Legal Alert | Preventive restructuring and other changes in insolvency law

On 17 July 2022, Act No. 111/2022 Coll. on the resolution of impending bankruptcy, or a substantial part thereof, enters into force, which - among other things - redefines impending bankruptcy, introduces new legal institutes of the so-called preventive restructuring, and at the same time changes the conditions of bankruptcy and the related possibility or obligation to file a bankruptcy petition.

What is impending bankruptcy?

A debtor is in imminent insolvency if, taking into account all the circumstances, it is reasonably foreseeable that it will become cash flow insolvent within 12 calendar months. In the event of imminent insolvency, the debtor has obligations to take precautionary measures to avert imminent insolvency.

Preventive restructuring

One option in cases of imminent insolvency is to resolve the situation through a public or non-public preventive restructuring. Under certain conditions, public preventive restructuring provides the debtor with so-called temporary protection (protection against bankruptcy or restructuring, protection against the obligation to file for bankruptcy, against foreclosure or withdrawal or termination of the contract) for a maximum period of 3 plus 3 months. At the same time, the previously established institutes of temporary protection are abolished.

The non-public preventive restructuring is designed to deal with situations where the creditor is an entity subject to the supervision of the NBS.

Changes to insolvency rules

The Act also indirectly amends the Bankruptcy and Restructuring Act, with the most significant changes including:

- changing the definition of cash flow insolvency of a legal entity to a less stringent one, according to which a legal entity is cash flow insolvent if it is unable to pay at least two monetary obligations to more than one creditor for 90 days after the due date (instead of the previous 30 days);

- also provides for a presumption of the cash flow solvency - where, having regard to all the circumstances, it may reasonably be expected that the management of the assets or the operation of the business can be continued and the difference between the amount of its outstanding monetary liabilities and its monetary assets (hereinafter referred to as the 'coverage gap') is less than one tenth of the amount of its outstanding monetary liabilities or, within a period of not more than 60 days, the coverage gap falls below such a threshold;

- an obligation for the debtor (a legal entity) to file a motion for a bankruptcy proceedings in case of the cash flow insolvency) is reinstated in the insolvency legislation (currently the debtor is only obliged to file a bankruptcy motion in case of the over-indebtedness);

- in most cases, the conditions for filing a creditor's motion for the bankruptcy or for the subsequent declaration of the bankruptcy are thus somewhat more difficult - three times longer period of non-payment of overdue claims, a coverage gap;

- on the contrary, the rules for the possibility for a creditor to initiate the bankruptcy proceedings in cases where the debtor's insolvency can be presumed (the company has been dissolved but has not entered into liquidation, termination of an unsuccessful execution after more than 30 months) are simplified;

- the introduction of electronic proceedings and filing of claims: a petition for initiation of the bankruptcy or restructuring authorisation can only be filed electronically; the same applies to creditors, who will only be able to submit their claims electronically.