Due to the current unfavourable economic situation, many businesses are in arrears of their financial obligations. If a company is at risk of becoming bankrupt, it is obliged to take immediate steps to avert it (see the article “A Company in Crisis”). However, where a company is unsuccessful in staving off the crisis, bankruptcy proceedings are imminent.
When are bankruptcy proceedings unavertable? What are the managing directors’ responsibilities? And how can a company obtain temporary statutory protection?
When are bankruptcy proceedings unavertable?
Bankruptcy serves as an instrument used by debtors unable to pay their obligations. Its main purpose is to satisfy creditors from managed monetisation of the debtor’s assets. Bankruptcy proceedings are the result of a company being either insolvent or over-indebted.
When is a company insolvent?
A company is considered to be insolvent when it has at least two creditors, and is in arrears with the payment of at least two financial obligations for a minimum of 30 days. A company’s financial assets to be potentially used for covering its obligations include, inter alia, financial means, account receivables, deposits held in banks, and, in certain circumstances, financial receivables and debt securities. The actual movable and immovable assets of a company are, therefore, irrelevant as regards their potential to satisfy the company’s financial debts.
When is a company over-indebted?
A company is over-indebted if it has at least one creditor and the value of its financial obligations exceeds the value of its assets. Following a so-called “balance sheet test”, where the company’s assets are weighed against its obligations, over-indebtedness (if any) becomes clear. The value of a company’s assets is determined from the company’s accounting records or on the basis of an expert opinion.
Who can file an application for initiation of bankruptcy proceedings?
The application can be filed by any of the creditors or the debtor itself. Creditors should always consider filing the application, as, by doing so, they increase the likelihood of their receivables being satisfied. At the same time, creditors can file the application only on the grounds of insolvency, and not of over-indebtedness, since they do not have any information on the company’s assets and liabilities. The prerequisites for a creditor to file the application include its founded assumption of insolvency and a previous written call for payment against the debtor issued by any of its creditors.
When is a company required to file an application for bankruptcy proceedings?
When insolvent, a company is entitled to file an application. On the other hand, with over-indebtedness, it is obliged to file an application within 30 days of becoming aware or from that date when it should have become aware, when acting with professional care, of the over-indebtedness. Businesses must also keep track of the development of their financial situation, assets, and liabilities.
What responsibilities do statutory bodies have?
If a company’s statutory body fails to timely file the application for initiation of bankruptcy proceedings, it is obliged to pay a statutory penalty to the company in the amount of EUR 12,500. Since 2018, statutory bodies are also held liable for damage incurred by creditors for the statutory body’s failure to file a timely application. Situations may thus occur when the managing director may have to pay damages to all creditors equal to the sum of their receivables, which can eventually lead to the managing director being forced to file for bankruptcy protection.
How can businesses protect themselves from becoming bankrupt?
In connection with the economic aftermaths of the current pandemic, a new legal concept has been introduced into Slovak legislation: temporary legal protection. Businesses in Slovakia having accumulated a large number of overdue receivables, or experiencing a significant drop in revenue can now apply at their respective court to be temporarily protected. The temporary legal protection will lapse, by law, on 1 October 2020, unless prolonged by the Slovak government, but not later than 31 December 2020. The government is currently also drafting measures, with effect from 2021, to introduce the possibility of informal restructuring with the creditors’ consent.
The information above provides only a brief overview of the conditions for declaration of insolvency and initiation of bankruptcy proceedings. The statutory regulation is much more complex and its application requires detailed examination of each case.
By Martin Tupek, Senior Associate, and Adam Pichler, Senior Associate, Noerr