EU Directive on Preventive Restructuring: A missing piece of the puzzle arrives

Czech Republic

On 6 June 2019, the Council approved the European Parliament’s proposal for a Directive on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures.

The Directive introduces key principles on effective preventive restructuring and second chance frameworks into the legal systems of all Member states, ensuring that there are effective rules for viable enterprises and entrepreneurs enabling them to continue operating and to avoid insolvency, while restructuring their business effectively. It should grant insolvent entrepreneurs a second chance by fully discharging their debt after a reasonable period. It also aims to reduce the overall length and costs of the procedures, in particular when there is no reasonable prospect of the survival of the business.

Preventive restructuring rules and the discharge of debt for honest entrepreneurs have been missing in Czech law, which often led to the postponement of dealing with difficult situations to a point when a viable solution no longer exists, thus resulting in bankruptcy liquidation where it is a lose-lose situation for debtors and their creditors.

The Directive applies to legal entities and entrepreneurs; however, it gives Member states the right to extend the application procedures leading to the discharge of debts to individuals who are not entrepreneurs.

According to the Directive, the preventive restructuring is to be available in all Member states prior to insolvency with the possibility of stay of individual enforcement actions available up to a maximum period of four months, and the possibility of extensions of up to 12 months for more complex restructurings. The stay of individual enforcement will suspend the debtor’s obligation to file for insolvency under national law. The debtors are to remain totally or partially in control of their business during the preventive restructuring, permitting the payment of claims incurred in the ordinary course of business.

This Directive also lays down the minimum standards for the content of a debtor’s restructuring plan. Creditors affected by the plan will have a right to vote on the plan in classes reflecting the seniority of claims and interests, to ensure that similar rights are treated equitably. A minimum of two classes must exist – one for secured and one for unsecured claims. The restructuring plan should be approved by a required majority of each class of creditors; however, a cross-class cram-down principle for dissenting classes of creditors should apply under certain conditions.
The Directive also recognises the importance of financial assistance in the process of the restructuring. Good faith interim and new financing necessary for the continued operation should be therefore exempt from avoidance actions seeking the unenforceability of the financing.
The Member states must ensure that over-indebted entrepreneurs have access to at least one procedure leading to a full discharge of their debt after a maximum of three years; nevertheless, they are entitled to limit access to discharge of their debt in case the debtor accesses the procedure repeatedly in a period chosen by the Member state, in certain cases where the limitations are justified by a general interest.

The Member states will have generally two years from the publication of the Directive to implement the new provisions, with possible prolongation. We expect that the Czech Ministry of Justice will now prepare a new draft bill on preventive restructuring measures and start a public discussion about the implementation of the Directive into Czech law.

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