Contributed by CMS.
1. Overview
1.1 What domestic pieces of legislation and international instruments apply to restructuring and insolvency matters in your jurisdiction?
The Slovak insolvency regime is primarily governed by Act No. 7/2005 Coll. on Bankruptcy and Restructuring as amended (Insolvency Act) and Act No. 111/2022 Coll. on Solving Threatened Insolvency (Act on Preventive Restructuring) as well as related secondary legislation elaborating on the details of some related instruments. A definition of a “company in crisis” is also included in Act No. 513/1991 Coll. Commercial Code as amended (Commercial Code) which can be confusing.
Cross-border insolvencies are subject to the European Regulation on Insolvency Proceedings (2015/848) (Regulation).
Foreign insolvencies outside the EU may be governed by international treaties or agreements (if applicable) or are subject to the mutual recognition principle under international law.
1.2. Do you have a well-established legal regime governing restructuring and insolvency, or do you have rather frequent legislative changes in the area?
The Slovak regime frequently changes due to the requirements resulting from practice (the identification of legislative gaps or efforts to make the system more effective, transparent, and enforceable) or changes to other laws (e.g., the implementation of the EU Directive on preventive restructuring (2019/1023)).
1.3. Are there any special regimes applying to specific sectors?
Yes.
Firstly, special regimes concern certain financial entities such as banks, electronic money institutions, insurance/reinsurance companies, payment system operators, the central depository of securities, investment companies, health insurance companies, and their Slovak branches.
Secondly, small bankruptcy (a more streamlined process) applies to certain entities and situations:
- individual persons and small businesses;
- insolvencies resulting from the confiscation of property under criminal proceedings;
- insolvencies of operators of critical infrastructure.
Thirdly, individual persons who are debtors can be subject to the discharge of debts either through bankruptcy or repayment in installments, subject to separate provisions.
Fourthly, the state, municipalities, self-governing regional institutions, and companies established, budgeted, or otherwise related to them, as well as the National Bank of Slovakia (NBS) Deposit Protection Fund and the Investment Guarantee Fund are excluded from the application of Slovak insolvency law.
Our focus in this guide (unless otherwise stated) is on the insolvency or (preventive) restructuring of larger businesses.
1.4. Were any changes to restructuring or insolvency laws adopted in response to the COVID-19 pandemic? If so, what were they?
In response to the COVID-19 pandemic, the Slovak Republic introduced a bankruptcy moratorium to help entrepreneurs overcome the negative impacts of this crisis on their businesses in spring 2020. The moratorium was an opt-in model and entrepreneurs were entitled to apply for temporary bankruptcy protection subject to certain conditions. The original application until October 1, 2020, was extended until December 31, 2020, with the new law effective on January 1, 2021, making the bankruptcy moratorium a “standard” instrument irrespective of the COVID-19 pandemic, although stricter against debtors, as the consent of the creditors is required in comparison to the bankruptcy moratorium under the COVID-19 regime. The concept was incorporated into the Act on Preventive Restructuring and is a part of the preventive mechanism, which is still an opt-in model.
In spring 2020, Slovakia also implemented a loan moratorium applicable to banking as well as non-banking credit providers, subsequently extended until March 31, 2021.
1.5. Are there any proposed or upcoming changes to the restructuring insolvency regime in your country?
Not to our knowledge.
1.6. Has your country adopted or is your country considering the adoption of the UNCITRAL Model Law on Enterprise Group Insolvency?
No, and we do not have knowledge of any considerations in that respect.
2. Insolvency
2.1. Is there an insolvency test that triggers certain obligations for directors or officers of the debtor company? If so, what is the test and what are the consequences for failure to meet these obligations?
Through its statutory body, the debtor is obliged to monitor its financial situation and the status of equity and liabilities constantly in order to foresee any possible threatened insolvency in time and adopt suitable preventive measures to avoid it.
Slovak insolvency law regulates the process after the occurrence of insolvency (upadok) or threatened insolvency (hroziaci upadok).
The recognition of threatened insolvency does not have strict criteria (as the situation can be industry-specific or seasonal), only indicators that signal to the debtor the obligation to adopt preventive measures. Threatened insolvency occurs in particular if illiquidity is threatened (as specified below), i.e., if, considering all circumstances, it can be reasonably assumed that the debtor will become illiquid within the next 12 months. Another consideration can be if the debtor is in crisis in accordance with the Slovak Commercial Code, i.e., if the ratio of its equity to liabilities falls below 8:100. Another sign can be if the debtor is on the list of debtors maintained under special laws, e.g., list of debtors maintained by health insurance companies or tax authorities.
Slovak insolvency law sets out the criteria for two forms of insolvency tests:
- The debtor’s inability to pay its overdue debts (the liquidity test): this happens if the debtor is unable to settle at least two monetary obligations held by more than one creditor for more than 90 days after maturity. All obligations originally belonging to one creditor 90 days before the filing are deemed as one obligation. Under certain conditions, the debtor can be assumed as liquid, whereby more details are regulated in the underlying secondary legislation.
- Over-indebtedness (the balance sheet test): this applies to a debtor obliged to do accounting if it has more than one creditor and the value of its obligations exceeds the value of its assets. The valuation is made based on the accounts or an expert opinion, taking into consideration any positive going concern prognosis.
The details are further stipulated in secondary legislation.
If the tests are fulfilled, the debtor is obliged to file for bankruptcy or initiate a formal restructuring. Further consequences against the debtor are described in Section 2.3.
2.2. What types of insolvency procedures are established by law in your jurisdiction?
Slovak insolvency law recognizes the following insolvency procedures available to debtors (legal entities) in financial difficulties:
- bankruptcy proceedings (konkurz), a process leading to the liquidation of the insolvent debtor;
- formal restructuring (restrukturalizacia), which enables the debtor’s business to continue, and
- (public/non-public) preventive restructuring under the new Act on Preventive Restructuring.
Further, only bankruptcy proceedings will be covered in this Section 2.
2.3. Who has the right to initiate insolvency proceedings?
A creditor may only initiate the bankruptcy proceeding if illiquidity can reasonably be expected, i.e., the conditions for the liquidity test are met and one creditor requested the debtor to pay in writing.
The debtor must initiate bankruptcy proceedings within 30 days from learning, or with due professional care should have learned, of insolvency in any form. This obligation applies to the debtor’s statutory body as well as the liquidator and the debtor´s legal representative. The failure to observe this obligation can make such a person subject to a fine of EUR 12,000 and liable for damages to the extent of unsatisfied claims unless otherwise evidenced.
2.4. What are the consequences of commencing insolvency proceedings, in particular:
2.4.1. Does management continue to operate the business and/or is the debtor subject to supervision?
In bankruptcy proceedings, once the court formally approves the bankruptcy, the trustee takes over the management of the company and performs legal acts in the name of and on behalf of the debtor.
2.4.2. Does a moratorium or stay apply and if so, can it have an extraterritorial effect?
Bankruptcy proceedings have the following effects:
- most court and similar proceedings concerning the bankruptcy assets are interrupted (e.g., alimony proceedings or criminal proceedings); they can be reopened on a motion of the trustee; new proceedings can be filed only on the trustee´s motion;
- enforcement proceedings are stayed; proceeds are paid to the bankruptcy assets if not already paid to the given creditor;
- no new securities can be established;
- one-sided legal acts (e.g., POAs) concerning the bankruptcy assets are terminated;
- set-offs are subject to special provisions;
- contractual restrictions or prohibitions on the assignment of claims are not effective;
- any corporate reorganizations are subject to the trustee´s consent;
- the maturity of any debtor´s claims or claims against the debtor is generally accelerated.
Extraterritorial effects depend on the respective provisions of international treaties, such as the Regulation and the principle of mutual recognition (also see Section 4).
2.4.3. How does it impact the existing contracts (e.g. is the counterparty free to terminate them, can the debtor’s pre-insolvency transactions be challenged)?
Any contractual provisions entitling the counterparty to terminate or withdraw from the existing contract only due to bankruptcy are ineffective.
If the debtor has already performed under the contract and the counterparty did not or only partially performed, the trustee may demand the performance or withdraw from the contract (to the extent of not-yet-performed obligations); vice versa, the counterparty may withdraw from the contract to the extent of obligations not-yet-performed by the debtor and apply its claims through the registration of the claims in the bankruptcy proceedings.
In the case of the contracts for repeated or continuing activities (except for the employment agreements and apartment leases), the trustee may terminate such contracts on a two-month termination period unless a shorter period is given by law or the contract.
The counterparty may refuse performance until it is given (the security for) the counter-performance by the debtor, if applicable.
In addition, the trustee has wide powers to contest certain transactions effected by the debtor before and after the start of insolvency, if such transactions qualify as (i) preferential, (ii) being undervalued; (iii) intentionally curtailing creditors’ rights; or (iv) acts made by the debtor within six months after the cancellation of insolvency if the new insolvency was declared over the debtor and such acts cannot be deemed as made within the ordinary course of business. The trustee may generally challenge these transactions occurring up to one year before the start of insolvency, extended to three years if the transaction was made between close/linked persons, or five years in the case of the intentional curtailing of rights. The trustee must apply these rights within one year after the declaration of insolvency, otherwise, this right expires.
2.5. Which steps do insolvency proceedings normally include and what are the roles of the courts and other key stakeholders (such as debtor, directors of the debtor, shareholders of the debtor, secured creditors, unsecured creditors, etc.)?
In the case of bankruptcy, there are two initial phases: commencement of bankruptcy and declaration of bankruptcy.
A. Commencement of bankruptcy
If the insolvency petition meets the formal criteria, the competent court decides within 15 days from the commencement of bankruptcy, with various effects including:
- the debtor is obliged to limit its activities to the ordinary course of business;
- the security enforcement or enforcement proceedings not generally commencing or continuing;
- the company’s liquidation being interrupted, as well as any merger/demerger processes.
If there is doubt about the sufficiency of the debtor’s assets, the competent court may appoint a preliminary insolvency trustee to establish if the debtor has sufficient assets to cover the insolvency costs. In this phase, the debtor may pay mature obligations or initiate restructuring proceedings, resulting in the interruption or termination of the insolvency proceeding.
B. Declaration of bankruptcy
If the conditions are met (the debtor is still insolvent and has sufficient assets), the court declares the insolvency of the debtor, and the formal insolvency proceedings start: the insolvency trustee is appointed and takes charge of the debtor’s assets, and creditors are asked to register their claims. Further actions in the insolvency proceedings subsequently aim at selling the debtor’s assets and the collective satisfaction of creditors’ claims.
Courts generally fulfill the role of the supervision authority over the bankruptcy proceedings and can replace any missing instruction from the creditors’ committee (or in its absence).
As already mentioned, the management of the debtor is taken over by the trustee. Directors are obliged to fully cooperate with the trustee. Shareholders are not generally involved in the bankruptcy.
Creditors must register their claims within 45 days from the declaration of bankruptcy. Secured creditors also have to apply their security rights in time; otherwise, they will not be reflected.
Registered (uncontested) creditors form the creditors’ meeting and the appointed creditors from the creditors’ meeting form the creditors’ committee of three or five members. The trustee is obliged to work closely with the creditors’ committee, provide it with quarterly reports on its activities, request instructions concerning the disposal of the bankruptcy assets, etc.
Most further work is then with the trustee. However, if the trustee fails to perform certain acts (in particular the contestation of pre-insolvency transactions based on the creditor´s motion in due time), the creditor itself can proceed with such contestation with the court on its own.
2.6. In insolvency proceedings, do specific stakeholders’ claims enjoy priority (e.g., employees, pension liabilities)? Can the claims of any class of creditor be subordinated (e.g., equitable subordination)?
Insolvency claims are generally split into the following categories:
- claims against bankruptcy assets that are preferentially satisfied from bankruptcy proceeds, before any other claims: these are the claims arising after bankruptcy and related to the bankruptcy assets; the satisfaction is made in an order given by the Insolvency Act starting from the costs of the trustee, alimony for children, costs for operating the bankruptcy assets, employment costs and ending with taxes, customs, health insurance, and social insurance costs and other unspecified costs;
- secured claims: claims to be preferentially satisfied from the secured assets, after the deduction of respective claims against bankruptcy assets;
- unsecured claims: claims of other creditors, and claims of secured creditors to the extent they are not satisfied with secured assets;
- subordinated claims: claims with a subordination obligation or claims of related parties which are to be satisfied last.
2.7. What is a timeline for insolvency proceedings and how are they finalized?
Apart from the deadline for the registration of claims (creditors of claims registered later lose the voting rights and secured ranking) and the first creditors’ meeting, there are no deadlines for bankruptcy proceedings. They generally end on the sale of all bankruptcy assets and the distribution of proceeds to creditors, as applicable.
In practice, bankruptcy proceedings last several years as there are usually other related court proceedings, such as due to the contestation of pre-insolvency transactions, objection to registered claims, or exclusion of assets from bankruptcy assets.
2.8. Are there any liabilities that survive the insolvency proceedings?
The registered claims to which the debtor did not object can be subject to enforcement after the termination of the bankruptcy proceedings. In practice, this is applicable in cases where the bankruptcy was terminated by the court, e.g., because the conditions of the initiation were not met. Otherwise, the bankruptcy continues until the sale of all bankruptcy assets followed by the liquidation of the debtor (which is a legal entity) and its deletion from the Commercial Register.
3. Restructuring
3.1. What formal and informal restructuring proceedings are available in your country?
Slovak insolvency law recognizes:
- formal restructuring: if the debtor is already insolvent; and
- public/non-public preventive restructuring: if insolvency is only threatened.
Informal restructuring is not governed by law; it is usually subject to the individual agreement of amended conditions with the particular creditor(s) (typically financial institutions).
3.2. What are the entry requirements to restructuring and how are restructuring plans approved and implemented?
Formal restructuring applies when the debtor is already insolvent. The primary condition is the restructuring opinion prepared by the chosen trustee, who recommends the restructuring and the manner of its implementation. Once the restructuring has formally started, the trustee or debtor (depending on who initiated the restructuring) prepares the restructuring plan which is to be subsequently approved by the creditors’ committee, the general meeting of all creditors, and the court. Voting at the general meeting is affected in various groups; each secured creditor represents one separate group and then there are one or more groups of unsecured creditors and shareholders.
If one or more groups at the general meeting vote against the plan, the court may replace such refusal with its decision if the conditions are met (e.g., most creditors voted in favor of the plan and the members of the refusing group will not apparently be in a worse position than on eventual satisfaction under bankruptcy). Finally, the court may approve the plan only if the statutory conditions are met, e.g., unsecured creditors are to be satisfied with at least 50% of their claims unless they agree with a lower level of satisfaction, whereby such high level of mandatory satisfaction is mostly the dealbreaker in most plans. However, such obligation results from the negative experience of restructurings in the past when some entities tended to use the restructuring for “cleaning” their entity from (mostly) unsecured claims for minimum satisfaction.
Once the court approves the restructuring plan, non-registered claims become unenforceable and the debtor is obliged to advance in accordance with the approved plan. If so assumed under the plan, the trustee may be appointed as the supervisor if the debtor complies with the plan.
Non-public preventive restructuring is possible only if creditors are entities subject to supervision by the NBS or a similar foreign institution, whereby there is very little regulation of the process. After the notification to the court by the debtor (with the consent of the affected creditors), the debtor has three months to submit the restructuring plan and the court has 15 days for its approval or rejection (e.g., if the plan could damage other creditors not affected by the plan). Otherwise, the process is subject to individual negotiations.
Public preventive restructuring resembles formal restructuring, but the filing has to contain the concept of the restructuring plan. The professional advisor has to be engaged unless the debtor obtains the required creditors’ consent for a moratorium. A preliminary injunction and moratorium can be imposed and, overall, the negotiations are more flexible. The debtor has to present a realistic, well-prepared plan and various analyses required by law in order to persuade the creditors to support it (again, the refusal of some groups can be replaced by a court decision if the conditions are met). The approval process is similar to the formal restructuring and the fulfillment may be also subject to supervision by the trustee.
The Act on Preventive Restructuring has been effective only since July 17, 2022, so there is no practical experience with its application in daily practice.
3.3. Who has the right to initiate formal restructuring proceedings?
A creditor may only initiate a formal restructuring with the consent of the debtor.
The debtor may initiate a formal restructuring and preventive restructuring if the conditions are met.
3.4. What are the consequences of commencing restructuring proceedings, in particular:
3.4.1. Does management continue to operate the business and/or whether the debtor is subject to supervision?
Under both restructuring regimes, the management continues to operate the business, but it is obliged to perform only ordinary acts and is obliged to avoid any (extraordinary) disposal of the debtor’s assets.
It can also be determined that certain acts are subject to the consent of the trustee (under formal restructuring) or the advisor (under preventive restructuring). In the absence of consent, such legal acts would be valid, but they can be contested in bankruptcy proceedings (if applicable).
3.4.2. Does a moratorium or stay apply, and, if so, what is its scope?
Formal restructuring has the following effects:
- claims (including secured claims) against the debtor which are to be registered cannot be enforced, and pending enforcement proceedings are interrupted;
- a counterparty may not terminate or withdraw from a contract due to the restructuring or claims arising before restructuring, and any such contractual provisions are ineffective;
- set-offs are generally not possible;
- any corporate reorganizations are impossible and already approved reorganizations cannot be registered in the Commercial Register.
The moratorium is an opt-in instrument under the public preventive restructuring subject to the creditors’ consent. It can be provided for three months with a possible extension up to a further three months on an application and the written consent of the creditors’ committee.
Subject to certain conditions, the debtor is protected from creditor insolvencies, (security) enforcement, contractual terminations, set-offs and acquitted from the obligation to file for bankruptcy. On the other hand, the debtor has several obligations such as to primarily settle the claims necessary for the maintenance of business arising after the moratorium (excluding the claims of related parties) and to abstain from making material disposals of assets and taking actions beyond the ordinary course of business.
3.4.3. How do restructuring proceedings affect existing contracts?
Apart from the prohibition on termination or withdrawal (see Section 3.4.2.), existing contracts are to be observed as before; new contracts may be subject to the trustee’s approval if not considered as made within the ordinary scope of business. If the counterparty is obliged to perform under the existing contract in advance, it may refuse the performance until it has been provided some security or counter-performance.
3.4.4. How are existing contracts treated in restructuring and insolvency processes?
See Sections 2.4.3., 3.4.2., and 3.4.3.
3.5. Can third-party liabilities be released through restructuring proceedings?
In a formal restructuring, third-party liabilities remain unaffected by the plan.
The rights of creditors against third parties under a public preventive restructuring also remain unaffected by the plan, unless the given creditor agreed otherwise in writing.
3.6. Which steps do restructuring proceedings normally include and what are the roles of the courts and other key stakeholders (such as debtor, directors of the debtor, shareholders of the debtor, secured creditors, unsecured creditors, etc.)?
Formal restructuring
A. Restructuring opinion and petition
A restructuring opinion prepared by a trustee foregoes formal restructuring proceedings. This can be initiated by the debtor or a creditor; however, the creditor may do so only if the debtor cooperates and agrees. If the trustee recommends restructuring, the debtor or creditor (depending on who asked for the restructuring opinion) can file a restructuring petition.
Similar to bankruptcy proceedings, restructuring proceedings also have two initial phases: commencement and approval of restructuring.
B. Commencement of restructuring proceeding
The commencement of restructuring proceedings has similar effects as the commencement of bankruptcy (e.g., the debtor is obliged to limit its activities to the ordinary course of business); see Section 3.4.2. for further effects.
C. Approval of restructuring
If the conditions are met, the court approves the restructuring and the formal restructuring proceedings start: the restructuring trustee is appointed, and creditors are asked to register their claims. In contrast to bankruptcy proceedings, the debtor remains in charge of its assets, but its legal acts are subject to approval by the restructuring trustee to the extent stipulated by the court. See Section 3.2. for details on the approval of the restructuring plan.
Similar to bankruptcy, the trustee is the first supervisory authority over the debtor, manages the registration of claims, and creditors’ meeting, and prepares the plan if the motion was filed by the creditor and not the debtor.
The court has another supervisory position (including over the trustee), can cancel the restructuring if the conditions are not met or breached (which puts the debtor into bankruptcy), and plays the final approval role over the restructuring plan.
Creditors have to register their claims (together with security if applicable) within 30 from the approval of the restructuring; otherwise, they are not considered and are thus unenforceable. Creditors are represented through the creditors’ meeting and the creditors’ committee (similar to bankruptcy).
Shareholders can also become involved, in particular, if their rights are affected by the plan. The debtor manages the assets subject to the potential trustee’s consent.
Preventive restructuring
As explained in Section 3.2., preventive restructuring is a voluntary option of the debtor to avoid threatened insolvency.
As opposed to formal restructuring, creditors do not have to register their claims in public preventive restructuring. The debtor is obliged to prepare the list of all creditors together with an application for public preventive restructuring, whereby creditors may review the list and ask for correction or completion within 30 days after the approval of the preventive restructuring.
Some creditors are not affected by preventive restructurings, such as employees, small creditors, and tax/customs authorities.
Preventive restructuring is less formal and more flexible than formal restructuring, whereby a professional advisor (such as a lawyer or an economic advisor), who has the trust of relevant creditors, takes the main role in guiding the debtor through the whole process, managing it, preparing the plan and communicating it with creditors.
The Act on Preventive Restructuring requires a special exam for trustees dealing with preventive restructurings, as such trustees are expected to be more experienced – having sufficient expertise to manage preventive restructurings.
3.7. How are restructuring proceedings normally finalized?
All forms of restructuring finish on the approval of the restructuring plan by the court as the last authority.
If the court rejects the plan, it also terminates the formal restructuring. Once such a decision is valid and effective, the court declares the debtor bankrupt.
In the case of preventive restructuring, the rejection of the plan does not mean automatic bankruptcy as in the case of formal restructuring. The debtor may adopt other measures to save its business.
4. Cross-border restructuring and insolvency
4.1. Do domestic courts in your country recognize foreign insolvency or restructuring proceedings over a local debtor?
Processes within the EU are governed by the Regulation, setting up details on determining the center of main interests, secondary proceedings, mutual cooperation, etc.
Otherwise, in the absence of an international agreement or treaty, the recognition of foreign proceedings by Slovak courts is based on the request of the foreign trustee and the following:
- the mutual recognition principle, i.e., the foreign state would also recognize Slovak insolvency proceedings if applicable;
- the existence of a certified interest by a foreign trustee regarding Slovakia, which is typically given if the debtor has any assets in Slovakia;
- the absence of any other pending insolvency proceedings in Slovakia or in any other foreign country.
The court may recognize some effects of Slovak insolvency proceedings under Slovak law on foreign proceedings or vice versa, or determine that certain effects of foreign insolvency proceedings do not apply in Slovakia.
Irrespective of the recognition of foreign proceedings, creditors may also initiate a Slovak insolvency proceeding against a debtor governed by Slovak law. In such a case, the recognition of foreign proceedings is canceled by law.
4.2. What are the preconditions for recognizing foreign decisions?
See Section 4.1.
4.3. Do domestic courts cooperate with their counterparts in other jurisdictions and if so, what does such recognition depend on (such as the COMI of the debtor, the governing law of the debt to be compromised, etc.)?
Cooperation is quite frequent within the EU as it is governed by the Regulation.
Cooperation with non-EU countries is governed by the principles in Section 4.2. However, such cases are very rare, as generally conducting business in Slovakia on a permanent basis requires some form of legal establishment.
4.4. How are foreign creditors treated in restructuring and insolvency proceedings in your jurisdiction?
Foreign creditors are generally treated in the same manner as Slovak creditors. Foreign creditors have to register their claims in accordance with Slovak insolvency law and using the mandatory electronic forms prescribed by law. Foreign creditors from the EU may also register their claims using the electronic form under Article 55 of the Regulation.
Foreign creditors that do not have a seat or branch office in Slovakia are obliged to appoint a representative for delivery in Slovakia and notify the trustee of such an appointment. Otherwise, all documents will be delivered to such foreign creditors only by publication in the Commercial Journal.
In practice, trustees tend to inform all foreign creditors known to them in writing in English of basic information about Slovak insolvency, the need to register a claim, deadlines, etc.
5. Summary
5.1. Overall, do you have a more creditor-friendly or debtor-friendly restructuring and insolvency regime in your jurisdiction?
Both processes try to balance the position of the debtor and creditors. Creditors are typically more protected, as the debtor holds all information about its situation, business, accounts, etc., and can thus decide which information it shares with creditors. For example, even if restructurings enable debtors to save their business, it is generally up to creditors to approve the restructuring plan, although the court may replace the consent of some groups with its decision, subject to certain conditions.
