Peter Vrabel and Robert Vasko of Legate assess the bankruptcy and insolvency regime in the Slovak Republic
Section 1: processes and procedures
1.1 What reorganisation and bankruptcy processes are available for financially troubled debtors?
Slovak law provides for two particular processes for debtors in financial difficulties: bankruptcy and restructuring. Both proceedings are initiated solely upon the petition (proposal) and are divided into two phases. Bankruptcy is commenced upon the declaration of bankruptcy by the court and is preceded by bankruptcy proceedings (initial phase) where ascertainment of the debtor's property is carried out by a trustee (in the Slovak Republic, the administrator). On the other hand, restructuring is commenced upon its permit by the court and is preceded by restructuring proceedings (initial phase) where the evaluation of all prerequisites is executed by the court.
Should the debtor file a petition to declare bankruptcy, its insolvency is presumed. A creditor is entitled to initiate a bankruptcy proceeding only if the debtor is insolvent (the debtor is unable to fulfil at least two monetary obligations to more than one creditor within 30 days of their due date).
Unlike bankruptcy, where insolvency of the debtor is a prerequisite, the process of restructuring may be carried out even if insolvency of the debtor is impending, provided the process is recommended in a restructuring opinion and the maintenance of at least a substantial part of the operation of the debtor's enterprise and a higher degree of creditor satisfaction than in bankruptcy may reasonably be expected. However, a creditor is only authorised to initiate restructuring after the debtor's endorsement.
The bankruptcy process is generally supervised by the bodies of creditors and the competent court while the estate of the debtor is administered by the trustee appointed by the court. On the other hand, within the restructuring, the administration of the debtor's property is entrusted to existing management. Control of the process is executed by the trustee through the endorsement process, which is subject to the supervision of the court.
Conversion of all residual property of the debtor and its liquidation to ensure the highest possible satisfaction of the creditors is the main feature of bankruptcy. That is to say, bankruptcy is general collective execution (liquidation) of a debtor's property. In contrast to bankruptcy, the maintenance of at least a considerable part of the operation of the debtor's enterprise, the enforcement protection of the debtor, the prolongation of maturity of respective parts of the debtor's obligations and the greater creditor satisfaction than in bankruptcy, are the main aims of the restructuring process.
1.2 Is a stay on creditor enforcement action available?
Each and every already initiated enforcement proceeding towards property of the debtor is ex lege (by operation of law) terminated upon declaration of bankruptcy. Therefore, no additional filings are needed. There are no exceptions regarding the ban of enforcement.
However, within the initial phase of bankruptcy enforcement actions are only suspended, as opposed to bankruptcy where enforcement proceedings are terminated. This will equally apply to restructuring, where enforcement proceedings are only suspended and after permit of restructuring terminated. Should the bankruptcy not be declared or the restructuring is not permitted, already-initiated enforcement proceedings will be resumed.
A stay on creditor enforcement cannot be lifted and it expires upon termination of bankruptcy or restructuring.
1.3 What are the key features of a reorganisation plan and how is it approved?
In general a reorganisation plan includes two main sections: the descriptive part and the binding part.
It can be concluded that the binding part of the restructuring plan is crucial, as it contains specification of all rights and obligations to be constituted, altered or expired with respect to participants of the restructuring plan (such as prolongation of maturity, partial expiration of the obligations, and the installments schedule).
In the event that restructuring is initiated by a creditor, the trustee draws up and proposes the restructuring plan. If the process is initiated by the debtor, it is responsible for the restructuring plan submission.
No period of exclusivity applies under Slovak law.
In order to adopt the restructuring plan, certain voting requirements have to be met. A participant in the plan possesses one vote for each euro of the ascertained receivable and the voting requirements stipulate whether votes per capita or votes counted according to the ascertained receivable are needed. The adoption of the restructuring plan requires that: (i) each group for secured receivables votes for the plan adoption; (ii) in each group for unsecured receivables, an absolute majority of voting creditors must support the plan (per capita) and concurrently their votes exceed a majority of votes of the voting creditors (per ascertained receivable), (iii) in each group for proprietary rights of shareholders votes of an absolute majority (per ascertained receivable) vote for the plan approval; (iv) an absolute majority of votes of present creditors (per ascertained receivable) votes for the plan adoption. The consent of the debtor is required only if the debtor is a natural person and the restructuring plan is proposed by the trustee.
The restructuring plan adopted by the creditors at the approval meeting is also subject to the court's confirmation that it may either reject the plan on the grounds stipulated by law or support the plan and complete a formal process of restructuring.
The unregistered receivables subject to restructuring or denied claims become unenforceable upon the court's confirmation of the plan.
1.4 Can a creditor or a class of creditor be 'crammed-down'?
If the voting requirements for the plan adoption are not met, the submitter of the plan may demand substitution of approval within respective groups (classes) through a decision of the court. However, there are few conditions to be fulfilled in order to demand the substitution of approval prescribed by law. The substitution of approval of an unsecured receivables group may not be awarded if creditors of the group obtain fulfillment in a period exceeding five years; this will not apply to so-called subordinated claims. All in all, even if a group (class) of creditor is crammed-down or outvoted, the plan may be confirmed by the court through the substitution of its consent.
Further, 50% of the ascertained claims will not cease to exist and the remaining part converts to other proprietary right. The debtor may not distribute profit between its members until receivables of unsecured creditors are not satisfied to the extent of 50% of their ascertained amount; this will not apply in relation to subordinated claims. Infringement of the debtor's duty under a previous sentence establishes the inefficacy of the plan towards affected unsecured groups (classes).
Unsecured receivables of a related person, unsecured claims consisting of contractual penalties and receivables connected with the obligation of subordination are deemed as subordinated claims. They should be satisfied from proceeds remaining after the full settlement of other unsecured receivables.
1.5 Is there a process for facilitating the sale of a distressed debtor's assets or business?
Within bankruptcy, the trustee usually draws up a sales plan of the debtor's property. Any sale is subjected to authorisation of the creditor body or the court; real estate may be realised only by auction and after expert opinion on its value is submitted.
Credit-bidding or stalking horse bids are not allowed.
Within the framework of bankruptcy, a forfeiture of pledged property and blocking of other offers to buy property of the debtor are not allowed and the trustee is not bound by any contractual pre-emption rights.
1.6 What are the duties of directors of a company in financial difficulty?
First, the debtor is obliged to prevent its insolvency and systematically monitor its financial situation as well as the status of its assets and obligations. If the insolvency is impending, the debtor is obliged to take appropriate measures to avert it without undue delay.
The insolvent debtor is obliged to file petition on a bankruptcy declaration within 30 days of the day of ascertainment of its heavy indebtedness; otherwise statutory representatives of the debtor are obliged to pay in favour of a bankruptcy mass a sum in the amount of the debtor's registered capital, but not exceeding double the minimum amount of a company's registered capital stipulated by law. When assessing heavy indebtedness, so-called going concern value is taken into account and obligations are reduced by subordinated claims.
1.7 What priority claims are there and is protection available for post-petition credit?
Receivables against assets (such as costs of property realisation, remuneration of the trustee, wages of employees and expenses connected with proceeding) are priority claims within bankruptcy.
Claims arising during restructuring proceedings, labour receivables to which entitlement arises in the month in which the restructuring process was initiated, remuneration of the trustee and non-monetary receivables, are priority claims within restructuring, which are not affected by the restructuring proceeding. Such claims are fully redeemable and are not included in the restructuring plan unless creditors grant consent.
Post-petition credit is not affected by the restructuring plan if it is provided to the debtor after commencement of the restructuring proceeding.
1.8 Is there a different regime for banks and other financial institutions?
No other regime applies to banks and other financial institutions, if they are in position of unsecured creditor.
Section 2: international/cross border issues
2.1 Can bankruptcy or reorganisation proceedings be opened in respect of a foreign debtor?
Insolvency proceedings (bankruptcy or restructuring) may be opened in the Slovak Republic under Council Regulation (EC) 1346/2000 on insolvency proceedings (Regulation).
If a centre of main interests (Comi) of the debtor is situated in the Slovak Republic, the main insolvency proceeding may be opened in the Slovak Republic and is governed by Slovak law (lex fori concursus). The main insolvency proceedings have extraterritorial effects and affects the entire property of the debtor across the EU.
The secondary insolvency proceeding may be opened in parallel with the main insolvency proceeding provided it is initiated after the commencement of the main proceeding and establishment of the debtor is situated in Slovak Republic. The secondary insolvency proceeding is governed by laws of the Slovak Republic and its effects are limited only to the assets located in the Slovak Republic. This does not apply to restructuring, which cannot be opened as the secondary insolvency proceeding.
For an insolvency proceeding with a foreign element (outside of the EU), the reciprocity principle applies, unless an international treaty stipulates otherwise. The competence of the Slovak court applies if the debtor has property in the territory of the Slovak Republic, regardless its amount.
Bankruptcy declared by a Slovak court affects property of the debtor situated abroad, if legal regulations of the respective state permit it.
2.2 Can recognition and assistance be given to foreign bankruptcy or reorganisation proceedings?
According to the Regulation, all member states court decisions in insolvency proceedings are recognised in other member states without any further formal requirements. Therefore, the trustee is entitled to exercise all powers and competencies under the law of the state where the insolvency proceeding is commenced.
Foreign bankruptcy is recognised by Slovak courts on petition of aforeign trustee provided: the reciprocity principle applies; and the foreign trustee proves its appointment, initiation of foreign bankruptcy and legal interest of such recognition (unless an international treaty stipulates otherwise).
Section 3: other material considerations
3.1 What other major stakeholders (such as governmental or regulatory institutions) could have a material impact on the outcome of the reorganisation?
The Tax Offices and Social Insurance Companies have a specific status within the framework of restructuring as providers of state aid. For this reason, they are considered creditors not consenting with the plan who have the possibility possibility of substituting their approval (see 1.4).
Protection of employees is ensured through guarantee insurance, which is mandatory for any employer operating in Slovak Republic. If an employer is unable to settle claims of employees due to its insolvency, such claims are satisfied through guarantee insurance benefits. Pension liabilities are covered by guarantee insurance benefits, which can be disbursed for three months provided the employment lasted for the 18 months preceding the employer's insolvency.
Moreover, labour claims of employees arising after bankruptcy is declared are considered receivables against assets and have priority claim status; they will be satisfied before unsecured receivables.
Section 4: current trends
4.1 Outline any bankruptcy and reorganisation trends specific to your jurisdiction.
A significant amendment of insolvency law became effective on April 29 2015 through Act 87/2015 Coll. This act strengthens the legal position and increases the satisfaction of unsecured creditors in restructuring and establishes a register of disqualified statutory bodies who have breached their statutory duties. The amendment prevents a merger, an amalgamation and a split-up of a company during bankruptcy or restructuring, which are ways the debtor and its statutory bodies may avoid their liabilities. Moreover, it tightens obligations of statutory members of insolvent companies or companies facing impending insolvency by diversion of insolvency and a ban on drawback of fulfillment substituting a company's own resources.
First published by our sister publication IFLR magazine. Take your free trial today.
About the author
Peter Vrabel is a managing partner and the leader of the Legate team. His previous experience, acquired mainly at Squire Sanders & Dempsey, make him an expert in various practice areas of law. He is a fully licensed security broker, mediator, arbitrator and trustee.
Peter Vrabel's expertise involves particularly M&A, gas and oil, insolvency law, litigation and arbitration, construction law, international public and private law, aviation law and public procurement as well as related cross-border matters. He is working on legal assistance for four companies that are rated among the top 20 non-financial enterprises in the Slovak Republic.
About the author
Robert Vasko has been a junior lawyer associated with Legate since 2013 and is a rising star for insolvency and restructuring issues. He focusses mainly on insolvency law, litigation and corporate matters.
Robert Vasko was involved in resolving cross-border restructuring issues in relation to the restructuring of a leading construction business in the Slovak Republic, as well as the successful representation of a real estate developer in incidental proceedings invoked by restructuring. He works on insolvency cases on both sides of the process: cooperation and backing of the trustee and on the one side and representation of the creditors in insolvency proceedings on the other.
Robert Vasko also gives advice on conformity assessment matters, consumer protection issues from the trader's perspective and receivables recovery. He also provides sole representation in civil litigation matters for domestic clients.