Creditor protection under amendment to Company Conversions Act

Providing sufficient security

The amendment to the Company Conversions Act changes the definition of claims where creditors may demand security and the timeframe for exercising the right to security. This also applies to future or contingent claims. Under the literally interpreted previous wording of the act, the protection only applied to outstanding claims that originated before the conversion was recorded in the Commercial Register.

Now, it is explicitly admitted that creditors of future or contingent claims also have a right to sufficient security if the claims arise from obligations originated before the draft terms of the conversion were published and if their recoverability is impaired because of the conversion. This means that claims for which a right to sufficient security arises may not exist at the date of publication of the draft terms of the conversion. The Company Conversions Act thus provides a higher level of protection for creditors of claims arising from long-term contractual relationships (e.g., credit, lease, or general agreements).

For the sake of completeness, we cover changes concerning cross-border company conversions in this article.

If the creditor and the person participating in the conversion do not agree on a method to secure the claim, the creditor must exercise their right to sufficient security before the court within three months of the date of publication of the draft terms of the conversion, otherwise this right ceases to exist.  Until now, the time limit was six months from the date of recording the conversion in the Commercial Register. This means that the time limit will be substantially shortened, giving the companies participating in the conversion greater legal certainty. On the other hand, it means that creditors must be more vigilant in protecting their rights. Importantly, the act now explicitly stipulates that the filing of a creditor’s petition for sufficient security does not prevent the conversion from being recorded in the Commercial Register.

The amended Company Conversions Act also stipulates that sufficient security shall be established directly by the court’s decision. In this context, the amendment explicitly provides for certain aspects of the court proceedings such as the requirement for the creditor to support their reasonable concern, the need for the court to take into account the type and amount of the claim, and the establishment of the security at the earliest as at the date of recording the conversion in the Commercial Register. In practice, the creation of a right of pledge or the provision of a security deposit may be considered relevant security.

Information obligation

It will also no longer be necessary to publish a notice of the filing of the conversion’s draft terms in the Collection of Deeds or to notify creditors of their rights in the Commercial Bulletin. It will now suffice that the person participating in the conversion files a notice to creditors, representatives of employees (or employees), and shareholders/members/partners of their rights in the Collection of Deeds, along with the draft terms of the conversion. The amendment thus simplifies the process of publishing the draft terms of conversions and reduces their financial costs. In practice, in our opinion, the new rule stipulating the obligation to publish the notice of creditor, employee, and shareholder rights also on the participating entity‘s website, if set up, may be problematic. This rule will affect all joint-stock companies and those limited liability companies (or other corporations) that have voluntarily set up a website. In practice, proving that the notice was published on the company's website for the entire period required by law (one month before the date of approval of the conversion) can be difficult. The extent to which this is necessary and how this shall be proved will only be clarified by practice.

Effectiveness of the amendment

For practice, it is also important which wording of the Company Conversions Act will govern conversions already initiated. The amendment stipulates in its transitional provisions that if the draft terms of the conversion were prepared (i.e., signed) under the version of the law in effect before the amendment's effective date (19 July 2024), the conversion shall be completed in accordance with the law as it currently stands. However, the body of the company competent to approve the conversion may decide (opt-in) that a conversion already in progress should nonetheless proceed in accordance with the new wording of the act.