Insolvency and Restructuring in Slovakia - General aspects of insolvency proceedings in Slovakia
September 2010 – The purpose of this edition of the newsletter is to provide a general overview of insolvency proceedings in Slovakia. We will address more specific issues relating to restructuring and insolvency, such as the latest court decisions, in future newsletters.
The Insolvency Act and its prospectus amendments
The Slovak regulation on restructuring and insolvency (R&I) is incorporated into the Act on Bankruptcy and Restructuring (the “Insolvency CodeCode”) introduced in 2006. Although there have been a number of amendments to the Insolvency Code since then, none of them have substantially changed the principles and concepts introduced in 2006.
Nonetheless, prior to the Slovak general elections of June 2010, the Slovak Ministry of Justice drafted an amendment to the Insolvency Code, which should introduce significant changes to the Insolvency Code and, among other things, replace the over-indebtedness test with the balance sheet insolvency test. However, the amendment was not adopted by Parliament in June 2010 (only by a narrow margin), and it is not clear whether any of the proposed changes will be taken up by the new Slovak Government.
Further to certain sources, the Ministry of Justice, on the incentive of the new Minister of Justice, Ms Lucia Žitňanská, has already started an initiative leading to significant amendment of the current Insolvency Code. However, at the time of this article, no precise information was available. We will closely monitor the process and inform you about any such changes in the future editions of the newsletter.
R&I regiments in Slovakia
The Insolvency Code recognises in principle three types of insolvency proceedings:
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bankruptcy,
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restructuring, and
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debt clearance.
It also includes specific rules for (a) “small bankruptcy” (in Slovak malý konkurz) for small businesses and (b) the treatment of insolvent financial institutions, including banks or insurance providers.
Insolvency
Insolvency tests under the Slovak legislation
There are two insolvency tests under the Slovak legislation: the financial liquidity test and the over-indebtedness test. If a company is illiquid and/or over-indebted, it is deemed insolvent under Slovak law:
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A company is deemed illiquid if it is not able to pay its debts that are in arrears for more than 30 days and if it has more than one creditor.
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A company is over-indebted if its overdue liabilities exceed its total assets and if it has more than one creditor.
Bankruptcy – When bankruptcy may be declared
If a company is insolvent, bankruptcy may be declared under a petition filed by the debtor or a petition filed by the creditor(s). The insolvency court will evaluate such petition and will rule on it within 15 days of receipt of the petition.
If a bankruptcy petition is filed by the debtor and the decisive facts are well-documented, the decision of the court is straightforward and the court takes no steps to identify the creditors. The debtor is required to submit a list of assets, a list of liabilities, a list of related parties, and the most recent financial statements (if applicable). The court tends to review the bankruptcy petition merely from the standpoint of formal requirements.
If a bankruptcy petition is filed by a creditor, it must be proved to the court that the debtor is insolvent, in particular, that the debtor is illiquid. As creditors have no access to the debtor’s books, they are normally not able to prove over-indebtedness. A creditor must prove to the court that it is entitled to file the petition and justify the insolvency of the debtor.
Restructuring – Court restructuring and out-of-court restructuring
Slovak companies in financial difficulties looking for a rescue solution may opt for either court (formal) restructuring or out-of-court (non-formal) restructuring.
Out-of-court restructuring (frequently referred to as internal, financial or economic restructuring), although not regulated under Slovak law, may result in certain benefits for debtors and shareholders (and to certain extent also creditors) as opposed to formal restructuring. For example, when entering into out-of-court restructuring, the debtor is not under any risk of bankruptcy as opposed to court restructuring where bankruptcy might occur if the restructuring plan is not approved by the creditors.
Nevertheless, there are reasons to prioritise court restructuring over out-of-court restructuring, such as tax benefits and the debtor’s protection against law suits and individual enforcement actions initiated by its creditors, as these are suspended during the court restructuring process.
Restructuring – Court restructuring under Slovak law
The debtor or any of its creditors (with the debtor’s consent) may file for restructuring as a method of remedying insolvency.
Restructuring is a court-driven rescue process available to businesses that are at risk of insolvency. It is aimed at proportional satisfaction of the creditors’ claims through the preparation and adoption of a restructuring plan and is designed to save the business (or at least a vital part of the business) from liquidation. In the initial phase of restructuring, the debtor appoints a trustee to evaluate whether the business is suitable for restructuring (this stage lasts about one month).
Subject to receiving a positive opinion from the trustee, it is followed by restructuring proceedings co-managed by the debtor’s management and the trustee under the supervision of the court and the creditors. The restructuring proceedings last for approximately six to eight months, and the debtor enjoys statutory protection from the individual enforcement actions of creditors during this period.
Restructuring has priority over bankruptcy. If, during the bankruptcy proceedings, a petition for launching restructuring proceedings is submitted, the court should review such petition, and if it meets the prescribed requirements, the court will interrupt the bankruptcy proceedings and commence restructuring.
For further information, please contact Viliam Mysicka, Counsel, at .