Trade Alert: Czech Republic

CZECH REPUBLIC

Andrej Babiš’ government survived a second no confidence vote on 27 June 2019, following an initial call for a vote of no confidence on 23 November 2018. The embattled billionaire Prime Minister of the Czech Republic continues to face allegations of corruption in connection with EUR 2m of European Union ("EU") subsidy payments allegedly illegally received by one of Babiš’business interests. This follows the largest protests seen in the Czech Republic since the Velvet Revolution in 1989, with 250,000 people said to have taken part and, according to Bloomberg, around 400,000 signing a petition calling for the Prime Minister’s resignation.

Protests began after the Czech police recommended that Babiš be charged with fraud in connection with the EUR 2m EU subsidy, after which the Czech Justice Minister unexpectedly resigned a few days later. Furthermore, an EU audit provisionally concluded that Babiš may have a conflict of interest due to his involvement in the implementation of the EU budget despite his continued business connections.

In spite of the protests Ano (which means “yes” in Czech, the anti-establishment party founded by Babiš in 2012) remains the most popular party in the Czech Republic, winning the May 2019 European elections with 21 per cent of the vote. Ano swept into power in October 2017 leading a coalition with the Social Democratic Party. 

At the LMA Developing Markets Conference held on 30 April 2019, the Czech Republic was identified as a market that had recently experienced favourable lending conditions. In a survey conducted on the day, 10.7 per cent of participants considered the Czech Republic as the country within CEE/CIS which offered the most opportunities for syndicated lending in 2019. On 10 July 2019, the European Commission reported in its summer economic forecast that the Czech Republic had grown strongly in 2018 with real GDP rising by 3.0 per cent, with 2019 and 2020 growth expected to ease to 2.6 per cent and 2.5 per cent respectively.

SPECIAL THANKS

We appreciate the assistance of Ludӗk Chvosta of Noerr with the following discussion of Czech law, regulation and practice.

CZECH LEGAL SYSTEM

The Czech Republic’s legal system is a civil law legal system. Legislative power is vested in the Parliament of the Czech Republic (Parlament České republiky) made up of the lower house, the Chamber of Deputies(Poslanecká sněmovna Parlamentu České republiky), and the upper house, the Senate (Senát Parlamentu České republiky). The President of the Czech Republic, currently Miloš Zeman, is the head of state, although this office is mainly a representative role. Executive power rests predominantly in the hands of the Prime Minister, Babiš, who heads the Government. As a civil law system, the Czech judiciary generally has no power to formally create law by precedent, but senior Czech courts will not refuse to rule where law is incomplete or ambiguous and will instead give their own interpretation on the matter which other courts will follow creating de facto legal precedent.

Czech law is structured hierarchically. The Constitution (Ústava České republiky), ratified on 1 January 1993, and other constitutional acts (ústavní zákony) are the supreme law of the Czech Republic. Next in rank are ordinary acts (zákony) which provide the basis for enacting regulations. The other major source of law in the Czech Republic is EU legislationfollowing the Czech Republic's accession to full membership of the EU on 1 May 2004.

KEY POINTS FOR TRADERS

• Banking licence required for activity involving ongoing funding to a Czech borrower unless it is on a “one-off” basis and the lending activity will not recur. Licence not required for acquisitions of fully funded term loans.
• Assignment of receivables or assignment of contract are the recommended transfer methods; English law governed participation agreements can be used with caution where transfer is not possible but may be challenged by the local regulator as systemically circumventing the law if deemed to give rise to a de facto “shadow” creditorship on an other than “one-off” basis.
• 15 per cent withholding tax on interest payments to non-residents subject to the relevant double tax treaty benefits; 35 per cent withholding tax where jurisdiction of lender has neither a double-tax treaty nor tax information exchange agreement with the Czech Republic. 

BANKING LICENCE REQUIREMENTS

A banking licence is required when the extension of a loan is part of a continuing undertaking towards a Czech borrower in the ordinary course of the lender’s business (i.e., where there is an ongoing funding obligation such as for an unfunded/partially funded term loan or a revolving loan). 

Exceptions exist to this rule when:

• the transaction is made on a “one-off” basis and the lending activity will not recur; or
• where the investor acquires a fully funded term loan. 

Lending is deemed to be on a “one-off” basis where activity consists of a single transfer of a loan (including a transfer under a revolving credit facility) from a Czech banking entity to an entity that does not plan to engage in long-term business activities.

METHOD OF TRANSFER

Assignment of receivables (postoupení pohledávky) is the most commonly used method of transfer. Borrower consent is only necessary where required under the credit agreement.

Assignment of contract (postoupení smlouvy) has been possible since 2014 and works by both assigning the rights and transferring the obligations under the credit documentation. Borrower consent is required for this form of transfer.

As a matter of general law, security will pass automatically in both instances. However, where the security is registerable it is necessary to update the relevant register accordingly with an application supported by a joint declaration of the former and new creditor. English law novationmay be used to transfer debt of a Czech borrower; however, care should be taken as there is substantial uncertainty as to whether such a form of transfer will impact the existing security. As such, transferring by assignment is recommended to avoid potentially having to release and retake security.

In cases where the aforementioned assignments are not possible (e.g., due to transfer restrictions in the credit documentation), parties may instead seek to reflect the  economics of the loan by using a Loan Market Association form of funded participation agreement. However, advice should be sought in advance to ensure that such participation arrangements do not give rise to a de facto “shadow” creditorship on an other than “one-off” basis. This categorisation could be perceived as an attempt to systemically circumvent the law with such participation arrangements potentially breaching banking licensing requirements. The risk of the local regulator making a circumvention finding is increased if the original lender is perceived as merely an intermediary, for example, if the participant actually directs the original lender’s conduct in respect of the loan.

SECURITY AND TRUSTS / AGENCY

Following the 2014 reforms to the Civil Code (Act 89/2012) and implementation of the Business Corporations Act (Act 90/2012), the concept of trusts (svěřenský fond), amongst others, was introduced in the Czech Republic. However, trusts are not widely used, owing in part to a poorly defined concept with several restrictions above and beyond its common law counterpart.  

The most commonly used security arrangements are:

• security agent (Agent pro zajištění) structures, where the security and guarantees are held by the security agent under a “joint creditorship” structure, whereby the security agent acts as a joint and several creditor alongside the other lenders. Despite widespread use, the security agent concept remains untested by the Czech courts and is not explicitly codified, with the exception of a recent introduction of the concept in legislation governing bond issues; and 
• parallel debt structures which, similarly to the above, have not yet been definitively tested by the Czech courts. Despite this, foreign law governed parallel debt structures are widely used in the Czech Republic (with some nascent usage of local law governed parallel debt structures as well). 

TAX AND STAMP DUTY CONSIDERATIONS

A blanket 15 per cent withholding tax applies to all interest paid by a Czech borrower to non-Czech lenders though this may be reduced or eliminated where there is a relevant double-tax treaty.

Where the lender is from a country which has neither a double-tax treaty with the Czech Republic nor a tax information exchange agreement, a 35 per cent withholding tax applies.

POST-TRANSFER FORMALITIES

There are usually no post-transfer formalities in respect of a loan transfer, save for a notice of assignment to the borrower or updating the security register, where relevant. If an assignment results in changes to the secured creditor or pledgee, local public registers may need to be updated (depending on the type of security, these may include the land office, the register of pledges, or the commercial register). The fee for registration of a real estate mortgage is usually small, c. CZK 1,000 (EUR 37).

CLAW-BACK PROVISIONS

Under certain circumstances, legal acts such as transfer/assumption of debt may be subject to statutory claw-back provisions under Czech law, rendering such transactions null and void. 

Generally, acts taken up to five years before the commencement of insolvency proceedings which: 

• lack adequate consideration; 
• constitute preferential treatment of one lender over another; or 
• are intentionally prejudicial,

can be nullified by an insolvency court (especially if such conduct is towards members of a group).

INSOLVENCY LAW UPDATE: INDIA

ESSAR STEEL LIMITED ("ESSAR STEEL")

On 4 July 2019, the National Company Law Appellate Tribunal (the "NCLAT") passed a judgment in the matter of Standard Chartered Bank vs. Satish Kelmar Gupta, R.P. of Essar Steel Limited & Ors providing that secured creditors would not get preferential treatment in the USD 6bn sale of Essar Steel's plant to Arcelor Mittal. The NCLAT judgment has since been stayed by the Supreme Court until a hearing scheduled for 7 August 2019. 

Pursuant to this judgment, Essar Steel's secured financial creditors would not receive the 90 per cent expected return on a preferential basis but would, instead, receive a 60.7 per cent return, as an equal distribution across all classes of creditors.

Creditors including the State Bank of India and SC Lowy (whose admitted claims totalled INR 132,264,790,246 (USD 1.9bn) and INR 9,001,242,665 (USD 131m) respectively) appealed this decision to the Indian Supreme Court. Bloomberg reports that in documents filed with the court, the creditors claimed that the equal treatment of secured and unsecured creditors would lead to a "severe plunge" in the rate of recoveries and expose the creditors to "grave financial distress". The Financial Times suggests that "the court's decision…is not only fundamentally wrong; it is also a ruinous rejection of a seminal principle of credit that inflicts harm on investors in India and beyond". The Financial Times notes that "for a country desperate for foreign investment, India can do without judicial activism in capital markets" and that "the consequences of such errant and capricious rulemaking will be to raise the risk premium on doing business in India". 

On 17 July 2019, the Indian government announced that it would amend the 2016 Insolvency and Bankruptcy Code (the "Code") to give preference to secured lenders over operational creditors which would be effective retrospectively. Enactment of such amendment would require the NCLAT or the Supreme Court to give effect to it. The NCLAT's judgment regarding Essar Steel was seen as the last straw following "frustrating legal delays and bizarre judgments" which were threatening to deter foreign investors. NCLAT's judgment was seen as particularly problematic since the NCLAT was created to settle disputes relating to the Code which was designed to attract foreign investment in India. Further proposed amendments to the Code include requiring cases to be concluded in 330 days, preventing the use of delay tactics in bad-debt resolutions as has been seen in cases such as Essar Limited which remains unsettled after over 600 days.

Click here for the NCLAT's judgment.

For further information on these developments, please contact Sankar Swamy and Krishna Venkat at Anoma Legal.

RALLYE SA: SAUVEGARDE FILING DEADLINE 9 AUG 2019/9 OCT 2019

Rallye SA ("Rallye"), the French-based holding company of supermarket chain Casino Guichard-Perrachon SA ("Casino") forms part of Jean-Charles Naouri's "French retail group's complex financial web":

• Euris SAS, Naouri's private investment fund, holds approx. 92 per cent of Finatis SAS;
• Finatis SAS holds approx. 90 per cent of Foncière Euris SA;
• Foncière Euris SA holds approx. 60 per cent of Rallye; and
• Rallye holds approx. 52 per cent of Casino. 

In May 2019, Rallye, Finatis SAS and Foncière Euris SA entered procédure de sauvegarde("safeguard proceedings") in an attempt to protect the group from creditors and save it from collapse. 

The filing deadline for French resident creditors is 9 August 2019and for non-French resident creditors 9 October 2019. See below for a further update on Rallye / Casino and please contact Iden Asl with claims filing queries.

NOTABLE TRANSACTIONS

RALLYE SA ("RALLYE")

On 23 May 2019, Rallye entered into a procédure de sauvegarde(safeguard proceedings), along with a number of its group companies (Euris SAS ("Euris"), Finatis SAS ("Finatis"), Foncière Euris SA ("Foncière Euris"), Cobivia SAS and L’Habitation Moderne de Boulogne SASU). The opening of the safeguard proceedings were published in the Bulletin Officiel des Annonces Civiles et Commercialeson 9 June 2019 (the “Publication Date”). Creditors located in France must submit claims to the court appointed creditors’ representative, Me Valérie Leloup-Thomas of Selafa MJA, with acknowledgement of receipt within two months of the Publication Date (9 August 2019), whilst non-French creditors have until four months from the Publication Date (9 October 2019). The announcement of the opening of the safeguard proceedings can be found here.

Reuters reported that a French court passed a judgment on 4 July 2019allowing Societe General SA("SocGen") to call in collateral it holds in Rallye. Pursuant to a derivatives contract entered into in 2014, Foncière Euris pledged 1,770,000 shares in Rallye as collateral, approximately 3.4 per cent of Rallye's share capital. After the safeguard proceeding was announced, Foncière Euris tried to prevent SocGen from calling in the collateral, which was provisionally approved by a French court on 29 May 2019. This led to a "stock rout sparked by legal defeat" on 9 July 2019, with Rallye's shares falling 13 per cent due to investor concerns regarding other pledges potentially made within the group as well as a concern that the market may be "flooded" by shares in the group companies. 

Casino has also struggled with the "hyper-competitive French retail market" and has not paid its interim dividend this year. It is selling assets in an attempt to pay down its debt, with aim of disposing of at least EUR 2.5bn worth of assets by the first quarter of 2020. As part of this, it has agreed to sell Vindemia, one of its subsidiaries, for EUR 219m.

Please contact David Chijner if you have any queries regarding the Rallye safeguard proceedings.

VALLOUREC SA ("VALLOUREC")

Vallourec, the multinational manufacturing company headquartered in France, announced its Q2 results on 24 July 2019, with its EBITDA increasing to EUR 102m, compared to EUR 23m in Q2 of 2018. Philippe Crouzet, Chairman of the Management Board of Vallourec comented that the Q2 results evidenced that "Vallourec is on the right path to recovery". He anticipated the continued recovery of the oil and gas business, particularly in Brazil in 2020. It was also reported that, based on current market trends, Vallourec indicated that it would fulfil its financial covenants come the end of the year.

STEINHOFF INTERNATIONAL HOLDINGS N.V. ("STEINHOFF")

Steinhoff announced the approval of CVA Amendment Consent Request No. 4 (the "Amendment") by the requisite majority of creditors on 28 June 2019. This amendmentextends the CVA long-stop date to 9 August 2019 and amends the Steinhoff Europe AG ("SEAG") CVA and Steinhoff Finance Holding GmbH ("SFHG") CVA to facilitate internal restructuring within SEAGprior to completing the wider restructuring. 

Various announcements were made on 12 July 2019 including the publication of Steinhoff's half-year reports, notice of Steinhoff's AGM(which will occur on 30 August 2019) and the requirement for creditors in the SEAG CVA and SFHG CVA to file entitlement letters prior to 19 July 2019 to be eligible to receive an entitlement to the New Lux Finco 2 Debt and/or the New Lux Finco 1 Debt on or before the Restructuring Effective Date. Steinhoff reported a loss of EUR 356m in the report. However, net sales from continuing operations increased to EUR 6.8bn.

Steinhoff also confirmed that it launched proceedings in the Cape Town High Court against former CEO Markus Jooste and former CFO Ben la Grange to recover R 850m and R 271m respectively paid to them during the course of their employment. This follows the crippling 95 per cent drop in share price in response to the December 2017 accounting scandal.

CONTACT

Please contact Iden Asl, Hannah Geddes or Tobias Plowman with any queries regarding this month's Trade Alert.