.e. the entities (usually creditors) affected by the restructuring measures. The entrepreneur is not obliged to deal with all of his creditors, but can choose between them.

Moreover, the entrepreneur may to some extent impose restructuring on the parties concerned against their will. This could never happen in an informal (non-statutory) restructuring, as it operates solely on the basis of 100% consensus.

Finally, preventive restructuring is based on the preservation of dispositive rights to the assets of the entrepreneur and the possibility for the shareholders to retain their ownership interests. This is a fundamental difference from insolvency proceedings. In addition, the restructuring process protects new and interim financing, without which the operation of a commercial establishment in difficulty cannot normally be maintained. The entities providing such financing need not be concerned that the financing would be assessed as an ineffective legal act in any future insolvency proceedings (if the restructuring fails).

Conclusion

The draft law on preventive restructuring contains enough interesting incentives that could positively motivate entrepreneurs to solve financial problems in a timely manner. While informal restructuring is already quite common today, the new legal framework may represent something of a revival.

However, the assumption remains that the entrepreneur will actively address the unfavourable economic situation. This is a completely voluntary process and no one can force the entrepreneur into it.

If you are considering any restructuring or (insolvency) reorganisation and would like to know the details, please do not hesitate to contact our team of experts.

Author: Jiří Koubek, Veronika Odrobinová