Pre-pack proceedings Slovak law: challenge to avoid speculations?

Only a year ago, Slovakia transposed EU Directive 2019/2023 on preventive restructuring frameworks with an intention to reform insolvency proceedings and make them more effective. (See CMS | Law-Now | New Slovak legislation on solving threatened bankruptcy).

In a bid to further harmonise EU insolvency law, the EU Commission issued a proposal for a directive harmonising certain aspects of insolvency law on 7 December 2022. In this article, we will focus on one of the Draft Directive's key aspects: pre-pack proceedings and its possible impact on Slovak law.

Pre-pack proceedings consist of two phases:

• the preparation phase for finding an appropriate buyer for part or all of a business; and
• the liquidation phase for approving and realising the pre-agreed sale of part or all of a business and distributing the proceeds to creditors.

The aim of the pre-pack proceeding is to facilitate the sale of a business that is considered a “going-concern”, preserve this business and in return achieve more proceeds and higher satisfaction for creditors.

Current situation in Slovakia

Slovak law does not currently have formalised pre-pack proceedings as envisaged under the Draft Directive, but the sale of a business is possible under existing laws both during pre-insolvency and insolvency.

In a pre-insolvency period, a potential debtor and its management may freely sell part or all of the business in accordance with applicable laws, assuming that the preventive restructuring process (as implemented under the Directive 2019/2023) has not yet started. The sale of a business is also possible within the preventive restructuring as well as the restructuring process, but the consent of the respective creditors´ bodies and the court is required. 

An insolvency trustee may also sell a business under bankruptcy, and this is typically the trustee's first choice since a sale would allow for a relatively quick and easy monetisation of bankruptcy assets, which would satisfy creditors and naturally allow for the payment of the trustee´s reward. This presumes, however, that the business is still a going concern and attractive to potential buyers, which is often not the case in a bankruptcy scenario.

Sale of a business under Slovak law

The sale of a business (i.e. an enterprise) is regulated as a contractual type under Slovak commercial law with a few exceptions in insolvency cases.

The major characteristics of a sale include:

• a written contract requiring verified signatures of both parties;
• numerous mandatory provisions under the Slovak Commercial Code, which cannot be excluded;
• the buyer generally acquiring all rights and obligations related to the business, which are of private nature (also including all IP rights unless the transfer of such rights would conflict with an applicable contract on performance of such rights);
• the examination of public rights (e.g. licenses, permits) and obligations (e.g. taxes) under applicable laws since they may not be automatically transferred together with the sale of the business;
• the transfer of employees with the mandatory notification of employees or employee representation bodies (as applicable) at least one month in advance;
• the registration of the sale of a business with the Commercial Register and the liquidation of the seller only with the lapse of one year after registration provided that no creditor has contested the sale with the court during the time allotted for creditor contestation (i.e. a subjective 60-day period, an objective six-month period).

The specifics of selling a business within the period of bankruptcy:

• the trustee acts on behalf of the debtor;
• only contractual relationships approved by the buyer upon the transfer and non-monetary liabilities from employment relationships given in the transfer agreement (i.e. the buyer will acquire only employees named in the transfer agreement) are transferred to the buyer (any other liabilities do not automatically transfer to the buyer);
• if a certain licence or permission is required for operation of a business under special laws, the trustee may transfer the business only to the buyer having the respective licence or permission with the expectation of the further operation of the business;
• the sale of the business is subject to the instructions of the respective creditors´ body and eventually the court.

Major changes in the Draft Directive

Firstly, the preparation phase will have to be introduced into Slovak law and drafted diligently to avoid the possible attempts of debtors to “wash” their assets from debt through pre-pack proceeding agreed upon with a straw man or similar structures. A trustee might have difficulty recognising such motivations due to limited information and material sources, and liability issues might continue for the long run. Presumably, the monitor will be appointed from the existing list of special trustees (e.g. for preventive restructuring).

Secondly, considering the various past speculative insolvencies in Slovakia, principles applicable on the sale process will have to be sufficiently drafted to ensure their enforceability and discourage any dishonest intentions. In particular, this will apply in case of only one binding offer or an offer from a related party.

Thirdly, if and how the unsecured and secured creditors are protected in the process in practice will also be important. The Draft Directive can be read in a manner that unsecured creditors might not have the right to be heard and the consent of secured creditors may not be necessary in certain situations. This could create a great imbalance between the interest to preserve the business and the right of creditors to be satisfied from bankruptcy assets.

Above all, the debtor must not forget the statutory deadline for mandatory bankruptcy filing, which is 30 days after the debtor has learned or acting with due diligence could have learned of its insolvency. Otherwise, the management might be fined for late filing.

Naturally, these are only the major observations of the Draft Directive on pre-pack proceedings. They show that the implementation will be a demanding task for the Slovak legislator to secure the true purpose of this tool and avoid possible abuse by speculators.

For more information, contact your CMS client partner or this CMS expert.

This article is part of our Law-Now blog series "Harmonisation of Insolvency Laws in the EU", which deals with the two exciting topics of the EU Commission's draft directive, "pre-pack proceedings" and "insolvency avoidance actions". The series shows how these topics are being discussed in the Member States and what the situation is in individual non-Member States.