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Slovenia: Amendment to the Insolvency Act Brings Additional Duties to the Management and Supervisory Bodies

Issue 10.12
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On November 1, 2023, the amendment to the Slovenian Insolvency Act (ZFPPIPP-H) entered into force and introduced a series of significant changes that should not be overlooked.

The amendment, among other things, incorporated Directive (EU) 2019/1023 on restructuring and insolvency into Slovenian law. This integration has led to the introduction of the concept of threatening insolvency. This concept, which is applicable when a company is in danger of not being able to fulfill its financial obligations within a year, has brought an element of uncertainty into Slovenian law since it is not clear when this situation actually arises.

In Slovenian law, a company is going to be considered insolvent if it is in a situation of long-term illiquidity or long-term insolvency. This is different to some other jurisdictions where the legal prerequisite for opening an insolvency proceeding is only long-term illiquidity. Consequently, in those jurisdictions, a situation of long-term insolvency (capital inadequacy) is similar to a “likelihood of insolvency,” unless the company has already become permanently illiquid. Slovenian legal academia therefore links the newly introduced concept of threatening insolvency to situations of capital inadequacy and unsustainable debt (long-term insolvency), which is also used as a benchmark for the purpose and reasonableness of restructuring.

In addition, by introducing the concept of threatening insolvency, the ZFPPIPP-H also elevated the responsibilities of the company and its management in tackling financial issues and ensuring short- and long-run solvency. The main responsibilities are outlined below.

In situations of threatening insolvency, the management and other bodies of the company are now required to constantly monitor the company’s operations and identify any developments that could jeopardize its existence. If such risk is identified, management is required to take financial restructuring measures to prevent the threatening insolvency and promptly report these measures to the supervisory body. If the necessary restructuring measures fall under the responsibility of other corporate bodies, the management must ensure that the relevant corporate body discusses and acts on the proposed measures.

Furthermore, even at this stage, the management and other corporate bodies already have specific responsibilities concerning their business conduct to safeguard the legitimate interests of creditors against management decisions that could affect the company’s estate. This is particularly important when such decisions could further reduce the value of the assets available for restructuring or distribution to creditors. In such circumstances, it is crucial that management acts with due care and diligence of a prudent businessperson and for the benefit of the company.

Management must therefore, in both pre-insolvency and insolvency scenarios, ensure equal treatment of creditors (unless breaching this rule is justified and essential for preventing insolvency), consider the interests of creditors, shareholders, and other relevant parties that may be affected, and refrain from actions that could jeopardize or reduce the company’s assets or its very existence.

Given the increased pre-insolvency responsibilities, the previous requirement for management to prepare a financial restructuring report in case of insolvency has been deemed redundant and removed by the amendment. In addition, the time limits for actions upon the occurrence of insolvency have been changed. Management must now initiate insolvency proceedings immediately, but at the latest, within a month of insolvency (previously, the management had the obligation to file for compulsory settlement proceedings within three months if the probability of a successful restructuring was more than 50%, or filing for a bankruptcy proceeding within three business days if the likelihood of successful financial restructuring was less than 50%). In the case of an exceptional event causing insolvency, the deadline is three months. 

Finally, an important change of the new law that should not be missed is the extension of the contestation period in insolvency proceedings. Transactions or legal acts of the insolvent debtor that took place in the period of 12 months, or 36 months for gratuitous disposals, prior to insolvency proceedings can be challenged. With the new law, transactions and legal acts can be challenged even beyond these periods if it can be proven that the debtor was already insolvent at the time of the respective transaction or that such transaction caused the insolvency. This change has introduced additional legal uncertainty for companies since, in theory, creditors will now have the possibility to challenge any legal act of the company beyond defined contestation periods if they can prove that the company was at the time of the relevant transaction insolvent.

By Maja Erker Zgajnar, Partner, and Neza Voncina, Attorney at Law, CMS

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.