On June 20, 2019, the European Parliament and the Council of the European Union adopted the Directive (EU) 2019/1023 on restructuring and insolvency (hereinafter: Directive). The objectives of the Directive are to make it easier for companies in financial difficulty to access restructuring measures at an early stage to prevent them from becoming insolvent, to lay down minimal rules on the discharge of debt incurred by insolvent entrepreneurs and to increase the efficiency of preventive procedures and insolvency procedures, primarily to shorten the length of the procedures.
Member States have to adopt and publish the laws and regulations necessary to comply with the Directive by July 17, 2021. Nevertheless, the Member States that encounter particular difficulties in implementing the Directive into their national legislation can benefit from an extension of a maximum of one year of the implementation period. Even though the Slovenian Government exercised the benefit of extension of the implementation for one year, the Ministry of Justice has in December 2020 prepared a draft bill introducing amendments to the Slovenian Insolvency Act to implement the Directive into Slovenian legislation.
Researches show that in Slovenia an insolvency procedure with the distribution of assets on average lasts 4 years and 4 months before it is completed. The average satisfaction of ordinary claims in bankruptcy procedures is just 4,6%. The excessive length of the procedures and untimely identification of financial difficulties have been identified as the main obstacles triggering low recovery rates in insolvency procedures.
The Directive and draft bill acknowledge that the earlier a debtor can detect its financial difficulties and can take appropriate action, the higher the probability of avoiding impending insolvency or, in the case of a business the viability of which is permanently impaired, the more orderly and efficient the liquidation process would be.
For this purpose, the proposed bill introduces the term “threatened insolvency” into Slovenian legislation as a situation that arises when it is probable that a debtor will become insolvent within one year. To timely prevent insolvency, a system of early identification of threatened insolvency is proposed along with an obligation of financial advisors of the company (accountants, auditors or persons providing services related to the company's operations or inspection of the company's operations) to notify the management of the company in writing if they believe that the company is likely to become insolvent or is insolvent. Furthermore, it is proposed that the obligation of the management (and in some cases also the shareholders) to prepare a financial report and to propose restructuring or insolvency procedure is moved from a time when the company becomes insolvent to an earlier point in time when insolvency is only threatening.
Intending to eliminate the threatened insolvency, the proposed bill is also expanding the scope of preventive restructuring procedures. At present, preventive restructuring procedure can only affect financial creditors and has minimal court oversight. The proposed new judicial restructuring procedure provides a possibility to adopt a wider range of measures including a restructuring of non-financial claims. This pre-insolvency procedure could prove useful in restructuring linked businesses on different levels of a vertical supply chain that was hit by the COVID-19 pandemic.
The proposed bill also provides measures to facilitate the success of the restructuring procedure. Many agreements include clauses on termination of agreements in case of insolvency or threatened insolvency (ipso facto clauses). This decreases the possibility of a successful rescue of the debtor’s business. The bill provides a prohibition of termination “essential contracts” (contracts which are necessary for the continuation of the day-to-day operations of the business, e.g., supply of gas and electricity) during the negotiation phase solely on account of the insolvency of the debtor. Prohibition of such termination should enable the debtor to continue its business operations until a restructuring plan is confirmed or denied.
Taking into consideration the adverse economic consequences of the COVID-19 pandemic and the fact that state intervention measures will eventually cease, it is expected that in H2 of 2021 we will witness an increased wave of restructuring and insolvency procedures. Even though the Directive was adopted before the COVID-19 pandemic hit the world, we can say that the Directive is addressing efficient solutions for the affected companies and is a welcoming addition to the Slovenian legislation on restructuring and insolvency. Keeping our economy alive in these difficult times will be one of our main goals in years to come, consequently, Slovenia and the other Member States will face difficult regulatory challenges to successfully tackle these issues. And implementing the Directive into national legislation surely is a first step in the right direction.
By Ziga Kosmatin, Senior Associate, and Luka Rzek, Associate, Miro Senica & Attorneys