This article is a loose follow-up to our previous article on the increased risk of liability of members of the statutory body in the event of bankruptcy of a business corporation under the new legislation effective as of 1 January 2021. The aim of this article is to provide members of the statutory body of business corporations (a.k.a. managers) with the basic measures and procedures they should take imminently after becoming aware of the bankruptcy of their business corporation.
Determination of bankruptcy or imminent bankruptcy and convening a general meeting
The obligation of managers to ascertain and resolve the bankruptcy of their own business corporation (company) is provided in the Insolvency Act only indirectly, through a sanction that may be imposed on managers if, despite the existing bankruptcy, they do not file a debtor’s insolvency petition in time. If a manager discovers from the financial statements, the insolvency test or “merely” from the fact that the company is not or soon will not be able to fully meet its monetary obligations to creditors, one of his first duties is to convene a general meeting without delay.
In such a case, on the agenda of the general meeting should be to discuss the current situation and to choose the next course of action. The general meeting should decide whether the company will attempt an informal restructuring or whether a debtor’s insolvency petition will be filed and the method of resolving the insolvency will be decided within the insolvency proceedings (bankruptcy, reorganisation).
Filing an insolvency petition
“A debtor who is a legal person or a natural person – entrepreneur is obliged to file an insolvency petition without undue delay after he became aware or, with due diligence, should have become aware of his bankruptcy.” For a legal person, this obligation is executed by its statutory body, which, in the exercise of due care, is obliged to be aware of the company’s economic situation and to be informed of its debts, i.e., it has all the presuppositions to react in time and, in the event of the company’s insolvency, to file an insolvency petition without delay.
The obligation to file an insolvency petition without undue delay is defined by the court as a very short period of time, which means urgent, prompt, imminent or immediate action to comply with the obligation. It is a period of days, or at most weeks, but the duration of the period will depend on the circumstances of the particular case. Although it is a very short period of time, the manager is obliged to comply with the convening period established by the constitutive act or the law when convening the general meeting.
Preventive restructuring legislation
Directive (EU) 2019/1023 from 20 June 2019 of the European Parliament and of the Council (EU) on preventive restructuring frameworks, debt relief and bans on activities and measures to improve the effectiveness of restructuring, insolvency and debt relief and amending Directive (EU) 2017/1132 (the “Restructuring Directive“) is currently being implemented. This new legislation will set out comprehensive rules for so-called “preventive restructuring”, which will substantially simplify and accelerate the revitalisation of companies in crisis.
The implementation of the Restructuring Directive was to take place by 17 July 2021. However, this term was adhered to and an extension to 17 July 2022 was requested. Therefore, at present, we have no legislation which would provide leastwise a basic legal framework for the implementation of restructuring. In other words, there is currently no supporting legal instrument to regulate the out-of-court negotiations of different groups of creditors with the debtor.
The company is protected from creditors during the negotiation of the restructuring plan and during the implementation of the restructuring, for example, by the debtor’s disposal right introduced by the Restructuring Directive. The essence of the debtor’s right of disposal is that the company’s managers can continue to dispose of the company’s assets and make decisions about its day-to-day operations, which enables them to fulfil the objective of the restructuring plan set.
Furthermore, the Restructuring Directive allows the suspension of the enforcement of individual creditor claims. The suspension of the enforcement of creditors’ claims may be carried out in a limited form applicable to individual creditors or a certain category of creditors, or in a general form, i.e., in a form applicable to all creditors of the company. Such protection from creditors will require the court’s approval and will be accompanied by a suspension of the obligation to file an insolvency petition for the duration of this measure.
The basis of restructuring is the formation of a restructuring plan, which contains not only proposed measures to save the entrepreneur, but also an overview of his assets, debts and creditors divided into groups according to their economic interests.
According to the Restructuring Directive, the restructuring plan should be voted on by creditors in separate classes and in some cases approved by the court. Court approval will have to be given if (i) the restructuring plan reduces or postpones creditors’ claims and the affected creditors do not agree with the plan, (ii) new financing will be perquisite for further restructuring, or (iii) more than 25 % of the company’s employees would be lied off. This is essentially the same principle as for the approval of a reorganisation plan, which is already included in our legislation.
Given that the Restructuring Directive has not been implemented in our legal system yet, at present only so-called informal restructuring can be carried out, which most often includes the following forms, e.g.:
- overall revitalisation of the company (e.g., change of business strategy, strengthening of marketing, sale of untapped assets, appropriate cost reduction, etc.);
- financial restructuring (e.g., refinancing operating loans, acquisition of new financing options);
- optimisation of working capital;
- direct communication or approaching investors or financiers regarding the provision of funds (e.g., capitalisation for investors).
As follows from the above, it is the duty of managers to detect company’s bankruptcy in a time and subsequently respond appropriately to the situation either by carrying out an informal restructuring or by filing an insolvency petition.
As for the current legislation, it is inexorable in terms of filing an insolvency petition. The adoption of the Restructuring Directive would, at least in a framework, unloosen this regulation and thus give companies and their statutory bodies more space. However, until the transposition of the Restructuring Directive, it is necessary to follow the current legislation.
In case of any questions regarding this matter or current legislation, we are at your disposal. Do not hesitate to contact us.
Mgr. Martin Heinzel, senior attorney-at-law – email@example.com
Mgr. Nikol Čišecká, junior lawyer – firstname.lastname@example.org
23. 09. 2021