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 Dutch Bankruptcy Act (Faillissementswet) and the European Regulation on Insolvency Proceedings are the primary legal frameworks governing insolvency proceedings in the Netherlands. There is no legal basis to restructure financially distressed but viable businesses outside of insolvency in the Netherlands. 

It is expected that an out-of-court restructuring instrument, the WHOA, will come into force in the coming months. This restructuring proceeding combines elements of the US’s Chapter 11 procedure and England’s Scheme of Arrangement

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. 

Insolvency proceedings applicable to companies in the Netherlands are bankruptcy and a suspension of payments. 

Bankruptcy

Bankruptcy proceedings focus primarily on liquidation of the debtor’s assets. Both the insolvent company or a creditor can file for bankruptcy.

Suspension of payments

The aim of a suspension of payments is business continuation. Suspension of payments can only be requested by the insolvent debtor. 

A restructuring outside formal insolvency can only be achieved in the Netherlands at present on a consensual basis, with the consent of all affected creditors. Each creditor can therefore frustrate the process by refusing to accept the proposed restructuring plan. Forcing a dissenting creditor into a restructuring is almost impossible. Therefore this restructuring tool is hardly ever successful. A suspension of payments provides temporary relief against unsecured, non-preferential creditors only, provided there is a reasonable prospect that the company is viable by being able to (partially) compensate its creditors. A suspension of payments has proven to be an ineffective instrument to restructure the debts of a company as it does not affect the rights of secured or preferential creditors. 

The new restructuring framework, the WHOA, is a procedure which can be opposed by dissenting creditors and can lead to a creditor cramdown outside of insolvency. 

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.

In order to file for bankruptcy the following conditions must be met:

  • there must be at least two debts, of which one is overdue
  • the debtor must have stopped paying its debts.

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.

Bankruptcy

Bankruptcy can be considered as a general statutory seizure of the debtor’s assets, followed by liquidation of these assets. A trustee is appointed by the court upon commencement of a bankruptcy. This trustee is in charge of the liquidation of the bankrupt estate. 

Suspension of payments

Suspension of payments is a proceeding that only provides temporary relief against ordinary, unsecured creditors of the debtor. Only the debtor itself can file for a suspension of payments. During a suspension of payments the debtor’s business will be managed jointly by the debtor and a court-appointed administrator. As practice has shown, a suspension of payments is hardly ever successful and the majority of suspensions of payments are converted into bankruptcies.

WHOA (future legislation)

The WHOA scheme provides an instrument to Dutch and foreign debtors to effectively and efficiently restructure their debts through a compulsory composition with creditors and shareholders outside of formal insolvency proceedings.

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. 
  • Estate creditors: arise following the commencement of bankruptcy and ensue from either statutory provisions or from legal acts by the trustee; these claims have priority over other claims
  • Secured creditors, i.e. creditors with security rights (separatisten): can enforce their rights during bankruptcy as if bankruptcy had not been commenced
  • Preferential creditors: preferential rights create a preference regarding the distribution of proceeds of the liquidation. The claims of this group of creditors rank higher than those of unsecured creditors. Preferential creditors are:
    • UWV (Employee Insurance Agency)
    • Tax & Customs Administration
    • employees with a wage claim before bankruptcy. 
  • Unsecured or ordinary creditors: will only receive payment if there are sufficient proceeds remaining after all the creditors with higher ranks have received payment. 

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.

There is no formal obligation to file for bankruptcy. However it might be advisable to file for bankruptcy to avoid directors’ liability: this might be invoked if the insolvent company continues business and enters into new contracts when knowing the company cannot fulfill its payment obligations, or when selective payments are being made to specific creditors.

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.

According to Dutch law, when performing their tasks, all directors must act in the interest of the company and its business, which implies that the board of directors should take into account the interests of all stakeholders (shareholders, creditors, employees etc.). Directors can be held liable in the cases described below:

Liability towards the company/Section 2:9 BW 

Each managing director is obliged to fulfil his/her task towards the company adequately. Pursuant to Section 2:9(2) DCC, the legal entity may hold its directors liable for improper management. In practice, this only occurs in exceptional situations. The criterion for improper management is that no prudent director would have acted that way in the same circumstances. Also, director(s) must be seriously to blame (ernstig verwijt) for the improper management.

Liability towards the liquidator/Sections 2:138 and 2:248 BW

Directors may also face a claim filed by the bankruptcy trustee representing the interests of the creditors collectively. Sections 2:138 and 2:248 BW offer the trustee specific grounds for liability of directors of public and private limited companies, and foundations and associations subject to corporate income tax. Under Section 2:138/248 BW, liability is presumed if a director violates the following statutory obligations: 

  • duty to maintain proper bookkeeping (Section 2:10 BW)
  • duty to publish financial statements in a timely manner (Section 2:394 BW). 

Provided that these conditions are satisfied, a director can be held jointly and severally liable for the deficit of the bankrupt estate, with the restriction that these type of claims can be filed only on the ground that the improper management took place during the three-year period preceding the company’s bankruptcy.

Liability towards the creditors/Section 6:162 BW 

A managing director can be externally liable towards creditors for a wrongful act. The managing director is only liable in the situation that he/she can be attributed serious, personal blame (ernstig verwijt). In Ontvanger v. Roelofsen, the Supreme Court distinguished two categories of wrongful acts that may give rise to ‘serious reproach’:

  • the first involves a director who enters into a new obligation on behalf of the company while he/she knows, or should have known, that the company will not be able to meet that obligation in a timely manner (e.g. insufficient liquidity) and is unable to provide sufficient recourse (e.g. insufficient solvency) 
  • the second concerns a director who frustrates the payment of an outstanding amount and the possibility of recovery to the detriment of a creditor. 

For both categories of wrongful acts, liability is assumed if the director could have foreseen the damage to the creditors concerned.

  • 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. 

Bankruptcy

During bankruptcy the company’s management loses control and is no longer able to dispose of its assets. A trustee is appointed and is in charge of liquidation of the bankrupt estate. The representative bodies are therefore not normally involved in the insolvency proceedings. However, they have duties of disclosure and cooperation in order to assist the trustee with the fulfilment of his/her duties.

Suspension of payments

During a suspension of payments the powers of the directors are shared with the administrator.

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.

The general meeting of shareholders is exclusively authorised to resolve to distribute the profits that have been determined by the adoption of the annual accounts, as well as to resolve other distributions of assets. Distribution under Dutch Law consists of the following tests:

Balance Test

The general meeting can resolve to make a distribution in as far as the private limited company’s equity exceeds the reserves that have to be maintained by virtue of law and the articles of association. The deciding factor is the actual financial situation of the company at the moment the distribution (payment) is being made. 

Distribution Test

Once the general meeting has resolved to make a distribution in accordance with Dutch law, such a resolution will not have any effect and payment cannot be made as long as the company’s management has not approved it in a separate resolution.

The management board may only refuse to approve a proposed distribution if the management board knows, or should reasonably know, that the company cannot pursue the payment of its due and payable (short-term) debts after making the proposed distribution. The deciding factor is the financial situation of the company at the moment the distribution is being made.

If, after making the proposed distribution, the company is unable to pursue payment of its due and payable short-term debts, the managing directors who at the time of the distribution knew about, or should have reasonably foreseen, this situation are jointly and severally liable towards the private limited company to make up the deficit caused by the relevant distribution. Also the company can reclaim payment from a shareholder, as beneficiary of the distribution, if the shareholder knew, or should have reasonably foreseen, that the company would get into payment problems: the shareholder is jointly and severally liable to make up the deficit so caused.

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 shareholders’ meeting needs to give its consent before the board can apply for bankruptcy. 

The approval of shareholders is not necessary in case of suspension of payments unless the consent of shareholders is stipulated in the articles of association or a shareholders’ agreement.

With regard to the WHOA, shareholders can participate in the procedure. Under the WHOA, shareholders’ rights can be affected by the restructuring plan.

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.

A voluntary liquidation is possible in the situation that:

  • there are sufficient assets to pay the debts
  • there are insufficient assets, but all creditors explicitly agree with a voluntary liquidation.

A shareholders’ meeting of the company will have to resolve that the company be liquidated. If it is expected that there will be insufficient funds to pay the company’s debt after monetarising assets, the company should file for bankruptcy unless all the creditors agree with a liquidation outside formal insolvency. 

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

No.

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.

Unknown.

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
Picture of Jan Willem Bouman
Jan Willem Bouman
Partner
Utrecht