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. 

Federal Law No. 9/2016 (the “Bankruptcy Law”) is the primary legislation governing insolvency and restructuring proceedings in the UAE. The Bankruptcy Law applies to the majority of UAE companies, covering all companies established under the UAE Commercial Companies Law (Federal Law No.2 of 2015) and most free zone companies (with a few exceptions for free zones with their own bankruptcy and insolvency regime, such as the Dubai International Finance Centre and the Abu Dhabi Global Market).

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. 

In brief, the Bankruptcy Law provides for two primary options for businesses in financial distress: Preventative composition and Bankruptcy. Both processes are initiated through an application to the court. Preventative composition is a process initiated by the debtor to ask for the court’s assistance in settling debts with its creditors with the ultimate aim of working through the financial hardship to recover the business, whereas bankruptcy proceedings can involve either a rescue procedure or a liquidation. Under the Bankruptcy Law, directors of the company must file for bankruptcy where the company fails the Bankruptcy Test (see section 3 below).

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.

Bankruptcy Test

Bankruptcy under the Bankruptcy Law is assessed on a cashflow basis and on a balance sheet basis (the “Bankruptcy Test”). The cashflow test asks if the company has been unable to pay its debts when they fall due for more than 30 consecutive business days, while the balance sheet test asks whether its assets are less than its liabilities. If a company fails either limb of the Bankruptcy Test, the directors/managers of a company must apply for bankruptcy.

Creditors

A creditor with a debt in excess of AED 100,000, and which has not been paid for 30 business days after final demand, may also petition the court for bankruptcy to recover the debt due to it.

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.

Preventative composition

This is a process only available for companies that do not meet the formal Bankruptcy Test, but where the directors feel that they will be unable to trade out of their existing indebtedness. In a preventative composition, the company would make an application to the court supported by a detailed overview of its trading position and net assets (and various other information) and their plan for how the preventative composition plan should proceed to enable them to settle their debts to a position where they can exit the plan and begin business as usual again.

If the court accepts the application, the company’s debt obligations will be suspended, during which time the court will appoint a trustee to supervise the directors’ management of the company. The trustee would seek to agree a plan for the company to trade out of its existing position. The plan would require the approval of a majority of its creditors holding not less than two thirds of the value of the total outstanding debts of the company. The trustee, with assistance of the court, would then oversee implementation of the preventative composition plan over a period of up to 3 years. During the term of the plan, the company is restricted from taking certain measures (such as settling claims that arose prior to commencement of the plan, taking on new debt or disposing of its assets etc.) and must generally manage the business in accordance with the terms of the court-approved plan and under the supervision of the trustee and the court. If at any time during the implementation of the plan, the company fails the Bankruptcy Test or the court determines that the plan is impossible to implement, it may terminate the plan and convert it into a declaration of bankruptcy, described below.

Bankruptcy

There are two limbs of bankruptcy under the Bankruptcy Law: Formal restructuring and Insolvent liquidation.

Formal restructuring

The initial view to be taken by the court on an application for bankruptcy is to assess whether the company can be restructured, settle its debts, and become profitable again. So, similar to the preventative composition, an expert and trustee are appointed to determine the company’s financial position, compile a complete list of creditors, and assess whether the company can be restructured in order to become profitable once more. Any such plan presented to the court requires the approval of the company and the approval of a majority of its creditors holding not less than two thirds of the value of the total outstanding debts of the company. The trustee and company then implement the restructuring plan, in a similar way to the preventative composition plan, but with the trustee taking a more executive role.

Insolvent liquidation

If a restructuring is not possible, the court shall issue a judgement to declare the company bankrupt and order liquidation of its assets. A declaration of bankruptcy and liquidation could also be issued in a range of other scenarios, including if the required majority approval of creditors is not reached for the restructuring plan, or if the company applied for bankruptcy and is deemed to have acted in bad faith or applied in order to delay or evade payment to a creditor. The court may also order the insolvent winding-up of a company if a plan for preventative composition or restructuring fails or becomes, in the court’s opinion, impossible to achieve.

Once bankruptcy is declared, the trustee shall arrange to liquidate the company and its assets and distribute the proceeds to the creditors in order of priority, and the balance back to the company for distribution among its shareholders.

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 Bankruptcy Law distinguishes between “privileged” creditors and normal unsecured creditors. Privileged creditors are creditors with privileged debts, such as judicial fees or expenses, any amounts owing to employees for salaries/benefits and amounts owed to governmental authorities. Privileged creditors also include secured creditors.
Privileged creditors are first in the waterfall of payments on an insolvency. It is not until privileged creditors’ debts have been satisfied that unsecured creditors can be paid.

It is important to note that the preventative composition process does not prevent any third party holding a secured debt from enforcing their debts against the debtor. The court would review those claims but has limited scope to prevent the secured creditors from enforcing their debts when due. This point has not been well tested before UAE courts, and so the position a court might take when being presented with a secured debt is difficult to predict.

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.

Article 68 of the Bankruptcy Law sets out a strict obligation on a debtor to file for bankruptcy if it fails either limb of the Bankruptcy Test.

If the debtor fails to file for bankruptcy within the required timeline, its directors and management may face civil and criminal penalties. Punishable offences also include fraud, embezzlement, distributing false profits and doctoring company books and can attract significant penalties of up to 5 years’ imprisonment and AED 1 million in fines. Additionally, the Bankruptcy Law introduces a regime for the disqualification of directors; and failure to file for bankruptcy within the prescribed timeframe may constitute a ground for disqualification of the director(s) concerned for a period up to 5 years and/or attract fines.

Directors and managers of a company can also be found criminally liable if they are proven to hide company assets from creditors, prejudicing certain creditors by, for example, paying one creditor to the detriment of others or failing to provide the requested information to the court/trustee in charge of the proceedings. “Managers” of a company are broadly defined under the Bankruptcy Law and include anyone who is acting in a managerial capacity. Penalties under the Bankruptcy Law are therefore not limited only to directors and officers, but also potentially heads of department or anyone else acting in a “managerial” capacity.

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.

In an insolvency/bankruptcy/restructuring situation, the actions and decisions of the company’s directors, and those other persons determined to be a “manager” (as described above) in the time leading up to such an event will be carefully reviewed to confirm whether those individuals managed the company’s business correctly with a view to all relevant stakeholders, including its creditors.

Directors and officers have an obligation to cooperate with the appointed trustee/liquidator and provide all requested documents. Failure to do so could lead to severe penalties (see point 6 above). The directors and managers of a company can also be held personally liable if the court determines that the company’s assets cover less than 20% of its debts and the directors or officers are proved to be liable for the company’s losses due to a breach of their duties. In this situation, the court has the authority to declare directors and officers jointly and severally liable to pay all or any of the company’s debts.

In addition, in the period of 2 years prior to a declaration of bankruptcy, if the directors or officers, or any one of them, is found to have disposed of assets at an undervalue, given preferential treatment to creditors or used commercial methods “without considering their risks” (such as commercial deals which are not on arm’s length terms entered into to avoid or delay bankruptcy), the directors or officers (or any of them) can be jointly and severally liable to pay any or all of the company’s debts, save for any director or officer who voted against taking the relevant action. The directors and officers have a defence if they can prove that they have taken all precautionary measures to minimise potential losses in relation to their assets and the company’s creditors

  • 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. 

A trustee and potentially an expert are appointed in the court order ordering the opening of preventative composition and bankruptcy proceedings. It is the trustee, with the court’s approval, that oversees or administers the company’s dealings during such proceedings. The “representative bodies”, i.e. the directors and officers of the debtor, are therefore normally not involved in the proceedings. However, they have duties of disclosure and cooperation in order to assist the trustee with the fulfilment of their duties (and see point 6 above regarding penalties for failure to do so).

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.

A plan for preventative composition or a restructuring plan will inevitably require the support of the company’s shareholders when making the application as the creditors and court will want to know that the plan proposed by the company to trade out of its financial difficulties has the support of the company’s shareholders. However, the obligation to file for bankruptcy is an obligation on the directors of the company to initiate the process, rather than 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.

In general, other than voting on the preventative composition/restructuring plan, shareholders are not actively involved in proceedings as the court-appointed trustee or the liquidator (in liquidation proceedings) will take control over the company’s assets. Creditors will be given a chance to submit their claims against the debtor once proceedings have commenced. The trustee will then work with the creditors to establish their claims and prepare a restructuring plan (in the case of preventative composition or restructuring).

It is also worth noting that the Bankruptcy Law includes the concept of a “shadow directorship”, which means that if a person (including a shareholder) instructs the management of a company, that person may be liable under the Bankruptcy Law if any of the offences listed in the Bankruptcy Law (such as those listed in point 6 above) are committed.

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.

There are two types of insolvency proceedings:

Members’ voluntary liquidation

The shareholders of a company can apply for a liquidator to be appointed with the aim of entering into a voluntary liquidation when the company in question is still solvent. However, this can only happen once the company (through its board of directors) has made a formal declaration for voluntary liquidation.

Creditors’ voluntary liquidation

If the company becomes insolvent, the liquidator will call a creditors’ meeting and the proceeding becomes a creditors’ voluntary liquidation. The process can be started by the board of directors of an insolvent company (i.e. when the company fails the Bankruptcy Test).

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

Yes. See above in respect of preventative composition in the UAE.

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.

To date, the Bankruptcy Law remains relatively untested by significantly-sized restructurings and insolvencies. Given that the Bankruptcy Law only came into effect in December 2016 and has therefore not been much tried and tested, it is not possible to determine the average success rate of completed restructuring/insolvency proceedings at this stage.

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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John O'Connor
Partner
Dubai
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Shakeel Adli
Partner
Dubai
Hanna Uhlin