Preventive restructuring – a new solution for companies in financial difficulties
In August, the senate approved a bill on preventive restructuring. It aims to help entrepreneurs avoid bankruptcy and enable them to deal with serious financial difficulties promptly and without public involvement.
With more than a year's delay, the act transposes the EU directive and introduces into Czech law the missing concept of preventive restructuring. Until now, only two possible ways for companies to resolve their financial difficulties, i.e., reorganisation or bankruptcy, were regulated by the Insolvency Act. However, a prerequisite for the application of these instruments is the debtor's insolvency or at least imminent insolvency.
Preventive restructuring, on the other hand, allows to address economic difficulties in time to prevent insolvency and to maintain and restore the operation of an entrepreneur's business establishment. Preventive restructuring starts with the creation of a remediation project, followed by a detailed restructuring plan including the economic strategy of the restructuring, austerity measures to be taken, and proposed solutions; the entrepreneur shall consult their restructuring plan with their key creditors.
Due to the extremely sensitive content and detailed information on the entrepreneur and their business establishment, neither remediation projects nor restructuring plans shall be published. Unlike insolvency proceedings whose course is recorded in a comprehensive and detailed manner in a public insolvency register with the participation of all creditors, preventive restructuring allows the entrepreneur to complete the process behind closed doors, only involving selected creditors, thus keeping sensitive information about the business secret. With preventive restructuring, the effects of negative publicity otherwise associated with insolvency and the negative psychological effect of bankruptcy should be minimised.
Compared to reorganisation, which is only allowed for companies with more than 50 employees or a turnover exceeding CZK 50 million, preventive restructuring will be available to more entities that need to resolve their financial difficulties. The act shall enter into force on the day following its publication in the Collection of Laws.