Uncertainty and rising prices in Slovakia have caused a number of entrepreneurs to see their cash flow decrease, leading to a risk that they will not be able to pay their debts on time in the coming months. But legislation offers the possibility of overcoming a financial crisis in the company in the form of preventive restructuring. When is it time to act and when is it too late?

From the times of uncertainty during the COVID-19 pandemic, through the financial crisis due to the sudden rise in prices, high inflation and the ongoing war in Ukraine, many in Slovakia expected and still expect companies to go bankrupt, declare bankruptcy, or seek restructuring permission.

The aim of preventive restructuring is to preserve the company's business more economically and time-efficiently than bankruptcy or restructuring (which is the Slovak equivalent of reorganisation in Czech law).

New legislation providing for the possibility of preventive restructuring was adopted by the National Council of the Slovak Republic in May 2022. The new form of preventive restructuring should be more cost-effective, less formalistic and faster than the classic restructuring we know from the Bankruptcy and Restructuring Act.

The main difference with restructuring in the Bankruptcy Act is that preventive restructuring may only be used in the time of impending insolvency, and protection from creditors is not automatic. Last but not least, preventive restructuring does not contain minimum limits for the satisfaction of unsecured creditors. Satisfaction may be below 50% of the nominal value of a claim, a threshold that significantly limits the applicability of judicial restructuring in Slovak law.

The preventive restructuring process itself is very similar to the restructuring process under the Bankruptcy Act. The debtor must draw up a draft plan or, where appropriate, instruct the trustee to draw up such a plan. Subsequently, the court appoints a special trustee, who, among other things, supervises the debtor, once the preventive restructuring has been permitted. At the same time, at the request of the debtor, the court grants temporary protection from creditors and sets up a creditors' committee. The restructuring plan, known as a public plan, is reviewed by the trustee, then approved by the creditors at a creditors' meeting, and finally confirmed by the court.

As regards the publicity of public preventive restructuring, it is the same as under the Bankruptcy Act. Details of the debtor are published in the Commercial Bulletin, together with information on the permission and termination of the debtor's public preventive restructuring, the granting of temporary protection, and a list of the debtor's creditors. In contrast, in a non-public preventive restructuring, which may only be carried out between the debtor and banks, nothing is made public.

So when is the right time to act?

Statutory body members should already be vigilant at the time of impending insolvency. Failure to use preventive procedures and to act in the state of impending insolvency may result in the only solution to the company's financial crisis being the filing of a bankruptcy petition, and the closure of the business, which will, among other things, increase the risk of liability of statutory bodies.

In Slovakia, a company’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. Impending insolvency is also defined as a low ratio of internal and external resources, or in other words, the company’s high loan exposure.

If this situation arises, statutory body members are obliged to take appropriate and proportionate measures to prevent the company's insolvency. One option is to take appropriate measures to increase the liquidity of the assets (for example, by selling the company's assets) or to increase the share capital or equity in order to increase the equity funding ratio (including, for example, capitalising the company's receivables). In addition to the standard measures related to increasing the cash flow in the company, Slovak law allows the use of preventive restructuring, whether public with all creditors or non-public with banks.

Ability to pay and inability to pay

A statutory body member is obliged to file a bankruptcy petition within 30 days of becoming aware that the company is insolvent. Thus, if it is unable to pay, it is unable to pay at least two monetary obligations within 90 days past due to more than one creditor. Or it is over-indebted if the value of its liabilities (both due and undue but excluding subordinated liabilities and liabilities to related parties) exceeds the value of its assets.

Previously, the obligation to file a bankruptcy petition only applied in the event of over-indebtedness, but with the new regulation of preventive restructuring in Slovakia, this obligation also applies to inability to pay – thus extending the liability and increasing the risks for statutory body members of Slovak companies.

Under the Bankruptcy Act, it still applies that "a legal entity is able to pay if, having regard to all the circumstances, it is reasonable to assume that the management of the assets or the operation of the business can be continued and the difference between the amount of its outstanding monetary obligations and its monetary assets (the so-called 'coverage gap') is less than 1/10 of the outstanding monetary obligations". If the coverage gap is more than one tenth (10%) of the outstanding monetary obligations, the company may not yet be insolvent, but if a creditor files a bankruptcy petition with respect to the company, the court will declare bankruptcy.

Another novelty is the regulation on inability to pay, which refers to enforcement proceedings. "If a monetary receivable cannot be recovered from the debtor by enforcement, the debtor shall be presumed to be unable to pay." In view of this, the responsibility of statutory bodies to act in a timely manner and either take appropriate measures to prevent insolvency or, if it is too late, to file a petition for bankruptcy or restructuring in a timely manner is increased.

However, it is still the case that a creditor may only file a bankruptcy petition due to the debtor's inability to pay. At the same time, however, if the court, when examining the debtor's assets before declaring bankruptcy, finds that the presumption of ability to pay cannot be rebutted by the debtor, it shall declare bankruptcy over the assets of such a company, regardless of whether the company is insolvent or not.

A company in crisis

In addition to the above regulation of bankruptcy law concerning insolvency and impending insolvency, since 2016 there has been the specific regulation of a so-called ‘company in crisis’ in Slovakia, enshrined in the Commercial Code. This regulation prohibits the possibility of repaying certain liabilities of the company to certain related parties (the so-called ‘performance replacing own resources’) in a situation where the company is in a so-called crisis – i.e., in particular when the company is threatened with insolvency or when the ratio of its equity to all liabilities is less than 8%.

Managers’ liability

In general, of course, statutory body members are not liable for the company’s debts. However, there are exceptions where a statutory body member may be personally liable, to a certain extent, for the debts of the company to its creditors.

As regards bankruptcy, statutory body members are obliged to file a bankruptcy petition in a timely manner. In case of failure to file the petition in a timely manner, they may be liable to pay a fine of EUR 12,500 to the bankruptcy estate, they are liable for damage to creditors up to the amount of a creditor's claim, and they may also be entered in the register of disqualifications and prohibited to perform the office of a statutory body member for up to three years.

In addition, in the context of a "company in crisis", the Commercial Code regulates the obligations of a statutory body member, the breach of which will give rise to the personal liability of such a statutory body member. If a statutory body member breaches the prohibition to return the performance by replacing own resources, he or she shall be jointly and severally liable to the company itself and to its creditors for the return of said performance. Even the next member of the statutory body shall be liable together with them for such return if they do not duly recover the return of said performance for the benefit of the company.

Preventive restructuring will cleanse the company of some of its old debts, and help entrepreneurs, for example, start new projects that will ensure the operation of the business for years to come.

Last but not least comes the criminal liability of statutory body members for intentional or fraudulent insolvency of the company. Although not widely used in practice, if the management by a statutory body member exceeds the limits of criminal liability, creditors may file a criminal complaint outside the aforementioned claim for damages and let the law enforcement authorities impose the alleged criminal liability on the statutory body member.

Statutory body members are therefore obliged, in addition to their duties in the ordinary course of the company's business, to monitor the state of liquidity of the company's assets and, in the event of an impending insolvency or crisis, to take such measures as may be necessary to prevent the company's insolvency. One solution is to go down the path of preventive restructuring, which will cleanse the company of some of its old debts, and help entrepreneurs, for example, start new projects that, although requiring higher initial funding, will ensure the operation of the business for years to come.

If the measures taken are ineffective and the company nevertheless ends up insolvent, statutory body members are obliged to file a bankruptcy or restructuring petition in a timely manner in order to avoid personal liability to both the company and its creditors.