This content is from: Slovak Republic

Slovak Republic: Interim protection of business operators from Covid-related bankruptcies

Another set of measures came into force in Slovakia on May 12 to protect business operators from the fallout caused by Covid-19. These measures implement interim bankruptcy protections for business operators. These measures are temporary and as it stands, will expire on October 1 2020, with an option for the government to extend them through December 31 2020.

The primary purpose is to prevent a potential wave of creditor petitions for bankruptcy over business operators, and to that end the measure mandates that any bankruptcy proceedings initiated by creditors after March 12 will be suspended by law. In addition, a protected business operator will not be forced to file for bankruptcy. Existing law requires a business operator to file for bankruptcy within 30 days after becoming aware it is over-indebted, or after it could have become aware of that fact with the exercise of professional diligence. Creditors will not be able to exercise liens or pledges against a protected business operator and all enforcement proceedings commenced after March 12 against a protected business operator will be suspended; enforcement agents will also be required to unblock the bank accounts of the business operator. Creditors and experts alike have already voiced concern that this interim protection is disproportionate and significantly reduces the protection of creditors from non-paying debtors. The counter-arguments note that it is necessary to protect otherwise viable businesses whose problems objectively arose solely due to the coronavirus health crisis.

The interim protection is designed as an opt-in model, meaning that business operators will be required to apply for the protection at one of the four designated district courts using the form made available on the website of the justice ministry. If the application for interim protection meets all the lawful requirements, the court will provide the interim protection without delay (although no specific time period has been laid down) by issuing a confirmation of interim protection to the business operator and publishing the information in the Official Gazette.

The requirements for eligibility have been drafted broadly – for instance, the business operator is not required to attach any additional material to the application, such as a list of obligations or assets, that could be reviewed prior to approval of the interim protection in an effort to prevent abuse of the protection. Businesses will not be required to offer any evidence to the court in advance when applying for the protection. Potential abuse of the interim protection will be reviewed after it has been provided.

The court approving the interim protection will have the right, of its own initiative or on the suggestion of any third person, to decide on the early termination of the interim protection in cases where the requirements of the application were not met or if the protected business operator violates the obligations arising out of that protection. While under the interim protection, a business operator will be required to always give priority to creditors over the operator's own interests, and during the interim protection will not be permitted to take profit payouts, modify the structure of assets, or substantially reduce assets.

Creditors are concerned that the law does not specifically set out these obligations and/or criteria for termination of interim protection, and the decision is strictly in the court's discretion. The law also does not provide for a time period in which the court must decide on termination of interim protection or, what is likely an even greater danger, any specific penalties for debtors who abuse the interim protection or violate the lawful requirements during the protection.

All legal entities and sole traders who were not insolvent as of March 12 are eligible to apply for interim protection. Interim protection will not be available to business operators who were in financial difficulties and insolvent prior to the Covid-19 health crisis. Banks, insurance companies, pension fund management companies, and other financial market participants are barred from applying for interim protection.

The definition of insolvency provided in the Act on Bankruptcy and Restructuring will be applicable for matters concerning interim protection. This act defines two insolvency situations: inability to repay debts as they come due, and over-indebtedness. A legal entity is unable to repay debts if it is 30 days or more past due on its obligations to at least two creditors. A sole trader is unable to repay debts if they are 180 days or more past due on obligations to at least one creditor. Over-indebtedness is where a business operator has at least two creditors and the value of its obligations exceeds the value of its assets. However, total obligations do not include obligations owed to members, directors, and other related parties.

The rules of interim protection allow protected business operators to financially support their business through resources from related parties during the period of protection. In fact, if a business operator, despite interim protection, enters bankruptcy after the protection ends, the debts owed to related parties will not be considered subordinated debts but instead will be automatically satisfied in bankruptcy proceedings along with other normal creditor claims. The only limitation will be that in bankruptcy proceedings that follow the end of interim protection, any use of the business operator's assets to collateralise the claims of related parties will not be taken into account.

Daniel Futej and Daniel Grigel

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