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Slovak Republic: Shareholder liability for harm to creditors

The Slovak Commercial Code is set for sweeping changes, most of which, if signed by the president, will come into force in January 2018.

One of the most significant changes brought about by these amendments is that the liability for harm caused by the company to its creditors has been broadened to encompass the shareholders who control the company. If a shareholder carries out an act that substantially harms the company or causes its insolvency, the shareholder will be held individually liable. The amendment covers the type of situation where, for instance, a company is floundering and the shareholders rush to drain capital or carry out other acts that sink the company economically. For a controlling person (shareholder) to be held liable for a company's insolvency, there must have been active performance by the shareholder, that is to say there must have been an act by which the shareholder compelled the company to adopt a decision (such as to grant a loan, enter into a particular contract etc). This usually involves an instruction given by the general meeting to a member of the statutory body, where such instruction substantially contributes to the company's insolvency or to actions of the company that lead to insolvency. It is not necessary for the specific act of a shareholder to have led to the non-payment of a debt owed to a concrete creditor, just that the act substantially contributed to insolvency. The consequence of that act is that the shareholder is directly liable to the company's creditors, who will have the right to bring action directly against the controlling shareholder.

The shareholder will not be held liable if they can prove they were acting in an informed way and in good faith for the benefit of the company. The proposed amendment therefore requires more for liability than just a bad business decision in the course of a normal entrepreneurial risk. It requires the purposeful intervention of the controlling shareholder in the assets of the business entity.

In terms of indemnification, the shareholder's liability will be activated only after the bankruptcy proceedings are concluded, or without bankruptcy proceedings where the company lacks sufficient assets. Unless the creditor proves a different amount, damages will be calculated based on the difference between the actual amount of the creditor's receivables and the amount that the creditor has already received.

Adoption of the amendment also causes the incorporation of the new offence of 'unfair liquidation' into the Criminal Code, intended to provide for the punishment of so-called 'straw men' and the poeple who participate in the acts associated with transferring equity interest in companies to these straw men. A person who deliberately intermediates unfair liquidation, transfers equity interest to a straw man, or acts as an actual straw man faces a year up to eight years' imprisonment, depending on any aggravating circumstances.

The other substantial changes brought by the amendment concerns M&A. These changes will come into effect this year. Companies will keep the right to merge, but only if it does not cause their insolvency. Mergers will be subject to an auditor's opinion confirming that following the merger, acquisition or division of a company, none of the legal successors will become insolvent. Consequently, liabilities of the successor company cannot exceed its assets. However, it does not mean there is an absolute ban on the involvement of insolvent companies in mergers or acquisition. A healthy company can merge with an insolvent company but only if the creditors of these companies are not jeopardised as a result of this transaction. Hence, the successor company that will absorb the entire negative equity of the dissolving company cannot become insolvent as a result.

Additional new conditions require that as of the effective day of the merger, acquisition or division, neither the successor company nor the dissolving company may be in liquidation, they cannot be subject to the effects of a declaration of bankruptcy or an initiation of a restructuring procedure or a permission for restructuring, and there cannot be any ongoing proceedings concerning their dissolution or they cannot be dissolved by a court or on the basis of a court decision.

The companies participating in the M&A will now be obliged to submit a notice to the competent tax authority of their intention to perform the transaction of the companies. The notice must be submitted at least 60 days prior to the general meeting that will decide on the approval of the draft contract of merger or acquisition. If the ownership interests or shares in the dissolving company are subject to a pledge or security interest, the secured creditor must likewise be notified.

Daniel Futej and Dalimir Jančovič
Futej & Partners

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