DRAFT LAW ON PREVENTIVE RESTRUCTURING - A CHANCE FOR ENTREPRENEURS NOT TO GO BANKRUPT

The Chamber of Deputies has received two bills, designated as Chamber Print No. 371 and No. 372. These bills, submitted by the Government of the Czech Republic, concern the introduction of the so-called institute of preventive restructuring into the Czech legal order. This institute could help prevent bankruptcy for entrepreneurs facing financial difficulties.

The first bill, the Preventive Restructuring Bill (Parliamentary Document No 371), introduces this bankruptcy prevention option into Czech law. The second proposal (Parliamentary Document No. 372) is a technical amendment to the Insolvency Act, which accompanies the transposition regulation and aims to adapt the current legislation so that the first of the aforementioned laws fits correctly into the Czech legal system and, together with this, properly transposes Directive (EU) 2019/1023 of the European Parliament and of the Council of 20. June 2019 on preventive restructuring frameworks, insolvency and bans and measures to improve the effectiveness of restructuring, insolvency and resolution procedures and amending Directive (EU) 2017/1132 (the Restructuring and Insolvency Directive).

The existing Czech legislation lacks an institute that would aim at early detection of financial and non-financial difficulties of entrepreneurs and, together with that, initiate the recovery process in the manner contained in the proposed transposition from the European Union. At present, apart from possible contractual solutions, there is only one way out, and that is the so-called reorganisation under the Insolvency Act, which, however, is targeted only at the actual bankruptcy of the entrepreneur. However, there is no overlap between these two institutes, as preventive restructuring does not target the actual bankruptcy of the entrepreneur, but seeks to prevent it in time and thus also to prevent it.

The draft law responds, among other things, to existing legislation in Great Britain, the Netherlands or Germany, where transposition has taken place or at least similar legislation is known. In practice, we already know that foreign creditors or foreign parent companies are demanding similar solutions which are familiar to them from their own laws and which, thanks to transposition, should be available in all EU Member States.

One of the key advantages of the new regulation is undoubtedly the possibility of continuing to run a business even in the event of financial difficulties. However, the adoption of a combination of the various restructuring measures envisaged by the rehabilitation project and the subsequent embedding in the restructuring plan itself is a condition. This plan will then be agreed and voted on by the creditors addressed by the entrepreneur in their capacity as interested parties. The aim of the whole process is to revitalise a viable plant and thus avert possible bankruptcy, not to maintain various forms of zombie companies.

In addition, it should be mentioned that the whole preventive restructuring is based on the fact that it preserves the dispositive power and, together with this, the possibility of retaining the ownership interest by the shareholder, who in the Czech Republic is usually part of the statutory body. The intention of the proposal is to encourage rational and timely action by entrepreneurs and to motivate them to clearly describe the state of affairs and possible solutions.

Last but not least, it is worth noting that, unlike in insolvency proceedings, in a preventive restructuring, only designated creditors (the so-called key creditors) will be addressed. These creditors are identified by the entrepreneur and are identified by the parties concerned. The remaining creditors who have not been identified as key for the entire restructuring will be identified as unaffected in the process itself and their legal position will not be affected.

Finally, the legislative process of the Preventive Restructuring Bill has already started in July 2021. The submitter believes that from the perspective of the addressees of the standard, given the current economic situation, this is an eagerly awaited instrument and its passage will not be hindered by any political entity.

Both proposals had passed their first reading and would now be the subject of debate by the Constitutional and Legal Affairs and Economic Affairs Committees, to which they had been referred. Personally, however, I do not think that there will be any major changes or amendments.