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Slovak Republic: Company in crisis regulations

A recently adopted amendment to the Commercial Code, effective from January 1 2016, will bring about some changes relating to corporate governance

Daniel FutejDaniel Grigel
A recently adopted amendment to the Commercial Code, effective from January 1 2016, will bring about some changes relating to corporate governance.

According to the amendment, a court may issue a decision banning an individual from holding the office of a member of the statutory or supervisory body of a corporation or cooperative. This also applies to managers of branch offices and procuration holders. Once the court's decision becomes final, the disqualified person automatically ceases to hold office and they will be recorded in a disqualification register. That register will be checked by the commercial register before persons are officially recorded in the corporate structure. Disqualification decisions will have two forms – the first is a final decision by which the court imposes a prohibition in criminal proceedings, and the second is a decision issued as a result of failure to timely apply for a declaration of bankruptcy.

The amendment introduces the new term 'company in crisis', and defines this as a situation when a company is bankrupt or is at risk of bankruptcy. Risk of bankruptcy will be calculated on an equity to debt basis, with the risk of bankruptcy being defined as equity to debt of 4:100 for the year 2016.

The company in crisis regulations are intended to lay down clear rules for providing loans and credit to companies at risk of bankruptcy. Essentially, the amendment sets out the cases where, at a time when a company is in crisis or is at risk of a crisis, the company's capital contributed by creditors is reclassified as subordinated debt – obligations to be satisfied after other creditors have been first satisfied – and these creditors have no voting rights in the bankruptcy and restructuring process.

The reason behind introducing the company in crisis is that in Slovakia, it is typical in the financing of limited companies that the company's equity financing is on a very low level; if the company is in need of additional capital, it is not provided by the members through equity (additional capital contributions) but through related-party debt financing. Loans and credit are made to the company by the members either directly or through various third entities they control. The amendment has collectively entitled this related-party financing equity investment. Moreover, where financing is provided by shell companies, a reverse burden of proof is applied, (it is assumed that the financing is an equity investment if provided by an entity in which the beneficiary cannot be determined).

The amendment entrenches a general prohibition on returning the equity investment along with any appurtenances or contractual penalties during the period the company is in crisis – that is, until the company is out of the crisis. The same applies where the company would once again be facing a crisis as the result of returning the equity investment. If despite the prohibition the return occurs, the members of the statutory body will now be liable for its repayment. As a rule, the repayment would be enforced in connection with the declaration of bankruptcy of the company at issue.

Additionally, while the company is in crisis, members will be prohibited from distributing profits amongst themselves whilst leaving creditors with unpaid invoices. Prior to distributing profits, the company's principal must always verify whether a distribution to the company's owners will jeopardise the payment of creditors' invoices.

The amendment also reworks the existing rules prohibiting the return of contributions in equity companies (companies limited by shares, joint-stock companies and cooperatives). Transactions in which a specific monetary or in-kind value is returned to a member will be considered a return of the contribution made by that member to the company in payment of registered capital, as will all transactions made between the company and a member, for the account of the member, where no reciprocal consideration is made.

The prohibition on returning contributions applies to transactions concluded between the company and its members, regardless of the legal form they take, be it a gift, purchase, lease or loan. The prohibition applies to existing members and to past and future members, along with indirect members, persons acting on the account of members and persons related to members. If a contribution is returned contrary to this prohibition, the person who was unjustly enriched to the detriment of the company will be required to surrender the enrichment to the company. The statutory body of the company guarantees fulfilment of the member's duty to return the contribution; this guarantee is similar to the guarantee of the contributions administrator, since the returned contribution must be viewed as an unpaid contribution.

Daniel Futej and Daniel Grigel

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