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The April 2015 amendment to the Slovak Commercial Code and the Slovak Act on Bankruptcy and Restructuring

On 23 April, 2015, the Slovak Parliament passed an act amending the Commercial Code, the Act on Bankruptcy and Restructuring and other acts. The act was published in the Collection of Acts under no. 87/2015 Coll. The purpose of this amendment is, according to its explanatory memorandum, to respond to some current issues related to bankruptcy and restructuring and to related issues in trade relations. The passing of the amendment was relatively intensely monitored by the public with regard to its impact on a publicly well-known construction company restructuring. As to its content, the amendment in question is based in a substantial part on the last year’s amendment to the Commercial Code and other acts passed by the Slovak Parliament, which did not enter into force because the Slovak Parliament did not override the veto of the President of theSlovakRepublic. The most fundamental changes, that the amendment in its current form introduces, include the following.

Register of disqualifications

Disqualification means a ban on the possibility to act as a member of a statutory or supervisory body of a company or a cooperative and the prohibition to act as head of an organizational branch of a company or as procurator. Disqualification is based on a court decision, both (i) a decision to impose punishment of the prohibition of the relevant activity and (ii) a decision to impose a contractual penalty in connection with the breach of the obligation to file for bankruptcy. The register of disqualification is a non-public register, which is part of the central information registry of the judiciary and will be maintained by the District Court Žilina. The relevant data is provided to the court by other courts that in the first instance issued effective judgments on disqualification. In order to reduce the administrative burden on businesses, data indicating whether or not the person is disqualified is automatically verified by theCommercial Register Court in the register of disqualification before its registration in the Commercial Register. Of its own motion theCommercial Register Court deletes the disqualified person who exercises a function from the Commercial Register. The disqualified person is moreover obliged to notify the legal entity in which he/she exercises the relevant function of the disqualification. If the disqualified person, either itself or through another person acts on behalf of a legal entity, there is a legal liability of the acting person for obligations from trades that the acting person negotiated on behalf of that legal entity. The legislation regarding the disqualification will become effective January 01, 2016.

Transactions with conflict of interest

The rules under the provisions of § 59a of the Commercial Code, limiting the acquisition of property (and the need for its expert valuation) from the founder or shareholder of the company or the parties related to him, cease to apply to a limited liability company from January 01, 2016. The legislator justified the measure by the need for reducing the administrative burden of limited liability companies. Such a company shall instead be protected by a new regulation on the prohibition of the return of contributions. According this regulation, the return of contributions is defined (in addition to the current return of a specific asset to the shareholder, contributed to the company), as any performance without adequate consideration given by the company to the shareholder, former shareholder or their related entities. In assessing the adequacy of the consideration in particular the usual price on the market, the price achieved in the ordinary course of business or the most probable price in an honest sale must be taken into account. Evaluation of the consideration will no longer have to be done by expert opinion, which would have to be deposited to the Collection of Deeds, as it is currently. The consequence of the breach of the prohibition of the return of contributions will be the obligation of the person who was enriched to return the difference between the consideration given and the consideration that would be adequate. The members of the statutory body of the company are obliged to enforce this obligation and those members of the statutory body who were in office at the time of return of the contribution, are jointly and severally liable to the company and to its creditors for the return of the contribution to the company.

Resignation of the member of the company’s body

In order to provide greater certainty about the moment at which the act of resignation is performed, the amendment introduces the obligation for a certified signature on the document, by which a member of a company’s body resigns and which is to be delivered to the company. The explanatory memorandum to the quoted provision itself states, however, that the effects of the resignation occur on delivery of the resignation of the company. If a member of a company’s body resigns at the General Meeting, authenticity of the signature of the Chairman of the General Meeting on the minutes must be certified. This rule became effective on April 29, 2015.

Company in crisis

With effect from January 01, 2016 new rules regarding the crisis of a company are introduced. Crisis is defined as a state of bankruptcy or imminent bankruptcy of a company. Imminent bankruptcy will be defined as a state of a low ratio of own funds and external funds, and it will be based upon the company's financial statements. Specifically, in 2016 as imminent bankruptcy a condition will be deemed where the ratio of equity and liabilities is less than 4 to100, in2017 is less than 6 to 100 and from 2018 is less than 8 to 100. The purpose of rules regarding the crisis of the company is to specify that certain performances that will be granted to a company in crisis will be deemed as performances in which satisfaction is subordinated to the satisfaction of the receivables of other creditors. It mainly concerns the debt financing of the company (other than funding via contributions of shareholders), such as through loans or similar performances. These performances provided to companies in crisis are legally considered to be so-called performances replacing own funds of the company which will be subordinated debt of a company. A company will not be able to return such performances, together with their accessory and contractual penalty to the shareholder, parties related to them, members of a company’s body and parties where it is not possible to identify the beneficial owner, if the company is in crisis or this would get the company into crisis. The performances replacing own funds returned in breach of the prohibition must be recovered by the company, while the members of the statutory body, who at the time of the returning were in office, are jointly and severally liable for the recovery. A similar regime applies to cases where a person, to whom performances replacing own funds should not be returned, secures a company's liabilities and due to the performance of the debt to the company's creditors from the security (e.g. liability) this person becomes entitled against the company (e.g. regression, subrogation). In this case, that person can not be given compensation if the company is in crisis or this would get the company into crisis.

The fine for failing to file a petition for bankruptcy

The amendment replaces the current rules for indemnification resulting from the failure to petition for bankruptcy and introduces a fiction whereby it is deemed that the bankrupt debtor and the person who is required to file for bankruptcy on his behalf have negotiated a contractual penalty for the benefit of the bankrupt debtor in the amount of a half of the lowest value of the registered capital of a joint-stock company, i.e. currently 12,500.00 Euro. The obligation to pay the contractual penalty arises with respect to the bankrupt debtor individually to each person required to file a petition for bankruptcy. The claim for indemnification in excess of the contractual penalty shall not be affected. In the proceedings for a claim for the contractual penalty a reversed the burden of proof is applied, the defendant, however, can prove that there were circumstances excluding his responsibility. The court in the given case is not entitled to reduce the contractual penalty. This rule will become effective on January 01, 2016.

Employee petition for bankruptcy

To facilitate the process of employees of the bankrupt debtor to initiate bankruptcy proceedings against their employer, additionally to the existing rules, a new rule states that the appropriate document, proving the existence of receivables necessary for commencing of the bankruptcy proceedings, is a written statement with certified signatures of at least five employees of the bankrupt debtor of the failure of the bankrupt debtor to satisfy the claims on their wages, severance or termination payment 30 days after they are due. The petitioner in this case can only be an employee or former employee of the bankrupt debtor, unrelated to the bankrupt debtor, who is represented by a trade union. A new exemption from the obligation to pay the deposit to cover the fee of the preliminary trustee in case of an employee petition for bankruptcy is introduced. These provisions came into force on April 29, 2015.

The status of a secured creditor for the owner of an item

The owner of an item that could otherwise demand the exclusions of this item from list of property on the basis of e.g. the retention of title or financial leasing will from January 01, 2016 be entitled to exercise his rights in the bankruptcy as though he exercised a security right. In the bankruptcy he will have the status of a secured creditor and satisfaction will be done from a separate estate. By filing the application the owner also authorizes the trustee to perform the sale of the item. Alternatively, in the event that the trustee, without delay after the bankrupt debtor is notified by the owner of the item, satisfies (outside the distribution of the proceeds) the obligation under the contract, the owner cannot claim the return of the item. A prerequisite for use of this process by the trustee is that he concludes with professional care that the satisfaction of the obligation is more favorable to the estate.

In relation to restructuring the amendment explicitly defines the position of leasing lessors who have no right to terminate the contract under which the debtor has the right to have an item in his detention. These persons will be given the right to exercise their rights as secured creditors. These provisions will enter into force on January 01, 2016.

Preconditions of the recommendation of restructuring

Proper accounting is a prerequisite for the trustee to recommend the restructuring. This condition is based on the intention of the legislator to permit restructuring only to entities whose accounting is transparent. Since restructurings should not be chained, a new condition is introduced, stating that no less than two years could have passed form the end of the last restructuring. These provisions came into force on April 29, 2015.

Restructuring report requirements

Following the newly defined preconditions for a recommendation of restructuring a number of requirements for the restructuring report are introduced. This report must include detailed descriptions of the debtor's legal actions with related parties and with persons who secure the obligations of the debtor. The aim of the regulation is to allow the creditors to have a better overview of the benefits of the restructuring process compared to the possibility of bankruptcy. The report in which the trustee recommends a restructuring must also include a further indication of the extent to which the shareholders (members) of the debtor have divided profits or other own resources over the last two years and also the opinion of an auditor or a court expert whether the financial statements (last ordinary or later extraordinary) give a true and fair view of the bookkeeping of the debtor. The above is based on a new concept, according to which restructuring should be available only to entities whose bookkeeping is performed properly. Another new requirement is the attachment of a list of all legal acts of the debtor with related parties exceeding the established limits, which aims to provide an overview of whether actions preformed previous to the restructuring did not lead to the disposition of a substantial part of the debtor's assets. These provisions came into force on April 29, 2015.

Resignation of the restructuring trustee

The amendment introduces a new option for a restructuring trustee to resign for any reason, even beyond the statutory framework under which the court may dismiss him. In that case, the court selects a new trustee randomly by electronic means. These provisions came into force on April 29, 2015.

Ban of Cram down

The Court can not substitute the consent of one of the categories of creditors with the adoption of a restructuring plan (the so-called Cram down) if the unsecured creditors should be provided performance for a longer period than five years without their consent. The measure is according to the explanatory memorandum aimed at reducing the imbalance between the position of secured creditors and unsecured creditors who could get into a disadvantageous situation. These provisions came into force on April 29, 2015.

Debt-equity swap and the rejection of the plan

The amendment introduces the exchange of debt for participation in the restructured legal entity in two dimensions, namely (i) as a reason for rejecting the plan, if according to the plan new shares (or other ownership interests) in exchange for monetary contributions or in exchange for receivables of unrelated creditors at least in the value of the net profit and other own resources of the debtor distributed to its members in the last two years are not issued and (ii) as a voluntary option of the debtor after the restructuring to provide the creditors with shares or other ownership interest in exchange for the receivables based on mutual agreement. Another new reason for the rejection of the plan is the fact that the plan is unfair in the sense that it introduces inequality between secured and unsecured creditors so that unsecured creditors would be satisfied in an unreasonably prolonged time compared to secured creditors. These provisions came into force on April 29, 2015.

Limitation of the debtor to divide profit before satisfying the creditors

After the restructuring a ban on the distribution of profit or other own resources of the debtor among its members before he could fully satisfy his unrelated unsecured creditors will apply. If this prohibition is violated, the plan becomes ineffective with regard to creditors of unsecured claims. A single creditor may seek a court declaration that there was an infringement of that prohibition; his success has effect with regard to all other participants in the plan. Even in the event of the creation of profit and its entrance in the financial statements an unrelated unsecured creditor is entitled to seek satisfaction of his original claim from this profit provided that the debtor does not need this profit to maintain the operation of his business, or a substantial part thereof. These provisions came into force on April 29, 2015.

Ban on participation of a restructuring entity in public procurement

With effect from April 29, 2015 the prohibition to participate in public procurement became effective for entities that are being restructured. The mentioned has been added among the conditions of personal status under the Law on Public Procurement to prevent the participation of entities whose restructuring was permitted in public procurement.

The author of the article is Simon Šufliarský, associate in Konečná & Zacha's office in Bratislava

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