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Slovakia: Dawn of a New Era for Insolvency Proceedings?

Slovakia: Dawn of a New Era for Insolvency Proceedings?

Issue 10.12
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For a long time, the Slovak insolvency law landscape was overshadowed by deep structural problems that resulted in a dire outlook for creditors in insolvency and restructuring proceedings.

On the insolvent liquidation side, an overwhelming portion of corporate insolvencies were entered into at a very late stage (deep insolvency), leaving the creditors no possibility of utilizing any assets. Consequently, in most cases, the proceedings were terminated due to insufficient assets on the debtor side.

On the other hand, the restructuring option offered an effective delaying strategy for debtors. Too often did restructuring measures focus merely on limiting creditors’ repayments as a sole solution rather than a last resort option after exhausting other restructuring options.

Previous attempts by the legislator to react and remedy the worst excesses led to a severe limitation of restructurings – a minimum statutory threshold of 50% satisfaction for unsecured creditors introduced in 2017 still is the most visible and criticized limit that effectively prevents most restructurings from being successful.

The necessity to implement the EU Directive on preventative restructuring frameworks (PRD) has given the Slovak legislator a much-needed impetus to review the (pre-)insolvency regulation. The law introducing preventive restructuring procedures entered into force in July 2022. In addition to insolvent restructuring that can be attempted by insolvent corporate debtors, it offers two options for companies that face imminent illiquidity and are threatened with insolvency.

Public preventive restructuring provides for a possible stand-still against creditor enforcement actions. Similarly to insolvent restructurings, it includes voting of the creditors on a public plan (the 50% satisfaction rate threshold does not apply, however, the plan must be approved by at least 75% of each class of unsecured creditors).

Non-public preventive restructuring is aimed at restructuring debts owed to financial institutions and requires creditors’ consent. In the case financial creditors and the debtor reach an agreement, it is approved by a court.

There have been no cases of successful preventive restructurings since their introduction. The main obstacle regarding the use of the regulation remains the unfavorable tax treatment of debts discharged in preventive restructuring schemes compared to those discharged in an insolvent restructuring. Nevertheless, market actors such as advisors to distressed companies already indicate that preventive restructuring is regularly considered, and it is only a matter of time until we see preventive restructurings in practice.

Even more important for the future of Slovak restructuring and insolvency practitioners, in our view, are further amendments to the insolvency law that were also part of the implementation of the PRD. It is important to note that, for the first time, the regulation emphasizes the role of advisors who are responsible for the viability of the proposed preventive restructuring plan. This opens the door for specialized professionals to become advisors to the debtor.

The legislator has also finally recognized the requirement for specialized courts and insolvency administrators. Judges from only three courts (the District Courts in Nitra, Zilina, and Kosice) currently handle preventive or insolvent restructurings and large insolvent liquidations concerning companies with assets or turnover exceeding EUR 10 million. Restructurings and large insolvent liquidations, though, can only be administered by insolvency administrators who have passed a special exam and operate in an office that safeguards the handling of complex cases. Currently, there are five special insolvency administrators in Slovakia and the regulation foresees that there should be at least 10 in the future. This specialization should provide for more legal certainty and professional administration of difficult restructuring and insolvency cases that affect large groups of creditors and employees and that have an impact on the business environment.

The next, much-anticipated, step is the Ministry of Justice announcing the digitalization of all insolvency procedures. This is a much-needed measure as the current state of insolvency registers and insolvency files is very user-unfriendly. Creditors face substantial technical obstacles when filing their claims or trying to receive full information on the state of proceedings. Digitalization will stir up discussions about the benefits and risks connected to a much higher degree of transparency, which it will inevitably bring. Digitalization will be introduced by the end of 2024 as it is a milestone of the Slovak National Resiliency and Recovery Plan.

By Radovan Pala, Co-Managing Partner, and Michal Michalek, Associate, Taylor Wessing

This article was originally published in Issue 10.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.