Arca case: a high-stakes game by lawyers. Group reorganization in the works

Source: tydenikhrot.cz

Author of comment: Mgr. Mgr. Lucie Kačerová

A meeting of creditors of the collapsed Arca Investments group has shone a light on interest groups and shown the strength of its current management. Velič’s team has withstood the pressure and may reorganize the company.

The concentration of elite attorneys in the vast judicial complex of Prague’s Vršovice was unusually high that day. I wish it hadn’t been. Last Tuesday, in the auction room of the Na Míčánky Judicial Complex, the key legal battle in the biggest bankruptcy in modern Czech history was fought.

Creditors came to decide the future of the Arca Investments group, a leading investment player with more than 200 companies in several countries, and total debts of around CZK 20 billion. Judge Aleš Bartoš set aside three days for the first AI creditors’ meeting – Tuesday to Thursday, but from the beginning he made it clear to all present that he wanted to be done sooner. He completed the claims review in a few hours. Not everyone was sympathetic to his time ambitions, however, and the creditors’ meeting itself dragged on after all.

There were over 1,700 creditors registered in the proceedings, yet the room was far from full and held only a few hundred people. In fact, strong creditor groups had already been formed earlier, each represented at the meeting by a team of lawyers. Indeed, only a handful of individual creditors came to vote. The meeting was therefore mainly a tactical game of major groups and well-known lawyers with years of experience in Czech insolvencies built up over many years.

IFIS against all

“May the best man win,” smiled Jan Čermák backstage during an informal greeting with Lee Louda, the insolvency administrator of the Arca group. Čermák is the chief strategist of the IFIS fund, which controls three billion crowns in claims (not all of which were granted voting rights by the judge) and which had already made it loud and clear before the meeting that its aim was to remove Louda from office.

Čermák, a Brno-based debt speculator, orchestrated a large team of lawyers and associates on the spot, who, as expected, humiliated the debtor. His team included controversial figures such as former judge Jan Kozák, and Helena Horová, a very influential insolvency administrator at the time. Marek Indra, a lawyer and majority owner of IFIS, also came to support his people at the beginning of the proceedings.

IFIS concentrated a large number of claims and profiled itself as the greatest enemy of the current management of Arca. Čermák had already achieved partial success at a subsidiary, Františkovy Lázně Savoy, where he had Louda dismissed. However, in Arca itself, a strong pact emerged against IFIS. Although there was feverish negotiation throughout the two days that the meeting lasted, with speculation about last-minute deals, key alliances built long before the meeting eventually prevailed.

The debtor’s attorney, insolvency matador Petr Kuhn, and his team did a good job. Together with Petr Smutný, a restructuring expert from PwC, who outlined a possible reorganization scenario for Arca, they managed to get the main creditor streams on their side.

Petr Sprinz, a lawyer from Allen & Overy which was representing J&T Bank in the case, was particularly active in the courtroom and behind the scenes. In the end, he maintained a united front with the largest unsecured creditors, i.e. AVEA (claims for CZK 3.5 billion), Traficon (CZK 1.7 billion) and the creditors’ representatives, attorney Pavel Korman (CZK 1 billion) and also with attorney Lucie Kačerová from Rowan Legal (approximately CZK 300 million). Although IFIS tried several times to split this alliance, IFIS failed in key votes.

Krúpa’s ghost

Tuesday’s battle over AVEA’s position in the proceedings was important. Activist lawyer Jan Langmeier proposed that the association be stripped of its voting rights because there was reason to suspect the association’s links to the group’s leadership, headed by Rastislav Velič. Langmeier was relying on a document sent to the court by the Slovak company RYG Investments, which falls within Pavol Krúpa’s sphere of influence. Langmeier thus definitively joined the camp of IFIS snipers.

Although Krúpa himself did not show up at the meeting, his “ghost” was very much present. Critics of the current leadership often referred to his compromising materials in their proposals, and Slovak lawyer Fadi Fardous, who is a major player in the Arca Capital Slovakia insolvency, also attended. Fardous is said to be close to Krúpa, together they are calling for the bankruptcy of Arca Capital Slovakia and have a similar plan for the parent company Arca Investments.

As expected, Langmeier’s attack on AVEA was supported by IFIS and, somewhat surprisingly, by insolvency lawyer Michal Žižlavský. He also represents a significant part of the creditors with a total value of over CZK 440 million.

At that moment, the AVEA representatives, led by attorney Tomáš Richter, were hardly smiling. And they were not the only ones. At least for a moment, Petr Kuhn looked up from the chess game on his laptop, which he was using to shorten the dull moments of the creditors’ meeting. The elimination of the largest creditor would have had a major impact on the entire course of the proceedings and the balance of power. IFIS, the second largest creditor stream, would be on a roll, which would not bode well for the prospects of Velič and his team.

“We all know that this is defamation by Mr Krúpa, and the aim of the proposal is then to hijack the whole insolvency procedure,” Richter responded.

Judge Bartoš eventually dismissed the motion, saying it was filed late. Kuhn and his allies scored an important victory, while IFIS had to improvise again.

Overnight, new strategies were devised and acted upon. The second day, already without  Velič and many of the creditors present – the hall was half empty compared to Tuesday – began in an atmosphere of paranoia. Huddled groups in the foyer and in the nearby cafeteria hinted at possible new coalitions. IFIS representatives were beaming, while on the other side of the hall the tension was palpable. There was speculation about the removal of Lee Louda in exchange for support for the debtor’s reorganization, and there were games being played for seats on the creditors’ committee.

Due to technical and organizational difficulties, the meeting started two and a half hours late.

IFIS subsequently tried to adjourn the meeting. It argued that too many claims had been singled out for special review and also that a decision by the Court of Appeal on the appointment of insolvency practitioner Lee Louda was still pending. IFIS had challenged his appointment in court. Judge Bartoš, however, did not grant the stay.

No twists and turns

Despite the extensive speculation about reversed alliances, in the end everything played into the debtor’s hands. The creditors unanimously approved the composition of the creditors’ committee. IFIS also raised its hand in favor, although its representative will not sit on this important body.

Seats will instead be taken by a representative of J&T Bank, a company related to Gomanold, IMOS from AVEA, Traficon and Real Controls represented by lawyer Pavel Korman. They will be joined by one of the largest individual creditors, the industrial company United Brushworks (Spokar), represented at the meeting by the aforementioned lawyer Lucie Kačerová from Rowan Legal. In the end, IFIS was not even successful in electing a substitute to the creditors’ committee. It is this body that will now play a crucial role in the further course of the proceedings.

There followed a passage in which the administrator, the debtor and the representative of the provisional creditors’ committee evaluated their work so far. Petr Smutný outlined a plan for a possible reorganization. On behalf of the debtor, Petr Kuhn emotionally apologized to all creditors for his mistakes. “Be tough on us, watch us, check us,” he urged the participants and described the debtor’s plan for reorganization as a management-creditor concept, where the debtor will formally prepare the plan, but the creditors will have the main say in it.

In the end, the vast majority of creditors, including IFIS and Jan Langmeier, were in favor of the reorganization. IFIS also tried to remove the debtor’s right to draw up a reorganization plan, but was unsuccessful. A large coalition of AVEA, Traficon, Korman, as well as Žižlavský and others, again opposed it. Velič and his team, in particular the PwC advisors, now have several months to present a detailed reorganization plan. The creditors will then vote on it again at a meeting.

Battle of Louda

“With the reorganization, we can deal with the complex legal, economic and tax situation of Arca Investments and, as a result, ensure that creditors will receive at least a 50 percent satisfaction rate of their claims within three to five years,” Peter Janiga, the Arca Investments representative responsible for the restructuring, said in a statement shortly after the vote. It is this young Slovak manager who is to be the new face of the group for the future process, while Rastislav Velič is to withdraw from the group. Janiga has been in the Arca group structure since 2017, having previously worked at KPMG and built up the fund structure in the hands of the Slovak state.

At the end of the meeting on Wednesday evening, however, trouble did spark when a battle broke out indirectly over the retention of insolvency administrator Lee Louda. After various maneuvers, IFIS scored a minor victory when its motion to remove Louda failed, but the possibility remained in play that a possible High Court ruling would remove him.

Despite the final legal mix, the first creditors’ meeting ended in a landslide victory for the current Arca management, which managed to win the largest mass of creditors over to its side. But the legal battle is far from over. Insolvency cases from the past are a good reminder of the twists and turns that are possible in such cases.

The article appeared in the print edition of the weekly Hrot.

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