This article provides general information regarding bankruptcy and restructuring proceedings under Slovak law, including the description of the roles, rights and duties of particular stakeholders participating in both proceedings.
This is part of the PLC multi-jurisdictional guide to restructuring and insolvency law. For a full list of jurisdictional Q&As visit www.practicallaw.com/restructure-mjg.
This article provides general information regarding bankruptcy and restructuring proceedings under Slovak law, including the description of the roles, rights and duties of particular stakeholders participating in both proceedings.
Slovak insolvency law is governed by Act No. 7/2005 Coll, Bankruptcy and Restructuring Act, as amended (Bankruptcy Act) and two implementing decrees. The Bankruptcy Act has been materially amended with the effect as of 1 January 2012, with certain changes taking effect only in 2013.
The Bankruptcy Act provides two main types of insolvency proceedings, which are separate proceedings with limited options of conversion from one to another and only a limited number of common rules:
Bankruptcy liquidation proceedings (konkurz), which provides for a sale of the debtor's assets (piecemeal or as a going-concern) and proportional satisfaction of the creditors from the cash proceeds.
Restructuring proceedings (reštrukturalizácia), which provides for a flexible approach under a restructuring plan, and in particular for the restructuring of the debtor's liabilities or for other restructuring measures (including a sale of the assets).
Bankruptcy liquidation can take also the form of a "small bankruptcy", which can be declared by the court in case of debtors who probably meet at least two of the following three criteria:
Assets below EUR165,000.
Sales below EUR333,000.
Fewer than 50 creditors.
(As at 1 March 2012, US$1 was about EUR0.7.)
While both types of proceedings have the same aim, the satisfaction of creditors' claims, they are pursued separately and by different means. While bankruptcy liquidation always leads to the winding-up of a debtor as a corporate entity, restructuring may preserve the debtor's business and corporate existence. The law gives priority to restructuring, by automatic suspension of the pending bankruptcy liquidation proceedings once the restructuring proceedings are commenced or by giving an opportunity to the debtor to ask the court to suspend the bankruptcy liquidation proceedings pending the preparation of a restructuring. However, any significant breach of the restructuring rules may result in a conversion into bankruptcy liquidation.
The Bankruptcy Act purports to provide for two theoretical tests of insolvency (úpadok):
Cash flow insolvency (platobná neschopnos), which means the debtor is unable to pay at least two liabilities which are 30 days overdue to more than one creditor. In practice this is the only test that is currently used.
Balance sheet insolvency (predĺženie), which is currently defined as an excess of due liabilities over the value of assets (at book value). The definition will be changed from 1 January 2013 to include all the debtor's liabilities, not only due liabilities. The value of the assets, but also the value of the liabilities, will be taken not only from the debtor's books, but primarily from an expert opinion (the value determined by the expert opinion having priority). The assets will need to be valued in light of the potential for the future operation of the debtor's business, if it is reasonable to expect it to continue. The liabilities do not include subordinated liabilities. Only debtors obliged to maintain accounting books can be balance sheet insolvent.
The creditors must generally register their claims in order to participate in either bankruptcy liquidation or restructuring proceedings. In a restructuring, registration must take place within a strict deadline, whereas in bankruptcy liquidation, registration can take place at any time, subject to certain disadvantages for late registrants.
Security rights, such as mortgages, pledges, but also title transfer securities, are generally respected. The law has an open definition of security interests, but there is a consensus that leasing arrangements are not included within the definition. In a bankruptcy liquidation, secured creditors are entitled to the satisfaction of their claim from the proceeds of the sale of the assets by which their claim was secured (forming a separate bankruptcy estate (see below)).
Creditors affiliated to the debtor (including past affiliates, directors and their relatives and anyone holding more than 5% of the debtor's share capital) are subordinated by operation of law. Such creditors cannot vote on the creditors' meeting and cannot become members of the creditors' committee. In restructuring proceedings, such creditors are subordinated to all other creditors.
Creditors exercise their rights in both types of proceedings through:
The creditors' meeting.
A creditors' committee (or a creditors' representative in a small bankruptcy liquidation).
In either type of proceeding, a creditors' meeting must be convened at least once by the trustee, or, if the trustee fails to convene a meeting, by the court. Each creditor with a registered claim has a right to be present at the creditors' meeting, but only the creditors with admitted claims can vote, unless the court grants them voting rights. The creditors' meeting elects and removes members of the creditors' committee and, in a bankruptcy liquidation, the trustee as well. The court can void an illegal resolution of the creditors' meeting on application of a creditor who objected to the illegal resolution and has the objection recorded in the minutes.
In a bankruptcy liquidation, the creditors' committee represents only the unsecured creditors, while in restructuring it represents all the creditors. Its members are elected by a regular majority vote (there is no cumulative voting) from among the present creditors with three or five members. In restructuring, these must be elected so as to provide equal participation of secured and unsecured creditors. If there are less than three members elected in a bankruptcy liquidation, the court exercises the powers of the committee. In restructuring this leads to a conversion to bankruptcy liquidation. The creditors' committee decides by a majority of its members present at its meeting. In a bankruptcy liquidation, the committee can give specific instructions to the trustee in respect of management of the estate. In a restructuring, its main role is to pre-approve the restructuring plan. Minutes from the creditors' committee meetings are published in the Commercial Bulletin. Any unsecured creditor can request the court to annul a decision of the creditors' committee in a bankruptcy liquidation. This option is not available in a restructuring.
Slovak insolvency law is to a large extent based on the person of the trustee. Trustees, who may be individuals or legal entities, are specifically regulated and must have a legal or economic university degree and pass a specific exam.
In a bankruptcy liquidation, the trustee has full power of management of the estate and his duty is to sell the assets and distribute the proceeds to the creditors. In the decision declaring bankruptcy liquidation, the court appoints a trustee selected by a random computer generator, but the first creditors' meeting may dismiss this trustee and elect a new one. Further creditors' meetings may do so only under specific conditions (such as a major change of creditors' structure or breach of trustee's duties). The trustee is under a duty to act with due care and must follow the creditors' committee's instructions in relation to the unsecured assets or secured creditors' instructions in relation to the secured assets.
In a restructuring, the trustee does not have the power of management, which stays with the debtor. The trustee's role is to supervise the debtor and review registered claims (which is very important). If the debtor files for restructuring, it also selects the trustee. However, this can be (and regularly is) abused, as the first trustee can deny claims and thereby fatally influence the results of voting in the creditors' meetings (and the success or failure of a plan).
Only eight (out of a total 54) district courts in Slovakia hear bankruptcy and restructuring cases. A single judge, who also supervises the trustee and the general course of the proceedings, makes all the decisions at the district level. However, this judge does not decide "incidental" disputes, such as disputes between the trustee and particular creditors on the existence of a claim or on the ownership of an asset included in the estate. On appeal, cases are heard by three (out of eight) regional courts in tribunals of judges.
The trustee must, on request, provide the court with information and explanations regarding the bankruptcy liquidation. In a restructuring, the court also supervises the debtor and the creditor's committee.
Bankruptcy. The debtor's management is severely limited in its powers by the filing of the petition for bankruptcy liquidation. The court's decision on commencement of the proceedings results in a prohibition on any actions out of the ordinary course of trading. On declaration of a bankruptcy liquidation, the trustee takes over the power of management with respect to the debtor's operations and assets and acts in the name and on behalf of the debtor. The former management technically stays in its position but loses almost all powers (except for certain procedural rights within the proceedings and, especially for individual debtors, the power to act in matters unrelated to the estate). Any debtor's claims must be paid to the trustee.
Restructuring. After commencement of restructuring proceedings, the debtor's management is limited to actions within the ordinary course of trading and any other (non-ordinary) actions are subject to the trustee's approval. The trustee can only approve such actions if they increase the value of the debtor's assets or are necessary to achieve the purpose of the restructuring. When the court authorises restructuring, the decision must clearly specify the debtor's actions that are subject to the trustee's approval. The creditors' committee can also request that the limitation on the debtor be extended. Unless the court orders otherwise, there are no specific rules for replacement of the statutory bodies/management and the shareholders' powers to elect or remove the management are therefore not normally limited.
In a bankruptcy liquidation, the law creates a bankruptcy estate, which comprises:
The debtor's assets as of the declaration of bankruptcy.
Any assets acquired during the proceedings.
Assets subject to claw-back.
Any assets securing the debtor's obligations.
The last category often leads to complicated litigation when trustees of various debtors whose liabilities are secured by the same asset try to include such assets in their estates. The estate does not include:
Assets which are not available in case normal enforcement, such as private items.
Funds from state budgets and assets procured from such funds.
The bankruptcy estate is divided into the general bankruptcy estate (generally unsecured assets) and a separate bankruptcy estate for each secured creditor (assets securing creditor's receivable). The creditors' committee has the right to instruct the trustee how to manage the general estate, whereas each secured creditor (or all the secured creditors, if the value exceeds the first-ranking claim) can give instructions in respect of the separate estates.
The law does not create an estate in a restructuring, which makes it impossible for the debtor to use the tools available to the trustee in bankruptcy liquidation, such as inclusion of assets invalidly transferred by the debtor in the estate or the claw-back of assets. Similarly, restructuring does not affect creditors' rights in relation to third party guarantors/security providers.
In a bankruptcy liquidation, the trustee and each registered creditor can contest the debtor's acts before the commencement of the proceedings (acts by other parties, such as creditors (for example, set-offs) or bailiffs (foreclosures) are not subject to claw-back). Any claw-back action must be filed within one year of the declaration of the bankruptcy liquidation. Claw-back is not available to the debtor or the trustee in restructuring.
The two basic types of avoidable acts are transactions at undervalue and unfair preferences. The claw-back period is one year (three for affiliates) before the commencement of the proceedings. A transaction is avoidable only if the debtor was insolvent at the time or if the transaction led to the insolvency (insolvency is presumed in case of transfers to affiliates). An exceptional claw-back action with a five years claw-back period is available in case of transfers deliberately defrauding creditors, where the counterparty had knowledge of such intent (such knowledge is presumed in case of transfer to affiliates).
In addition to the debtor's direct transferee, further transferees of the respective assets can also be liable to claw-back if they either:
Had knowledge of the avoidability of the previous transfer.
Acquired the assets for no consideration
Are affiliated to the debtor and do not prove that they did not have knowledge of the avoidability.
Universal successors are always liable to claw-back to the same extent as their legal predecessor (such as in mergers). A successfully contested transaction is ineffective towards all the debtor's creditors, which means that the property which was subject to the transaction, or a monetary consideration, becomes part of the (appropriate) estate.
Claw-back is not available in a restructuring.
In a bankruptcy liquidation, set-off remains generally available. However, both:
Claims against the debtor arising against the debtor before declaration of bankruptcy liquidation cannot be set off against debtor's claims arising after such declaration.
Unregistered claims, claims acquired after declaration of bankruptcy liquidation or claims resulting from contestable acts cannot be used for set-off.
Creditors can transfer claims against the debtor freely, disregarding any contractual limitations on transferability of claims.
In restructuring, set-off is prohibited against general insolvency claims, which otherwise must be registered as of the commencement of the proceedings. Administrative priority claims, such as claims against the debtor arising after the commencement of restructuring proceedings, can be subject to set-off.
The most important decisions and documents issued/prepared in the proceedings are published in the Commercial Bulletin. However, no official public insolvency register is available in Slovakia. Selected insolvency information can be searched in the Commercial Bulletin and obtained from the court on written request, subject to payment of the administration fee.
Registered creditors can obtain copies of the remaining documentation from the trustee, but generally only with a personal visit to the trustee's office and payment of a fee.
Bankruptcy liquidation proceedings are begun by a decision of the court on a petition for declaration of bankruptcy. If the petition is well founded, the court then declares the debtor's bankruptcy liquidation and appoints a trustee. This opens the main stage of the proceedings, comprising:
Registration and review of creditors' claims.
Identification and realisation of debtor's assets estate.
Distribution of proceeds.
On full distribution, the bankruptcy liquidation proceedings are terminated.
In general, both creditors and the debtor can file a petition for declaration of bankruptcy liquidation. Subject to certain exceptions, the petitioner is required to make a deposit to cover the expected remuneration and expenses of an interim trustee.
Debtor's petition. A debtor must file a petition for declaration of bankruptcy liquidation within 30 days of learning of its insolvency or of when the debtor should have learned of it when acting with due care. The directors/executives can be personally liable for the damage caused to the creditors by any delay in filing. Such damages are presumed to be equal to the amount of non-recovered claims of the creditors. As of 1 January 2013, when the new balance sheet insolvency test will become applicable (see above), the obligation to file will also apply. However, the liability for damages will be replaced by a specific liability to pay to the trustee an amount equal to the registered capital of the debtor (but not more than twice the legal minimum registered capital, that is, currently not more than EUR10,000 for LLCs and EUR50,000 for joint stock companies).
Creditor's petition. Creditors can file a petition for a declaration of bankruptcy liquidation if it appears reasonably likely that the debtor is cash flow insolvent. This is the case when the debtor is, despite more than 30 days notice, in delay with payment of at least two receivables to more than one creditor. A creditor must attach to the petition a judgment, a confession of judgment or a confirmation of its auditor evidencing the existence of its claim against the debtor (before the end of 2011, only creditors holding a final judgment could file a petition, which prevented creditors' petitions in practice).
On the filing of the petition, the court merely examines the formal requirements of the petition and if it is complete, the court commences the proceedings within 15 days without serving the debtor. This decision takes effect on its publication in the Commercial Bulletin.
Commencement of the proceedings results in a limitation of the debtor's power to dispose of its assets in the ordinary course of trading. Acts outside of such scope remain valid, but can be contested by the trustee. Commencement of the proceedings also stays most collection efforts by creditors, so that no enforcement proceedings or proceedings on enforcement of security rights can be initiated and pending proceedings are suspended. However, enforcement can continue in respect of liquid collateral (bank accounts, bonds and other tradable securities) and also in the case of a running enforcement through a public auction.
The debtor can obtain a conversion of the bankruptcy liquidation proceedings into a restructuring before the declaration of bankruptcy, if the debtor authorises a restructuring trustee to prepare a restructuring opinion. If so, the debtor has 60 days to file for restructuring (the opinion is part of the filing) and obtain a commencement of the restructuring proceedings.
The law gives specific rules on the procedure leading to the verification of insolvency and certain presumptions of insolvency, if the debtor does not provide sufficient evidence of its solvency. There are also certain binding deadlines so that a decision on declaration of bankruptcy liquidation is generally made immediately if there is a debtor's petition and no later than three months after commencement of the proceedings if there is a creditors' petition.
Before the declaration of bankruptcy liquidation, the court may appoint an interim trustee to verify whether debtor's assets are sufficient to cover the costs of the proceedings (currently EUR6,638 for legal entities). If the results are negative, the court will dismiss the case for lack of assets.
If the assets are sufficient to cover the costs of the proceedings and the debtor does not prove its solvency, the court declares a bankruptcy liquidation. Only the debtor can appeal such a decision. The decision on declaration of bankruptcy liquidation takes effect on its publication in the Commercial Bulletin.
Declaration of bankruptcy has the following legal effects:
The debtor's power of management in respect of the assets subject to bankruptcy liquidation passes to the trustee. Powers of attorney or offers issued by the debtor cease to exist.
The trustee can terminate the debtor's running contracts (including leases, except for residential leases) with the effect that the claims of the counterparty for damages become regular insolvency claims.
Claims against the debtor become due and payable (there is no rule on discounting of future bullet payments) and the debtor's claims against third parties also become payable (the trustee can also assign any claims disregarding any contractual prohibitions on assignment of debtor's claims).
Pending court and administrative proceedings are suspended and, except for specific cases (such as tax or criminal proceedings), can continue only with the consent of the trustee.
Pending enforcement proceedings are terminated and if there are undistributed proceeds, such proceeds are included in the bankruptcy estate, except if the enforcement was instigated by a secured creditor.
No security right can be created over the assets included in the estate, except where there is a registered pledge of future property established before the declaration of bankruptcy liquidation, which can also attach during the bankruptcy liquidation.
The creditors must register their claims in order to benefit of distributions of the proceeds from the sale of the estate. The basic registration period is 45 days and creditors who register their claims within this period have full rights within the bankruptcy liquidation. Unsecured creditors can also register after this period (security rights not registered in the basic period cease to exist), but such creditors will not have voting rights and will participate only in distributions taking place after such late registration. The claims must be registered on specific forms and foreign creditors must appoint a service agent resident in Slovakia, otherwise the court will not serve him personally. There are no specific rules for foreign creditors.
If the debtor operates a business, the trustee generally continues with its operation as long as:
The business generates enough cash to pay taxes, which have administrative priority.
The value of collateral of secured creditors are not impaired.
The operation of the enterprise will lead to higher satisfaction of creditors than if the operation was terminated (such as due to a potential sale or because the business generates operating profit).
If either of these conditions is not met, the court may order the trustee, on request of the respective creditor, to terminate the operations.
The trustee may realise the assets of the debtor either by a sale of the business (or a business unit) as a whole or by sale of particular items in public auction. The trustee does not have to respect pre-emptive rights established over the property by the debtor.
Secured creditors are entitled to the proceeds of the sale of the collateral (the separate estate) after deduction of the administrative priority claims against the respective separate estate, such as the costs associated with the collateral. The law does not limit such costs, but the secured creditor should be able to keep these costs limited by issuing appropriate instructions to the trustee.
The trustee then, with the court's approval, distributes the proceeds of the sale of the assets included in the general estate (and of excess proceeds from the sale of collateral) in accordance with the ranking of creditors, as described above.
Certain claims are excluded from satisfaction such as:
Appurtenances accrued on registered claims that became due after declaration of bankruptcy.
Contractual or non-contractual penalties relating to the debtor's assets where the obligation to pay such penalty occurred after declaration of bankruptcy.
Claims of creditors arising from gratuitous legal acts.
Restructuring proceedings can be initiated either by the debtor or by a creditor with the debtor's consent. The first stage takes place out of court. The petitioner requests a trustee (of its own choice) to prepare an opinion on the feasibility of a restructuring of the debtor (restructuring opinion). This opinion must be attached to a restructuring petition, which, if formally correct, results in commencement of the proceedings. The court then authorises the restructuring, if it is satisfied that all the conditions are fulfilled. Subsequently, the creditor' claims are registered and reviewed and a creditors' meeting convened to elect the creditors' committee.
If there is a debtor's petition, the debtor (and in case of a creditor's petition, the trustee) submits the restructuring plan, which must be first approved by the creditors' committee, then by the creditors in classes and finally by the court. The plan is binding on all its participants, that is, all creditors and holders of security rights. The plan is not binding on the asset-side of the debtor's balance sheet and it cannot fix a debtor's entitlement to particular assets.
The restructuring opinion must describe the debtor's business and conclude with a recommendation with respect to the debtor's restructuring. Such a recommendation presupposes that at least a substantive part of debtor's business can be preserved as a going concern and that the satisfaction of the creditors in restructuring appears to be higher than in bankruptcy liquidation. As the trustee is hired by the future petitioner, the results are very often pre-agreed.
Based on the opinion, the debtor or the petitioning creditor (having the debtor's consent) files the petition, which must take place before declaration of bankruptcy liquidation or be rejected.
On filing of the petition for restructuring, the court examines only the formal requirements of the petition. A decision on commencement of the proceedings takes effect on its publication in the Commercial Bulletin.
Commencement of the restructuring proceeding results in:
A limitation of the debtor's power to manage its assets to ordinary course of trading.
A moratorium protecting the debtor from most collection efforts (including in respect of liquid collateral or in running public auctions (see above for bankruptcy liquidation)).
A prohibition of set-off (see above).
A prohibition of termination of debtor's running contracts by the counterparty due to breaches arising before the commencement of the proceedings or due to the commencement of the proceedings.
Authorisation of restructuring starts the formal process leading to an adoption of a restructuring plan. It includes a list of debtor's actions, which require the trustee's consent. In addition, pending judicial and arbitration proceedings relating to claims that need to be registered are suspended and the creditors are referred to registration of claims until enforcement proceedings are terminated.
The restructuring plan can modify or terminate the rights of its participants, the registered creditors and debtor's shareholders, or any other parties. The restructuring plan may comprise various measures to restructure the debtor's business, such as debt/equity swaps, sales of assets, distributions in kind, contributions in kind to new legal entity and so on. The restructuring plan must have a descriptive part (disclosure statement) and a binding part (the actual plan). The plan can provide for a new financing for the debtor, but no rules for interim funding (and the granting of super-priority status) during the restructuring proceedings are set forth by the law.
The plan divides the claims into classes, with the effect that it:
Generally creates a separate class for each secured claim.
Classifies unsecured claims in accordance with legal and economic criteria (such as subordination).
Creates a class for shareholders, if their rights are affected (including by a sale of the debtor's business or a merger).
Subordinated claims (including shareholder loans) must be provided less advantageous treatment than other unsecured claims.
The draft restructuring plan must be submitted (by the debtor or the trustee, see above) to the creditors' committee within 90 days (or with the committee's consent within 150 days) from the authorisation of restructuring. The committee must approve the plan within 15 days of its submission (or have it amended by the plan proponent). If the committee rejects the plan or fails to approve it within the statutory period (including if the proponent fails to submit the plan) the trustee must immediately apply to the court for declaration of a bankruptcy liquidation.
On approval of the plan by the creditors' committee, the trustee convenes a creditors' meeting for the approval of the plan, which he then also chairs under the court's supervision. At the meeting, the plan participants (creditors) vote in the classes set forth in the plan. A class of unsecured creditors is deemed to vote for the plan if a double majority in terms of amount of claims and number of creditors votes in favour (only creditors holding more than 1% of the claims in the class are counted). In addition, the plan must be approved by:
Each secured creditor (even if the claim is denied by the trustee).
A majority of the shareholders.
A majority of all creditors in aggregate in terms of amount of their admitted claims.
The court can overrule the dissent of a particular class if the plan provides a better treatment to the members of such class than in case of bankruptcy and if a majority of all the classes support the plan (a lack of aggregate majority support among creditors cannot be overruled).
The law does not provide for an absolute priority test under which no junior creditors' class can obtain payment until the senior creditors classes are paid in full. This allows the shareholders to preserve their participation in the debtor even if it is hopelessly insolvent. In addition, the fact that unsecured creditors (and until end of 2011 all creditors) vote on the plan only if their claims are admitted often allows the debtors, who have the power to select the trustee (who in turn decides, which claims are admitted), to manipulate the process.
The court will approve the plan if it complies with the law and was appropriately approved by the creditors. The court can dismiss the plan if it is a result of fraud or if it is in material contradiction to the common creditors' interest. Such a decision is not subject to appeal and the plan becomes binding on all its participants immediately on its publication. A dissenting plan participant can only apply to the court for a declaration of unenforceability of the plan as against him if either:
The plan discriminates against him.
His claim(s) have been improperly classified, which puts him into a worse position than in case of bankruptcy liquidation.
Again, only creditors with admitted claims can oppose the plan through this remedy.
The court can convert the restructuring into a bankruptcy liquidation and appoint a different trustee in most cases where it is clear that the purpose of the restructuring will not be achieved, and in particular if:
The trustee breaches its duties.
No creditors' committee is elected.
The plan is not submitted or is not approved within the statutory deadlines.
Declaration of bankruptcy liquidation is the only exit from restructuring other than the approval of the plan. This means that after the authorisation of restructuring it is impossible to withdraw the restructuring petition. Before the authorisation, withdrawal is possible only with the consent of all the creditors who have registered their claims by the date of withdrawal.
Slovak law does not contain any specific rules for international insolvency outside of the EU. Regulation (EC) 1346/2000 on insolvency proceedings (Insolvency Regulation) applies in respect of intra-EU cross-border insolvencies.
Qualified. Czech Republic, 2007; New York, US, 2010; registered as a foreign lawyer in Slovakia, 2010
Areas of practice. Restructuring and insolvency; real estate; M&A.
Qualified. Slovakia, 2010
Areas of practice. Real estate; commercial.