Reorganisation Under Czech Law

Czech law provides a very favorable reorganisationregime for insolvent companies, with great flexibility and significant tools designed to enable value-creating restructurings.  As an example of such a restructuring, we describe a case on which we worked recently.  Afterwards, we describe several changes to the reorganisationregime, which will be implemented as of 1 January 2014 through an amendment to the Czech insolvency act. 
 
MSV Restructuring
 
Dentons Prague represented a creditors’ group comprised of certain financial institutions in a creditor-driven reorganisation of MSV Metal Studénka, a.s. (MSV), a major supplier of railway components.  The reorganisation, based on an innovative debt-to-equity swap structure, resulted in the preservation of 380 jobs and a very decent recovery for the creditors.  The transaction was completed in March 2013, when the company was taken over by a new investor.
 
The railway car production has been established in Studénka more than a century ago, starting as Staudinger Wagonfabrik AG.  The factory had undergone a number of transformations in the 20^thCentury, including the opening of a new forging line in 1957.  After the fall of communism, the forging line was privatisedinto Moravskoslezská vagónka, a.s., and in 2006 it was taken over by the International Railway Systems S.A. (IRS). By then, the company was already operating under the name MSV Metal Studénka, a.s. (MSV).
 
In 2011, IRS faced financial difficulties in its Romanian subsidiaries, which led also to MSV becoming insolvent.  ING Lease (C.R.), the company's main equipment financier, filed an insolvency petition in May 2011.  The petition included a request for the appointment of an interim trustee designed to limit the risk of concurrent insolvency proceedings being opened in Romania.  While the local management was in charge of the day-to-day business, the board of directors was mostly passive, its members abroad (in Romania) and in conflict of interests due to their positions within the Romanian affiliates.  Therefore, the creditor’s committee applied to the court for transfer of all the management powers to the insolvency trustee, a highly unusual move in reorganisation.
 
Reorganisation Plan
 
In October 2011, in a meeting of creditors at the Ostrava Regional Court, a majority of the company's creditors supported the proposition that instead of the company's board of directors, a creditor should prepare the reorganisation plan.  As the court transferred the right to manage MSV to the insolvency trustee, the creditors' committee quickly assisted the trustee to engage reliable interim management.  In this cooperative environment, ING Lease was able to submit a reorganisation plan prepared by Dentons (formerly Salans) and TARPAN PARTNERS, acting as economic advisors, in December2011.
 
In the proposed reorganisation plan, certain receivables of financial institutions were converted into equity in MSV in an operation never before tested in Czech insolvency proceedings.  A newly established company, MSV Holding s.r.o., acquired the new shares issued by MSV, representing 100% ownership, squeezing out the former shareholder.  The plan also contemplated the restructuring of other receivables, including a rather complex modification of leasing arrangements and several credit lines, and afforded an unusually high 60% dividend to unsecured creditors.  Almost all the creditors supported the reorganisation plan; and the court approved the plan without reservations in May 2012. 
 
Through the adoption of the reorganisation plan, MSV’s business was stabilised and MSV was able to implement the plan without any major difficulties, effective as of 1 July 2012.  MSV Holding s.r.o. then launched a tender for the sale of its shares in MSV; and, in January of 2013, MSV Holding s.r.o. concluded a share purchase agreement with the successful bidder, JET INVESTMENTS.  The share sale transaction closed in March 2013 upon the court’s confirmation that the reorganisation of MSV was completed.
 
Unlike other reorganisations, the creditors and creditors’ committee in the MSV case had a very important role in bringing about a successful reorganisation and were strongly involved in the operational matters of MSV.  This resulted in a high level of transparency through, among other measures, the publication of minutes from the committee's meetings and the adopted reporting procedures of the interim management in keeping business partners and employees informed about the process.  Thanks to the open and transparent approach adopted by the creditors and the company, the restructuring process had the trust and support of all parties and undoubtedly enabled the preservation of a significantly greater value for creditors and employees than if the case had been handled through bankruptcy liquidation.
 
2014 Amendments
 
As described above, the reorganisation regime under Czech law provides for great flexibility for the proponents of reorganisation.  However, the amendments that will become effective as of 1 January 2014 introduce many changes designed to, among other things, enhance the feasibility of reorganisations and strengthen the legal protections afforded to creditors. 
 
In particular, the thresholds for companies to which the reorganisation will be available as of 1 January 2014 are reduced from 100 to 50 with respect to the number of employees and from CZK 100 million to CZK 50 million in terms of the amount of sales.  A company which is below both these thresholds may opt for reorganisation only if it submits very early in the proceedings a reorganisation plan approved by at least half of both secured and unsecured creditors. 
 
Furthermore, if the reorganisation is authorised upon a creditors' application, or if the debtor is divested of its exclusive right to submit a plan of reorganisation, the creditors' committee will have, as of 1 January 2014, the power to replace the board of directors.  This significant change should simplify cases similar to the MSV situation by removing the uncertainty that the process of court removal of the management powers from the board of directors often entails. 
 
Finally, the 2014 amendments clarify that debtors in reorganisation are entitled to reject unfulfilled contracts.  This clarification will significantly reduce legal uncertainty in cases where the debtor has onerous contracts that it needs to cancel in its restructuring. 
 
The 2014 amendments, which affect the entire insolvency act, should increase the usefulness of the reorganisation regime and, accordingly, increase the likelihood that successful reorganisation cases such as MSV will be more frequent in the Czech restructuring market. 
 
Dentons’ Prague Reorganisation, Restructuring & Insolvency team have been advising clients in major insolvency and restructuring cases in the Czech Republic and, jointly with their other offices, in surrounding countries.  They have experience with advising creditors, in particular financial institutions, in protecting  rights upon insolvency of their borrowers, such as in the MSV case or in the highly contentious case of representation of foreign bondholders in the insolvency of ECM REAL ESTATE INVESTMENTS A.G.  They have also assisted borrowers in financial difficulties, such as in the case of the engineering company AE&E CZ, where they structured the first pre-packaged bankruptcy sale under Czech law.
 
 
Juraj Alexander
Dentons Europe CS LLP
Platnéřská 191/4, Prague, Czech Republic
Tel: +420 236 082 111
Email: juraj.alexander@dentons.com
 
Jiří Stržínek
Dentons Europe CS LLP
Platnéřská 191/4, Prague, Czech Republic
Tel: +420 236 082 111
Email: jiri.strzinek@dentons.com