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The financial crisis of 2008 hit Slovenia hard, as its economy has only recently managed to recover. Excessive borrowing in the ‘golden years’ prior to 2008, combined with imprudent financial institutions and failed investments, caused insolvency of many well-established market players, especially in the construction industry, and have forced a significant number of companies from virtually all sectors of the economy to their financial and operational restructuring. Slovenia entered the crisis with a new Insolvency Act,1 which only came into force in the midst of the crisis, on 1 October 2008. The insolvency legislation was insufficiently prepared for the situation that was to unravel in the coming years, hence, the Insolvency Act had to be amended eight times to adapt to the new reality of the Slovenian economy and implement an easier and more effective approach to financial restructuring of insolvent and soon-to-be-insolvent debtors, especially for restructuring of financial claims. Such amendments seem to be successful, as in its Doing Business Review 2017, the World Bank ranked Slovenia as 10th in the world in terms of the Resolving Insolvency Index (compared to 12th place in 2016).2
Slovenian law recognises two core types of insolvency proceedings: compulsory settlement, the purpose of which is financial restructuring of the insolvent debtor, and bankruptcy. Although legal consequences between the two types differ significantly, they both have an impact on creditors’ claims. Commencement of an insolvency procedure significantly limits creditors’ rights to judicial enforcement of their claims: the creditors may not initiate any new enforcement or interim security proceedings regarding their claims for the duration of the insolvency procedure, and the existing enforcement and interim security proceedings are either terminated or suspended, depending on the state of the procedure.3 Furthermore, upon commencement of the insolvency procedure, all non-pecuniary claims are converted to pecuniary claims at market prices at commencement of the procedure, claims in foreign currencies are converted to euros at the official rates of Bank of Slovenia, and the claims of individual creditors are automatically set off against counterclaims of the debtor against such creditor (with certain exceptions in bankruptcy).4
By an amendment to the Insolvency Act of 2013, pre-insolvency proceedings have been implemented for the soon-to-be insolvent debtors: the preventive restructuring procedure.
Pursuant to article 14 of the Insolvency Act, insolvency is a situation in which the debtor is experiencing either a long-term illiquidity (ie, the debtor is unable to settle all of its liabilities that have matured over a longer period of time), or a long-term payment incapability. Neither of these positions are further defined, as they have to be determined on a case-by-case basis pursuant to the financial position of each debtor; nevertheless, the Insolvency Act sets forth certain assumptions of insolvency to ease creditors’ burden of proof in insolvency procedures.
If the debtor is a legal entity, a long-term illiquidity is presumed when:
- the debtor is in default with payment of one or more obligations exceeding 20 per cent of all the debtor’s liabilities set forth in the debtor’s last published annual report, with such default lasting for more than two months;
- for a period of 60 consecutive days or for 60 days within a period of 90 (consecutive) days, the debtor does not have sufficient funds on its bank accounts to execute an enforcement order and such position persists on the day before filing for insolvency; or
- the debtor has no bank accounts opened in Slovenia and has not paid its liabilities arising out of an enforcement order within 60 days after such enforcement order has become final.
If a compulsory settlement procedure over a debtor has been confirmed by a final decision, such debtor is presumed to be in a state of long-term illiquidity if it defaults for over two months with either:
- payment of its liabilities pursuant to the confirmed compulsory settlement;
- payment of its liabilities against the secured creditors (ie, creditors holding claims secured by the right to separate payment, meaning the right to be paid from certain assets of the insolvent debtor before the claims of other creditors are paid from such assets, for example, pledge or retention rights); or
- performance of financial restructuring measures, set forth in the debtor’s financial restructuring plan.
The aforesaid presumptions may be challenged by the debtor if the insolvency proceeding is instated at the creditor’s petition. However, it is irrefutably presumed that the debtor is in the state of long-term illiquidity if it defaults for over two months with either payment of employees’ wages up to the value of minimal wage or with payment of taxes and social contributions, which have to be accounted for and paid on behalf of the employees by the employer together with the wages.5
It is presumed that the debtor is in the state of long-term payment incapability if: (i) the total amount of its liabilities exceeds the value of its assets; or (ii) the net loss of the current year, together with the transferred losses, exceeds half of the subscribed capital and such loss cannot be covered by transferred profit or reserves.
As soon as the debtor becomes insolvent, it is prohibited from performing payments or assuming new liabilities unless such payments or liabilities are required for the regular course of the debtor’s business. The debtor’s management has to analyse the reasons for the debtor’s insolvency and prepare a report on measures of financial restructuring within one month from the day the debtor’s insolvency is confirmed by the management. At the same time, the management has to verify whether there is at least a 50 per cent possibility that by implementing measures of financial restructuring the debtor would regain its short and long-term payment capability, and whether there is at least a 50 per cent possibility that the compulsory settlement would be confirmed, if such measures were insufficient. If either of the possibilities is lower than 50 per cent, the management has to file for bankruptcy.6
The preventive restructuring procedure is intended for debtors (small, medium or large corporations pursuant to the Companies Act)7 who are not yet insolvent, but a likelihood persists that they will become insolvent within a period of one year.8 Although the procedure may only commence at the debtor’s request, creditors holding at least 30 per cent aggregate value of financial claims9 listed in the debtor’s list of financial claims, certified by an appointed auditor, have to consent therewith. Upon commencement of the preventive restructuring procedure, a standstill applies for the claims listed in the debtor’s list of financial claims and the creditors may not initiate enforcement or interim security proceedings regarding such claims.10
Within three to five months following commencement of the preventive restructuring procedure, the debtor and creditors holding at least 75 per cent of aggregate value of financial claims that are listed in the debtor’s list of financial claims11 have to conclude a master restructuring agreement (MRA) and request court confirmation thereof. The parties to the MRA are free to agree on whichever restructuring measures they consider appropriate for elimination of the insolvency threat (provided that such measures are confirmed by a certified auditor) and the court does not verify the contents of the MRA. By its decision on confirmation of the MRA, the court extends the validity of the MRA to financial claims of those creditors that have not given their consent to the MRA,12 provided that such claims were listed in the debtor’s list of financial claims. Mandatory effects of the court-confirmed MRA only extend to the restructuring measures: if the parties of the MRA agreed to any creditors’ obligations against the debtor or among themselves, such obligations do not apply to creditors, who have not consented to the MRA. However, if the MRA establishes creditors’ rights against the debtor, such rights should also apply to creditors that are not parties to the MRA.13
Other than preventive restructuring procedure, the Insolvency Act does not govern any other type of pre-insolvency procedure. However, pursuant to the general principles of civil law, the debtor may at any time enter into an agreement with its creditors, whereby the parties agree to (financial) restructuring of creditors’ claims outside the scope of the preventive restructuring procedure. Such voluntary and contractual restructuring is common, especially with non-financial claims (ie, claims of the debtor’s suppliers as well as other claims from the debtor’s regular course of business), as such claims cannot be restructured by the MRA concluded in the preventive restructuring procedure. As there is no mandatory audit of the agreement on restructuring, voluntary restructuring may also save costs for the parties involved.
The parties to such voluntary and contractual restructuring may agree to any restructuring measure deemed appropriate by them, and the agreement may be concluded at any time (when there is no threat of insolvency, such threat exists or even after the debtor becomes insolvent, provided that in the latter case the debtor’s management complies with its obligations pursuant to the Insolvency Act). Obviously, the agreement on restructuring does not have any effect against the claims of creditors that are not parties to the agreement, nor does commencement of the negotiations impose a standstill or prevent creditors’ enforcement of the claims in the enforcement procedure.
In the compulsory settlement, the debtor undergoes financial restructuring, through which the debtor eliminates reasons for its own insolvency and, upon completion of the procedure, continues with its business activities. Creditors control the compulsory settlement procedure through their participation in the creditors’ committee and through their decision-making powers when approving the compulsory settlement. No forced sale of the debtor’s assets occurs in the compulsory settlement procedure.
Compulsory settlement may commence at the proposal of the debtor or of its creditors holding financial claims in the aggregate value of at least 20 per cent of all the debtor’s financial liabilities set forth in the debtor’s last published annual report.14 The debtor’s proposal for compulsory settlement, in which the debtor proposes that the creditors’ ordinary claims are either partially written off and their payment is deterred, may only apply to ordinary (ie, unsecured) claims; secured, priority and subordinated claims are exempt and the approved compulsory settlement does not apply thereto. However, if the debtor proposes transfer of claims to the debtor as creditors’ capital contribution in rem (conversion into equity), such proposal may also be addressed to creditors holding secured claims;15 such creditors may also be offered more favourable conditions or larger shares in comparison to creditors holding ordinary claims.
The proposal may also be limited to restructuring of only financial claims or to restructuring of financial and secured claims. In such event, the secured claims may only be restructured through deterred payment thereof or through lowering of the interest rate; if a claim is secured with more than one right to separate payment, such rights may be merged into one joint right to separate payment.
The amendments of the Insolvency Act 2013 have significantly eased performance of debt-to-equity conversions, as such conversion may take place upon a resolution of the creditors’ committee, if the conversion was not proposed by the debtor. The resolution of the creditors’ committee on the share capital increase must also include an option for holders of secured claims to convert their claims into share capital at a conversion rate being 25 per cent more favourable than the conversion rate for ordinary claims; if the conversion is proposed by the debtor, the resolution on share capital increase by in-kind contributions has to be adopted by the debtor’s general meeting. The creditors are free to choose whether they will convert their claims to equity or restructure their claims as proposed.
Approval of the compulsory settlement is decided by a vote of creditors with recognised or plausibly demonstrated claims. Creditors’ voting rights depend on the amount and type of their respective claims. The amount of each recognised or plausibly demonstrated claim of creditors is thereby taken into consideration, multiplied by a quotient for voting on compulsory settlement. Compulsory settlement is approved if the adoption is voted for by creditors with total weighted amounts of claims equaling at least six-tenths of the sum of weighted amounts.16 Hence, abstaining from casting a vote is equivalent to voting against the proposed compulsory settlement.
Following approval of the compulsory settlement, the creditors are only entitled to receive payment of their claims in the proportion and within the deadline, set forth in the approved compulsory settlement. Failure to approve compulsory settlement results in the debtor’s bankruptcy, with certain exceptions.
Bankruptcy proceedings can be instituted by the proposal of the debtor, its personally liable shareholder, a creditor proving that the debtor is in default with payment of its claim for more than two months, and the Guarantee, Child Support and Disability Fund of the Republic of Slovenia (only if the debtor is in default with payment of employees’ claims).17 In certain instances when compulsory settlement proceedings fail, the court puts the debtor into bankruptcy proceedings ex officio. In its decision to commence bankruptcy proceedings against a debtor, the court also appoints a bankruptcy trustee who immediately takes over the debtor’s management, its premises and documents, and acts as the debtor’s legal representative until final dissolution.
Within three months from the commencement of the bankruptcy proceedings, creditors have to notify their claims to the bankruptcy trustee; creditors holding secured claims have to notify both their claims and their rights to separate payment. All claims existing at the time of the bankruptcy proceeding’s commencement, whether due or not, and including conditional claims and recourse claims of co-debtors and guarantors, have to be notified. If the creditor fails to notify its claim or right to separate payment in due time, the claim ceases to exist in relation to the debtor and the creditor loses the right to be repaid from the bankruptcy estate or the right to separate payment, unless it holds a valid title to enforce security by way of extrajudicial sale.
As the goal of the bankruptcy proceeding is to monetise the debtor’s assets to form the bankruptcy estate, wherefrom the creditors’ claims are repaid, the bankruptcy trustee has to appraise the value of the assets and estimate the most suitable timing and manner for sale of the assets. The assets are usually sold on a public auction or by invitation to place binding offers (with the exception of securities traded in capital markets, perishable goods and the debtor’s inventory without market value); the money raised with the monetisation of the assets forms general distribution estate. Special rules apply for the sale of the debtor’s assets subjected to creditor’s right to separate payment: the respective creditor has to give its opinion or consent to the planned sale of the assets, while money raised with monetisation of each of such assets forms special distribution estate. Secured claims are paid from the respective special distribution estate, while the general distribution estate covers the costs of procedure, followed by preferred claims, ordinary claims and lastly, subordinated claims.
Cross-border insolvency proceedings
As an EU member state, Slovenia abides by the Regulation (EC) No. 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (the Insolvency Regulation), which facilitates recognition of insolvency proceedings that span across multiple jurisdictions. Insolvency proceedings, set out in Schedule A of the Insolvency Regulation, commenced in any EU member state have direct effect in Slovenia, and no recognition of such proceedings is required.
However, recognition is required for insolvency proceedings commenced in third countries and for any proceedings not included in the aforementioned Schedule A. Slovenia is one of only five EU member states that have implemented the UNCITRAL Model Law on Cross-Border Insolvency.18 Foreign creditors are given the same rights as domestic creditors and foreign trustees have the right of access to Slovenian courts, including the right to request recognition of foreign proceedings in a fairly simplified procedure. Upon recognition of a foreign insolvency proceeding, either as main or auxiliary procedure, the creditors may not initiate any new enforcement or interim security proceedings, the existing enforcement and interim security proceedings are suspended and the rights of debtor’s representation are transferred to the trustee; the recognising court may also decide on other legal consequences of the foreign insolvency proceedings.
Legal issues, related to cross-border insolvency and its recognition only gained momentum in 2017 with the demise of Agrokor, Croatian conglomerate, which, inter alia, is also the largest shareholder of Mercator, the largest Slovenian retailer. In late 2016, Agrokor encountered financial difficulties and was unable to settle its liabilities against its financial creditors. In order to prevent Agrokor’s bankruptcy, the Croatian government adopted an Act on Extraordinary Administration Proceedings in Companies of Systemic Importance for Croatia (commonly known as the Lex Agrokor) and, in April 2017, commenced the Extraordinary Administration Procedure (EAP) over Agrokor (including all of its Croatian subsidiaries) and appointed its Administrator. As some creditors, dissatisfied with commencement of the EAP, have taken steps to enforce their claims in Slovenia by seizing Mercator shares, Agrokor requested recognition of the EAP in Slovenia pursuant to the Insolvency Law.19
Although at first the District Court in Ljubljana recognised the EAP, it reversed this decision following the creditors’ appeal.20 In its landmark decision, also upheld by the Supreme Court,21 the Court set the standards by which the foreign insolvency procedure has to comply with in order to be recognised: it has to be a collective (judicial or administrative) procedure, it has to be pursuant to a law relating to insolvency, it has to be controlled or supervised by a foreign court, and its purpose has to be reorganisation or liquidation of the debtor.
According to the court, the EAP failed to meet such standards. Pursuant to Lex Agrokor, the EAP implemented a principle of material consolidation, with some minor, but important omissions. Although such consolidation might be appropriate under special circumstances (as set forth in UNCITRAL Legislative Guide on Insolvency Law), such circumstances did not exist in the case of Agrokor, as in legal transactions, whereby the companies have taken over guarantees for each other’s liabilities, Agrokor Group companies’ creditors and the companies themselves relied on their legal personalities, their independence from other (related) companies and on the separation of their assets from the assets of other Agrokor Group companies. Moreover, according to Lex Agrokor, the primary goal of the EAP is to ensure that the company of systemic importance for Croatia will continue to operate, with such goal to be achieved on the shoulders of group companies with better financial standing. Hence the EAP is neither a collective procedure, as interests of certain creditors are effectively exercised to the detriment of other creditors’ interests, nor is the purpose of the EAP reorganisation or restructuring of the debtor.
Furthermore, the District Court in Ljubljana held that the principle of equal treatment of creditors is a key principle of insolvency procedures in Slovenia, thus the principle is part of the Slovenian public policy. As the principle of equal treatment of creditors is not respected in the EAP, the EAP is contrary to Slovenian public policy.22
1 Financial Operations, Insolvency Proceedings and Compulsory Dissolution Act (Official Gazette of Republic of Slovenia, No. 126/2007 et seq, ‘Insolvency Act’).
2 Source: www.doingbusiness.org/data/exploretopics/resolving-insolvency.
3 Articles 131 and 132 of the Insolvency Act.
4 Articles 161 through 164 and 253 through 264 of the Insolvency Act.
5 Article 14(4) of the Insolvency Act.
6 Article 38 of the Insolvency Act.
7 Official Gazette of the Republic of Slovenia, No. 42/2006 et seq (the Companies Act).
8 Article 44d (1) of the Insolvency Act.
9 A financial claim is any claim originating from a loan agreement, financial leasing agreement, agreement for issuing a bank guarantee or any similar transaction concluded with a bank, financial institution or other financial companies, as well as with third parties, and derivative financial instruments issued by the debtor.
10 Articles 44m and 44n of the Insolvency Act.
11 If the MRA applies to both ordinary and secured financial claims, it has to be confirmed by creditors holding 75 per cent of aggregate value of ordinary claims as well as creditors holding 75 per cent of aggregate value of secured claims (article 44o (1) of the Insolvency Act).
12 Article 44t of the Insolvency Act.
13 Article 44v of the Insolvency Act; see also Plavšak, Nina: Preventive Restructuring Procedure, published in Pravna praksa, p 12 (23 January 2014).
14 Article 221j (1) of the Insolvency Act.
15 Article 144 (2) of the Insolvency Act.
16 Article 206 of the Insolvency Act.
17 Article 231 of the Insolvency Act.
18 Source: www.uncitral.org/uncitral/en/uncitral_texts/insolvency/1997Model_status.html.
19 As the EAP is not listed in Schedule A of the Insolvency Regulation.
20 Decision of the District Court in Ljubljana, ref No. R-St 642/2017 of 26 October 2017.
21 Decision of the Supreme Court of the Republic of Slovenia, ref No. Cpg 2/2018 of 14 March 2018.
22 The EAP was recognised in England and Wales by the judgment of the High Court of Justice, No. CR-2017-005571 of 9 November 2017.
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Ulčar & Partners is an expanding Slovenian law firm, founded in 2005, with a talented, dynamic and committed team of 12 lawyers and an office in Ljubljana. The firm has generally focused on corporate and commercial law from its formation, with a constant expansion of the specific fields covered by its lawyers. With committed experts with an extensive scope of knowledge and experience in all related legal fields, including restructuring and insolvency, labour law and financial instruments law, as well as dispute settlement, the firm provides comprehensive legal services to domestic and foreign clients. Having advised in a substantial number of high-profile, successfully completed M&A transactions, the firm is one of the leading Slovenian M&A practices. It has extensive experience with privatisation sales in Slovenia, and has recently advised in connection with several significant financing transactions.
Since 2010, Ulčar & Partners has evolved to one of the leading law firms in Slovenia with the capacity and experience to provide legal support in general corporate and commercial matters, as well as with cross-border M&A and financing transactions. When providing legal advice, lawyers at Ulčar & Partners use their legal know-how as a base that they upgrade with comprehensive knowledge of clients’ businesses. With continuous professional training and specialisation, the firm creates added value for clients, seeks creative solutions to legal challenges, and contributes to the realisation of the client’s business goals.
Ulčar & Partners
Matjaž is the firm’s founding and managing partner, specialised in corporate and commercial law and recognised as a leading expert in M&A and financial transactions. He has, for over 15 years, advised major Slovenian companies and international clients with respect to their domestic, and corporate and financial transactions. He handles large-scale privatisation projects and private M&A transactions, including takeovers, financing projects, and financial and corporate restructurings.
Ulčar & Partners
Blaž is a senior associate at Ulčar & Partners. His practice focuses on corporate law, where he regularly advises and represents corporate clients in corporate matters, business and financial restructurings and insolvency proceedings, including insolvency-related litigation. In addition, Blaž is also regularly advising domestic and foreign clients on compliance and regulatory issues.