Insolvency and bankruptcy in Slovakia from the creditors' viewpoint

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1 Insolvency and bankruptcy in Slovakia from the creditors' viewpoint Business Breakfast The SWEDISH, the NETHERLANDS, the BRITISH Chambers of Commerce and PETERKA & PARTNERS Law Offices 25 November, 2009 Art Hotel William, Bratislava Presented by: Mr. Premysl Marek, Partner Mr. Ondrej Majer, Senior Associate 1

2 PETERKA & PARTNERS brief presentation PETERKA & PARTNERS is one of the largest independent law firms in Central and Eastern Europe (Bratislava, Prague, Kyiv, Sofia) PETERKA & PARTNERS is a member of the international network of law firms TerraLex and the International Lawyers Network The Bratislava office began operations in 2001 and at present belongs among the leading law firms in Slovakia. It is ranked as a recommended law firm by Practical Law Company (PLC Which Lawyer), by Chambers Global 2009 and by the most recent edition of Legal 500 EMEA Our legal services relate to the activities of key foreign investors in Slovakia. The firm also provides consultancy to local clients - individuals, companies and institutions 2

3 PETERKA & PARTNERS Bratislava Insolvency & Bankruptcy practice Some recent references 2009 (available for disclosure): AEROPORTS DE PARIS - Advisory services to an important French airport provider in the restructuring and bankruptcy proceedings of SKYEUROPE AIRLINES, including legal issues related to the seizure of an aircraft in Paris as collateral because of unpaid debts, and related disputes. CARTASI Advisory services to the Italian bank and credit card acquirer, which processed all credit card operations for SKYEUROPE AIRLINES, in the airline s bankruptcy proceedings. ARCELOR MITTAL FCE Advisory services in the bankruptcy proceedings of Arcelor Mittal s important client in Slovakia. SENOBLE Advisory services to the Slovak subsidiary of an important French dairy producer concerning the acquisition of a production facility belonging to an insolvent entity. 3

4 Purpose of the presentation What a creditor should know about bankruptcy in Slovakia? How to proceed if your partner is insolvent or goes bankrupt? How to deal with partners threatened with a bankruptcy? 4

5 Slovak Bankruptcy law fundamental rules (1) EC Regulation (1346/2000): Slovak bankruptcy law applies if the bankruptcy is declared in Slovakia, that is, if the center of main interests ( COMI ) is in Slovakia (presumption: companies have a corporate seat in Slovakia). Once bankruptcy is declared these rules apply (with some exceptions) anywhere in the EU, except Denmark. Insolvency ( úpadok ): Objective situation the debtor is unable to pay all its creditors (insufficient assets or insufficient cash-flow). Bankruptcy ( konkurz ) or Restructuring ( reštrukturalizácia ): two specific types of collective procedures declared by a Slovak court if a debtor is found insolvent. 5

6 Slovak Bankruptcy law fundamental rules (2) Two main forms of insolvency under Slovak law: 1. Cash-flow insolvency (platobná neschopnosť) more than one creditor the debtor is unable to pay due debts for at least 30 days both the debtor and the creditor may apply for bankruptcy. 2. Overindebtedness (predlženie) more than one creditor the value of debtor s due debts exceeds the value of its assets only the debtor may apply for the bankruptcy No balance sheet insolvency (only due debts are taken into consideration) 6

7 Slovak Bankruptcy law fundamental rules (3) Insolvency proceedings under Slovak law: Bankruptcy ( konkurz ) = collective winding-up proceedings consisting in a bankruptcy trustee liquidating a debtor s assets and proportionally satisfying creditors from the proceeds of the liquidation. out of the debtor s control independent trustee, important role of creditors in the proceedings Restructuring ( reštrukturalizácia ) = collective proceedings consisting in restructuring debts and partial or entire satisfaction of creditors from the proceeds of continuing to operate the debtor s business. under the debtor s control trustee is chosen by the debtor under Slovak law, it might be misused in deep overindebtedness, creditors are likely to accept disadvantageous conditions of restructuring 7

8 Who is entitled to claim a declaration of bankruptcy? Voluntary bankruptcy debtor s petition a debtor (or its statutory body) is obliged to ask for bankruptcy proceedings to be opened within 30 days Involuntary bankruptcy creditor s petition only in case of cash-flow insolvency rare in Slovakia strict conditions - creditor must prove: its enforceable/acknowledged claim the enforceable/acknowledged claim of another creditor additional written reminder of both advance payment of 1,660 for the costs of the proceedings creditor s advantages are very limited comparing to the standard individual enforcement 8

9 Opening bankruptcy Request for a declaration of bankruptcy (debtor, creditor) Opening of bankruptcy proceedings (within 15 days) publication in the Commercial Bulletin Assessment of the existence of insolvency (only in involuntary bankruptcy creditor s petition) Assessment of the debtor s assets (if there are doubts whether they are sufficient to settle the costs of the proceedings) Declaration of bankruptcy or Termination of bankruptcy proceedings publication in the Commercial Bulletin 9

10 Position of creditors Different classes of creditors: secured creditors (creditors whose claims are secured with asset collateral pledge, mortgage, possessory lien, security assignment) entire satisfaction from the separate bankruptcy estate ordinary creditors proportional satisfaction from the general bankruptcy estate subordinated creditors and shareholders possibility of satisfaction only after full satisfaction of all ordinary creditors Situation in Slovakia: No balance sheet insolvency high threshold of insolvency (at the moment of opening bankruptcy proceedings the company is already heavily indebted - debts to assets ratio is very high) High threshold of insolvency plus strong position of secured creditors = very low degree of satisfaction for ordinary creditors 10

11 Lodging of claims Delay: 45 days from the declaration of bankruptcy. Declaration announced in the Commercial Bulletin ( Article 40 of EC Regulation: the trustee must immediately inform by individual notice all known creditors from other EU member states Only claims (receivables) duly lodged in the bankruptcy proceedings in time may be taken into account within the proceedings. Claims to be lodged: receivables that arose before the declaration of bankruptcy conditional and future claims that will arise after the declaration of bankruptcy, based on the legal title established before the declaration, including claims to be acquired by subrogation (such as a debtor s guarantor) Claims not to be lodged (paid directly from the bankruptcy estate): claims arising after the declaration of bankruptcy, except conditional claims 11

12 Process of lodging claims Two different regimes for lodging claims: Slovak law - obligatory for creditors resident in Slovakia and for creditors from outside the EU EU Regulation independent regime of Article 41 - creditors resident in other EU member states are entitled to chose between Slovak law and the EC Regulation... the 45-day deadline cannot be extended Slovak law regime - relatively strict rules the submission must be physically delivered in the deadline both to the court and to the trustee formal mistakes in the submission may result in rejection EU Regulation regime independent regime for lodging claims less strict might be problematic for various reasons 12

13 Assessing the claim If the claim is duly lodged the trustee verifies whether it is well founded. if the claim is well founded, the trustee accepts it (creditor may exercise its rights in the proceedings) if the trustee considers the claim is unfounded, it will be opposed within 30 days. If the claim is opposed, the creditor decides whether to initiate specific legal proceedings against the trustee before the bankruptcy court (within 30 days): if the court decides that the claim is well founded a creditor may exercise its rights in the proceedings if the court decides that the claim is unfounded or that the amount claimed is excessive (the real claim is less than 75 percent), the creditor might be significantly fined 13

14 Effects of bankruptcy (1) Some general effects: the debtor s assets and the assets of third parties which secure the debtor s debts comprise the bankruptcy estate (general, special) the court appoints a trustee who disposes of the bankruptcy estate instead of the debtor in order to wind-up the business and liquidate the assets the bankrupt s debtors must pay their debts to the trustee (otherwise, the debt is not discharged) all court and administrative proceedings are suspended (except tax and customs proceedings) with some exceptions creditors cannot proceed individually against a debtor s assets (including foreclosing a mortgage, pledge, possessory lien or security assignment) anywhere in the EU 14

15 Effects of bankruptcy (2) Some particular effects of a declaration of bankruptcy that might concern creditors: all claims against the debtor and all debtor s claims against creditors and third persons become immediately due (retention contract clauses do not work in bankruptcy if connected only to a lapse of time) it is possible to terminate certain contracts (those not yet executed) the creditor can ask the debtor to execute a contract before the creditor (or secure further execution), despite any contractual stipulation any contractual limitation on the transferability of claims against the debtor as well as against the creditor are not effective (it is always possible to assign such claims) the possibility of setting-off the bankrupt s debts is limited 15

16 setting-off claims If bankruptcy is declared it is not possible to set-off: * A debtor s claims against a creditor established after the declaration of bankruptcy (post-bankruptcy claims): with creditor s claims against the debtor that must be lodged * any debtor s claims against the creditor: with creditor s claims that were not duly lodged with claims transferred to the creditor after the declaration of bankruptcy with claims transferred to the creditor by an opposable act All other claims against the debtor may be set-off against any of the debtor s claims. 16

17 How to deal with partners threatened with insolvency? * Initial precautions are often more effective than further measures in bankruptcy proceedings. * Make sure that your contracts are adapted to the risk of your partner s bankruptcy. * Try to get good collateral. It is good to be a secured creditor. It is better to have an additional claim against another solvent person (bank guarantee, insurance). * Monitor the Commercial Bulletin to make sure you lodge your claims in time. 17

18 Any questions? 18

19 Thank you for your attention. Mr. Přemysl MAREK, Partner Mr. Ondřej MAJER, Senior Associate Tel.: +421 (02) PRAHA BRATISLAVA KYIV SOFIA 19