A closer look at the temporary regulation of insolvency proceednings and court-sponsored financial restructurings in Slovenia due to the COVID-19 epidemics

All insolvency proceedings (bankruptcy, and compulsory settlement) and court-sponsored financial restructurings (preventivna prestrukturiranja) in Slovenia are on hold until the recall of the COVID-19 epidemic (proceedings are currently expected to be on hold until 1 July 2020) (the "Recall"). During this time courts will not conduct the above-mentioned proceedings and no procedural and material deadlines will run.

We took a closer look at the implications of this temporary court regime and at the recently adopted Intervention Measures to Mitigate the Effects of the COVID-19 Infectious Disease Epidemic on Citizens and the Economy Act (Zakon o interventnih ukrepih za zajezitev epidemije COVID-19 in omilitev njenih posledic za državljane in gospodarstvo; the "Intervention Act"), which introduced the temporary changes to the regulation of the insolvency proceedings as already described in more detail in our article on April 3.

Companies that became insolvent due to the COVID-19 epidemic

Freezing of insolvency proceedings and extension of certain deadlines aim to increase the chance of a successful financial restructuring for companies that became insolvent due to the COVID-19 epidemic. The management of these debtors is granted more time to rescue the companies which in turn will delay or prevent the insolvency proceeding.

For example, management will have a duty to file for an insolvency only after 31 August 2020 (and possibly after 30 September 2020), and only then will the insolvency proceeding start. If a bankruptcy proceeding is proposed earlier by a creditor, the insolvency proceeding will continue only after the Recall and even then, the debtor will have another 4 months for a financial restructuring to prevent a bankruptcy, which can move the start of an insolvency proceeding to 1 November 2020.

The Intervention Act does not release the management from other obligations that kick-in to protect the interests of creditors when a company is insolvent. The management will therefore need to follow strict rules under the Slovenian Insolvency Act (ZFPPIPP), among other (i) treat all creditors equally; (ii) take on new obligations and make only payments that are necessary for regular operation of the company; and (iii) prepare the report on financial restructuring measures within one month of insolvency.

The question, in our view, is whether the management really can bring a company out of financial problems by following such strict rules? It would make more sense for the legislator to relax the law with respect to management duties and their liability until 31 August 2020 (and possibly after 30 September 2020).

Shouldn’t there be certain exemptions to the favourable regime?

Management of companies that became insolvent due to the COVID-19 epidemic will have a duty to file for insolvency only after 31 August 2020 (and possibly after 30 September 2020), even if all the attempts to rescue the company fail earlier.

If it becomes apparent (e.g. by the end of June following unsuccessful negotiations with creditors) that there is no reasonable chance to rescue the company, the management of the company should have a duty to file for insolvency earlier. There is no valid reason for suspending this obligation until 31 August in such circumstances.

For comparison, in Germany, if there is no reasonable prospect of restructuring a company that became insolvent due to the COVID-19 epidemic despite the application for public funds or serious financing or restructuring negotiations, a management has a duty to file for insolvency within regular deadlines, and the suspension of duty to file for an insolvency does not apply for such cases. Also, in Germany insolvency proceedings are still being conducted.

Companies that are insolvent (or companies likely to become insolvent within 1 year), but not due to the COVID-19 epidemic

Freeze of insolvency proceedings will affect other insolvent companies (or companies likely to become insolvent within 1 year) as well, even though the favourable temporary insolvency regulation mostly does not apply to them.

For these companies postponing the possibility of starting or continuing a compulsory settlement or a court-sponsored financial restructuring may even reduce a chance of a successful financial restructuring and increase the possibility of a bankruptcy, since their insolvency is not temporary and related to the COVID-19 epidemic. In principle, quick action is essential for the success of financial restructuring and prolonging a start of bankruptcy proceeding will only reduce the bankruptcy estate for all creditors.

Since most of the activities in insolvency proceedings in Slovenia are done online, there is no real reason why these proceedings have been classified as non-urgent proceedings and put on hold with the purpose to prevent the further spread of the COVID-19 epidemic. In many other EU countries, courts switched to written submissions, telephone and video conferences in all court proceedings, and only certain actions like public auctions have been postponed.

In defense of decision to halt all insolvency proceedings in Slovenia, the Ministry of Economic Development and Technology, as well as the Ministry of Justice, expressed their view that it does not make any sense to run insolvency proceedings in these “abnormal market conditions”, because debtors (i) could be forced in compulsory settlement proceedings to avoid bankruptcy, where deadlines are short; or (ii) have less chance for a successful financial restructuring before the start of bankruptcy proceeding, since this requires negotiations with creditors and execution of agreements; and (iii) the sale of assets in insolvency proceedings would not be in the best interest of creditors that may receive lower payout.

Normal market conditions may not be back for a longer period of time and these reasons do not justify freezing of all insolvency proceedings. The Intervention Act has taken such concerns in account already with extended deadlines in insolvency proceedings, whereby sale of assets could be simply postponed.

With all enforcement and insolvency proceedings on hold in Slovenia, there is no differentiation between debtors hit by the COVID-19 epidemic and those who faced financial trouble before, unrelated to the COVID-19 epidemic. In Slovenia, the whole financial burden linked to enforcement and insolvency will be put on creditors (individuals and companies).