Restructuring and insolvency law in Slovakia

1. What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?

The Slovak Insolvency Act (Act No. 7/2005 Coll. as amended) and the European Regulation on Insolvency Proceedings (2015/848) are the primary sources of legislation governing insolvency and formal restructuring proceedings in Slovakia. A restructuring of loans or other debts before the opening of insolvency proceedings against a debtor (i.e. informal restructuring) is not expressly regulated under Slovak law. It is usually based on contractual arrangements such as standstill agreements or restructuring agreements between the borrower (debtor) and the bank(s) (creditor(s)). We note that the new EU Directive on preventive restructuring (2019/1023) has not been implemented into the Slovak legal system yet.

Due to the COVID-19 pandemic, Slovakia introduced the possibility for entrepreneurs with their seat in Slovakia to apply for temporary protection applicable until 1 October 2020 (with the possibility for the Slovak Government to extend the application until 31 December 2020), unless terminated earlier by the entrepreneur itself or by the court. Temporary protection has various statutory effects; in particular it protects the entrepreneur under temporary protection from creditor bankruptcies, security enforcement or enforcement proceedings, and enables preferential satisfaction of obligations directly related to the maintenance of operations arising after temporary protection. 

We will not further elaborate on this temporary measure for the purposes of this questionnaire. Moreover, our focus is on the insolvency or restructuring of larger businesses as different rules apply to natural persons or small businesses

2. How are insolvency proceedings or restructuring proceedings initiated?

Insolvency proceedings are opened on an insolvency petition filed by the insolvent debtor or by its creditor subject to the existence of legal reasons specified in point 3 below. The petitioner is required to deposit EUR 1,500 to cover insolvency costs (except for some statutory exceptions, e.g. in the case of a filing made by employees over a likely insolvent employer). The insolvency court examines whether the insolvency criteria are met and if there are sufficient funds for the debtor to undergo the insolvency process (otherwise, it appoints a preliminary insolvency administrator); and, if so, confirms the debtor’s insolvency and appoints an insolvency administrator. 

As an alternative, the debtor’s insolvency (or impeding insolvency) can be resolved by restructuring, which is used when insolvency proceedings should not lead to the debtor’s liquidation. The debtor or its creditor (with the debtor’s consent) may file a petition for restructuring if they authorised an insolvency administrator to prepare an expert opinion on the feasibility of restructuring and such expert opinion supports restructuring. 

The Slovak Insolvency Act regulates the process after the occurrence of insolvency (úpadok) or impeding insolvency (hroziaci úpadok). It sets out the criteria of two forms of insolvency:

  • the debtor’s inability to pay its overdue debts (the liquidity test)
  • over-indebtedness (the balance sheet test).

The debtor is obliged to file a petition due to over-indebtedness; voluntarily the debtor may also file a petition for illiquidity or impeding insolvency. A creditor may only file a petition if it can reasonably assume that the illiquidity test is met.

Illiquidity 

Illiquidity occurs if a debtor is unable to settle at least two monetary obligations held by more than one creditor for more than 30 days after maturity. All obligations originally belonging to one creditor 90 days prior to the filing are deemed as one obligation. The details are regulated in the underlying secondary legislation.

Over-indebtedness

Over-indebtedness applies to the debtor obliged to do the accounting if it has more than one creditor and the value of its obligations exceeds the value of its assets. The valuation is made based on the accounts or expert opinion, taking into consideration also any positive going concern prognosis.    

Imminent insolvency

Imminent insolvency occurs in particular if the debtor is in crisis in accordance with the Slovak Commercial Code, i.e. if the ratio of its equity to liabilities is below 8:100. 

4. Which different types of restructuring / insolvency proceedings exist and what are their characteristics?

Slovak insolvency law recognises the following processes available to debtors (legal entities) in financial difficulties: 

  • insolvency (bankruptcy) proceeding pursuant to Part 2 of the Slovak Insolvency Act (konkurz), as a process leading to the liquidation of the insolvent debtor
  • formal restructuring (reštrukturalizácia), which enables the debtor’s business to continue.

Insolvency proceeding

The insolvency proceeding has two initial phases: commencement of bankruptcy and declaration of bankruptcy. 

Commencement of bankruptcy

If the insolvency petition meets the formal criteria, the competent court decides within 15 days from the commencement of bankruptcy having various effects such as:

  • the debtor is obliged to limit its activities to the ordinary course of business
  • the security enforcement or enforcement proceedings cannot generally commence or continue 
  • company liquidation is interrupted, as well as any merger/demerger processes.    

If there is doubt about the sufficiency of the debtor’s assets, the competent court may appoint a preliminary insolvency administrator to find out if the debtor has sufficient assets to cover the insolvency costs. Within this phase, the debtor may pay mature obligations or initiate a restructuring proceeding, resulting in the interruption or termination of the insolvency proceeding.

Declaration of bankruptcy

If the conditions are met (i.e. the debtor is still insolvent and has sufficient assets), the court declares insolvency over the debtor and the formal insolvency proceeding starts: the insolvency administrator is appointed and takes charge of the debtor’s assets, and creditors are asked to register their claims. Further actions in the insolvency proceeding subsequently aim at selling the debtor’s assets and the collective satisfaction of creditors’ claims. 

Formal restructuring

Restructuring opinion and petition

A restructuring opinion prepared by an insolvency administrator foregoes the formal restructuring proceeding. This can be initiated by the debtor or a creditor; however, the creditor may do so only if the debtor cooperates and agrees thereto. If the administrator recommends restructuring, the debtor or creditor (depending on who asked for the restructuring opinion) can file a restructuring petition.

The restructuring proceeding also has two initial phases: commencement of reorganisation proceeding and approval of reorganisation. 

Commencement of reorganisation proceeding

The commencement of reorganisation proceeding has similar effects as the commencement of bankruptcy (e.g. the debtor is obliged to limit its activities to the ordinary course of business). In addition, the other contractual party may not terminate or withdraw from the contract due to the default or restructuring of the debtor: such actions or contractual provisions are ineffective.

Approval of reorganisation

If the conditions are met, the court approves the restructuring and the formal restructuring proceeding starts: the restructuring administrator is appointed, and creditors are asked to register their claims. In contrast to the insolvency proceeding, the debtor remains in charge of its assets, but its legal acts are subject to approval by the restructuring administrator in the extent stipulated by the court. Following the general meeting of all creditors and the creditors’ committee, the restructuring trustee prepares the restructuring plan to be subsequently approved by the creditors’ committee, the general meeting of all creditors and the court. 

Most court decisions (in particular the ones approving various phases) are published in the Commercial Journal (available here: https://www.justice.gov.sk/PortalApp/ObchodnyVestnik/Formular/FormulareZverejnene.aspx) as well as in the Insolvency Register (available here: https://ru.justice.sk/ru-verejnost-web/pages/searchKonanie.xhtml?query=).

5. Are there several types of creditors and what is the effect of a difference?

Slovak insolvency law distinguishes between:

  • “general” (i.e. unsecured and not subordinated) creditors
  • secured creditors, and 
  • subordinated creditors (i.e. creditors having subordinated claims in accordance with the Slovak Commercial Code, holding contractual penalties or being related to the debtor). 

Unsecured creditors are satisfied from the proceeds from the “general” (unsecured) assets of the debtor, while secured creditors are preferentially satisfied from the proceeds from the assets secured in their favour; in the extent that a part of the secured claim remains unsatisfied, such part turns into the unsecured claim. Subordinated creditors can step in only if unsecured creditors are fully satisfied. 

Apart from the above, the Insolvency Act also recognises claims against the insolvency estate, i.e. claims arising after the declaration of bankruptcy such as expert opinions, accounting services, remuneration of the insolvency administrator, costs for the management of insolvency estates.  

In the case of the restructuring proceeding, apart from the separate groups for secured, unsecured or subordinated claims, another separate group shall be created for shareholder claims if shareholders’ rights are affected by the restructuring plan. A further group shall represent claims not affected by the restructuring plan.

6. Is there any obligation to initiate restructuring / insolvency proceedings? For whom does this obligation exist and under what conditions? What are the consequences if this obligation is violated?

According to the Slovak Insolvency Act, the debtor is obliged to file for an insolvency proceeding within 30 days since it has learnt, or acting with professional care could have learnt, about its over-indebtedness. This applies to (a member of) the statutory body of the debtor, as well as to its liquidator and   statutory representative.

The debtor may use the 30-day deadline for eliminating the insolvency and rescuing the company either through informal restructuring processes or filing for formal restructuring (i.e. engaging a restructuring administrator to prepare a restructuring opinion). In the case of failure of these attempts, the debtor is obliged to file for the insolvency proceeding.
If the persons obliged to file an insolvency petition on behalf of the debtor fail to do so in time, they can face various civil and criminal law risks. 

Firstly, each person can be obliged to pay a contractual penalty in the amount of EUR 12,500 to the insolvency administrator, unless he/she can secure release from liability. In addition, if the obliged person does not make the payment or provide sufficient evidence of his/her innocence to the insolvency administrator, the administrator enforces the payment with the court, whereby the court decision on the payment also qualifies as the “disqualification court decision”. The disqualification court decision means the disqualification of the particular person to function as (the member of) the statutory body, supervisory body, procurist or head of branch for a specific time period (up to 3 years). 

Secondly, the respective person may be liable for damages to the given creditor for late filing if the creditor is unable to satisfy its claim within the insolvency. Such damages decision also qualifies as the disqualification decision.
Thirdly, failure to file for insolvency in time may also trigger criminal liability under the Slovak Criminal Code with imprisonment of up to 5 years or even 10 years in special cases (e.g. if larger damages were caused or the person acted with special motive).

7. What are the main duties of the representative bodies in connection with restructuring / insolvency proceedings?

In general, the debtor (acting through its representative bodies) is obliged to prevent insolvency and constantly monitor its financial situation, status of equity and liabilities in order to foresee any eventual imminent insolvency and take measures to avoid it.

In the case of imminent insolvency, the debtor is obliged to adopt adequate and suitable measures to avoid insolvency without undue delay. This obligation is similarly regulated in the Slovak Commercial Code, although details of the measures are not specified. It only sets forth the obligation to convene a general meeting of shareholders of limited liability companies or joint-stock companies if the loss exceeded, or shall likely exceed, one third of the registered capital. The representatives are to propose measures to restore the company’s loss and notify the supervisory board about the situation without undue delay. Otherwise, they could face civil liability for damages or even criminal liability for late filing.

There is no list of adequate and suitable measures to avoid insolvency. However, it is generally expected that the representatives of the debtor attempt informal restructuring (negotiations with creditors on some form of debt restructuring), formal restructuring or optimalisation of the debtor’s activities (e.g. termination/sale of business in loss), only filing for insolvency in the last instance.

In the case of restructuring, the representatives of the debtor have to be formally/informally involved as restructuring can be made only upon the debtor’s petition or with the debtor’s consent. Moreover, the debtor remains in charge of its assets, even if certain legal acts are subject to approval by the restructuring administrator.

The situation is different in the case of an insolvency proceeding. Once the court declares insolvency over the debtor and the insolvency administrator is appointed, the debtor’s right to administer and dispose of the assets belonging to the insolvency estate is transferred to the insolvency administrator. The representatives of the debtor have obligations of disclosure and cooperation to assist the insolvency administrator fulfil its duties. 

The representatives may also be obliged to participate in a general meeting of creditors or a meeting of a creditors’ committee to respond to queries.

9. What are the main duties of shareholders in connection with restructuring / insolvency proceedings?

Shareholders do not have a direct obligation to file for insolvency. In the absence of new management (if new members are not registered within 60 days from the termination of the old management, either through resignation or removal), the old management is obliged to file for the cancellation of the company within 30 days.

However, the controlling person/entity (i.e. holding the majority of voting rights) could be held liable for the insolvency of its controlled entity (debtor) if it significantly contributed to the insolvency of the debtor, unless it can evidence that it acted with the information and good belief that it acted to the benefit of the debtor. Liability stands for damages to the creditor of the debtor caused by such insolvency. The rights of the creditor are time-barred to 1 year.

Also, if the company is in crisis, i.e. insolvent or imminently insolvent, a loan or similar payments from certain persons/entities (such as shareholders holding at least 5% share) could be deemed as replacing the company’s own sources, which cannot be repaid while the company is in crisis or if the company would get into crisis as a result of repayment.

These rules are rather new so details will emerge with the development of case law.

10. Are the shareholders of a company involved in restructuring / insolvency proceedings?

In general, shareholders have no right to make decisions on assets belonging to the insolvency estate. They can only register their eventual claims as subordinated claims; all claims of related persons/entities holding at least 5% share on voting rights/registered capital or having a similar level of influence are subordinated.

They can be involved in the restructuring if the restructuring plan proposes changes to shareholders’ rights, sale of the enterprise or its part, or merger/demerger concerning the debtor. Then, shareholders affected by the restructuring plan form a separate group and are entitled to vote about it. In certain circumstances, an individual group can, in principle, be overruled by other groups. 

11. Is a solvent liquidation of the company an alternative to regular insolvency proceedings?

Generally, it is up to shareholders to decide about further development of the company. However, if the company is over-indebted, the liquidator is obliged to file an insolvency petition without undue delay, unless the insolvency was already terminated for insufficiency of assets.

If the company was already insolvent upon the liquidation filing, the representatives could be held liable for late insolvency filing. 

The current formal restructuring enables the application of restructuring also in the case of imminent insolvency, even if the EU Directive on preventive restructuring (2019/1023) has not yet been implemented in Slovakia. It is expected that the new directive will also be accompanied by the reform of the current restructuring, as it is no longer widely used in practice after the rules became stricter and more unattractive following a series of abuses of the process a few years ago.

13. What is the average success rate after completed restructuring / insolvency proceedings?

The success rate in restructuring is higher than in insolvency, but some restructuring proceedings end up in insolvency proceedings after some time. 

Insolvency proceedings can last a very long time and be costly, leaving very little satisfaction for creditors (especially unsecured creditors).

Picture of Peter Simo
Peter Šimo
Of Counsel
Bratislava
Zuzana Nikodemova
Zuzana Nikodemova
Senior Associate
Bratislava