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New temporary protection for business entities

New temporary protection for business entities

Assistance to business entities is to be provided by the bill on temporary protection of business entities in financial difficulties, which was approved by members of the parliament.

It adopted that the effects of the current temporary protection of entrepreneurs will end on 31.01.2021 (compared to the original date of 31.12.2020). However, entrepreneurs will be able to be protected from the economic effects of the corona crisis even after this date, via a new institute - temporary protection of business entities in financial difficulties. 

This institute differs significantly from the original temporary protection of business entities. It is intended to act as a more durable tool, but only entities who have a precondition for the viability of their business and whose key creditors also agree to temporary protection will be able to apply for it. 

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

  • the centre of its main interests is in the territory of the Slovak Republic;
  • entity is not a bank, insurance company, broker, or other entity excluded by the law.

and apply to the relevant district court using the electronic form with a declaration of fulfilment of the following conditions (sorted from rather easy to prove/formal ones up to more challenging ones):

  • maintains proper accounting;
  • pursues the purpose of temporary protection;
  • it has not been under temporary protection in the last 48 months;
  • is registered in the register of the public sector partners (if the entity is a legal person);
  • as per the date of submission of the application, there are no grounds for its termination, the entity is not obliged to file for bankruptcy, and no effects of the opening of bankruptcy proceedingsbankruptcy declarationopening of restructuring proceedings, or restructuring permit towards the entity;
  • it has not distributed profit or other own resource nor made any measures that could jeopardize its financial stability in the last 12 months prior to the application;
  • no enforcement proceedings or similar proceedings were pending against it as per the date of submission of the application in order to satisfy the claim from its business activities;
  • in relation to its enterprise, asset, right or other property belongings to the enterprise, the exercise of the pledge shall not commence from the date of submission of the application;
  • an absolute majority of the creditors agreed with its temporary protection (with the exception of affiliated creditors).

In addition to the consent, the entity is obliged to attach to the application:

  • the written consent of the creditors to the temporary protection of the entity not older than 30 days;
  • a list of assets with the identification of burdens;
  • a list of liabilities with the identification of affiliated creditors and secured creditors;
  • list of related parties;
  • interim financial statement. 

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

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

  • during the temporary protection, it shall not be decided on the beginning of the insolvency proceedings;
  • the entity (including the obliged persons on its behalf) is not obliged to file an application for the declaration of bankruptcy on its assets during the temporary protection;
  • during the period of temporary protection, the undertaking, thing, rights or other property belonging to the undertaking may not be penalized in the enforcement proceedings for a claim arising before temporary protection, with the exception of unjustified state aid;
  • the pledge cannot be exercised against the entity in respect to the enterprise, property, right or other assets belonging to the enterprise;
  • against a receivable of the entity arising after the provision of temporary protection, it is not possible to set off a receivable towards the entity arising before the provision of temporary protection if it is a receivable that belongs to or belonged to the affiliated person;
  • another contractual party may not terminate the contract concluded with the entity by noticewithdraw from the contract or refuse performance under such a contract due to the entity’s delay caused before the provision of the temporary protection, unless the conditions required by law are met;
  • 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 obligations immediately related to maintaining the operation of the enterprise which arose after the granting of the temporary protection, the entity shall be entitled to pay preferentially over the previously due liabilities for the duration of the 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.

Temporary protection of the entity lasts 3 months from the date of its provision. The entity may request an extension of the temporary protection for another 3 months at the earliest 30 days and at the latest 10 days before the expiry of the temporary protection. The extension of temporary protection is subject to the following conditions:

  • the entity negotiates with creditors on the change of the content of obligations, on the partial waiver of obligations or on loan financing and makes a statement to that effect, which it shall attach to the application;
  • at least a two-thirds majority of creditors must agree in writing to the extension of temporary protection. 

Temporary protection expires:

  • 3 months after the provision of temporary protection or from the extension of temporary protection;
  • at the entity's own request;
  • by the moment of entry of the entity into liquidation;
  • by the court decision;
  • on the proposal of one of the creditors with the written consent of an absolute majority of all creditors of the entity. 

The expiration of temporary protection has the following consequences:

  • the entity whose temporary protection has expired is not entitled to reapply for temporary protection within 48 months of its dissolution;
  • the entity is obliged to submit in the collection of documents within 30 days from the expiry of the temporary protection a declaration that he is not in bankruptcy or to file a petition for a declaration of bankruptcy or a restructuring permit.

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 restructuring, bankruptcy proceeding or debt relief (in this regard we refer to our other articles on these themes).