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. 

In Romania, the primary legislation governing insolvency and restructuring proceedings is represented by:

  • Law 85/2014 on preventing insolvency proceedings and insolvency
  • Law 246/2015 on recovery and dissolution of insurers, and
  • European Regulation 2015/848 on Insolvency Proceedings. 

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 are initiated by submitting an insolvency petition in court. The petition may be filed either by the debtor through its representatives, or by any interested creditor meeting the legal conditions.  

Therefore, any company is entitled to petition for insolvency in court as soon as it determines that it is/soon will be unable to perform payment of its current/or future debt exceeding the threshold of RON 50,000 (approx. EUR 10,040) (“Threshold”).  

At the same time, any creditor of a company may file an insolvency petition in court if its receivables against that company exceed the Threshold and are overdue for more than 60 days. The debtor may defend against the creditor’s petition indicating that even if the above conditions are met, it has sufficient liquidity. In certain cases, the court may decide to oblige the petitioning creditor to pay a bond of up to 10% of the value of the debt (but not exceeding the Threshold) in order to cover any damages incurred by the debtor in case the creditor’s petition is without merit.

Debtors’ employees (deemed to be creditors) may petition for the insolvency of their employer as long as their salary receivables exceed six times the average gross salary per employee.

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.

Romanian law defines insolvency as the state of the debtor’s estate characterised by the insufficiency of funds needed for payment of due debts. The law provides the following grounds for the commencement of insolvency proceedings: 

  • insolvency status, i.e. the inability of the debtor to pay the creditor receivables over Threshold within 60 days of the debt becoming due
  • imminent insolvency, i.e. the prospective inability of the debtor to pay, at a specific point in time, the due debts with the amounts available at that specific point.

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.

Law 85/2014 provides two main types: insolvency proceedings and bankruptcy proceedings.

Insolvency proceedings

Insolvency proceedings are aimed at the restructuring and survival of the debtor, while paying the creditors’ receivables to the greatest extent possible. The debtor, judicial administrator or creditor(s) owing at least 20% of the total registered receivables may propose a reorganisation plan in order to restructure and continue the debtor’s activity, or liquidation of some of the assets it owns, or a combination of the two. Reorganisation plans need to contain a payment plan for the registered receivables that may stretch up to 3 years. Plans usually contain reductions of receivables, deferrals of payments and payment in instalments.

If the plan is completed, all historical debt is waived and the proceedings are closed by the syndic judge. 

Bankruptcy proceedings

If the debtor fails to observe a reorganisation plan at any moment, any creditor may ask for the debtor to be placed under bankruptcy and for liquidation to begin.

The debtor can also enter bankruptcy directly, provided the debtor does not express the intention to propose a reorganisation plan.

In both cases, any court’s decision, reports/summons issued by the judicial administrator and information on creditors’ meeting decisions must be published in the Official Insolvency Gazette, a public database which ensures that any interested person may find relevant information in connection with any company subject to such 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. 

The law provides several categories of creditors as follows: 

  • secured creditors
  • employees
  • state creditors (tax-related)
  • unsecured creditors
  • subordinated creditors.    

Creditors’ receivables generated by economic operations performed during insolvency proceedings will be paid by their due date. 

The receivables of secured creditors are usually satisfied in full unless the value of the receivables is not covered by the value of the secured assets, in which case each creditor will become an unsecured creditor for the remaining amount of its receivable. 

The remaining creditors are paid in their priority order (employees–state–unsecured) only if the creditors in the higher priority group are fully paid. 

Subordinated creditors are the last to be paid, as their receivables are deemed to be in connection with a certain debtor’s conduct. 

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.

If the debtor is insolvent (see point 3 above, conditions for “insolvency status”), Romanian criminal law provides that non-submission or late submission of an insolvency petition by the legal representative of the debtor for more than 6 months from the time period provided by the law for acting in this respect is punished by imprisonment between 3 months and 1 year or by a criminal fine.

Regarding imminent insolvency (i.e. the scenario when the debtor estimates it will not be able to pay its debts in the future), the law does not impose an obligation to submit such a  request. 

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 representative bodies have the obligation to supervise the financial situation, as they have the obligation to petition for insolvency in due time. (Failure to comply to such obligation might trigger criminal liability as described under point 6.)

On the other hand the representative bodies, as well as any other individual which caused the insolvency status, are personally liable if they for example:  

  • used the company’s goods for personal purposes
  • kept fictitious accounting records
  • ordered the continuation of an economic activity which obviously led to insolvency
  • hid part of company’s assets and fictionally extended its debts
  • in the month prior to petitioning for insolvency, performed certain payments to a creditor to the detriment of other creditors
  • perpetrated any other actions with the intention to contribute to the insolvency status of the company. 

In such a case, civil liability is triggered; and criminal liability may be triggered if such acts fall under the provision of criminal law. 

  • 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. 

In all cases, a “special” administrator will be appointed by the shareholders of the debtor soon after proceedings are initiated. In the case that administration rights are lifted, the special administrator only represents the interests of the shareholders in the proceedings, as the judicial administrator manages the debtor. Otherwise the special administrator would manage the debtor under the supervision of the judicial administrator. Although the representative bodies are not involved in insolvency proceedings, they have to provide all the information requested, as well as any other help to the person in charge of the debtor’s activity.   

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.

Under Romanian law shareholders have limited attributions during insolvency/bankruptcy. The only notable obligation is that they appoint a special administrator at the beginning of the proceedings. Otherwise, their activity is suspended. 

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.

Shareholders only need to approve the proposal by the debtor of a reorganisation plan. Otherwise they are not directly involved, as their interests are represented by the special administrator. 

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.

The solvent liquidation of a company may be halted by the objection of a dissatisfied creditor. While creditors have important rights and roles in insolvency proceedings, they are rarely able to halt proceedings. Therefore, solvent liquidation is an alternative only if all creditors of the company are satisfied. 

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

The legal framework under Romanian law consists of preventive concordat proceedings, an agreement concluded between debtor and creditors under specific terms with the purpose of: 

  • saving the debtor’s business and covering creditors’ receivables
  • providing the required support by the creditors for the debtor in question. 

In such a case, a contract will have to be concluded between the debtor and the creditors that are holding at least 75% of the value of the accepted and unchallenged claims, which will be subject to syndic judge approval.

The effects of such proceedings, once the court validates the preventive concordat agreement, are:

  • enforcement procedures commenced by creditors are stayed by effect of law
  • lapse of the statute of limitation for enforcement is stayed
  • accrual of interest and penalties is suspended, unless otherwise agreed
  • the debtor performs its activities as usual in respect to the preventive concordat agreement and under the supervision of the judicial administrator.  

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.

As the law does not provide specific economic requirements for a reorganisation plan, given the rather complicated voting procedure for the approval of a plan and that state creditors rarely approve plans unless paid in full, few reorganisation efforts are successful (i.e. a small percentage, perhaps 2–3%). 

Maja-Zgajnar-CMS-AT
Maja Zgajnar
Partner
Ljubljana
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Irena Šik Bukovnik
Attorney-at-Law for banking & finance
Ljubljana
Maja-Sipek-CMS-SVN
Maja Šipek
Associate
Ljubljana
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Horia Draghici
Partner
Bucharest
Andrei Cristescu
Andrei Cristescu
Senior Associate
Bucharest