The passage of the Slovak Insolvency Act in 2005 enshrined the concept of the related party to the debtor in Slovak law. The definition was drafted so broadly in the law that – apart from the corporate bodies – shareholders holding at least 5% share in capital or voting rights and their close relatives (e.g. spouses and children) are covered:. moreover, it included anyone able to exercise managerial influence over the debtor corresponding to that 5% share. Th recent case law has impacted this definition, and made it necessary for lenders and related groups to be cautious in their interaction with debtors and to seek legal advice regarding any communication.
Since 2012, the qualification of a related party also began to have an impact on the claims of such parties being classified as subordinated, regardless of security.
The regulation was intended to exclude situations typical at that time when members of the debtor's corporate bodies or other related parties registered their (in some cases, exaggerated) claims to achieve as much control over the insolvency process as possible. However, the broad definition coupled with the unclear specification of possible influence over the debtor remained unresolved under Slovak law, resulting in the recent case affecting Česká exportní banka, a.s. (CEB).
In 2008, CEB financed the construction of the greenfield steelworks Slovakia Steel Mills, a.s. (SSM) in eastern Slovakia. Based on the standard LMA documentation, the bank granted a loan of over EUR 166 million to the newly established Slovak entity. Despite the huge investment, the steelworks were never profitable and by 2012 SSM attempted an informal restructuring: consisting of sale of a part of its water enterprise and debt restructuring. Since all SSM's assets were secured by CEB, the steel concern negotiated with CEB over a waiver on asset sales. The negotiations were not successful.
In 2014, SSM filed for formal restructuring, but CEB contested it due to the low probability of this resulting in any successful business. As a result, SSM filed for bankruptcy in 2015, which is when the real fight started. In addition to other disputes, the trustee and other creditors contested CEB's huge claim.
A court examination of the loan documentation between CEB and SSM revealed various clauses considered standard that enabled the lender to have a certain level of control over the debtor, in particular in the event of default. Under the share pledge agreement, CEB as the lender could exercise voting rights in SSM if SSM defaulted and if CEB notified SSM that it wants to exercise these rights.
Even though CEB argued in court that it never used these rights in practice, the courts concluded that the existence of the mere possibility to exercise them was sufficient for qualifying as a related party. In the opinion of the court, evidence of the real exercise of management rights came through various documents (e.g. letters, emails, notes from meetings, etc.) and the informal restructuring talks in which CEB gave its opinion on SSM plans, such as in relation to debt restructuring or its water sales business. The first-instance judgement declared CEB as a related party effectively subordinating its claim to all other creditors. This decision was confirmed by the appellate court, making the judgments final and without the possibility of ordinary appeal.
The Supreme Court or Constitutional Court could still challenge the judgement although, at the moment, no such case appears to be pending according to publicly available information. The judgements and the interpretation by the courts thus far send a warning to lenders and related groups to be cautious in their management and communication with their debtors and to consult legal advice beforehand.