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. 

The primary legislation governing insolvency and restructuring proceedings in France is:

  • Book VI of the French Commercial Code, which is dedicated to companies facing difficulties. Some of its provisions will be modified pursuant to Law No. 2019-486 of 22 May 2019 (PACTE Act) which authorises, in particular, the French Government to adopt ordinances to modify French legislation in accordance with Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 [on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency)]; and
  • Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings. 

In addition, restructuring proceedings are also governed by regular corporate and labour law provisions.

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. 

Amicable restructuring

Amicable restructuring proceedings (i.e. mandat ad hoc and conciliation) can only be initiated by the debtor through the filing of a specific request to the President of the relevant Court.

Judicial restructuring

Insolvency proceedings are opened by the Court, which examines a specific petition that may be initiated as follows:

  • safeguard (sauvegarde) – can only be initiated by the debtor itself
  • judicial reorganisation (redressement judiciaire) or winding up (liquidation judiciaire) – can be initiated by either the debtor, a creditor or the public prosecutor 

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 keystone in French insolvency law is cessation of payments (cessation des paiements), which is the situation where a company cannot pay its outstanding due debts for lack of sufficient available cash and liquid assets:

  • if the company is not already in cessation of payments but is faced with difficulties that it is unable to overcome by its own means, the opening of an amicable restructuring proceeding or a safeguard proceeding can be requested
  • if the company is in cessation of payments for less than 45 days, a request to open a conciliation (amicable restructuring proceeding) can still be filed
  • if the company is in cessation of payments and no conciliation proceeding has been opened, only the opening of a judicial reorganisation or winding up can be requested, and the debtor must file such request within 45 days starting from the date of the said cessation of payments.

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.

Amicable restructuring

Under French law, two different amicable restructuring proceedings allow a company which is facing existing or foreseeable difficulties (legal, economic or financial) to seek a voluntary arrangement with its main creditors. These contractual and confidential proceedings aim at facilitating the conclusion of an agreement, allowing the difficulties to be solved outside a formal insolvency proceeding with the help of an officer appointed by the President of the Court (mandataire ad hoc or conciliateur):

  • a mandat ad hoc can be opened when a debtor is not in cessation of payments 
  • a conciliation can be opened before the debtor reaches a state of cessation of payments, or no more than 45 days thereafter. At the end of the negotiations, the agreement can either be approved (constaté) by the President of the commercial court or homologated (homologué) by the Commercial Court. During these proceedings, the company operates normally and can be subject to enforcement measures from its creditors. 

Both these proceedings are confidential.

Judicial restructuring

In contrast to amicable restructuring proceedings, the opening judgement of an insolvency proceeding entails the freezing of claims arising before said judgement and the stay of corresponding recovery actions and proceedings against the debtor.
The three insolvency proceedings provided for by French law are as follows:

Safeguard (sauvegarde)

This is opened by the court when the applying debtor is facing difficulties that it is unable to overcome on its own, but it is not already in cessation of payments. It allows the debtor to keep performing its activity and to pay its debts through the implementation of an instalment plan.

Judicial reorganisation (redressement judiciaire)

This is opened by the Court when the applying debtor is in a state of cessation of payments. It allows the debtor to keep performing its activity and to pay its debts through the implementation of an instalment plan or the sale of its assets and activities to a third party (i.e. disposal plan).

Winding up (liquidation judiciaire)

This is opened by the Court when the applying debtor is in a state of cessation of payments and turnaround is impossible. It usually implies the immediate closure of the business and the sale of assets for the satisfaction of its creditors. However, the Court might authorise the continuation of the activity for a short period of time in order to sell the activities and/or the assets under the best conditions possible. 

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. 

Treatment of claims during the observation period

Creditors are classified into two main categories:

  • creditors whose claims arose before the opening of insolvency proceedings, or after its opening but which do not fulfil the specific criteria provided by the French Commercial Code (i.e. claims that arose in a proper manner after the opening of insolvency proceedings and to enable the conduct of the proceeding or the observation period, or as consideration for a service supplied to the debtor); these creditors must transmit the relevant insolvency practitioner proof of claims within short time frames
  • creditors whose claims arose after the opening of insolvency proceedings and which fulfil the specific criteria.

Employees are treated separately and some of the claims benefit from a specific guarantee.

Treatment of claims within a safeguard or a judicial reorganisation 

Creditors’ committees can be set up if specific thresholds (notably turnover or number of employees) are reached to enable the adoption of restructuring plans under specific conditions. In such cases, the credit institutions and related entities and the main providers are divided into two different committees. The members of each committee vote on the approval of the restructuring plan which is adopted by a specific majority rule, allowing the committees to impose decisions on dissenting creditors who are also part of the committees. In addition, the bondholders’ committee, if any, is also consulted if the two above-mentioned committees adopt the restructuring plan they have been presented with.

In the absence of committees, the creditors are individually consulted and a postponement of the repayment of their claims can be imposed on them by the Court.

Should a restructuring plan be adopted, claims of creditors are still frozen and repaid in compliance with the provisions of said plan. Debt write-offs can be implemented if the concerned creditors (or the creditors’ committees) accept them.
The creditors’ committees mechanism should shortly be modified in accordance with Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019.

Treatment of the claims within a winding up 

The creditors mentioned under the first category above are paid depending on the available assets and on the subcategory they belong to:

  • secured creditors – a category that is itself subdivided (i.e. benefiting from securities, warranties, legal privileges, etc.) 
  • unsecured creditors

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.

A company must file for the opening of a judicial reorganisation or winding up within 45 days starting from its cessation of payments if no conciliation proceeding has been opened in the meantime. 

Failure to comply with this legal obligation may constitute a management fault which may lead to liability action against the de jure and/or de facto managers of the company.

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.

Managers and representative bodies of French companies are bound by a duty of care and diligence and owe duties to the company itself, its shareholders and third parties (including creditors).

The de jure or de facto managers shall request the opening of an insolvency proceeding within 45 days starting from its cessation of payments if no conciliation proceeding has been opened in the meantime. (See point 6 for the consequence of a belated filing.)

  • 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. 

The involvement of the representative bodies of a legal entity placed under an amicable restructuring or insolvency proceeding varies depending on the proceedings opened:

  • if an amicable restructuring proceeding (mandat ad hoc or conciliation) is opened, the company is managed as usual
  • if a safeguard is opened, the loss of control of the company is variable and depends on the appointment by the Court of an administrateur judiciaire with a mission of either monitoring or assistance
  • if a judicial reorganisation is opened, the loss of control of the company is variable and depends on the appointment by the Court of an administrateur judiciaire with a mission of either assistance or representation
  • if a winding up is opened, the loss of control is almost total.

In addition, the representative bodies are involved in various operations (e.g. verification of the claims and revendication of ownership processes, preparation – with the help of their legal and financial advisors – of an insolvency or reorganisation plan).

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.

In principle, shareholders have no obligation in connection with restructuring and/or insolvency proceedings. 

To that extent, they have no legal obligation to provide additional funding in the framework of such proceedings. Nevertheless, they can voluntarily contribute to the funding of the activity or to a restructuring plan, or agree to postpone the repayment of their debts, if any.

Note that within the framework of an insolvency proceeding, the relationship between the debtor and its shareholders might be carefully analysed and, if relevant, provide the grounds for liability actions notably against the de jure or de facto managers and/or the shareholders.

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 involvement of the shareholders of a company placed under restructuring or insolvency proceedings is not mandatory. Nevertheless:

Safeguard or judicial reorganisation

In the framework of a safeguard or judicial reorganisation proceeding, the adoption of a restructuring plan may be conditional upon the reconstitution of the company’s equity.

Judicial reorganisation

In the framework of a judicial reorganisation: 

  • the court can order the non-transferability of shares held by the de jure or de facto managers
  • the transfer of shares of the de jure or de facto managers can be forced
  • the voting rights attached to shares owned by the de jure or de facto managers can be exercised by a proxy designated by the court
  • when the termination of the activity of a company employing at least 150 people, or considered as dominant, is likely to cause “a serious disturbance to the national regional economy or its employment”, the court may, if it appears to be the only serious solution:
    • appoint a proxy to vote in place of the shareholders a decrease, followed by an increase, in capital, or
    • order the sale of shares held by the de jure or de facto managers.

In addition, shareholders are frequently requested to financially support the company in restructuring or insolvency proceedings.

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.

An out-of-court liquidation proceeding can only be opened if the amount of assets to be realised is higher than the company’s liabilities. However, if the company is in cessation of payments, the debtor must file for the opening of an insolvency proceeding within 45 days starting from its cessation of payments if no conciliation proceeding has been opened in the meantime.

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

As mentioned above (point 4), French legislation already provides for a legal framework for preventive restructuring (i.e. mandat ad hoc and conciliation proceedings). In addition, the sauvegarde – the insolvency proceeding which can be opened before any cessation of payments – allows the debtor to restructure its business in the early stages of its difficulty (see point 4).

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.

Usually, satisfaction rates are much higher in amicable proceedings (mandat ad hoc and conciliation proceedings – which are confidential) than in insolvency proceedings. 

According to the official statistics for between 2010 and 2016, companies which entered into:

  • a safeguard (sauvegarde – noting that such proceedings represent only 6% of the total insolvency proceedings opened):
    • 62% presented a restructuring plan 
    • 5% had their activity and assets sold to a third party 
    • 33% ended up in a winding up
  • a judicial reorganisation:
    • 27% presented a reorganisation plan 
    • 6% had their activity and assets sold to a third party 
    • 67% ended up in a winding up.
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Maja Zgajnar
Partner
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Irena Šik Bukovnik
Attorney-at-Law for banking & finance
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