Authors: Ondřej Majer, Juraj Dubovský, Lenka Ostró
The current economic situation in the market entails many pitfalls for many entrepreneurs, who often have to reach the bottom of their financial reserves in order to survive the adverse period. What are the solutions to avoid insolvency and what if insolvency has already occurred? When and how to resolve impending insolvency and what are the penalties for breach of obligations? When to seek an advisor and when to file a bankruptcy petition?
The answers to these questions, and more, were given by an amendment to the Slovak Bankruptcy and Restructuring Act together with the new Impending Insolvency Resolution Act as early as last summer. Although the amendment has expanded the cases where the obligation to file a bankruptcy petition applies, on the other hand, the new legislation has given entrepreneurs more time and the opportunity to proceed to a preventive solution to the financial crisis in their company, especially in cooperation with a qualified advisor. What entrepreneurs should do if their business is not doing very well is presented below in a short overview.
The new Slovak legislation has brought about, among other things, a change in the definition of insolvency and impending insolvency. A debtor is insolvent if it is unable to pay or over-indebted. A legal entity is unable to pay if it is unable to perform at least two financial obligations to more than one creditor 90 days after the due date, and over-indebted if it has more than one creditor and the value of its liabilities (both payable and non-payable, excluding subordinated liabilities) exceeds the value of its assets. Thus, the original period of 30 days has been extended to 90 days.
There is also a newly defined presumption as to when a company is solvent, namely in cases where, having regard to all the circumstances, it can reasonably be expected that the management of the assets or the operation of the business can be continued and the difference between the amount of its payable financial obligations and its monetary assets, the so-called ‘coverage gap‘, is less than one tenth of the amount of its payable financial obligations or, within a period of not more than 60 days, the coverage gap falls below such a threshold.
At the same time, a definition of impending insolvency has been introduced. The debtor’s insolvency is impending in particular if its inability to pay is impending, i.e., if, taking into account all the circumstances, it can reasonably be presumed that it will become unable to pay within 12 calendar months.
If a company’s insolvency is impending or the company is already insolvent, the Act introduces new obligations for persons acting on behalf of the company, as well as new options how to address such a situation.
New Act No. 111/2022 Coll., on Impending Insolvency Resolution, which regulates the institutes of preventive procedures, namely public and non-public preventive restructuring, has brought about the possibilities of resolving impending insolvency. The use of one of the preventive procedures is only an option for the debtor, not an obligation.
The main motivation for entrepreneurs should be to arrange their financial obligations and assets quickly, efficiently, and economically so as to avoid insolvency and keep the business running during the adverse period.
To help resolve an impending insolvency, the Act allows for the use of an advisor in a preventive procedure to help the debtor develop a plan and implement appropriate measures to avoid insolvency by assessing the debtor’s financial situation. The debtor’s advisor may be a lawyer, tax advisor or other person who has expertise and experience in this area.
The advantage of such a preventive procedure is its cost-effectiveness, informality and higher creditors’ satisfaction when compared to bankruptcy or restructuring under the Bankruptcy Act. During the procedure, the court will grant the debtor temporary protection from creditors, giving the debtor time to possibly restructure its financial situation.The adoption of the new legislation simultaneously abolished the temporary protection provided for in Act No. 421/2020 Coll., on Temporary Protection of Entrepreneurs in Financial Difficulties.
If the company’s insolvency, as defined above, is already impending and the presumption of solvency no longer applies, the Act requires the company to file a bankruptcy or restructuring petition under the Bankruptcy Act.
The statutory body, liquidator and legal representative of the debtor are obliged to file the petition with the court on behalf of the debtor within 30 days from the date when they became aware or, while acting with professional diligence, could have become aware of the insolvency. Compared to the previous regulation, the debtor is obliged to file a bankruptcy petition not only in the event of over-indebtedness, but also in the event of being unable to pay.
Breach of the obligation to file the petition in good time is sanctioned by a contractual penalty of EUR 12,500, which is subsequently recovered from the obliged person by the trustee, and which pertains to the company. In addition to the contractual penalty, the obliged person shall be liable for any damage to creditors caused by the failure to file the petition in good time.
A court’s final decision on the compensation of the creditors for damage shall be deemed to be a decision on the exclusion. Such a decision means for the statutory representative that for the period specified in that decision, or on the basis of a court decision for a period of three years after the decision becomes final, he shall be prohibited from performing the function of a member of the statutory body or supervisory body in a company or cooperative in the Slovak Republic.
