What Changes Will The Czech Republic's New Preventive Restructuring Act Bring To Debtors And Creditors?

• Published date: 28 September 2023
• Subject Matter: Insolvency/Bankruptcy/Re-Structuring, Financial Restructuring, Insolvency/Bankruptcy
• Law Firm: Schoenherr Attorneys at Law
• Author: Mr Nat'lie Rosov'

After a delay of more than a year, an act on preventive restructuring (the "Act") implementing the EU directive on preventive restructuring frameworks finally became effective in the Czech Republic on 23 September 2023. The long-awaited Act introduces a brand-new legal tool preventing the insolvency of viable enterprises in temporary financial distress.

What is preventive restructuring and why use it?

Today a distressed company may try to achieve an out-of-court arrangement with its creditors requiring the consent of all affected creditors with the terms of the restructuring. If a timely agreement with all affected parties cannot be achieved, the distressed company risks the deterioration of its financial situation or even insolvency, which can only be resolved by means of formal insolvency proceedings.

The aim of the Act is to enable debtors to restructure effectively at an early stage and to avoid insolvency, preventing the unnecessary liquidation of viable enterprises and restoring them to health. It is a voluntary and flexible process requiring cooperation with creditors, but not necessarily with all of them. This is the situation for which preventive restructuring is primarily intended.

Who can use it?

Access to preventive restructuring is limited to corporate debtors (legal entities, not natural persons) that meet the following fundamental conditions:

1. the company should be in good faith regarding the restructuring, viability and restoration of the business;
   
2. the company is not insolvent in the form of illiquidity (platební neschopnost) (cash-flow insolvency) - preventive restructuring should not apply in case of serious insolvency situations, but is aimed at the continuation of the business by restructuring its assets and liabilities and by implementing operational changes; over-indebtedness is not an issue from the perspective of eligibility to use preventive restructuring;
   
3. the financial difficulties are so serious that if the proposed restructuring measures are not implemented, the company would become insolvent; this should exclude the preventive restructuring of financially healthy entities attempting to manipulate their creditors or business partners to provide advantages or relief beyond the ordinary course of business;
   
4. generally, preventive restructuring is excluded in cases where the business entity has a dishonest intention (nepoctiv' z'měr) - the Act clarifies this vague term by providing a demonstrative list of these situations.
   

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