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Early-warning tools and preventive restructuring mean the threat of insolvency can be detected and defused in time

Czech law has so far lacked an instrument which would set forth clear and umambiguous rules for out-of-court negotiations between distressed businesses and their creditors. This may change, thanks to the transposition of EU law on the concept of preventive restructuring and the introduction of an early warning system.

The regular time period within which the Member States must transpose the restructuring and insolvency directive (including the rules for preventive restructuring) into national law runs out on 17 July 2021. The directive seeks to enable businesses which are aware of nascent financial difficulties to escape insolvency proceedings, based on an agreement with the affected creditors (carved out with minimal interference by the court) and to preserve their enterprise as a going concern. The key document in this respect is a restructuring plan, which not only includes the proposed measures for rescuing the business but also an overview of the entrepreneur’s assets, liabilities, and creditors (within several categories, depending on their economic interests).

The Member States moreover have the option to introduce, as an accompanying measure, an early warning tool. Upon entering certain key accounting data, the entrepreneur receives feedback from a unique algorithm, alerting them to the potential future threat of insolvency. As of now, it is not clear in what form this tool will be made available to entrepreneurs. Of course, the central question is how to protect the entered accounting data and prevent its potential abuse or leak to third parties. Previous experience suggests that the system’s Achilles heel will ultimately be the owners of businesses themselves, and their ego which does not allow them to admit to themselves that they will soon lose control of their situation unless they speedily implement the proposed measures.

Only time will tell whether the legal concept of preventative restructuring, in tandem with the early warning tool, will live up to its potential and "eradicate" preventable insolvencies of SMEs in particular; much hinges upon the final form of the national legislation. Given the current state of society, battered by the consequences of the Covid-19 pandemic, it is painfully obvious that the quick transposition of the directive becomes more relevant every day. Given this, it is particularly regrettable that the Czech lawmaker won’t be able to honor the regular deadline and has in fact already asked for an extension until 17 July 2022.

In case of interest, we stand ready to provide you with additional information on this topic.

Source:
Directive (EU) 2019/1023 of the European Parliament and the Council of 20 June 2019 (Directive on restructuring and insolvency)
Summary of the interim results by the expert working group on the transposition of Directive 2019/1023 on restructuring and insolvency (Ministry of Justice, legislative department)