In May 2022, a new law on resolving imminent insolvency came into effect, which also amended and modified other legal regulations, significantly including the Bankruptcy and Restructuring Act, the Commercial Code, and others, most of which came into effect later, on July 17, 2022. July 2022. The new law introduced new institutions, procedures, and rules into the Slovak legal system, the main purpose of which is to prevent the negative consequences of economic failure of economic entities. In the following article, we will present the adopted changes in more detail.
Bankruptcy is undoubtedly an undesirable situation and every entrepreneur's nightmare. The Bankruptcy and Restructuring Act defines bankruptcy as a state in which a debtor is insolvent or overindebted. Since insolvency and over-indebtedness lead in the vast majority of cases to the cessation of business, the legislator has decided to adopt legislation that could, to a certain extent, eliminate the risk of bankruptcy and thus prevent the cessation of business. This is Act No. 111/2022 Coll. on the resolution of impending bankruptcy and on amendments to certain acts, which has been in force since July 17, 2022, and which transposed the Directive on restructuring and insolvency into Slovak law.
This Act regulates certain instruments to help resolve impending insolvency due to the debtor's imminent inability to pay, namely public preventive restructuring and non-public preventive restructuring. The adoption of this law also led to amendments to other legal regulations, such as the Commercial Code and the Bankruptcy and Restructuring Act.
In view of the new legislation, the Ministry of Economy has prepared practical guidelines for small and medium-sized enterprises, which are available on the website of the Ministry, including in English. These guidelines and manuals are intended to help navigate the new legislation and clarify the procedures and methods for using the various institutions. The Ministry has also prepared a guide for entrepreneurs on preventive restructuring and the use of advisory services in this area, which may be a useful aid given the recent nature of the legislation.
As mentioned above, bankruptcy is defined as a situation where a debtor is either insolvent or over-indebted. Simply put, a debtor is considered over-indebted if they have more than one creditor and the value of their liabilities exceeds the value of their assets. This definition has remained unchanged with the adoption of the new law. However, it is important to note that there has been a change in the definition of insolvency. The old legislation considered a debtor to be insolvent if they had at least two liabilities to two different creditors that were more than 30 days past due. However, with the entry into force of the Act on Impending Bankruptcy, a change was made and the aforementioned period was extended from 30 days to 90 days. A natural person is considered insolvent if they are unable to meet even one financial obligation more than 180 days after the due date.
We have explained what bankruptcy, insolvency and extension are. But what does the new law on imminent bankruptcy actually bring?
As stated in the explanatory memorandum, the new legislation is intended to be an effective tool for the timely resolution of a debtor's situation so that they can continue their activities and maintain their viability, and in particular to prevent bankruptcy and subsequent insolvency. The basic objective of the law is to "provide debtors with sufficient scope for effective, efficient, rapid and transparent preventive restructuring at an early stage when insolvency is imminent." It is important to note that such preventive measures and the prevention of insolvency proceedings not only increase the satisfaction of creditors' claims, but also preserve jobs and, for example, the entrepreneur's know-how.
What solutions does this law introduce?
To achieve these objectives, several new institutions have been introduced, such as preventive restructuring, temporary protection, and so-called early warning tools. The individual institutions available will be described in more detail below.
Preventive restructuring
The law also introduces preventive restructuring as a new way of restructuring commercial companies. In preventive restructuring, the debtor can address its impending insolvency through a recovery plan, which the law refers to as a public preventive restructuring plan and which must be realistic. Preventive restructuring is simpler and less costly than "classic" restructuring under the Bankruptcy and Restructuring Act. The debtor may draw up the recovery plan itself or request assistance from a preventive proceedings advisor from a list published on the website of the Ministry. The recovery plan must then be approved by the creditors and the court.
The law introduces two forms of preventive restructuring – public and non-public. The basic difference is that non-public preventive restructuring can only take place with creditors who are subject to supervision by the National Bank of Slovakia. In contrast, public preventive restructuring is possible with all creditors.
The advantage of non-public preventive restructuring is that it gives entrepreneurs the space to focus on their largest liabilities in a less formal process and in closer contact with creditors.
The advantage of public preventive restructuring, given that it involves all creditors, is that it provides a comprehensive solution to the entrepreneur's liabilities, and this is achieved in a relatively short period of time. In this case, however, the debtor must be registered in the register of public sector partners at the time of filing the proposal.
The course of preventive restructuring
Public preventive restructuring takes place in several steps, during which the debtor is required to fulfill a number of obligations and requirements laid down by law. The process can be divided into several parts.
- In the first step, the debtor must prepare for the preventive restructuring itself to the greatest extent possible. Particular attention should be paid to Section 10 of the Act, which sets out the conditions under which preventive restructuring will be permitted or, conversely, defines cases in which the court will not permit public preventive restructuring, for example if the debtor is in liquidation or there are grounds for winding up the debtor, etc.
- If the conditions for authorizing public preventive restructuring are met, the debtor shall submit a proposal for authorization of public preventive restructuring to the competent court. The application shall be submitted exclusively in electronic form and, in addition to the general requirements for submission, shall also include a statement by the debtor that the conditions for granting public preventive restructuring have been met and a draft public plan (the requirements for this public plan and its draft are set out below).
- If the court grants public preventive restructuring in accordance with Section 10 of the Act, the debtor is obliged to convene an informative meeting to be held no earlier than 15 days and no later than 20 days after the granting of public preventive restructuring. Anyone who claims to be a creditor of the debtor has the right to attend the informational meeting. The basic purpose of this informational meeting is to familiarize creditors with the debtor's public plan, i.e., the method of its recovery.
- Subsequently, the debtor is required to convene a meeting of creditors. This must take place no earlier than 60 days and no later than 70 days after the approval of public preventive restructuring, and is led by the debtor. The basic task of the creditors' meeting is to approve the public plan by the creditors' committee. The creditors' committee has three or five members and its activities are managed by the chair of the creditors' committee. Its tasks are defined in Section 33 of the Act, and its activities consist mainly of supervising the debtor's activities during public preventive restructuring.
- After the public plan has been approved, the debtor is required to submit a proposal for confirmation of the public plan to the court within seven days. The court either confirms or rejects it. It rejects it in particular if the rules for the preparation, drafting and approval of the public plan have not been complied with, the public plan is vague or unclear, or the new financing necessary for the implementation of the public plan unfairly prejudices the interests of the creditors. A complete list of reasons for rejection is set out in Section 45(1) of the Act. However, it should be noted that even if the court does not approve the public plan, the debtor is not obliged to file for bankruptcy. It is important to note that the debtor is still in a state of "imminent bankruptcy" and not directly in "bankruptcy."
- However, if the court approves the public preventive restructuring plan, it becomes binding on the debtor, and the debtor undertakes to comply with and fulfill it. In order to increase legal certainty for creditors, the public plan may stipulate that, for the duration of its implementation, a supervisory administration shall be established to supervise and control the debtor's business activities in accordance with the approved public plan.
Public preventive restructuring plan
The law sets out several basic criteria that a public restructuring plan must meet, such as comprehensibility, realism, sustainability, and fairness in terms of the equitable distribution of the debtor's assets among the creditors concerned.
The public preventive restructuring plan is divided into three parts: (i) an introductory part, (ii) a descriptive part, and (iii) a binding part.
The introductory part contains basic identification data such as the name of the debtor, the name of the administrator, and the competent court. In the descriptive part (Section 36(3) of the Act), the debtor provides, for example, a detailed description of its economic situation, identifies the creditors concerned and indicates the expected satisfaction rate of each creditor concerned in the best alternative scenario. In the binding part (Section 36(4) of the Act), the debtor shall describe the manner in which the assets will be disposed of, identify the entities providing financing to the debtor or describe other legal relationships to be established on the basis of the public plan.
The public preventive restructuring plan shall be accompanied, for example, by a list of creditors, a list of assets, a list of related parties or a list of employees. The final list of annexes is set out in Section 36(6) of the Act.
Pursuant to Section 8 of the Act, the draft public plan must contain the elements of a public plan pursuant to Section 36, i.e. in principle all the above-mentioned elements.
Temporary protection
Temporary protection is an institution created by law, under which the debtor is to be given sufficient material and, in particular, time to effectively achieve the objective pursued by public preventive restructuring, i.e. the recovery of the company.
Under the new legislation, temporary protection will be for a three-month period (which may be extended by a further three months at the debtor's request), during which the debtor is not required to file for bankruptcy and any proceedings already initiated are suspended. However, it is important to note that in order for temporary protection of the debtor to be granted, the consent of the majority of creditors from the creditors' committee must be obtained.
The introduction of temporary protection has several positive effects for the debtor, for example:
- the debtor is not required to file for bankruptcy, and during the temporary protection, bankruptcy cannot be declared against the debtor or restructuring allowed; any bankruptcy or restructuring proceedings already started under the Bankruptcy and Restructuring Act are suspended;
- during temporary protection, no enforcement proceedings may be brought against the debtor;
- during temporary protection, no security interest in the debtor's property may be enforced against the debtor and no such security interest may be exercised.
Temporary protection is clearly a favorable institution for the debtor, protecting them for a certain period of time from the negative effects of bankruptcy, enforcement, or the exercise of security rights. This means that the debtor can continue to ensure the operation of its business while focusing on effectively resolving the impending insolvency. The advantage is that the effects of temporary protection are general, i.e., they apply to all of the debtor's creditors. This means that there are no creditors with privileged status who could circumvent the effects of the temporary protection granted and file for bankruptcy or commence enforcement proceedings.
Advisor in preventive proceedings
Another new feature is the introduction of the role of advisor in preventive proceedings. The law stipulates that the debtor's statutory body shall consider using an advisor who has the professional knowledge and experience, technical and personnel resources necessary to resolve the debtor's impending insolvency and who enjoys the trust of the relevant creditors. The advisor's tasks include preparing projections of cash flows, revenues and expenses and their structure for the purpose of drafting a draft plan and a public plan examine the content and scope of factors affecting the sustainability of the debtor's business and its ability to continue operating, including the degree of threat to its sustainability, or, for example, examine and propose the need to introduce specific measures and their expected impact on the sustainability of the debtor's business. The debtor may use an advisor in preventive proceedings throughout the entire proceedings, from the period immediately preceding the commencement of preventive restructuring proceedings until their conclusion, when the debtor is "restored to health."
The advisor's services are provided for a fee, which should be reasonable. A fee is considered reasonable if it does not exceed one percent of the debtor's turnover for the last calendar year. From the debtor's point of view, it is certainly advisable to seek the assistance of an advisor, especially if the debtor does not have sufficient economic and legal knowledge, as the advisor in preventive proceedings is a guarantor of expertise and, from their position, should be a guarantee of high-quality services. However, the disadvantage will be an additional financial burden on the bankrupt. The law does not limit the use of the services of only one advisor, so the debtor may use the services of several advisors, such as a lawyer and a tax advisor at the same time.
The Ministry of Economy is required to publish on its website a list of advisors for small and medium-sized enterprises in the event of imminent bankruptcy. As of the date of publication of this article, there are more than 50 entities on this list, mainly from the legal sector. The complete list is available here.
In the case of public preventive restructuring, the debtor is required to use an advisor unless they obtain consent for temporary protection under Section 17(1) of the Act.
Special procedural provisions and causal jurisdiction of courts
The new legislation also introduced the causal jurisdiction of courts for proceedings to resolve imminent insolvency. The Act specifies three causally competent district courts to which the debtor may apply with a proposal for preventive public restructuring. Specifically, these are the District Court of Košice I for the district of the Regional Court in Košice and the Regional Court in Prešov, the District Court of Žilina for the districts of the Regional Court in Žilina, the Regional Court in Banská Bystrica and the Regional Court in Trenčín, and finally the District Court of Nitra for the districts of the Regional Court in Nitra, the Regional Court in Trnava and the Regional Court in Bratislava. The decisive factor for determining the jurisdiction of the court is the debtor's registered office at the time of filing the petition. The Regional Court in Banská Bystrica shall have exclusive jurisdiction over appeals.
Impact of the Act on Impending Insolvency on other legislation
As the issue of impending insolvency is directly linked to the Act on Bankruptcy and Restructuring, changes have also been made to this legislation, and other changes have been adopted to improve and simplify the processes. The definition of insolvency mentioned above has been changed, and the definition of imminent bankruptcy and the debtor's obligations in connection with imminent bankruptcy have been added, as well as, for example, the presumption of solvency. A significant change is the obligation of the debtor to file for bankruptcy even in the event of insolvency (until July 16, 2022, the obligation only applied in the event of prolongation) and also the prohibition of the debtor who has learned or could have learned (while exercising professional care) of their insolvency to fulfill due monetary claims to an extent greater than that which would accrue to the creditor in the event of satisfaction in bankruptcy (if declared). This prohibition, or the related obligation of the debtor not to fulfill a monetary obligation in a higher amount, applies from the moment the debtor learned or could have learned of its insolvency while exercising professional care, i.e., regardless of whether or not bankruptcy had been declared on the debtor's assets.
Further details on determining insolvency and imminent insolvency are set out in Decree of the Ministry of Justice of the Slovak Republic No. 197/2022 Coll.
Other changes in the Bankruptcy and Restructuring Act also affect the filing of claims, which can now only be submitted electronically and only to the administrator. Creditors are therefore no longer required to deliver a copy of the application to the court. However, please note that the 45-day substantive deadline for the delivery of applications remains in force, meaning that the application must be delivered on the last day of the deadline; simply sending it is not sufficient. Another new feature is the possibility of convening a creditors' meeting by videoconference, which we certainly see as a positive change that can contribute to the efficiency and better accessibility of the meetings themselves. The deadlines for convening the first meeting of creditors have also changed. Under the original legislation, the first meeting of creditors had to be convened no earlier than the 15th day and no later than the 20th day after the expiry of the deadline for disputing claims. Under the new rules, the first creditors' meeting must be held no earlier than 30 days and no later than 45 days after the expiry of the deadline for disputing claims, thus allowing more time.
The Act on Impending Insolvency also amended the Commercial Code, extending the definition of a company in crisis to include a company that is at risk of insolvency, i.e., it does not have to be directly in a state of insolvency.
The adoption of the Act transposed the EU Directive into Slovak law. We view the adoption of the Act on Impending Insolvency positively, but its benefits will only become apparent in practice and through the use of the new solutions available. Early detection of impending insolvency and active resolution can help preserve the existence of many businesses. If an entrepreneur is unable to cope with the situation on their own, they can seek assistance from one of the advisors in preventive proceedings. At the same time, they can apply for temporary protection, which will give them at least three months to resolve their adverse financial situation.
