Restructuring and insolvency law in Slovakia

Restructuring

The Insolvency Act (Act No. 7/2005 Coll. as amended) and the Preventive Restructuring Act (Act No. 111/2022 Coll. which implemented the EU Directive on Restructuring and Insolvency of 20 June 2019 (EUR 2019/1023) are the primary sources of legislation governing restructuring proceedings.

General civil, corporate and labour law also apply to implementing restructuring tools. 

Only the debtor can petition for preventive restructuring. Formal restructuring can also be initiated by the creditor if:

• the creditor acquires the trustee’s recommendary opinion, and
• the debtor agrees to it.

Formal restructuring

Formal restructuring is an alternative to bankruptcy proceedings when the debtor is already insolvent. The debtor or its creditor can file a petition for restructuring if they authorise an insolvency administrator to prepare an expert opinion on the feasibility of restructuring and such expert opinion supports restructuring. If the conditions are met and restructuring is formally opened and started, a restructuring administrator is appointed and creditors are asked to register their claims. The debtor remains in charge of its assets, but its legal acts are subject to approval by the restructuring administrator to the extent stipulated by the court.

Following the general meeting of all creditors and the creditors’ committee, the restructuring administrator prepares the restructuring plan to be subsequently approved by the creditors’ committee, the general meeting of all creditors and the court. In general, a majority of creditors from the given group have to approve the restructuring plan. The court has the power to replace the approval of a certain group with its consent subject to certain conditions. Moreover, the court may disapprove the restructuring plan if the statutory conditions are not met, e.g. unsecured creditors will not be satisfied up to at least 50%, unless such unsecured creditors agree otherwise in writing. Such court disapproval converts the proceedings to bankruptcy proceedings.

Preventive restructuring

Restructuring will be opened if the debtor is not yet insolvent, but insolvency is threatened. The procedure can be public or non-public. The aim is to give the debtor the possibility to restructure its debt under the protection of individual enforcement actions.

Public restructuring

Public restructuring is quite regulated and formalistic. The court approves public preventive restructuring if certain conditions are met, in particular if the debtor is not insolvent, wound-up or in liquidation or enforcement proceedings. In the same decision, if requested the court grants a moratorium for 3 months, which can be extended up to 6 months in total, provided that certain creditors agree and conditions are met.

The court appoints a special administrator only in certain situations (moratorium, expectation of cramdown, request by the debtor or a majority of creditors); the administrator is selected at random by the court. Following a meeting of affected creditors and the creditors’ committee, the debtor prepares the restructuring plan to be subsequently approved by the creditors’ meeting and the court, including the cross-class cramdown if necessary.

Non-public restructuring

Non-public restructuring, which is possible only with creditors under the supervision of the National Bank of Slovakia or similar institution abroad, is only subject to a court notification on initiation of the proceedings and submission of the restructuring plan within 3 months of the notification. If the court does not reject the plan within 15 days of its submission, it is deemed approved with effect against the creditors agreeing to it in writing.

Formal restructuring 

There are two general classes of creditors: secured and unsecured. If any changes in the shareholder rights, transfer of business, merger or de-merger are expected, a separate group of shareholders is created. There might also be a group of subordinated creditors or creditors in similar positions (related creditors). The classes may be split to further separate groups to reflect their same economic interests, such as legal grounds or security of claims.

A simple majority of each class has to approve the restructuring plan before it is sent for court approval. Different but non-discriminative arrangements can be agreed for the settlement of debts.

Preventive restructuring 

The classification of creditors is generally split into creditors affected by the plan, and creditors not affected by the plan (e.g. employees, small creditors and non-monetary creditors).

Creditors affected by the plan are further divided into classes of secured creditor, unsecured creditors, related creditors, subordinated creditors and shareholders. These groups may be further split, except for unsecured creditors.

Voting depends on the class. For unsecured creditors, there is a combination of the amount of the claim (a three-quarters majority is required), and each creditor having one vote (a simple majority is required). Each secured creditor has to agree to the plan. A simple majority has to approve the plan in all other cases.

As regards restructuring, no.

The filing obligation exists only for bankruptcy proceedings and applies to the statutory representative of the debtor or its liquidator: either has to apply for bankruptcy within 30 days from it learning or, acting with professional care, when it could have learnt of the debtor’s insolvency. A failure to file is subject to a fine of EUR 12,500; in addition, there might also be liability for damages or criminal liability. 

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

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

Shareholders do not have a direct obligation to file for restructuring or bankruptcy. 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 existing management is obliged to file for winding-up of the company within 30 days.

A controlling person/entity (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 to the benefit of the debtor. Liability is for damages to the creditor of the debtor caused by such insolvency. The rights of the creditor are time-barred to 1 year.

In addition, 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.

Insolvency 

The Insolvency Act (Act No. 7/2005 Coll., as amended) and the European Regulation on Insolvency Proceedings (2015/848) are the main sources of legislation governing insolvency.

Insolvency proceedings are opened on an insolvency petition filed by the insolvent debtor (its statutory body, liquidator or other entitled person in its name), or by its creditor subject to the existence of the legal reasons specified in Q3 below. The insolvency court examines whether the insolvency criteria are met and if there are sufficient funds for the debtor to undergo the insolvency process, in which case it confirms the debtor’s insolvency and appoints an insolvency administrator. Otherwise, it appoints a preliminary insolvency administrator.

The Insolvency Act sets out the criteria for two forms of insolvency (úpadok):

• 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 any form of insolvency within 30 days it learns or, acting with due professional care, could have learnt of its insolvency. A creditor can only file a petition if it can reasonably assume that the illiquidity test is met or following some publication notices under special laws.

Illiquidity 

Illiquidity occurs if a debtor is unable to settle at least two monetary obligations held by more than one creditor for more than 90 days after maturity. All obligations originally belonging to one creditor 90 days before 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 any positive going-concern prognosis.    

The only insolvency procedure is bankruptcy (konkurz). The aim is to sell bankruptcy assets and satisfy the debtor’s creditors in accordance with the order of priority, which subsequently leads to liquidation of the debtor. Insolvency proceedings have two initial phases:

Commencement of bankruptcy

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

• the debtor is obliged to limit its activities to the ordinary course of business necessary for its operations (e.g. any new financing, corporate reorganisations, immovables transfers or other acts favouring one creditor)
• the security enforcement or enforcement proceedings cannot commence or continue
• company solvent 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.

In this phase, the debtor may also pay all mature obligations or initiate restructuring proceedings, resulting in the interruption or termination of the insolvency proceedings.

Declaration of bankruptcy

Once the court declares insolvency, an 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 proceedings subsequently aim at selling the debtor’s assets and the collective satisfaction of the creditors’ claims.

Slovak insolvency law distinguishes between:

• “general” creditors, i.e. unsecured and not subordinated
• secured creditors
• 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 of the debtor’s “general” (unsecured) assets, while secured creditors are preferentially satisfied from the proceeds from the assets secured in their favour. To the extent that a part of the secured claim remains unsatisfied, such part turns into an 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, and costs for the management of insolvency estates, which are preferentially satisfied from the (secured/general) assets they belong to or in a proportion to other insolvency assets.

Only a formal restructuring is an alternative to insolvency proceedings.

Financial restructuring from the creditors’ perspective

The monitoring possibilities depend on whether the debtor has already entered some restructuring or insolvency proceedings. In the absence of such proceedings, a lender may generally freely contractually agree with the debtor on such monitoring obligations if they are aimed at protecting the lender’s rights and interests regarding the financial services provided to the debtor, including the security. As of 1 March 2024, new provisions of the Insolvency Act will be valid and effective in this respect to exclude related party risks.

Otherwise, in the respective insolvency proceedings, the lender might want to be appointed to the creditors’ committee as it has more statutory or agreed supervisory powers than a standard creditor, e.g. certain changes or actions by the debtor are subject to the prior consent of the creditors’ committee.

In addition, in case of a preventive restructuring, the debtor may be obliged to appoint a professional advisor meeting certain statutory requirements to lead it through preventive restructuring and financial difficulties. The advisor’s bonus or a change of advisor is subject to consent of the creditors’ committee. Such person is usually authorised to countersign all/some of the borrower’s undertakings, to prepare a regular report on the borrower’s activities, and to advise how to restructure the company and its debts to avoid insolvency. The advisor must have adequate liability insurance to cover the liability for damages to the debtor. The advisor will also be liable for any intentional infringement of statutory duties towards creditors for damage caused to them.

It depends on how the financial difficulties are to be qualified, if the debtor is already a company in crisis (the ratio of its equity to liabilities is below 8:100), under imminent insolvency or insolvency and if any formal proceedings have already started.

In the case of formal (restructuring) proceedings, new financing is specifically regulated in the respective restructuring laws. For example, the Preventive Restructuring Act protects new and interim financing, if it is reasonably and immediately necessary for the survival of the business and approved by the creditors’ committee. Such claims are to be satisfied before other unsecured creditors, i.e. they cannot be additionally secured. New financing is not immune from contestation, but that can be difficult in practice as new financing is subject to the approval of the creditors’ committee or other entities.

In the absence of formal proceedings, new financing or security could be enforced only to the extent of the difference between the amount of the claim and the value of the secured assets if the company is in crisis and the lender knew or should have known about it.

In addition, there could be clawback risks if the security is taken at an undervalue or claims are satisfied preferentially to other creditors.

Non performing loans 

Non-performing loans (NPLS) can be sold by assignment. This means a case-by-case transfer. No formalities are required for an assignment and the debtor need not be notified in order to perfect the assignment. However, a notification is required to enforce the assignment because until the debtor is notified, it can still discharge the debt by paying the assignor.

However, if the lender is a bank or a branch of a foreign bank (jointly the “bank”), the bank has to observe strict banking secrecy obligations unless otherwise agreed in the loan documentation. As a result, the bank has to notify the debtor first and can assign the claim without the debtor’s consent only if the debtor is continuously in delay for more than 90 days. Additional special rules apply to consumer loans and mortgage loans to consumers. 

Sub-participation is not regulated under Slovak law, but it can be used in practice.

A one-off purchase of a non-performing loan does not require a licence, but purchasing non-performing loans as part of a business would require a licence. If these activities are performed from the assignee’s own sources, they could be performed under a trade licence (factoring and forfeiting); otherwise, a banking licence is required.