The International Comparative Legal Guide To Recovery & Insolvency 2012 - Slovenia

This article appeared in the 2012 edition of The International Comparative Legal Guide to: Corporate Recovery & Insolvency; published by Global Legal Group Ltd , London.

1 Issues Arising When a Company is in Financial Difficulties

1.1 How does a creditor take security over assets in Slovenia?

The Slovenian legislation includes the following types of in rem securities relating to: (i) real properties – mortgage (hipoteka), land debt (zemljiaki dolg), real encumbrance (stvarno breme); and (ii) movables and property rights, respectively – pledge (zastavna pravica), retention of title (pridr~ek lastninske pravice), transfers by way of security (prenos v zavarovanje), and assignment by way of security (odstop v zavarovanje).

In order to establish a legally binding security, certain principles must be respected:

As a general rule, collateral assets must be specified (določen) or specifiable (določljiv) in order for the security interest to be (validly and enforceably) established. The requirements for a valid security are: (i) the entering into of an agreement creating an obligation to create security (zavezovalni pravni posel); (ii) the entering into of an agreement on the creation of security (razpolagalni pravni posel); and (iii) the performance of an additional act prescribed by the law – aimed at ensuring publicity. For example: in the case of real estate, the creation of a mortgage must be registered with the land register (zemljiaka knjiga) while movable objects must be either (a) transferred into the possession of the creditor/pledge, or (b) registered into the registry of pledged movables (register neposestnih zastavnih pravic na premičninah) – we note that the registry is only available for certain types of goods (e.g. automobiles, inventories). As for security assignments, the notification of the debtor is not a requirement for the security assignment to be valid (we note, however, that – until such notification – the debtor may validly fulfil its obligation towards the assignor). Furthermore, in order to achieve bankruptcy remoteness (i.e. that the assignee may claim security/priority over the assigned claim), the assignment agreement must be entered into in the form of a notarial deed. The same applies also with respect to security transfers. Furthermore, the security interest will only be valid and enforceable if the principle of accessority (akcesornost) - i.e. the dependence on the existence of a secured debt - is adhered to. Only land debt is not regarded as accessory security. 1.2 In what circumstances might transactions entered into whilst the company is in financial difficulties be vulnerable to attack?

Pursuant to the avoidance rules set out in the Slovenian Financial Operations, Insolvency (both on behalf of the insolvent debtor): Proceedings and Compulsory Dissolution Act (Zakon o finančnem poslovanju, postopkih zaradi insolventnosti in prisilnem prenehanju – ZFPPIPP), transactions fulfilling the following conditions may be challenged either by the bankruptcy receiver or the insolvent debtor's creditors:

1. the challenged legal act took place within the "suspect period", i.e. 12 months prior to the opening of bankruptcy proceedings;

2. the consequence of the legal act was either (a) the decrease of the net value (čista vrednost) of the debtor's assets, or (b) unfair preferential treatment vis-a-vis other creditors; and

3. the person to the benefit of which the act was performed knew or should have known that the debtor is insolvent.

It is presumed (and the burden of proof to the contrary lies with the creditor for the benefit of whom the act was performed) that the condition under (B) above is fulfilled if: (i) the act was performed due to the fulfilment of a bilateral contract (dvostranska pogodba) to the benefit of the creditor who has fulfilled its part of the contract prior to the fulfilment of the contract on the part of the debtor; (ii) due to the debtor's act, the creditor has acquired the right of separation with respect to the receivable created prior to the performance of the respective act; or (iii) if the act was performed during compulsory settlement proceedings contrary to the general regime restricting the conduct permissible during such proceedings.

It is further presumed (and the burden of proof to the contrary lies with the creditor for the benefit of whom the act was performed) that the condition under (C) above is fulfilled if: (i) the debtor has fulfilled its part of the obligation before it was due or otherwise in contrast with the established business practice between the debtor and the respective creditor; or (ii) such act was performed within three months prior to the opening of bankruptcy proceedings.

In the event that the debtor has disposed of its assets to the benefit of a creditor free of charge or at an unreasonably low price, such act may be challenged irrespective of whether or not the condition under (C) above is fulfilled (i.e. irrespective of whether or not the beneficiary of the debtor's act was aware or should be aware of the debtor's insolvency).

1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Slovenia?

Once the company becomes insolvent, the focus of the directors' and the management/supervisory board's obligations shifts from protecting the interests of shareholders to protecting the interests of creditors.

In particular, upon establishing that the company is insolvent, the directors/board members have the following obligations: (i) the obligation of equal treatment of creditors (e.g. to hold off all payments save for those necessary for the conduct of the company's daily business (including the payment of employment relating priority unsecured claims (prednostne terjatve), operating costs, payments matching deliveries, VAT etc.); and (ii) the obligation to prepare a financial restructuring report (poročilo o ukrepih finančnega prestrukturiranja) and submit it to the supervisory board within one month after the occurrence of insolvency. The said report must outline: (i) the description of the company's financial position; (ii) the analysis of the reasons for insolvency; and (iii) the opinion of the directors/board members as to whether or not the chances of successful financial restructuring are at least 50%. If (a) in the director's/management's opinion, the respective chances are below 50%, or (b) if the director/management deems that, in the absence of a capital increase, chances of successful judicial composition proceedings are below 50% and the shareholders' meeting fails to pass a resolution on the share capital increase/the shareholders fail to pay the contributions within the set time limit, the...