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Protection against Bankruptcy for Businesses in Slovakia during Corona Crisis 

by Katarina Cechova

Published: April, 2020

Submission: May, 2020

 



The Government of the Slovak Republic approved on 14 April 2020 the draft bill amending Act No. 62/2020 Coll. on certain emergency measures in relation to the spread of dangerous contagious human disease COVID-19 and in the justice, and amendments to certain laws.The bill was passed by the Slovak Parliament on 22 April 2020 and has been published in the Collection of Laws on 25 April 2020.The below regulation on temporary protection of businesses came into force since 12 May 2020. The aim of the regulation is to create a legal framework for provision of temporary protection (standstill of bankruptcy) to businesses that, as a result of the spread of coronavirus, have found themselves in a very serious financial situation that jeopardizes their current or future operations. Provision of temporary protection creates conditions for viability and proper operation of businesses once the measures that have dampened several areas of the economy will be removed.


Criteria for provision of temporary protection


Entrepreneurs with their seat or place of business in the Slovak Republic may apply for the temporary protection, provided that their trade license existed before 12 March 2020 and they were not insolvent as of 12 March 2020 (i.e. they were neither overindebted, nor illiquid). The bill also stipulates who is not entitled to apply for the protection, e.g. banks, insurance companies, asset management companies or securities traders.


Businesses shall be granted the temporary protection in case of significant increase of their due but unpaid receivables or significant decrease in sales compared to the same period in 2019; if an applicant has not operated business in the given period, as the comparable period will be considered February 2020. Granting the temporary protection is subject of non-existence of grounds for winding-up or pending bankruptcy or restructuring proceedings and that as of 12 March 2020 no attachment (execution) or pledge enforcement proceeding related to applicant’s business was pending. The applicant is also obliged to maintain proper accounting and financial statements submitting, and to declare that in 2020 it neither distributed profit or other own capital resources, nor has taken any other measures jeopardizing its financial stability (save for measures aimed at prevention or mitigating effects of coronavirus). Even if the applicant used its profits for benefit of shareholders or jeopardized otherwise its financial stability, provided it has remedied the consequences of such acts, it may subsequently apply for the temporary protection.


Procedure for granting temporary protection


The entrepreneurs that decide to apply for the temporary protection are obliged to use a form that will be published on the website of the Ministry of Justice of the Slovak Republic. The application must be sent electronically to the court specifically designated as the locally competent for this purpose (entrepreneurs-individual persons may also deliver the application by post or in person). If the application complies with the statutory requirements, the court shall issue a confirmation on temporary protection without undue delay and publish this information together with the applicant’s data in the Commercial Bulletin.


Effects of temporary protection


Effects of granting temporary protection intend to avoid a potential wave of new bankruptcy proceedings and are particularly the following:


  • bankruptcy proceedings commenced upon a creditor’s petition for bankruptcy declaration if filed after 12 March 2020 or during temporary protection shall become suspended;
  • own obligation to file for bankruptcy ceases to exist during the temporary protection;
  • suspension of attachment (execution) proceedings initiated after 12 March 2020 against businesses under temporary protection;
  • impossibility of enforcement of pledge over enterprise, things, rights or other properties belonging to the business under temporary protection;
  • impossibility to set off a claim that arose against the entrepreneur prior to the provision of temporary protection with a claim that arose to an entrepreneur after provision of temporary protection – this applies to claims that belong to or belonged to a person related to the entrepreneur;
  • impossibility the other contract party to (i) unilaterally terminate, or (ii) withdraw from, or (iii) refuse performance due to a delay of the entrepreneur under temporary protection if his/its delay has arisen in the time period between 12 March and 12 May 2020 and provided it was caused by the spread of coronavirus; this, however, does not apply if the other contract party would have imminently threaten operation of its own business;
  • suspension of statutory time periods for claiming rights towards the entrepreneur under temporary protection (including for claims from contradictory legal actions);
  • possibility of priority repayment of junior debt directly related to the maintenance of business rather than senior debt;
  • provisions of the Commercial Code on company in crisis or bankruptcy law on subordinated satisfaction will not apply to loans or economically equivalent transactions granted in clearing by related persons during the term of temporary protection if directly related to maintenance of the business; however, a security created for its repayment shall be disregarded in bankruptcy;
  • during the temporary protection neither distribution of profits or other capital resources, nor disposal with any substantial assets of the entrepreneur under temporary protection shall be permitted; the entrepreneur under temporary protection is obliged to make a sincere effort to satisfy creditors and to prioritize their interests over its own interests. In case of declaration of bankruptcy on property of entrepreneur under temporary protection, a legal act done contrary to the above rules shall become ineffective towards creditors.

Termination of temporary protection


Temporary protection shall have a limited duration for all entrepreneurs and regardless of its commencement. Under the bill it may last until 1 October 2020 only. The Government was delegated the power to extend duration based on a government decree (however at maximum up to 31 December 2020). An entrepreneur may waive provided temporary protection. The court may also terminate the protection if the conditions for granting were not met for its provision or duration. Anyone can file a qualified motion for termination of the temporary protection.


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