Latest Changes To Insolvency Legislation

• Published date: 21 July 2022
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law, Insolvency/Bankruptcy
• Law Firm: Wolf Theiss
• Author: Mr Rudolf Pfeffer and Stanislav Bojnansky

New Slovak legislation on preventive restructuring - "An ounce of prevention is worth a pound of cure."

On 16 March 2022, the Slovak Parliament passed the Act on Resolution of the Imminent Insolvency and on changes and amendments to certain acts (the Act), implementing the EU Directive on restructuring and insolvency ¹. The Act became effective as of 1 May 2022; however, most of its provisions will become effective as of 17 July 2022.

Among other things, the Act introduced a new legislative framework for preventive restructuring. The preventive restructuring is designed as an early intervention procedure for businesses which find themselves in financial difficulties, while still being at the stage when the company is not technically insolvent and can be preserved as a going concern. As such, preventive restructuring offers an alternative to more invasive insolvency-driven procedures such as bankruptcy or formal court-administered restructuring.

Although informal standstill arrangements between debtors and their key creditors have been used in practice even before the adoption of the new legislation, the formal recognition of preventive restructuring is widely considered as a step in the right direction. While it is too early to judge whether the new legislation will in fact achieve the desired impact and some of its aspects would certainly require further clarification and fine tuning, the early sentiment from the business community is welcoming towards the changes.

Imminent insolvency - new rules

A corporate debtor may consider preventive restructuring as a route to solving its financial difficulties if it meets the test of imminent insolvency.

Even though the concept of imminent insolvency as suchis not completely new in the Slovak insolvency regulation, the term has lacked a comprehensive definition backed by consistent practice. Although the exhaustive definition of imminent insolvency continues to be missing, the new legislation clarifies that a debtor is in imminent insolvency particularly when it is at risk of cash-flow insolvency. This condition is satisfied when, considering all circumstances, a debtor can reasonably expect to become cash-flow insolvent within 12 calendar months.

The definition and consequences of cash-flow insolvency are also set to change. Until 16 July 2022 (i) a company is deemed to be cash-flow insolvent when it has more than one creditor and more than one financial obligation 30 days overdue, provided that such overdue obligations are not covered by the company's financial assets. In the event of cash-flow insolvency, there is no statutory obligation for the company (and its directors) to apply for bankruptcy - this statutory obligation exists only if the company meets the balance sheet insolvency test.

Under the new legislation a company will be deemed to be cash-flow insolvent when it has more than one creditor and more than one monetary obligation 180 days (during the period from 17 July 2022 to 31 December 2022) or 90 days (from 1 January 2023 onwards) overdue, provided that such overdue obligations are not covered by the company's financial assets. In the event of cash-flow insolvency occurring as from 17 July 2022, the company (and its directors) will be obliged to apply for bankruptcy.

The above changes are designed to incentivise companies to take a more forward-looking approach to their cash-flow projections and, in the event of expected financial turbulences, consider preventive restructuring as a solution to their financial difficulties well in advance.

Proactivity and transparency as key imperatives

If the company decides to resolve its imminent insolvency in preventive restructuring, directors of the company are obliged to act proactively with a view to finding a consensual arrangement in cooperation with the company's creditors.

The element of proactivity is vested under the broadened scope of duties associated with imminent insolvency. A company must continuously...