Following last edition’s article on the insolvency proceedings of the market-leading Czech betting company, we would like to provide an update on the progress of the company’s insolvency proceedings.
As set out in our previous article, the company’s private creditors voted for bankruptcy of the company, and on 30 May 2011 the court confirmed the creditors’ choice and officially announced the bankruptcy of the company. Following the decision on bankruptcy, the insolvency administrator is expected to convert the assets of the bankrupt company into cash so as to achieve the best result for the company’s creditors.
The creditors held a meeting on 11 August 2011 and approved the proposal of the insolvency administrator to sell the whole enterprise of the betting company through one purchase agreement in a tender. Pursuant to the respective provisions of law, such a sale also has to be approved by the court. The court approved the sale of the whole enterprise on 17 August 2011.Following the court’s resolution, the insolvency administrator announced the tender on 19 August 2011.
The tender process
The only criterion was that the bidder with the highest price will win the tender and become the owner of the whole enterprise of the bankrupt betting company. Each bidder (individual or legal entity) must have submitted an application and pay a deposit amounting to CZK 500 million (approx. EUR 20 million) within 35 days following the announcement of the tender (i.e. until 23 September 2011) to qualify for participation in the tender. The purchase agreement agreed with the successful bidder must have been approved by the Czech Office for the Protection of Competition (and/or by the European Commission if applicable) to become effective. If the agreement was not approved by the Office for the Protection of Competition, the purchase agreement would not become effective and the bidder must pay a contractual penalty amounting to CZK 1.5 billion (approx EUR 60 million) in such case. These conditions were publicly criticised by several businessmen for being harsh, however the insolvency administrator insisted that they remain in place. The proposal of some of the businessmen for public auction has been rejected by the insolvency administrator as less profitable and more risky due to a threat of scheming during the auction.
The insolvency administrator was entitled to decline all the offers and could cancel the tender at any time.
On 23 September 2011 the insolvency administrator publicly announced that three offers have been submitted in the tender, the highest offer being CZK 3,810,000,000 (approx. EUR 152,400,000). The winner of the tender, an SPV held by a financial group ultimately owned by two Czech top businessmen, has been officially announced by the insolvency administrator on 26 September 2011. On the same day the insolvency administrator as the seller and the winner of the tender as the purchaser entered into an agreement on purchase of the whole enterprise of the bankrupt company for the aforementioned price. On 29 September 2011 the court granted its consent with the execution of the agreement, and on 27 October 2011 the transaction was finally approved by the Czech Office for the Protection of Competition. As a result, the agreement on transfer of enterprise has entered into effect as of 27 October 2011, which means that the winner of the tender has become a rightful owner of the betting company’s enterprise, including its trademarks and business name.
Contesting the tender process
Notwithstanding the above, a competing financial group has contested – together with one creditor of the bankrupt company – both the tender process and the conclusion of the agreement to purchase the enterprise. This financial group, supposedly owned by a group of Czech and Slovak businessmen, had previously expressed its interest in acquiring the enterprise of the bankrupt company and presented itself as a fourth serious candidate for the acquisition. However, from the beginning of the tender process it complained that the conditions of the tender were too harsh, unfair and unfavourable, and announced that it would not take part in the tender process. Instead of taking part in the tender process, it sent, on the last day for submitting applications to the tender a letter to the insolvency administrator and to the court that it had a serious interest in acquiring the enterprise of the bankrupt betting company for a price of CZK 4,650,000,000 (approx. EUR 186,000,000, i.e. by EUR 33,600,000 more than the winner of the tender), but only “outside the tender” and under more favourable conditions than those set out in the tender.
This counter offer has been rejected by both the insolvency administrator and the court with the reasoning that (i) it does not contain all formal prerequisites; (ii) the creditors had approved, at the meeting held on 11 August 2011, selling the enterprise of the bankrupt company exclusively in the tender, including the conditions of the tender, and this resolution was duly approved by the court on 17 August 2011; and, as such the counter offer should have been duly submitted in the tender; (iii) the contractual conditions proposed in the counter offer are disadvantageous for the creditors; (iv) there is no guarantee that the price offered would be paid (the parties who duly took part in the tender must have paid a CZK 500 million (approx. EUR 20 million) deposit to the insolvency administrator); (v) entering into negotiations on the counter offer would be discriminative in relation to the parties who duly fulfilled the harsh conditions of the tender process, and would cause further disputes; (vi) entering into negotiations on the counter offer would probably slow down the whole insolvency proceedings and the value of the bankrupt company would decrease as a result, and; (vii) the financial group who submitted the counter offer runs – with financing provided by the creditor who also contested the tender – a competing lottery company who profits from the protraction of the insolvency of the bankrupt betting company. The market share of the competing betting company owned by the financial group who submitted the counter offer has grown rapidly during the months when the bankrupt company has been in insolvency proceedings, it can, therefore, be presumed that the financial group who submitted the counter offer has no real interest in the acquisition of the enterprise of the bankrupt betting company, but only wants to obstruct the completion of the insolvency proceedings and the “resurrection” of the bankrupt betting company in order to improve the economic results of its own betting company.
The insolvency administrator also refused a proposal of the creditor (who is financing that finance group’s competing betting business) to cancel the completed tender process and to prepare and announce a new tender process. As the reasons for the refusal the insolvency administrator stated that: (i) there is no guarantee that the competing financial group or other parties would take part in such new tender; (ii) there is no guarantee that even the parties who took part in the previous tender would take part in the proposed new tender; (iii) there could be disputes initiated by the creditors and the parties to the previous tender; and (iv) its approval by creditors and the court would take at least 2 to 5 months, while the value of the bankrupt company would significantly decrease during this period (mainly due to increased market pressure of its competitors), which would have an adverse effect on the creditors of the bankrupt company and the bankrupt company itself. According to the statements of the insolvency administrator (and of the court), the highest price offered in the completed tender is much higher than the value of the enterprise of the bankrupt company as valued by experts, and it is not likely that a higher price would be offered in a new tender.
Current situation, future progress
As the financial group who submitted the counter offer has not been happy with these reasons, it has announced that it will start various court disputes in this matter, as well as file a complaint against the insolvency administrator.
In the meantime, the creditor who provides financing for that finance group’s competing betting business has already filed a claim at court against the winner of the tender and against the insolvency administrator. In the claim the creditor is requesting: (i) to declare the agreement of the purchase of the enterprise of the bankrupt company entered into by and between the insolvency administrator and the winner of the tender null and void and (ii) to change the judge due to bias.
Notwithstanding the above, the winner of the tender as the new owner of the enterprise already took over the enterprise and has started doing the betting business and renovating the headquarters of the betting company. The new owner of the enterprise is also preparing a new large advertising campaign with Jaromír Jágr, one of the most famous Czech hockey players.
Although it seems likely that the claim filed by the aforementioned creditor will be unsuccessful and that the winner of the tender will become the undisputed owner of the bankrupt betting company’s enterprise in the end, the result of the court dispute still remains uncertain, and we will monitor the progress in this interesting insolvency case (which is one of the most interesting in the past few years) and provide any further updates in due course.