New tool for early resolution of financial difficulties of businesses is being prepared
In recent days, the Ministry of Justice has published a bill on so-called “early restructuring”. This is in response to the Directive of the European Parliament and the Council of the EU from June 2019, which aims to unify mechanisms to help viable businesses in financial difficulties across the EU. The bill has now been circulated to other ministries for inter-ministerial comments, which should result in a government bill.
Rather than amending the existing Insolvency Act, the draft goes down the route of creating a new Act enshrining a new structure for early restructuring proceedings, which includes, inter alia, a new register of restructurings and a new position for restructuring advisers and administrators. The aim of the proposal is, according to the ministry’s statement, to create “a flexible tool to avert imminent insolvency and rescue viable businesses at an early stage”. The main criticism of the bill is aimed at the potential problems associated with the creation of a new “pre-insolvency” infrastructure, which may take time to be adopted by the Czech judiciary.
The bill introduces an intermediate step before declaring bankruptcy under the Insolvency Act, which companies in the Czech Republic often resort to when it is too late and 98.4% of them end up in liquidation bankruptcy, according to statistics from the Ministry of Justice. Early restructuring should occur when the management starts to realize the unsustainability of the financial situation and an out-of-court agreement with creditors is no longer possible. Compared to insolvency proceedings, it is an almost conflict-free procedure in which, if the creditors and the management agree, the restructuring court does not have to make any authoritative decision.
Early restructuring should also bring a certain amount of discretion, as information would not usually be available to the public. The very public nature of insolvency proceedings under the Insolvency Act often leads to stigmatization of the management and the company may become untrustworthy to potential investors or customers.
Finally, it is worth mentioning that this bill is unlikely to be passed before the October elections, so its future shape will depend on the new government and the elected Chamber of Deputies. However, as it is a transposition of an EU directive, the government will most likely try to get it passed at least by the 17 July 2022 deadline.
At the moment, the existing Insolvency Act, with which our law firm has many years of experience, is still in force. So please do not hesitate to contact us with your query or request for assistance.
Vojtěch Makovec, Partner
rutland & partners, law firm
Tel: +420 226 226 026
Email: vojtech.makovec@rutlands.cz
