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Adverse economic situation of companies

obligations and solutions possibilities of debtors

Adverse economic situation of companies

The past period has brought new challenges for everyone, not only in the field of protection of life and health but also in the field of business. Many entrepreneurs have lost a significant part of their income and found themselves in an adverse economic situation. 

In the articles below, you will read about the obligations imposed on such entrepreneurs by law, as well as about the possibilities that entrepreneurs can use to improve their situation.

Temporary protection of the business entities

The current situation has prompted the government to adopt several measures to eliminate economic and other impacts associated with the spread of Covid-19 disease. One of the results of these measures is also the amendment to the so-called act “Lex Corona“ effective from 12.05.2020.

This amendment introduces an institute of temporary protection of business entities. Its purpose is to create a time-limited framework with tools to support the effective management of the negative effects of the spread of Covid-19 disease on business entities operating the enterprises.

The business entity (legal entity, as well as natural person-entrepreneur) is entitled to apply to the court for temporary protection provided that fulfils following formal pre-conditions:

  • seat or business place is in the territory of the Slovak Republic,
  • authorization to do business originated before 12.03.2020,
  • entity is not a bank, insurance company, broker or other in law excluded entity

and declares fulfilment of following conditions (sorted from rather easy to prove/formal ones up to more challenging ones):

  • maintains proper accounting,
  • pursues the purpose of temporary protection,
  • does not breach the obligation to deposit the financial statement in the collection of deeds within the statutory period.
  • no enforcement proceedings were pending against it as per 12.03.2020 in order to satisfy the claim from its business activities,
  • in relation to its enterprise, asset, right or other property belongs to the enterprise, the exercise of the pledge was not commenced as per 12.03.2020,
  • as per the date of submission of the application, there are no grounds for its termination and effects of bankruptcy declaration or restructuring permittowards the entity,
  • submits application due to significant increase of overdue receivables or significant decrease of revenues compared to the same period in 2019, which significantly jeopardize the operation of the enterprise,
  • in the calendar year 2020 did not distribute profit or other own resources, or did eliminate the consequences of such acts,
  • in the calendar year 2020, except for measures aimed to mitigate effects of Covid-19 disease spread, did not take any other measure to jeopardize its financial stability or did remove such consequences,
  • was not bankrupted as per 12.03.2020.

In this regard, bankrupt means:

  • insolvency – the company is not able to fulfill 30 days after the maturity period at least two financial obligations to more than one creditor or
  • indebtment – the company is obliged to keep accounts pursuant to the Accounting Act and it has more than one creditor and the value of its debts exceeds the value of its equity.

Upon court acceptance of such an application, it shall grant the business entity temporary protection by issuing a certificate. The court shall immediately publish the information in the Business Journal, that the applicant has been granted temporary protection.

The temporary protection of the entity has, in particular the following effects:

  • proceeding on creditor's application for the declaration of bankruptcy on the entity’s assets filed after 12.03.2020 is interrupted,
  • the entity (including the obliged persons on its behalf) is not obliged to file an application for the declaration of bankruptcy on its assets for the duration of the temporary protection,
  • the enforcement proceeding began after 12.03.2020 against the entity to satisfy a claim from its business activity is interrupted for the duration of the temporary protection,
  • the pledge cannot be exercised against the entity in respect of the enterprise, property, right or other assets belonging to the enterprise,
  • against a receivable of the business entity arising after the provision of temporary protection, it is not possible to set off a receivable towards the business entity arising before the provision of temporary protection if it is a receivable that belongs to or belonged to the affiliated person,
  • other contractual party may not terminate the contract concluded with the entity by notice, withdraw from contract or refuse performance under such a contract due to the entity’s delay in the period from 12.03.2020 to 12.05.2020 caused by the spread of the disease Covid-19, unless the other contractual party directly endangered the operation of its enterprise,
  • time limits for right exercising against the entity (including time limits for exercising the claims from disputable legal acts) do not elapse during the period of temporary protection,
  • the entity (including its statutory body) may not distribute profits or other own funds and it shall refrain from disposing of the assets of the enterprise and any assets that may belong to them if there are substantial changes in the composition, use or designation of those assets or its not insignificant reduction,
  • the obligations immediately related to maintaining the operation of the enterprise which arose after the granting of the temporary protection, the business entity shall be entitled to pay preferentially over the previously due liabilities for the duration of the temporary protection.

Temporary protection expires:

  • on 31.12.2020 (it was originally on 01.10.2020, however, the duration was extended by the government),
  • at the business entity's own request,
  • by a court decision if there were no preconditions for temporary protection, the preconditions for granting ceased or the business entity under temporary protection has breached the obligations under temporary protection.

Having in mind the practice of liabilities settlement in Slovakia, potential proving of declared fulfilment of conditions (especially non-existence of insolvency status) may in many cases depend on profound constructive interpretation of entity’s financial relationships. Proper evaluation of conditions fulfilment may be crucial for entity defending within court proceedings considering termination of temporary protection.

At the same time, we state that even if an entity does not meet the requirements for granting temporary protection, it still has the opportunity to solve its situation by negotiation with creditors and business partners, as well as by restructuringbankruptcy proceeding or debt relief (in this regard we refer to our other articles on these themes).

Company in crisis

The current spread of the disease Covid-19 brings serious risk of adverse economic situationin many companies, while the result of such risk could be the situation when such companies may get into so-called crisis.

In compliance with the Act No. 513/1991 Coll. Commercial Code, as amended (“Commercial Code”) the company is in crisis, if it is bankrupt or bankruptcy is imminent. For this purpose, it shall be as a company considered only Limited Liability Company, joint-stock company, simple shares company and limited partnership, the general partner of which shall not be any natural person.

The company is bankrupt if it is:

  • insolvent – the company is not able to fulfill 30 days after the maturity period at least two financial obligations to more than one creditor or
  • indebted – the company is obliged to keep accounts pursuant to the Accounting Act and it has more than one creditor and the value of its debts exceeds the value of its equity.

If the legal person, as well as its statutory body, liquidator or legal representative becomes aware of the fact that it is indebted, it/he is obliged to file an application for bankruptcy proceedings generally within 30 days after it/he becomes or may become aware of such fact. We do point out that pursuant to the current legislation adopted with respect to the spread of Covid-19 disease such period has been extended to 60 days if the indebtment has become within the period from 12.03.2020 to 30.04.2020. The breach of such obligation is penalized by the sanction in the amount of EUR 12.500,- payable by the obliged person.

A company’s bankruptcy is imminent if the ratio of its own assets (own financing resources) to its liabilities (external financing resources) is less than 8 to 100.

The statutory body of a company which found out or with regard to all circumstances should have found out that such company is in crisis, is obliged in accordance with the requirements of professional care to do everything that any other reasonably careful person would do in a similar situation to overcome such crisis.

The Commercial Code protects the common creditors of the company, and that in a way setting out the conditions on financing of the company. If the company needs to raise additional capital for its development, often it is not provided by the assets (additional contributions), but by the debt (e.g. by the credits, or other similar forms). The aim of the legislation is not to prevent such financing, but for the case, if the development of business activities as a result of failure to bear the business risk would not be successful, to requalify it as the so-called performance replacing a company’s own resources, which will be satisfied after overcoming the crisis by the company.

Performance replacing a company’s own resources means a loan or a similar performance for a corresponding economic purpose provided to a company in crisis. This applies accordingly to a contribution made to the company before the crisis, the maturity of which was deferred, or extended during the crisis.

During a crisis, performance shall be considered as replacing a company’s own resources only if at the time it was provided:

  • such circumstance arose from the last annual financial statements or extraordinary financial statements of the company,
  • such circumstance would have arisen from the financial statements of the company if they had been was prepared on time, or
  • the person who provided such performance knew or, taking into account all the circumstances, could have known that such circumstance would have arisen from the interim financial statements of the company if they had been prepared.

Performance provided by:

  1. a member of the statutory body, employee falling within the direct control of the statutory body, authorized signatory, head of a branch of an enterprise, member of the supervisory board,
  2. a person who holds a direct or indirect share representing at least 5% of the company’s registered capital or voting rights in the company, or has the ability to exercise influence over the management of the company which is comparable to the influence corresponding to this share,
  3. a silent partner,
  4. a person related to persons referred to in points 1., 2. or 3. hereof,
  5. a person acting on behalf of the persons referred to in points 1., 2. or 3. hereof

shall be considered performance replacing the company’s own resources.

The following is not considered performance replacing a company’s own resources:

  • performance or security provided to a company during a crisis in order to overcome it according to a restructuring plan,
  • provision of funds to the company for a period not exceeding 60 days; this shall not apply if provided repeatedly,
  • deferral for a period not exceeding six months of the maturity of an obligation from the supply goods or services; this shall not apply if the deferral is granted to the company repeatedly,
  • providing items, rights, or other monetary value to the company free of charge.

Performance replacing a company’s own resources, along with interest and contractual fines, cannot be returned if the company is in crisis, or if it entered into a crisis as a result of such performance

If the company returns performance replacing a company’s own resources during the crisis (while as the return shall be considered also off-setting the receivables), such performance shall be returned back to the company and the statutory bodies shall be obliged to enforce such performance. For the returning back of such performance shall be liablejointly and severally all of the statutory bodies which have executed such function at the time of returning of performance contrary to the Commercial Code and also the statutory bodies which have executed their function during the period, in which the company has not enforced its entitlement of returning back such performance.

Restructuring

Act No. 7/2005 Coll. on bankruptcy and restructuring and on alteration and amendment of some acts, as amended (“Bankruptcy Act”) within its prevention provisions imposes on the debtor in a state of imminent bankruptcy the obligation to take, without undue delay, appropriate and proportionate measures to avert bankruptcy.

The current situation relating to the spread of Covid-19 disease may be the reason for the arising of such an adverse economic situation causing the debtor to fail to avert its bankruptcy. In such case, the debtor may deal with such a situation by the means of restructuring.

The restructuring is a special type of civil procedure regulated by the Bankruptcy Act, the purpose of which is the economic recovery of the debtor, which is during the restructuring proceedings entitled to continue in its business activity under the supervision of its creditors, court and bankruptcy administrator. 

In this respect we do point out that the Bankruptcy Act differentiates between two forms of the bankrupt:

  • insolvency – the company is not able to fulfill 30 days after the maturity period at least two financial obligations to more than one creditor or
  • indebtment – the company is obliged to keep accounts pursuant to the Accounting Act and it has more than one creditor and the value of its debts exceeds the value of its equity.

We also point out that the above-mentioned possibility of the debtor to deal with its economic situation by the restructuring does not release the debtor from its statutory obligation to file the petition in bankruptcy if it is indebted (for more information we do refer to part dealing with the problematics of bankruptcy). 

If the bankruptcy of the debtor is imminent or it is bankrupt it may appoint the relevant bankruptcy administrator to prepare the restructuring opinion.

The bankruptcy administrator during the preparation of the opinion researches the financial situation and business situation of the debtor and pursuant to findings he does recommend or does not recommend the restructuring of the debtor in his opinion. The administrator may recommend the restructuring if:

  • the debtor is a legal person performing the business activity,
  • the bankruptcy of the debtor is imminent or already it is in bankruptcy,
  • financial statements of the debtor provide a true and real picture of the facts which are subject to accounting and on the financial situation of the debtor,
  • the last restructuring of the debtor or its legal predecessor was at least 2 years ago,
  • it is possible to reasonably presume that at least substantive part of the operation of the debtor will be maintained, and
  • in case of the restructuring permit, it is possible to reasonably presume a higher extent of satisfaction of the debtor’s creditors than in case of bankruptcy declaration.

If the administrator has recommended the restructuring in his opinion not older than 30 days, the debtor as well as the creditor (with the consent of debtor) shall be entitled to file an application for restructuring proceedings. For more information on the detail of application we do refer to the Sec. 112 of Bankruptcy Act.

If the court finds out that the application for restructuring proceedings fulfills the mandatory criteria, not later than within 15 days after the delivery of the application it decides on the initiation of the restructuring proceedings, the effects of which are, in particular, as follows:

  • debtor is obliged to limit the performance of its activity only on the ordinary legal actions,
  • the receivable which has been in restructuring proceedings applied for cannot be subject to the enforcement proceedings against the assets in the ownership of debtor,
  • the secured receivable, which has been in restructuring proceedings applied for, shall not be subject to start and continuing in performance of security rights against the assets in the ownership of debtor,
  • the receivable, which has been in restructuring proceedings applied for shall not be subject to the receivables set-off.

If the following criteria are met, the court shall not later than within 30 days after the initiation of the restructuring proceedings decide by the means of resolution on the allowing of restructuring:

  • opinion shall meet the mandatory criteria and its content is clear and understandable,
  • opinion shall be prepared by the administrator registered in the list of administrators, having its office established within the district of the bankruptcy court of appeals, where the respective bankruptcy court is seated,
  • opinion shall be at the time of filing the application not older than 30 days since it was day of preparation,
  • administrator empowered to prepare the opinion has recommended the restructuring of debtor.

The allowing of restructuring has, in particular, the following effects:

  • the restructuring prevents from the situation where the same debtor would be subject to the bankruptcy proceedings,
  • the enforcement proceedings against the assets of the debtor shall be stopped,
  • court and arbitration proceedings with respect to the receivables which were in restructuring proceedings applied for shall be interrupted.

The resolution on allowing of restructuring shall contain provision by which the court appoints the administrator (on the basis of random selection among the administrators, having their office registered within the district of the respective bankruptcy court is seated), and shall call the creditors to apply for their receivables by the forms provided for in the Decree of Ministry of Justice of SR no. 665/2005 Coll., by delivering one original copy to the administrator within 30 days after the allowing of the restructuring. The application form delivered after expiry of such period shall not be taken into account. At the same time, in the respective resolution, the court shall set out the extent of legal actions of the debtors, which shall be during the restructuring subject to the consent of administrator. The court shall publish such resolution in the Commercial Journal, and the restructuring shall be considered as allowed at the next date following the real publishing of such resolution in the Commercial Journal.

Subsequently, the administrator shall be obliged within 30 days to fairly check the status and issues for the disputability of the applied receivables. Provided that the administrator becomes aware of such disputability, administrator shall the respective receivable or its part deny. Otherwise shall be such receivable or its part considered as identified.

The creditors shall be during the restructuring entitled to execute their rights through the creditor bodies (in the extent in which were their receivables identified), and that in particular creditors meeting (consisting of all creditors, which have applied for their receivables) and creditors committee (consisting of creditors elected by the creditors meeting).

The administrator shall during the restructuring perform supervision over the business activities of the debtor, while this supervision shall be performed with due care, preventing the debtor to decrease the value of its assets or to upset the successful termination of the restructuring. At the same time, the supervision over the activity of the debtor, administrator and creditor bodies shall be performed also by the court.

The process of recovery of the debtor shall be performed on the basis of the restructuring plan – the deed regulating the creation, amendment or ceasing of the rights and obligations of the persons mentioned therein, as well as the extent and way of satisfaction of such persons, which are creditors of the applied receivables, or the shareholders of the debtor.

If the court has allowed the restructuring on the basis of the application of the debtor, the plan has to be prepared and such prepared plan has to be gradually submitted to the creditors committee, meeting of the participants of the plan and to the court by the debtor. If the application has been submitted by the creditor, the plan shall be prepared and submitted by the administrator.

The plan has to be prepared in the manner securing the highest possible level of satisfaction to the creditors of debtor while securing its reality and sustainability. The plan shall provide the unsecured creditors the satisfaction of their receivables in the amount at least 20% higher than they could achieve in the bankruptcy proceedings.

The plan adopted by the consenting meeting shall be as well validated by the court by the means of the resolution issued upon the request of the party which as submitted the plan and such resolution shall be published in the Commercial Journal.

In that regard we do state that the statutory grounds for the refusal of the plan by the court shall be, in particular, the following facts:

  • the level of satisfaction of any of unsecured receivables (with exclusion of the subordinated receivables or receivables which would be in the bankruptcy proceedings satisfied as the subordinated receivables), is lower than 50% of the amount of the respective receivable, this shall not apply if the respective creditor expressed his consent with such lower level of satisfaction in writing,
  • the considerations set out for the satisfaction of any of unsecured receivables(with exclusion of the subordinated receivables or receivables which would be in the bankruptcy proceedings satisfied as the subordinated receivables) shall be according to the plan provided during the period longer than 5 years, is lower than 50% of the amount of the respective receivable, this shall not apply if the respective creditor expressed his consent with such longer maturity period of the considerations set out for the satisfaction of its receivables in writing.

The restructuring plan approved by the court shall have the following effects:

  • provisions of the plan shall become effective towards all participants of the plan by the publishing of the resolution on approval of the plan in the Commercial Journal,
  • by the publication of the resolution on approval of the plan in the Commercial Journal ceases to exist the right of the creditors, which have not properly and in due time, applied for their receivables, to enforce these receivables from the debtor, as well as the securing rights relating to the assets of the debtor which have not been applied properly and in due time,
  • the debtor or its takeover party shall not after the termination of the restructuring divide the profit or other equity between its members sooner, than the unsecured receivables of the creditors will be satisfied to the amount of the identified receivables pursuant to the plan.

Subsequently, the court shall publish in the Commercial Journal the resolution on termination of restructuring, which means the ceasing of the effects of the initiation of the restructuring proceedings and the interrupted court and arbitration proceedings subject which are receivables,, applied for in the restructuring shall be terminated. 

If the debtor or the takeover party would not, within the 30 days after the delivery of the call, fulfill properly and in due time towards the person mentioned in the plan the receivable or the other obligation arising from the plan, such plan then starts to become ineffective towards the participant of the plan. In such ineffectively of the plan towards the creditor shall be the debtor obliged to fulfill the original receivable of the creditor in the extent in which such receivable has been applied for and identified.

At last but not least we do point out that this legal status shall be valid at the date of its publication, while we do have information on the planned amendments to legislation regulating the abovementioned problematics.

Bankruptcy

The one (and many times the only) way of resolution of adverse economic situation of the corporate person – the debtor, which has resulted in the bankruptcy, are bankruptcy proceedings regulated by the Act No. 7/2005 Coll. on bankruptcy procedure and restructuring, as amended (“Bankruptcy Act”). This situation may be currently caused by the adverse effects of the spread of Covid-19 disease (e.g. interruption of the relations between the debtor and his business partners, decrease of the demand for the goods/services of the debtor and subsequent decrease of his income relating therewith).

The bankruptcy procedure is the special type of civil procedure, the aim of which is in particular the identification of the assets of bankruptee (debtor), its monetization and subsequent satisfaction of the creditors of bankruptee according to the allocation of the proceeds from such monetization. With respect to mentioned, it is necessary to point out that the majority of the bankruptcy proceedings ends up in a winding up of the bankruptee.

The debtor shall be considered as bankrupt if it is:

  • insolvent – the company is not able to fulfill 30 days after the maturity period at least two financial obligations to more than one creditor or
  • indebted – the company is obliged to keep accounts pursuant to the Accounting Act, as amended, and has more than one creditor and the value of its debts exceed the value of its equity.

The bankruptcy proceedings shall be initiated by the application for bankruptcy. The Bankruptcy Act differentiates between the debtor application and creditor application, and that is based on the person filing the application to the district court seated in the district where the respective regional court is seated.

Indebted debtor shall be obliged to file the application for the bankruptcy standardly within 30 days after it becomes aware or with respect to his obligation to act in due care may have become aware of his indebtment. With respect to mentioned we point out that according to the current legislation adopted due to the spread of disease Covid-19 is the period during which is the debtor obliged to file the application for bankruptcy in case of indebtment, which has arisen within the period between 12.03.2020 and 30.04.2020, prolonged to 60 days. This obligation bounds, besides the debtor, also the statutory body or member of statutory body of debtor, liquidator of debtor and legal representative of debtor. In case of breach of duty to file the application for bankruptcy in due time, the Bankruptcy Act envisages the imposing of the sanction (in the form of contractual penalty) in the amount corresponding to the half of the minimum share capital of joint-stock company (i.e. 12.500,- EUR), which has to be paid to the bankruptcy assets of debtor.

The creditor shall be entitled to file the application for bankruptcy standardly if he may reasonably presume the insolvency of his debtor.

The applicant, either the debtor or the creditor, shall be obliged before the filing of the application for bankruptcy to pay on the account of the court the advance payment for the remuneration and expenses of the preliminary administrator, corresponding to the amount of 1.500,- EUR

With respect to the fact that this article is not primarily focused on the specifics of the initiation of bankruptcy proceedings, for more information on the requisites for bankruptcy declaration we do refer to Section 12 of Bankruptcy Act. Since the legal regulation is complex and complicated, we do advise to consult this issue with an attorney. 

If the court finds out that the application for bankruptcy meets the statutory requisites, not later than within 15 days after the delivery of the application, it shall decide on the initiation of the bankruptcy proceedings, which shall have the following effects:

  • debtor is obliged to limit the performance of its activity on the ordinary legal actions,
  • the assets of debtor cannot be subject to the enforcement proceedings,
  • the assets of debtor cannot be subject to start and continuing in performance of security rights

If the bankruptcy proceedings have been initiated on the basis of the debtor application, the court shall not later than within 5 days after the initiation declare bankruptcy over the assets of debtor, or within the same period shall appoint the preliminary administrator (in case of doubts over the value of assets of debtor).

If the bankruptcy proceedings have been initiated on the basis of the creditor application, is the bankruptcy declaration procedure more complicated. The court shall with respect therewith call the debtor in particular to submit its statement to the application, certificate of its solvency, and the documents and provision of information, which shall prove its solvency. Only if the debtor fails to certify its solvency, the court shall declare bankruptcy over its assets.

The declaration of bankruptcy has in particular the following effects:

  • the entitlement of bankruptee to dispose with the assets which are subject to the bankruptcy proceedings shall be transferred onto the administrator,
  • the undue receivables and obligations of the bankruptee which have arisen before the bankruptcy declaration and which are relating to the assets which are subject to the bankruptcy proceedings shall be until the cancelation of the bankruptcy proceedings considered as due,
  • all court and other proceedings relating to the assets which are subject to the bankruptcy proceedings shall be interrupted,
  • the assets which are subject to bankruptcy proceedings cannot be subject to the initiation of enforcement proceedings, previously initiated enforcement proceedings with respect therewith shall be stopped,
  • the assets which are subject to bankruptcy proceedings cannot be subject to the security rights, with the exclusion of the situation envisaged in Bankruptcy Act,
  • unilateral legal actions of the bankruptee shall cease to exist, if they relate to the assets which are subject to bankruptcy proceedings, in particular its orders, mandates, power of attorneys and proxy holdings,
  • the receivable arisen to the bankruptee after the bankruptcy declaration cannot be set-off with the receivable which has arisen to the bankruptee before the bankruptcy declaration,
  • by the bankruptcy declaration, the entitlement to act on behalf of the bankruptee in employment relationships towards the employees shall be transferred onto the administrator.

The court shall publish the resolution on declaration of bankruptcy in Commercial Journal, while the bankruptcy shall be considered as declared on the next date following the real publication of such resolution in Commercial Journal. The debtor becomes the bankruptee after the bankruptcy declaration. In the resolution on declaration of bankruptcy, the court shall appoint the bankruptcy administrator, which will lead the bankruptcy proceedings afterwards and which will call the creditors to apply for their receivables by the forms provided for in the Decree of Ministry of Justice of SR no. 665/2005 Coll., by delivering one original copy to the administrator within 45 days after the declaration of bankruptcy. The application form delivered after expiry of such period shall be taken into account, however the respective creditor cannot execute the voting rights and other rights connected to the applied receivables, and the possible security right of creditor is not taken into account.

Subsequently, the administrator shall be obliged within 30 days to fairly check the status and issues for the disputability of the applied receivables. Provided that the administrator becomes aware of such disputability, administrator shall the respective receivable or its part deny. Otherwise shall be such receivable or its part considered as identified.

The creditors shall be during the restructuring entitled to execute their rights through the creditor bodies (in the extent in which were their receivables identified), and that in particular creditors meeting (consisting of all creditors, which have applied for their receivables) and creditors committee (consisting of creditors elected by the creditors meeting).

As we indicated above, the administrator during the bankruptcy proceedings in particular identifies the assets of the bankruptee, which shall be subsequently monetized by the rules provided for in the Bankruptcy Act. With respect therewith we do point out that according to the legislation adopted with respect to the spread of the Covid-19 disease shall be the administrator obliged in the period between 27.03.2020 until 30.04.2020 (according to the amendment of this legislation effective from 12.05.2020 - in the period between 27.03.2020 until 31.05.2020) retreat from the performing of the auction, instructing the sale of the assets by the auctioneer, organizing the offer procedure or other procedures aimed on the sale of the assets. If the administrator does not fulfill those conditions, such monetization shall be invalid.

At the final phase of the bankruptcy proceedings (possibly sooner) the administrator shall allocate the proceeds from the monetization between the particular creditors, the applied receivables of which have been identified, and by performing this action the administrator fulfills the one of the general goals of the bankruptcy proceedings – to satisfy, or at least partially satisfy the receivables of the creditors of the bankruptee. 

Provided that the all assets have been monetized and the proceeds have been allocated, the administrator shall be obliged to perform the steps aimed at the cancellation of the bankruptcy proceedings, including the filing of the application for cancellation of the bankruptcy proceedings, on the basis of which the court shall decide on the cancellation of the bankruptcy proceedings

At last but not least we do point out that this legal status shall be valid at the date of its publication, while we do have information on the planned amendments to legislation regulating the abovementioned problematics.

Debt Relief (Personal Bankruptcy)

The current situation relating to the spread of the disease Covid-19 brings along adverse effects, such as decrease of salaries or loss of job of natural persons, or decrease of demand for the goods/services of natural persons-entrepreneurs causing decrease of their turnovers, and such effects may result in a situation in which such persons are not able to pay their debts.

Particularly natural persons non-entrepreneurs, as well as natural persons entrepreneurs may achieve relief of their debts which they do fail to pay, and that can be done by the use of the institute of debt relief (also so-called “personal bankruptcy”)which is the formal process governed by the Act No. 7/2005 Coll. on bankruptcy procedure and restructuring, as amended (“Bankruptcy Act”).

However, there exist receivables against the debtor which cannot be relieved by the use of mentioned institute. Those shall be so-called exempted receivables and are as follows:

  • child support,
  • secured receivable,
  • receivable arisen from the compensation for damage caused on the health or caused by intentional action,
  • employment-law entitlements against the debtor,
  • financial sanction imposed on the debtor within the criminal procedure,
  • non-monetary claims.

The debtor shall be entitled to apply for the debt relief provided that they fulfill the following conditions:

  • has to be insolvent, i.e. it is not able to fulfill 180 days after the maturity period at least one financial obligation,
  • there has to be ongoing enforcement proceedings against the debtor (in case of the bankruptcy declaration, from the initiation of enforcement proceedings must pass at least 1 year),
  • it has to be applied for with honest intent,
  • the centre of main interests has to be in Slovak Republic.

Person interested in the debt relief has to firstly fill and submit the Request for provision of legal aid in the debt relief proceedings along with the attachments in the Legal Aid Centrum, while the Legal Aid Centrum will provide consultation to such person and check the filled request. The whole procedure is free of charge. More information are available at: https://www.centrumpravnejpomoci.sk/sekcia/7-osobny-bankrot.

Subsequently the Legal Aid Centrum decides whether it admits such person the entitlement to the provision of legal aid in the debt relief proceedings. Provided that the application of debtor has been admitted, the Legal Aid Centrum shall start to represent this person – debtor – before the court during the decision making whether the debtor will be debt relieved, including the submission of application for debt relief (according to the Bankruptcy Act such application may be submitted only through the Legal Aid Centrum, or the attorney appointed by such centrum).

Provided that the court will decide on the debt relief of debtor, at the same time the court appoints the bankruptcy administrator of the debtor, which shall afterwards maintain the debt relief process until its finalization (in particular, the administrator shall identify the assets of the debtor and subsequently shall monetize the assets and satisfy the creditors of debtor).

Bankruptcy Act differentiates between the debt relief in the form of bankruptcy procedure or repayment schedule.

 

Debt Relief by Bankruptcy Proceedings

In this form of debt relief, it is not necessary for the debtor to have assets and income. The possible income of the debtor is not affected in the debt relief by the bankruptcy proceedings. However, if the debtor has assets, it has to take into account the fact that these assets or its part will be monetized, and the debtor will lose such assets. From the proceeds from such monetization the debts will be partially paid

The debt relief by bankruptcy proceedings is suitable for the debtors having the debts higher than is the value of their assets, or if they do not have assets and have only low or no income.

After the debt relief performed by this form, all enforcement proceedings shall be stopped, besides the exemptions mentioned above, and it is not possible to deduct the income of the debtor. At the same tame by the declaration of such debt relief, the joint ownership of spouses shall cease to exist.

The debtor shall be aware that the Legal Aid Centrum shall provide the loan in amount of 500,- EUR for the advance payment for the remuneration of administrator, which the debtor shall pay away.

 

Debt Relief by Repayment Schedule

This form of debt relief is suitable for the debtors having the regular incomeThe debtor keeps all of assets in the use of repayment schedule.

The requisite (besides the other abovementioned) is payment of the amount around 700,- EUR, which does consist of 500,- EUR for the advance payment for remuneration of administrator and around 200,- EUR to the attorney, which may be appointed by the debtor or by Legal Aid Centrum. The debtor shall be obliged to be represented by the attorney in the debt relief by repayment schedule.

If the debtor does meet all of the criteria, the court shall within the 15 days provide the debtor the protection from creditors (for the maximum period of 3 years).

The appointed administrator has 45 days from the date of abovementioned advance payment to inspect the situation of debtor and prepare the repayment schedule. The repayment schedule shall be set out in a way in which the debtor pays at least 30% of all debts within 5 years. The court shall accordingly set out how many % within the extent of 30% to 100% of unsecured debtors shall be paid by the debtor.

Similarly to the bankruptcy procedure, when using the repayment schedule the enforcement proceedings against the debtor shall be stopped. If the court sets out the repayment schedule, it is a ground to decide on the stopping of the enforcement proceedings.

We do point out that the debtor shall be entitled to repeatedly apply for the debt relief by bankruptcy proceedings or repayment schedule not sooner than after the 10 years from the declaration of bankruptcy or from the setting out of the repayment schedule.

At last but not least we do point out that this legal status shall be valid at the date of its publication, while we do have information on the planned amendments to legislation regulating the abovementioned problematics.

Authors:

JUDr. Martin Jacko, managing partner and attorney at law
Mgr. Martin Holý, associate