New options to resolve the company’s financial situation

Companies whose financial situation is on a negative trend have a new option to address their financial situation and their impending bankruptcy. The Act on Resolution of Imminent Insolvency introduces a new option of preventive restructuring, which the debtor can choose to be between public or non-public.

What is preventive restructuring?

Preventive restructuring involves the re-negotiation, i.e. reopening and renegotiating the contractual relations under which the debtor company is obliged to pay its creditors. However, the prerequisite is that the debtor must credibly demonstrate to its creditors that it is at risk of insolvency in the next 12 months, i.e. that it is at risk of having to file for bankruptcy. The aim of the whole formal process is to reach a new agreement between the debtor company and the creditors on how the company’s debt will be repaid. On the other hand, the debtor company has to demonstrate to its creditors that a possible deferral of repayments, or forgiveness of part of the debt, or another proposal to resolve the debtor’s financial situation, is better than any other alternative that the debtor expects in the future (analysis of creditors’ best interest) and at the same time that the debtor’s business is viable (viability analysis).

Financial ratios – when is bankruptcy imminent?

Preventive restructuring can be used if a company is at risk of bankruptcy in the next 12 months, i.e. if the difference between the amount of its outstanding monetary liabilities and its monetary assets (the ‘coverage gap’) is at risk of being more than a tenth of the amount of its outstanding monetary liabilities.

current liabilities – cash assets > (current liabilities)/10

When should you start preventive restructuring?

The debtor’s statutory body is obliged to monitor the company’s financial situation with professional care. If it determines with professional care that the company is at risk of future insolvency, it has the option, but not the obligation, to resolve the company’s impending insolvency through a preventive restructuring. If the statutory body does not have sufficient professional knowledge or experience, it is obliged to seek the assistance of an expert to assess whether the debtor is at risk of insolvency and what measures need to be taken to overcome the impending insolvency.

The debtor’s adviser

The role of the debtor’s adviser is to analyse the situation of impending insolvency and to propose a solution – a restructuring plan. The debtor’s adviser must have appropriate knowledge of economics and the law as well as sufficient technical equipment and staff. In addition, the adviser must enjoy the confidence of the relevant creditors, or else the creditors may not approve the restructuring plan.

How preventive restructuring is carried out

The whole procedure consists of two main parts. First, the debtor prepares for the restructuring, during which the debtor’s advisor analyses the current financial situation and its expected development and starts the communication with the selected creditors. At this stage, the debtor must develop a draft restructuring plan. Subsequently, a proposal for a public preventive restructuring or a proposal for a non-public preventive restructuring will be filed.

Temporary protection

The debtor company has the right to apply for temporary protection along with authorisation of a (public) preventive restructuring. In particular, enforcement of a decision (debt recovery) and enforcement of a pledge cannot be made against the debtor, and the debtor is also not obliged to file for bankruptcy and is entitled to give priority to the payment of new obligations over old obligations. Temporary protection may be granted for a period of three months and may be extended for a further three months. Temporary protection must be agreed to in advance by the statutory creditors.

Difference between public and non-public preventive restructuring

A public preventive restructuring is a new debt repayment agreement with all creditors under which the debtor can apply for interim protection, which is a formal process involving not only the court but also a court-appointed trustee, in addition to the adviser, and the court will form a creditors’ committee from the list of creditors. By contrast, a non-public preventive restructuring is a new debt repayment agreement with only selected creditors, who must be supervised by the National Bank of Slovakia (e.g. banks and leasing companies). While the court will not allow a public preventive restructuring if the debtor company is bankrupt or if, for example, enforcement proceedings or the enforcement of a pledge is underway against the debtor, there are no such requirements for a non-public preventive restructuring. During a public preventive restructuring, formal acts such as the informational meeting of creditors, meetings of the creditors’ committee and the approval meeting take place. A non-public preventive restructuring does not have such formal processes and much depends on the communication between the debtor, the advisor and the creditors concerned. The restructuring plan resulting from both the public and non-public preventive restructuring process must be reviewed and subsequently confirmed by the court.

The restructuring plan

A debtor’s restructuring plan contains, in particular, measures aimed at averting the debtor’s insolvency and ensuring the viability of the debtor’s business. These include, in particular, the restructuring of liabilities (deferment of repayment, partial forgiveness, alteration of security), a change in the debtor’s asset or capital structure, or a restructuring of human resources or a change in the debtor’s management and control. The financing of these measures must also be addressed in the restructuring plan.

Although the whole recovery (restructuring) process is formally concluded with the adoption of a restructuring plan, the outcome of the whole procedure will depend on whether the restructuring plan adopted succeeds in averting the imminent insolvency of the company.

Advantages of preventive restructuring

Preventive restructuring, like traditional restructuring, involves temporary protection from creditors. However, unlike formal restructuring, it is a much more flexible and quick process. Preventive restructuring also provides a platform for intensive and effective communication with creditors, which can be crucial in resolving insolvency.

JUDr. Martin Provazník, partner bpv Braun Partners