A Czech court has ruled that a lender was ineligible to join the insolvent borrower's creditors' committee because the share pledges and other security it had taken made it effectively the borrower's holding company.
The case concerned the agent for a syndicate of banks which had loaned CZK 1.2 billion to a major fashion business. The security taken was a standard package containing pledge and subordination agreements along with rights to monitor the company's financial position without direct participation.
When the company was declared insolvent, the bank as an agent and one of the company's major secured creditors joined the insolvency proceedings and registered its claims and those of the syndicate.
Under Czech law, creditors may (and, in certain cases, must) form a creditors' committee which acts as a consulting body and has certain rights as regards the court and the insolvency administrator. Membership would have enabled the bank to be an active participant in the proceedings on its own behalf and on behalf of the syndicate.
The court ruled that, when exercising its rights under the loan agreement and the finance documents, the bank had acted as a holding company. The Insolvency Act prohibits companies in the same group from joining the creditors' committee.
The bank was not prevented from being a secured creditor; in fact, the court expressly stated that it could give instructions to the insolvency administrator regarding the management and disposal of an insolvent borrower's assets, rights, claims or other property, which is arguably among the most important rights of a secured creditor.
The decision is unorthodox to say the least, as the court seems to have ignored a fundamental distinction between a holding company, which usually exists merely to reduce costs and centralise management across a number of different businesses, and a secured lender, whose concerns (as evidenced from the contents of credit facility or loan restructuring documentation) are very different indeed. However, given that Czech courts are not bound by precedent, the decision may not be followed.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
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The original publication date for this article was 25/11/2010.