CMS Expert Guide to restructuring and insolvency law

A global overview

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

The primary legislation governing insolvency and court-sponsored financial restructuring proceedings in Slovenia is the Financial Operations, Insolvency Proceedings, and Compulsory Dissolution Act (Zakon o finančnem poslovanju, postopkih zaradi insolventnosti in prisilnem prenehanju, hereinafter “ZFPPIPP”).

There is no special law or regulation governing out-of-court restructuring of financial obligations. There are only informal guidelines. 

After the start of the financial crisis in 2008 there was a period involving a number of financial restructurings in Slovenia. Based on that experience and know-how:

  • in 2011 the Managers’ Association of Slovenia adopted Principles on Restructuring of Corporate Debt 
  • in 2014 the Bank Association, in cooperation with the Bank of Slovenia and the Ministry of Finance, prepared Slovenian Principles of the Financial Restructuring of Corporate Debt. 

Out-of-court financial restructuring agreements are purely a result of negotiations and agreement between the parties. 

Both proceedings are fully governed by the Code of Civil Procedure (“CPC”).

The CPC provides for:

  • Insolvency ("bankruptcy" under the Code, the term "insolvency" is only used in relation to non-traders);
  • Concordata and creditors' agreement as prior restructuring mechanisms;
  • Rehabilitation of the insolvent, after insolvency has been declared.

2. How are insolvency proceedings or restructuring proceedings initiated?

All insolvency proceedings and court-sponsored financial restructuring proceedings are initiated based on a request to the court which can be filed by: 

Compulsory settlement 

  • an insolvent debtor
  • a personally liable shareholder, or 
  • creditors in certain cases.   

Simplified compulsory settlement

  • an insolvent debtor, or 
  • a personally liable shareholder.  

Bankruptcy 

  • an insolvent debtor 
  • a personally liable shareholder
  • creditors in certain cases, or 
  • Public Guarantee, Maintenance and Disability Fund of the Republic of Slovenia, in certain cases.

Court-sponsored financial restructuring proceeding

  • a debtor.  

Out-of-court financial restructuring 

  • can be proposed by any of the involved parties. 

Bankruptcy may be initiated at (i) the request of the insolvent debtor; (ii) any creditor or public prosecutor within two years of the occurrence of any of the following grounds, even if the debtor has ceased trading: 

  • suspension of payments by the debtor; 
  • the debtor has absconded or vanished from his place of business without leaving a legal representative and/or dissipation; and 
  • loss of goods or any other abusive procedure which reveals, on the part of the trader, a manifest intention to place himself in a situation where he cannot fulfil his obligations.

It can also arise from the unsuccessful use of preventive proceedings (concordata and creditors' agreement)

A bankruptcy proceeding is initiated against insolvent debtors. Under ZFPPIPP the company is considered insolvent if the following reasons exist:

  •  long-term illiquidity (trajnejša nelikvidnost), i.e. the company is not able to pay its payment obligations that are due in a longer period of time, and/or
  • the company is over-indebted (dolgoročna plačilna nesposobnost).

ZFPPIPP defines certain assumptions for a company to be considered insolvent which help to establish or prove that a company is insolvent. Certain assumptions are considered true unless proven otherwise, and certain assumptions cannot be contested.

Assumptions that can be contested

Long-term illiquidity 

  • if a company is late with payment for more than 2 months and with more than 20% of all of its payment obligations, as shown in its last published balance sheet/annual report, or
  • if the monies on a company’s bank account do not suffice for payment of its obligations under the writ of execution or debenture note (izvršnica) in an uninterrupted period of 60 days, or interrupted period of more than 60 days within a period of 90 days, and such situation exists on the day prior to filing for bankruptcy, or
  • if the company has no bank account with Slovenian providers of payment services and has not paid its payment obligations under the writ of execution in a period of 60 days from when such decision became final.

Over-indebtedness 

  • if the value of the company’s assets is lower than the total amount of its obligations
  • if the loss of the current business year with losses brought forward reached half of the registered capital and such loss cannot be paid out of the profit brought forward or the provisions.   

Assumptions that cannot be contested

ZFPPIPP defines certain assumptions for a company to be considered insolvent which are considered true and cannot be contested:

Long-term illiquidity 

  • the company is late with payment of employees’ salaries in the amount of a minimum salary for more than 2 months, or
  • the company is late with payment of taxes and contributions that need to be paid in respect to employees’ salaries, and such situation exists on the day prior to filing for bankruptcy.

Pursuant to the intervention measures of the Slovenian state amid the COVID-19 pandemic, an additional assumption for long-term illiquidity has been introduced that applies until 30 September 2020: 

  • the company is late with payment of salaries and contributions to employees for more than 1 month from the time the company received compensation from the state for salaries and contributions of employees, based on the intervention measures amid the COVID-19 pandemic.

The Angolan regime defines bankruptcy as the impossibility of honouring obligations.

The inability of a trader to meet its obligations presupposes an assessment based on one of two criteria (or a combination thereof): 

  1. the cash flow criterion – which occurs when the debtor becomes unable to pay his debts when they fall due, irrespective of whether the assets exceed the liabilities 
  2. the balance sheet criterion – when the debtor's assets are insufficient for full performance of his obligations.

In the case of limited liability companies, bankruptcy may also be declared on the grounds of manifest insufficiency of assets to meet liabilities. 

The declaration of bankruptcy also takes place when any of the above facts mentioned in point 2 have been proven.
Regarding the insolvency of a non-trader, the debtor may be declared bankrupt when his assets are lower than his liabilities. In this regard, insolvency shall be presumed (a) when at least two uncontested executions are pending against the debtor; (b) when the debtor has been seized on the basis of a justified fear of insolvency and has not pleaded, by embargos, the sufficiency of his assets or, having alleged it, the embargos are dismissed.

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

For a company that is insolvent the following insolvency proceedings are available in Slovenia: 

  • compulsory settlement proceeding
  • simplified compulsory settlement proceeding
  • bankruptcy proceeding.   

Prior to insolvency there are two options of restructuring proceedings: a court-sponsored financial restructuring and an out-of-court financial restructuring.

Insolvency proceedings

Compulsory settlement (postopek prisilne poravnave)

  • a compulsory settlement proceeding is a proceeding available to already insolvent companies; it can be proposed even if the bankruptcy proceeding has already been initiated. Once bankruptcy proceeding starts, there are no longer any restructuring options 
  • the proceeding is usually proposed by a debtor, though in certain cases it may be proposed by creditors holding more than 20% of the value of all claims against the debtor
  • compulsory settlement generally affects all unsecured claims. The company, however, has the possibility to propose:
    • restructuring of secured claims as well
    • restructuring of claims of financial creditors only
  • the proceeding is led by an insolvency administrator, appointed by a court, who also oversees the business operations of the debtor during the proceeding 
  • a proposal for a compulsory settlement proceeding must be substantiated with a combination of one or more of the restructuring measures necessary for a successful restructuring; these measures may include: 
    • financial restructuring measures: principal haircut, maturity extension, and/or interest rate reduction
    • corporate restructuring measures (usually ancillary in nature): a simplified capital reduction, a capital injection with cash inflow or by way of a D/E swap, a downstream spin-off
    • operational restructuring measures: divesting non-core assets, operational turnaround, etc.
  • compulsory settlement requires a vote of 60% of all affected claims. 

Simplified compulsory settlement (poenostavljena prisilna poravnava)

  • a simplified compulsory settlement is intended for micro-sized companies and self-entrepreneurs who meet the criteria of micro- or small-sized companies. Some rules of compulsory settlement are simplified to ensure efficient restructuring of small entities. For example, in this proceeding, no administrator is appointed, creditors do not register their claims, there is no creditors’ committee and there is only limited involvement of the court
  • simplified compulsory settlement requires more than a 50% vote of all creditors. 

Bankruptcy (stečajni postopek)

  • a bankruptcy proceeding is initiated to enable a court-sponsored dissolution of an insolvent debtor with the best possible recovery terms for the creditors. After the opening of a bankruptcy proceeding, creditors’ claims can only be exercised within this proceeding. There is no possibility of the restructuring of a debtor within a bankruptcy proceeding.

Restructuring proceedings

Court-sponsored financial restructuring (postopek preventivnega prestrukturiranja)

  • a court-sponsored financial restructuring proceeding is available to debtors who are not insolvent but are likely to become insolvent within 1 year. If financial creditors holding at least 30% of the value of all financial claims support the initiation of the proceeding this condition is presumed to be fulfilled 
  • a statutory stand-still/execution holiday prevails for the entire class of financial creditors during the time period of the proceeding
  • the proceeding is led by the debtor
  • the proceeding is intended for the restructuring of financial claims (secured and unsecured) only; claims of other creditors (e.g. suppliers) are not affected unless they expressly consent to be part of the restructuring agreement
  • the restructuring agreement may contain various restructuring measures, but only the following will achieve the “cram-down” effect on dissenting creditors: 
    • principal haircut and/or maturity extension of unsecured financial claims
    • interest rate reduction and/or maturity extension of secured financial claims (to a maximum of 5 years) 
  • other restructuring measures (e.g. D/E swap, principal reduction of secured claims, maturity extension of secured claims beyond 5 years, haircut and/or maturity extension of claims held by other non-financial creditors) require explicit the consent of affected creditors
  • the restructuring agreement must be approved by financial creditors holding at least 75% of the value of all financial claims (with a separate majority of 75% of all secured financial creditors if the restructuring agreement affects secured financial claims). 

Out-of-court financial restructuring 

  • an out-of-court financial restructuring agreement is purely a result of negotiations and agreement between the parties. All parties need to consent to the terms of restructuring agreement.

As mentioned above, there are two preventive options:

Concordata is an agreement between the debtor and his creditors, whereby the debtor is obliged to pay all of the debts within a certain period of time, without jeopardising the management of the company and its assets; and

a creditors' agreement is also an agreement, but only between the creditors, reached by the majority of creditors with voting rights (representing at least 75% of the corresponding claims), which may lead to the formation of a new company in order to continue the commercial business of the bankrupt entity, provided that certain requirements are met. This new company will hold the assets of the bankrupt company and the participations of the creditors in the respective share capital will correspond, in full or in part, to the amounts of their claims.

In the absence of any means of recovery being requested and approved, by the creditors or the court, the debtor is immediately declared bankrupt.

The bankruptcy may, if there is evidence for it, be classified as casual, culpable or fraudulent.

Casual – When the bankrupt, having conducted his business with honesty and normal diligence, has been rendered incapable of fulfilling his obligations for reasons beyond his control;

Culpable – When the bankrupt has acted with obvious negligence, recklessness or prodigality, has consumed a considerable part of his assets at stake or has failed to comply with the legal provisions relating to bookkeeping and business transactions. Failure to voluntarily file for bankruptcy presupposes his guilt; or

Fraudulent – When (i) the bankrupt, knowing the impossibility of fulfilling his obligations, pays any creditors or provides them with means to obtain advantages over others; (ii) there is a description of fictitious claims or wilful omission of assets in his balance sheet, with the purpose of avoiding or delaying bankruptcy, the bankrupt has purchased goods on credit with the intention of reselling them, before payment, for a lower price than usual, if such resale has taken place; (iii) the bankrupt is suspected of simulated acts, falsely dated acts or has in any other way acted in bad faith to the detriment of the creditors.

Fraudulent bankruptcy and culpable bankruptcy are punishable by imprisonment.

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

Under ZFPPIPP the types of creditors are: 

  • preferential (secured) creditors (prednostni upniki) – hold a right to separate satisfaction (prednostna pravica do poplačila). They are paid before the ordinary creditors (unsecured) from the proceeds of the debtor’s assets on which they have their security, depending on their rank
  • creditors with exclusion rights (izločitvena pravica) – have an ownership right on a debtor’s asset and therefore have the right to exclude this asset from a bankruptcy estate
  • ordinary creditors – are paid after preferential creditors, in the same rank and in the same share, depending on the value of the general bankruptcy estate in a bankruptcy proceeding. In a compulsory settlement proceeding, simplified compulsory settlement proceeding and a court-sponsored financial restructuring proceeding these creditors may, by law, be more affected than the preferential creditors (e.g. haircut on principal can be proposed only for unsecured claims)   
  • subordinated creditors (podrejeni upniki) – are subordinated to preferential and ordinary creditors.

ZFPPIPP also differentiates between financial and non-financial creditors. For example:

  • court-sponsored financial restructuring is only meant for the restructuring of claims of financial creditors 
  • a compulsory settlement proceeding can only be initiated with the intent to restructure financial claims. 

There are several types of creditors. The graduation of claims is based on the following fundamental principles: 

  1. First the costs of the bankruptcy proceedings are paid;
  2. Then the claims of the State and local authorities; 
  3. After which, the so-called preferred creditors, in respect of whom the claim enjoys security in rem, over a particular property, the value of which from the sale of that property is used for payment (if the value of the property is not sufficient to settle the entire debt, it is then paid on the terms of ordinary creditors);
  4. Finally, the ordinary creditors, i.e. those who do not enjoy any security.

In the event of insolvency of a company, if there are corporate creditors and private creditors of partners with joint and unlimited liability, they are paid in preference to the latter for the proceeds of the assets of the corporate body, after the claims have been met with real collateral on those assets.

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?

When a company becomes insolvent, the management of the company must, among other actions: 

  • submit a report on financial restructuring measures to the supervisory board within 1 month of the company becoming insolvent. (If there is no supervisory board, the obligation is the same with the exception of not submitting the report to the supervisory board.) Such report must clarify the company’s financial position, analyse the causes of insolvency and provide the management’s opinion as to whether a financial restructuring is more likely than not to succeed, and if so, provide a financial restructuring plan
  • file for bankruptcy within 3 business days if the management is of the view that:
    • the probability of successful financial restructuring is less than 50% (the deadline starts when the term of 1 month, outlined in the previous item, expires), or 
    • the shareholders do not approve the capital injection (the deadline starts when the shareholders’ meeting is concluded), or
    • when approved, all the shares have not been registered and paid in time (the deadline starts when the term for registration and payment of shares expires)
  • file for a compulsory settlement proceeding within 3 months of the company becoming insolvent if the probability of a successful restructuring is more than 50%.  

Pursuant to the intervention measures of the Slovenian state amid the COVID-19 pandemic, management does not need to file for insolvency proceedings until 31 August 2020 if a company has become insolvent due to the COVID-19 pandemic.

Management, however, will have a duty to file for insolvency within the regular deadline if there are no prospects for a company to resolve its insolvency. If a bankruptcy proceeding is proposed earlier by a creditor, management will have 4 months (instead of the usual 2 months) for a financial restructuring to prevent bankruptcy.

Generally, under the Slovenian Companies Act and ZFPPIPP, members of the management board and supervisory board have a duty to act in the benefit of the company with the diligence of a conscientious and fair-minded businessperson. They are jointly and severally liable to the company for any damage caused pursuant to the rules of the Companies Act and ZFPPIPP, unless they can prove they acted with due care and in line with the business and financial rules and rules of management.

A claim for damages against the management board and supervisory board members can be exercised by creditors in the case that the company cannot pay their claims, and by a bankruptcy administrator for the benefit of creditors in a bankruptcy proceeding.

Pursuant to ZFPPIPP, the management and supervisory board can also be sanctioned with a fine ranging from EUR 2,000-10,000 if they do not follow the steps required by ZFPPIPP when the company becomes insolvent.
In a pre-insolvency situation the management is, pursuant to the rules of the Slovenian Companies Act and ZFPPIPP, required to initiate a restructuring proceeding in due time and/or implement other restructuring measures to ensure the company’s solvency.

Obligation

If the debtor is unable to meet his commercial obligations before effectively terminating the payments or within ten days of such termination, he shall apply to the competent court for a declaration of bankruptcy. To this request, the debtor must attach various accounting documents. 

Consequences

If the debtor doesn’t file for bankruptcy (or insolvency, in the case of a non-trader), such behaviour has an influence on the qualification of bankruptcy/insolvency (i.e. his action may be deemed guilty or fraudulent, which are both punishable by imprisonment).

If the bankruptcy of a limited liability company is found to be faulty or fraudulent, its directors, officers or managers who prove to be responsible, as well as any accessories, will be indicted and tried for the crimes.

Directors may also respond under the general terms of the Companies Act. Under this law, managers and directors are jointly and severally liable for damages they cause to the company, for acts or omissions committed in violation of legal or contractual duties

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

Once a company becomes insolvent, the management has, in addition to those described under point 6 above (among others), the following duties:

  • equal treatment of creditors
  • to take on no new obligations or make payments on behalf of the company, except for those that are necessary for regular business operations.

The directors or managers of limited liability companies are subject to the obligations incumbent upon the individual bankrupt in the bankruptcy proceedings, and they are, furthermore, responsible for petitioning for bankruptcy, attaching for that purpose a certificate of the minutes of the meeting or general meeting at which such petition was decided.

  • in a bankruptcy proceeding, representation of the company is transferred to the bankruptcy administrator
  • in a compulsory settlement proceeding, simplified compulsory settlement proceeding, court-sponsored financial restructuring or out-of-court financial restructuring, the company is still run by the existing management, supervised by its supervisory board
    • in a compulsory settlement proceeding, an administrator is appointed but has only a limited supervisory role. 

Upon receipt of the petition for bankruptcy, the judge will appoint a bankruptcy trustee (insolvency administrator), who has the following tasks:

  • Administration of the assets of the estate (assets of the company); he may perform all acts of general administration and perform all acts convenient to the conservation and enjoyment of the rights of the bankrupt, in the interest of the bankrupt and of the creditors, and avoiding, as far as possible, worsening the bankrupt’s economic situation; and 
  • Selling all the assets and rights in the bankruptcy estate until the debts are fully settled.

The modality of the sale of goods is defined by the receiver (representative of the judge, who acts directly under his direction and supervision) and may take the form of a proposal in a closed letter and auction, if the sale is judicial; and sale by direct negotiation, if the sale is extrajudicial.

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

Personally liable shareholders have a right to file for compulsory settlement proceedings and bankruptcy proceedings. 

After insolvency occurs, authorisations of the shareholders’ meeting are limited to recall and appointment of members of the management and supervisory board and the passing of certain decisions necessary for successful restructuring (e.g. if a restructuring plan anticipates a capital injection, etc.).

In a bankruptcy proceeding, shareholders must provide the insolvency administrator with explanations of the bankruptcy debtor’s transactions and other facts and circumstances relevant to the bankruptcy proceeding and for preparing financial statements.

Notwithstanding the effects referred to above regarding limited liability companies, the decision declaring the unlimited liability company bankrupt also declares the bankruptcy of all of the shareholders of that company.

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

For certain restructuring measures, the shareholders’ involvement is needed (for example, if there are any demands of creditors to shareholders such us capital injection or converting shareholder loans to equity; or any decision of shareholders is required for implementing  restructuring measures, or when shareholder loans are also being restructured). 

In a bankruptcy proceeding, the shareholders’ involvement is limited to their duty to provide the bankruptcy administrator with certain information relevant to the proceeding.

The declaration of bankruptcy has several effects in the legal sphere of the bankrupt company, specifically with regard to the shareholders: 

  1. inhibition of management and disposal of their assets; 
  2. ineffectiveness of legal transactions carried out after the declaration of bankruptcy, although such acts may be ratified by the bankruptcy trustee; 
  3. closure of the bankrupt company's current bank accounts, immediate maturity of debts and suspension of any interest against the bankrupt estate, except if covered by a real guarantee.

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

A solvent liquidation may be an alternative to an insolvency proceeding, but only if an insolvent company can become solvent (by way of capital injection, for example) first. Solvent liquidation can only be initiated if the company is solvent.

No, the only alternatives to insolvency/bankruptcy are the use of preventive means. What exists is the possibility of rehabilitation of the insolvent/bankrupt when the bankruptcy has been classified as casual or when he has served or been forgiven the penalty for being guilty, or for fraudulent bankruptcy. The rehabilitation of the bankrupt can only be requested in the proceedings in which the bankruptcy is declared.

Yes, preventive (court-sponsored) restructuring is regulated in Chapter 2.3 of ZFPPIPP.

The existing regime, as mentioned above, is set out in the CPC, which provides for only two preventive means: concordata and a creditors' agreement. 

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

According to publicly available data, the following success rates apply:

Compulsory settlement proceeding

  • ordinary claims: approximately 30-40% with payment deferral of 4-6 years 
  • claims with rights to separate satisfaction: 100% with payment deferral of 4-6 years.

Simplified compulsory settlement proceeding 

  • ordinary claims: approximately 30-50% with payment deferral of 4-5 years
  • claims with rights to separate satisfaction: 100% with payment deferral of 4-5 years.

Bankruptcy proceeding

  • ordinary claims: below 10%
  • claims with rights to separate satisfaction: approximately 20%.  

For court-sponsored restructuring there is no publicly available data since master financial restructuring agreements are commercially confidential.

There is no available data from the Angolan courts regarding this matter.

Maja-Zgajnar-CMS-AT
Maja Zgajnar
Partner
Ljubljana
Picture of Irena Sik
Irena Šik Bukovnik
Attorney-at-Law for banking & finance
Ljubljana
Maja-Sipek-CMS-SVN
Maja Šipek
Associate
Ljubljana
Andrea Baptista
Associate
Lisbon
Madalena Cid Gonçalves
Madalena Cid Gonçalves
Trainee
Lisbon