Slovakia has so far emerged as one of the small number of countries in central and eastern Europe (CEE) that has as yet emerged relatively unscathed from the economic turmoil. But there are lay-offs at many companies and certainly there is an increasing trend that restructuring and insolvency legal knowledge will become more and more relevant. 2008 has already presented A&O Bratislava SRO with a tremendously important precedent for our restructuring practice. Acting as the company's legal adviser and working alongside one of the world's leading London-based work-out consulting firms, we advised in relation to a ground-breaking and pioneering restructuring case in Slovakia. The court-ordered local restructuring came as a consequence of the break-up of the client's group and the subsequent outburst of a number of standalone insolvency proceedings in a number of European countries. This followed on from the failure to commercially reorganise the client's group as a whole, which had been attempted for several months.
The transaction was revolutionary in the Slovak market, involving numerous elements and mechanisms not previously used in Slovakia. Our involvement also gave us the opportunity to test in practice and in the company's day-to-day operations several previously untested concepts introduced into Slovak law by the 2005 Insolvency Act, which was co-drafted by the Ministry of Justice and Allen & Overy Bratislava with financial aid from the World Bank.
The effective application of many of these concepts and of the formal restructuring in general may prove to be a decisive factor in determining the success or failure of an ever-increasing number of restructuring cases sparked (and yet to be sparked) in the CEE region by the aftermath of the financial crisis. This is particularly so in the situation where, despite the fact that several restructuring cases have been successfully completed since 2005, local market participants still seem to overlook the benefits of formal restructuring.
Some hot trends to watch for in this area may include the following.
- An increase in director's liability litigation: though historically directors' duties have been prosecuted in practice rarely (if at all) in Slovakia, we can expect that there will be increased efforts to import this international trend into Slovakia (especially by sophisticated foreign-owned creditors and investors).
- The ability of the key stakeholders to exploit the opportunity of combining the benefits of informal restructuring with the advantages of formal restructuring proceedings by way pre-packed restructurings (the pre-pack plan concept).
- The ability of the big creditors to see the opportunity in, and to find sufficient comfort with, the protections afforded by the provision of interim restructuring finance to debtors in distress (the new money concept).
Resolution of insolvency
Two types of formal insolvency proceedings are available under Slovak law – bankruptcy proceedings and restructuring proceedings.
The purpose of bankruptcy proceedings is to resolve the debtor's insolvency by realising its assets to collectively satisfy its debts and to achieve proportionate satisfaction of the debtor's creditors. Either the debtor itself or its creditors have the right to file a petition for bankruptcy. However, a debtor must apply for its own bankruptcy within 30 days of it becoming aware of, or (if acting with reasonable professional care) it should have become aware of, its insolvency. The same duty applies to the persons authorised to act for and on behalf of the debtor (directors and members of the board of directors, for example).
Rather than file for bankruptcy, a petition for restructuring may be filed. In legal terms, the purpose of a restructuring is to resolve the debtor's insolvency by satisfying the debtor's creditors in the manner agreed in the restructuring plan. The main idea is to rescue financially troubled businesses whenever there is a real chance that this is economically achievable and not to the detriment of creditors. The key features of the restructuring proceedings (which are in some respects similar to US Chapter 11) are:
- the feasibility of the restructuring must be supported by an expert opinion prepared by an independent restructuring trustee before the petition for restructuring is filed (the restructuring trustee may be appointed either by a debtor or a creditor);
- there will be a moratorium on creditors' claims against the debtor, while at the same time the protection of security and creditors generally is safeguarded through the requirement that creditors must receive in restructuring a greater benefit than in bankruptcy (liquidation) proceedings;
- pre-packed restructurings are possible in various ways;
- the debtor remains in the possession of its business (debtor in possession or DIP) under the supervision of a restructuring trustee, the court and the creditors;
- the outcome of the restructuring proceedings is the preparation of a restructuring plan that must be approved by the relevant majority of creditors (and in some circumstances, also by shareholders) and subsequently confirmed by the court;
- there is the option of binding dissenting creditors to the plan (cram-down); and
- new money provided in the course of the restructuring proceedings enjoys super-priority ranking (but not at the expense of existing secured creditors).
In the case of a petition for bankruptcy and a petition for restructuring being submitted at the same time, the law favours restructuring.
Insolvency tests
There are two tests for insolvency (in Slovak: úpadok). These are the cash-flow test (inability to pay debts as they fall due) and the balance sheet test (overindebtedness).
The cash-flow test is met if a debtor has more than one creditor and, 30 days after the maturity date, it is not able to pay more than one monetary obligation. When determining whether a debtor meets the cash flow test, all receivables originally owed to a single creditor during the 90-day period before the submission of a petition for declaration of bankruptcy shall be deemed to constitute one receivable.
The balance sheet test is met if a debtor keeps accounting books, has more than one creditor and the value of its matured obligations exceeds the value of its assets.
The debtor is insolvent if either of these tests is met. However, one of the obvious advantages of the restructuring (unlike the bankruptcy proceedings) is that it can be initiated also in relation to imminent insolvencies.
Restructuring in more detail
Procedure and the trustee's opinion
A debtor may file a petition for a restructuring order only if it has appointed a restructuring trustee who has prepared an opinion, not more than 30 days old, in which the restructuring is recommended. The debtor may appoint the trustee to prepare the opinion not only if it is already insolvent but also in cases where insolvency is imminent. The purpose of the opinion is to see whether the preconditions for the debtor's restructuring are satisfied. The opinion must be prepared by a trustee who is listed in the list of qualified insolvency practitioners. The trustee must prepare the opinion in an impartial manner using a trustee's professional level of care. The persons who instructed the trustee to prepare the opinion must provide the trustee with all necessary cooperation, especially by providing him or her with all documents, information and explanations required for the proper preparation of the opinion. The debtor's creditors are entitled to appoint a trustee, and to make a petition for restructuring themselves. However, in practice this requires substantial cooperation on the part of the debtor. Therefore, unless the debtor agrees to the restructuring, a successful initiation of this type of insolvency proceedings by creditors is unlikely to occur in practice.
In his or her opinion, the trustee may recommend restructuring of the debtor only if the following conditions are met: (i) the debtor has not ceased to perform its business activity; (ii) the debtor is insolvent or insolvency is imminent; (iii) it is reasonable to expect that at least a material part of the operations of the debtor's business can be preserved; and (iv) it is reasonable to expect that restructuring will result in better satisfaction of creditors of the debtor than if bankruptcy is declared.
In attached schedules, the opinion may contain a draft restructuring plan, and a binding declaration of the debtor and of one or several creditors of the debtor regarding the draft restructuring plan (the idea of a pre-packed plan).
After the court ascertains that the petition for restructuring formally complies with the statutory requirements, and that it is duly supported by the expert opinion, the court must commence restructuring proceedings within 15 days of receipt. Otherwise it shall reject the petition within the same period of time. The court resolution regarding the commencement of restructuring proceedings must be published in the Commercial Bulletin without delay after it has been issued. The restructuring proceedings effectively commence at 12:00am the next day after such publication. Furthermore, at that time the moratorium on creditors' actions becomes effective, the debtor must restrict its activities to ordinary legal acts only, and some additional effects associated with the commencement of proceedings are initiated.
After restructuring proceedings have been commenced, the court must ascertain whether all preconditions to ordering restructuring have been satisfied. However, the court does not analyse the economic feasibility of the restructuring; it is bound by the recommendation of the trustee as expressed in his or her opinion. In other words, unless the opinion suffers from glaring deficiencies, if the trustee has recommended restructuring measures, the court is obliged to issue a restructuring resolution. The court must make such resolution, and thus appoint the trustee who prepared the opinion in support of the restructuring proceedings, within 30 days of the commencement of restructuring proceedings.
Trustee as a guardian of the restructuring eligibility
Once appointed, the trustee's main duty is to supervise the business of the debtor. The trustee must carry out this supervision with a professional level of care to ensure that the debtor does not diminish the value of its assets or otherwise frustrate successful completion of the restructuring. If the debtor seriously or repeatedly breaches its legal obligations the trustee must without delay petition the court to declare a bankruptcy (to convert the restructuring into bankruptcy proceedings). Moreover, in the course of the restructuring, the trustee must continually monitor developments in the financial and business situation of the debtor, and if the financial situation or the business situation changes to the extent that the successful completion of restructuring can no longer be reasonably expected, the trustee must without delay petition the court to declare a bankruptcy (to convert the restructuring into bankruptcy proceedings).
DIP concept
The debtor remains in possession of its business – however, it is under the supervision of a restructuring trustee, the court and the creditors. In addition, in the resolution ordering the restructuring, the court may determine the scope of those legal acts of the debtor that will be during the restructuring subject to prior approval by the trustee. The scope of these legal acts may be extended by the creditors' committee at any time during the restructuring proceedings.
Restructuring plan
The key aim and desired outcome of restructuring proceedings is the preparation of a restructuring plan, which needs to be approved by a relevant majority of the creditors (and in some circumstances, also by the shareholders) and subsequently confirmed by the court.
In legal terms, the restructuring plan is a document providing for the creation, variation and termination of rights and obligations of those persons identified in it, as well as providing for the scope and method of satisfaction of those parties to the plan (who are either creditors with filed claims or the debtor's shareholders). Once the court approves the plan, the plan is binding on all parties to the plan. The plan consists of a descriptive part and a binding part.
The measures to be adopted by the plan are very flexible. For example, they may include a typical plain vanilla restructuring of the debtor's financial debt, the conversion of the debt to equity, the transfer of the debtor's assets or business to a newly established entity, merger, amalgamation or division of the debtor or a change of its legal form. The restructuring plan is normally prepared by the debtor.
Before the creditors (and as applicable, the shareholders) vote on the approval of the plan, it must first be submitted to the creditors' committee for preliminary approval (within 90 days of the restructuring order, with a possible extension of 60 days).
The voting at the creditors' meeting takes place in at least two groups – one for secured creditors whose rights are affected and a second for other creditors. Where relevant, the shareholders will form a third group. The party submitting the plan may divide the above groups into further separate groups, such that those claims of creditors or shareholders having identical economic interests belong to the same group.
In simplified terms (as the exact formula for calculating the relevant majorities is more complex), the following is necessary for the plan to be confirmed: (i) in each group of secured claims, more than two-thirds majority approval by value; (ii) in each group of unsecured claims, a simple majority of votes by value; (iii) in each group of shareholders, a simple majority of votes by value; and (iv) in aggregate, a simple majority of votes by value of creditors attending the confirmatory creditors' meeting. There is the option of binding dissenting creditors to the plan (cram-down).
Position of secured creditor
Restructuring is a complex process and the secured creditor's position will ultimately depend on the vote regarding the restructuring plan. However, the key points to note in respect of the secured creditor's position in a restructuring are as follows.
- There is an automatic stay of enforcement actions by individual secured creditors (without any exceptions).
- No claims that originated before the commencement of the restructuring proceedings can be set off against claims of the debtor.
- There are limited possibilities to terminate an existing contract for a pre-moratorium default.
- There is a requirement for the prepared plan to create at least one group of secured creditors, and a corresponding requirement that this group approve the plan by a two-thirds voting majority.
- The leverage of the secured creditor on proceedings as a member of the creditors' committee (if elected) and through voting on the plan.
- A key safeguard is the legal requirement that the extent of the satisfaction of the secured creditor's debt (the same applies to any creditor) must be higher than on bankruptcy.
| Author biographies |
Hugh Owen
Allen & Overy
Hugh Owen qualified as an English solicitor in 1996, and is a partner. He worked in Allen & Overy in London and Prague before his arrival in Bratislava. He has advised on a variety of corporate and commercial transactions, including privatisations, M&A and joint ventures. Hugh has also advised a number of international banks on banking and structured finance/derivatives transactions. He is responsible for coordinating Allen & Overy's activities in Romania, Bulgaria, Croatia, Serbia, Slovenia and other south-eastern European states.
Email: hugh.owen@allenovery.com
Martin Magál
Allen & Overy
Martin Magál graduated from the Comenius University in Bratislava in 1998 and is a partner and advocate. He obtained an LLM from Cambridge University in 1999. He has advised on a number of significant corporate, commercial and finance transactions in the Slovak Republic, including M&A and many of the large-scale privatisations and foreign direct investments. In 2006, he spent one year on secondment as acting general counsel with a big Slovak bank. He is a key member of the team developing our litigation practice in Bratislava.
Email: martin.magal@allenovery.com
Renátus Kollár
Allen & Overy
Renátus Kollár joined Allen & Overy in 2000 and is an advocate. In addition to his Slovak law degree, Renátus studied international financial law at Oxford University as a visiting student. In 2004 he spent six months at Allen & Overy London on a secondment. He specialises in restructuring, banking and debt finance, and also has experience of various corporate acquisitions, commercial transactions and telecoms projects. His experience includes competition protection, outsourcing and regulatory matters, and he has assisted in connection with the drafting of key laws in the Slovak Republic, in relation to insolvency, restructuring and security. He also advised several local banks on their standard security documentation.
Email: renatus.kollar@allenovery.com |