Slovak bankruptcy moratorium

In response to the COVID-19 pandemic, the Slovak government and Parliament approved a bankruptcy moratorium to help entrepreneurs overcome the negative impacts of this crisis on their businesses. The moratorium is an opt-in model and entrepreneurs are entitled to apply for temporary bankruptcy protection subject to certain conditions.

The original wording granted protection until 1 October 2020 with the possibility for the Slovak government to extend it if necessary. The temporary protection can be further terminated by the entrepreneur itself, which has happened in a surprisingly high number of cases and shortly after being granted protection, or on a court decision if the conditions were or are not met or terminated, or if the entrepreneur breaches its obligations. The Slovak government recently approved extending temporary protection until 31 December 2020, which also applies automatically to the entrepreneurs already under temporary protection.

At the same time, a new law on the temporary protection of entrepreneurs in financial difficulties is being prepared, planned to take effect as of 1 January 2021, i.e. after the termination of the temporary moratorium due to COVID-19. The original wording led to over 200 comments and had to be rewritten.

In many aspects, the draft law copies the temporary moratorium by offering temporary protection to Slovak enterprises in financial difficulties. However, in this case it is more intended to balance the position of the eventual debtor and its creditors. Firstly, the applicant must fulfill certain criteria to qualify for the protection, such as not being insolvent, in enforcement proceeding or enforcement of a pledge/mortgage, as it might already be too late for it to survive. Furthermore, it must be registered in the Register of Partners of the Public Sector (the “Register”) with the intention of revealing the ultimate beneficiaries and bringing greater transparency. The draft law does not restrict registration to a certain point in time, so if necessary, such unregistered applicant could make voluntary registration in the Register at any time.

In addition to granting creditors a better position, a majority of creditors must agree with the moratorium. The majority is calculated according to the amounts of the claims, whereby related creditors are not considered in the total amount of claims. The claims of creditors exceeding EUR 100,000 are also not included in the necessary majority, except for the claims of public authorities and entities registered in the Register. Again, the aim is to make clear who the ultimate beneficiaries of the respective creditor are. This could be disadvantageous especially to foreign creditors, but if necessary, such unregistered creditors could make voluntary registration.

The temporary protection under the draft law can be provided for three months with a possible extension by a further three months on application and the written consent of a two-thirds majority of creditors (calculated as above). Further temporary protection can only be granted after four years.

Temporary protection is aimed at giving debtors time to save their businesses, most likely through negotiations with creditors including new financing primarily provided by the existing secured creditors and having priority satisfaction to unsecured creditors (unless security is granted). Subject to certain conditions, debtors are protected from creditor insolvencies, (security) enforcement, contractual terminations, set-offs and acquitted from the obligation to file for bankruptcy. On the other hand, debtors under protection have several obligations such as to primarily settle the claims necessary for the maintenance of business arising after the protection, to abstain from distributing profits and other performances to related persons/entities, and from making material disposals of assets and taking actions outside the ordinary course of business.

The draft law is still subject to approval by the Slovak Parliament, so the final wording might still change, but it is definitely crucial that businesses are aware of this concept in Slovakia.