The Preventive Restructuring Bill has been approved by the government. The Act’s ambition is to help companies facing financial difficulties. How? Let’s ask JUDr. Michal Žižlavský, a founding partner of AS ZIZLAVSKY, a law firm that also holds a special licence for insolvency practitioners.
Who is the new Bill attractive for?
Preventive restructuring is a tool to help managers and shareholders of companies at risk of insolvency. It could be an attractive option to solve an otherwise critical situation for Executive Directors, members of Boards of Directors or Supervisory Boards, as well as shareholders and cooperative members. But also for those who do not hold any official position, but act as de-facto directors or qualify as beneficiary owners. New tools, such as a very broad moratorium protecting the entire group, will become available to them. Restructuring is designed as an umbrella that protects a company against legal actions taken by creditors that could be devastating for the business. Thanks to restructuring, time will fly a bit slower in situations when there is no other option. Restructuring gives the debtor and the creditors time to reach an agreement.
Does preventive restructuring offer any protection to those who would otherwise be liable?
It does, and this is a very important aspect. Managers and shareholders who reverse an imminent insolvency of the Company in accordance with the preventive restructuring rules will avoid any future actions to compensate for insufficient assets affecting their personal property. They will be protected even in situations when the restructuring fails and the Company ends up being insolvent.
Which companies may take advantage of preventive restructuring?
Preventive restructuring is available to companies that face financial difficulties, but are not yet insolvent. More specifically, they do not face case-flow insolvency as defined by the Insolvency Act. Preventive restructuring has not been introduced to deal with cases of insolvency. It has been introduced to prevent such cases. That is why it is called “preventive”. Having said that, there must be an actual risk of insolvency, rather than a hypothetical one, since restructuring provides the managers with tools they would not have at their disposal otherwise.
What is the essence of restructuring?
To put it simply, it is an agreement with some of the debtor’s creditors, especially those creditors that are critical for further operation of the business. The agreement is based on a mitigation plan that is later transformed into a restructuring plan. The plan includes a number of cost-saving measures and operational changes plus restructuring measures. Restructuring may involve the sale, possibly with subsequent lease, of corporate property. In addition, restructuring usually involves debts, whose maturity is extended or which are partially waived. Restructuring may also involve equity through additional contributions made by the existing shareholders, or through debt-equity swaps. It must be stressed, though, that there is no one-fit-all solution. Each restructuring plan must be tailor-made for the specific company. This is similar to judicial restructuring plans.
To administer standard restructuring, insolvency practitioners need a special licence. Does the same apply to preventive restructuring?
Preventive restructuring is not as formal as judicial restructuring. Two classes of practitioners will be involved. First, a restructuring consultant will be engaged by the companies at their discretion to help them prepare their mitigation plan and negotiate the restructuring plan. Naturally, companies should choose consultants or law firms having sufficient background, expertise and experience in the field of restructuring and insolvency. Later, restructuring administrators are appointed by insolvency courts just like in the cases of judicial restructuring. Only insolvency practitioners holding a special licence may be appointed to act as restructuring administrators. Our law firm has the licence and capacity to perform both jobs.
Are there any benefits of preventive restructuring for creditors?
Indeed; otherwise, it would not work. Creditors who support business restructuring enjoy some benefits. First and foremost, they are entitled to preferential payment of their debt even if preventive restructuring fails and the company eventually becomes insolvent. This applies not only to banks that provide working capital loans, but also to energy companies, suppliers or lawyers that provide legal services related to preventive restructuring.