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The Pandemic and Its Impact on Financial Regulations in Slovakia

The Pandemic and Its Impact on Financial Regulations in Slovakia

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The still ongoing pandemic and its impact on the economic environment occupy governments all over the world. In Slovakia, several measures have been adopted by legislative bodies since its outbreak last year mainly in the area of financial aids and business loans. Moratoriums have also impacted the positions of banks and other creditors demanding their claims against debtors.

The adoption of the Act on certain extraordinary measures in the financial area in relation to the spread of COVID-19, which has been in force since April 2020,  introduced a wave of various measures aiming directly at the support of businesses. They covered three areas: taxes, financial market, and budgetary rules.

The tax-related section introduced extended deadlines for submission of tax returns, tax returns of employees, annual reports, and financial statements. The aim was to relieve businesses of obligations that had increased their expenses and administrative burden. Taxpaying legal entities were, for example, able to deduct from the tax base loss carryforward for tax periods 2015 to 2018 up to the aggregate value of EUR 1 million. Furthermore, enforcement proceedings and tax audits performed by the Financial Administration were suspended.

The situation in the financial market was affected too. SMEs could receive financial aid for maintenance of their operations provided by the state-owned banks Exportno-importna banka Slovenskej republiky (Eximbanka SR) and Slovenska zarucna a rozvojova banka, a.s. Financial aid was provided in the form of either a loan guarantee or payment of loan interest (interest subsidy).

Both SMEs and large enterprises could also receive financial aid for liquidity provision from Eximbanka SR or funds managed by Slovak Investment Holding, a.s., through banks and branches of foreign banks, in the form of either a loan guarantee or loan guarantee fee waiver.

The new regulation also allowed employers and natural persons to defer repayment of their loans if they were, or could potentially be, unable to repay these on time due to the pandemic. The maximum deferral period was three months or nine months with a bank being the creditor. Similarly, consumers could apply for deferral of their consumer loans and mortgages.

Later in 2020, the measures introduced under the above Lex Corona Act were tightened in order to prevent the state’s economy from substantial damage caused by a too long period of their application. This amendment introduced the concept of temporary legal protection which could be applied for and granted in a formal court proceeding, resulting in protection from bankruptcy and enforcement proceedings.

On January 1, 2021, the Act on temporary protection of entrepreneurs took effect. It leans on the abovementioned concept – while prolonging the period of granted temporary protection – but under stricter rules. Involved businesses now have to obtain the approval of the majority of creditors and fulfill other statutory conditions. Debtors may apply for the moratorium until December 31, 2022.

The temporary protection regime, as opposed to its 2020 version when it could be obtained through a formal process, is now limited by law. Affected entrepreneurs are currently more likely to initiate restructuring or declare insolvency.

As of January 1, 2021, the Act on bankruptcy and restructuring was amended, introducing a newly designed arrangement of a low-cost fast so-called “small bankruptcy.” The new regulation has significantly simplified the rules for the conduct of bankruptcy. If all conditions are met, the court declares small bankruptcy over the debtor’s assets within 15 days from the application. This measure is intended for small entrepreneurs whose businesses failed, but could not otherwise exit the market quickly. Small bankruptcy enables them to save up to five years.

The Ministry of Justice has proposed a bill dealing with imminent bankruptcies that should form a framework for the voluntary recovery of businesses. This preventive instrument is intended to create enough room for entrepreneurs for an efficient, fast, and transparent preventive restructuring already at an early stage when insolvency is “imminent,” and thus preventing the debtors from going bankrupt and having to file for insolvency.

This purpose can be achieved also through temporary protection, as it provides a sufficient timeframe for effective restructuring. The adoption of the new regulation should simultaneously abolish the temporary legal protection provided for under the 2020 amendment. The new act should take effect in July 2022.

By Tomas Zaborsky, Head of Banking and Finance, and Erika Urdovicova, Junior Associate, Noerr Slovakia

This Article was originally published in Issue 8.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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