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 piece of legislation governing insolvency in Serbia is the Serbian Insolvency Act (Official Gazette of the Republic of Serbia nos. 104/2009, 99/2011, 71/2012, 83/2014, 113/2017, 44/2018 and 95/2018). In addition, please note that preliminary insolvency proceedings involving restructuring, i.e. reorganisation proceedings, are regulated by the same Act. Restructuring proceedings outside of insolvency proceedings are governed by Serbian corporate and labor law regulations.

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. 

After filing of the insolvency petition, the court firstly examines whether the conditions for opening insolvency proceedings are met. These so-called preliminary insolvency proceedings may last for a maximum of 30 days from the date of filing of the insolvency petition by an authorised petitioner. The petitioner (i.e. the entity that filed the insolvency petition) is obliged to make an advance payment of costs. The amount of the advance payment is determined depending on the classification/size of the legal entity. 

Afterwards, the court deliberates as to whether the company’s assets will at least cover the costs of insolvency proceedings. If the company has enough assets, the court will proceed with the opening of insolvency proceedings and appoint an insolvency administrator (a preliminary administrator may be appointed while examining the existence of grounds for insolvency, to protect the insolvency estate). If the court establishes that the company has only one creditor, the proceedings will be terminated without delay.

Insolvency proceedings are conducted by several bodies that have various competencies in terms of conduct of the proceedings, but specifically the insolvency judge, the insolvency administrator, the assembly of creditors and the board of creditors. However, the main authority in terms of the statutory issues lies with the judge (such as opening the proceedings, appointing the administrator, issuing a resolution on division of assets and concluding the proceedings) as well as the insolvency administrator, who administers the proceedings.

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.

Under Serbian insolvency law, the company (i.e. insolvency debtor) itself or any creditor can file an insolvency petition before the competent court, whereas insolvency proceeding must be opened if at least one of the following grounds exists:

  • Permanent insolvency – the company is unable to pay its debts within 45 days of the date they become due or it has completely ceased all payments for a consecutive period of 30 days. Permanent insolvency is presumed where the petition opening insolvency proceedings was filed by a creditor who was unable to obtain satisfaction of his monetary claim by any of the means of enforcement in a judicial or tax enforcement proceeding available in the Republic of Serbia
  • Imminent insolvency – it is apparent that the company will not be able to pay its debts as they become due
  • Overindebtedness – the liabilities of the company exceed its assets
  • Failure to comply with the adopted reorganisation plan or if the reorganisation plan was put into effect in a fraudulent or unlawful manner.

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.

Pursuant to the Insolvency Act, insolvency proceedings are split into two phases – preliminary insolvency proceedings and the main insolvency proceedings (please see answer no. 2 for more details).

The Act also recognises restructuring by means of a regular reorganisation plan or a pre-prepared reorganisation plan (please see answer no. 12 for more details).

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. 

Yes, the Insolvency Act recognises several types of creditors, namely:

  1. Secured creditors (in Serbian: “razlučni poverilac”)
  2. Lien creditors (in Serbian: “založni poverilac”)
  3. Creditors with a right of separation (in Serbian: “izlučni poverilac”)
  4. (Non-secured) insolvency creditors (in Serbian: “stečajni poverilac”)

Secured creditors are creditors that have a security, statutory retention right, or a right of settlement on assets and rights that are recorded in public records or registers, and have the right of primary settlement from the proceeds of the sale of such assets, or from collection of claims on which they have gained that right. 

Lien creditors are creditors that have security on the property or rights of the company (i.e. insolvency debtor) registered in public records or registers and who, unlike secured creditors, do not have a monetary claim against the company (i.e. insolvency debtor) that is secured by such security interest.

Creditors with a right of separation are creditors entitled to request that a certain asset be excluded from the insolvency estate (e.g. since they have ownership rights over such asset etc.).

The claims of (non-secured) insolvency creditors are divided into four ranks, based on priority of their claims in terms of settlement out of the insolvency estate.

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 appointed administrator determines during winding-up proceedings (i.e. voluntary liquidation proceedings) that the company does not have enough assets to settle all its liabilities, said administrator is obliged to initiate insolvency proceedings against the company before the competent court. The consequences of violation of this obligation are not explicitly regulated in law.

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.

Under the Serbian Companies Act, the representative bodies have a general duty to act diligently, showing the care of a prudent businessperson, and with a reasonable belief that they are acting in the company’s best interest. This provision can be applied to restructuring and insolvency proceedings in the sense that the company’s representative bodies should refrain from any action which could decrease the value of the insolvent company, i.e. its assets, or in any other way prevent successful completion of the insolvency proceedings. 

The representative bodies are thus bound to refrain from entering into agreements and taking part in legal transactions after illiquidity or overindebtedness of the company with the purpose of decreasing the future insolvency estate or putting some creditors in a more favourable position by providing security or settlement to them. 

Also, after the opening of insolvency proceedings, the former representative bodies (after the commencement of insolvency proceedings the insolvency administrator is the sole representative of the insolvent company) are bound to hand over the accounting documents, business books, stamps and any other data or information needed for conducting the insolvency proceedings. They may be held liable for any damages caused to the creditors by withholding or providing incorrect data or information.

  • 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. 

When it comes to restructuring (preliminary insolvency proceedings) the representative bodies of a legal entity are usually involved in the preparation of the reorganisation plan (pre-prepared reorganisation plan) as well as in implementation of the adopted reorganisation plan under the supervision of an independent expert/panel of experts. The task of the independent expert is to monitor implementation of the plan and report to the creditors.

On the other hand, once insolvency proceedings have been formally opened the representative bodies have far fewer powers. They are involved only with respect to initiating the insolvency proceedings – e.g. the company’s assembly decides on filing an insolvency petition. 

Other than this, they have duties of disclosure and cooperation with the insolvency administrator and to provide adequate protection of the property (see above under 7). This is due to the fact that after the opening of the insolvency proceedings the insolvency administrator becomes the new legal/statutory representative of the insolvent company and is the sole person authorised to manage the business of the insolvent company and manage its assets.

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.

Other than the general duty to act diligently and in the best interest of the company (see above under 8), the shareholders have no specific duties in connection with the restructuring and insolvency proceedings.

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 Insolvency Act specifically entitles shareholders who own at least 30% of the shares to submit a reorganisation plan. Additionally, when it comes to the insolvency proceedings, the shareholders may decide on the commencement of the insolvency proceedings via the company’s assembly.

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.

Under Serbian law, the liquidation (winding up) of a company may be conducted only when the company has enough assets to settle all of its liabilities. 

By contrast, insolvency proceedings are commenced and conducted in the event of permanent insolvency, imminent insolvency, overindebtedness or a failure to comply with the adopted reorganisation plan (see above under 3). 
Therefore, under Serbian law solvent liquidation of the company is highly unlikely to be an alternative to regular insolvency proceedings.

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

Yes. Under the Serbian Insolvency Act there is a legal framework for reorganisation, the purpose of which is to enable companies in financial difficulties to continue trading in whole or in part, for example by changing the composition, conditions or structure of assets and liabilities or of their capital structure, including by sales of assets or parts of the business.

The law provides for two types of reorganisation – a regular reorganisation and a reorganisation where an authorised petitioner files a pre-prepared reorganisation plan, the difference being the point in time when the reorganisation plan is filed with the court (i.e. after insolvency proceedings have been opened or before).

In the case of a regular reorganisation, the plan is filed within 90 days from the opening of insolvency proceedings, whereas with a reorganisation filed by an authorised petitioner using a pre-prepared reorganisation plan, the plan is filed concurrently with the insolvency petition.

In both cases, adoption of the reorganisation plan leads to termination of insolvency proceedings. 

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.

Statistically, the average insolvency payout to non-secured creditors lies between 5 and 10%. 

It should be noted, however, that quite often no monies will be distributed due to a lack of assets. This is because in some insolvency proceedings all funds available in the insolvency estate are needed to pay court fees and privileged/secured claims.

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 Nedeljko Velisavljevic
Nedeljko Velisavljević
Partner
Belgrade
Picture of Nenad Kovacevic
Nenad Kovačević
Attorney-at-Law
Belgrade
Igor-Djordjevic-CMS-SRB
Igor Đorđević
Attorney-at-law for Energy, Banking & Finance, Projects and Infrastructure
Belgrade
Milica-Tomic-CMS-SRB
Milica Tomic
Associate
Belgrade