The economic crisis presents a real-life test for the Slovenian insolvency legislation, unequalled in its young history. Numerous insolvency proceedings against Slovene companies have revealed several serious flaws of the Insolvency Act and forced the legislator into continuous amendments.

The global economic crisis and its local effects have put the Slovene Insolvency Act (Zakon o finančnem poslovanju, postopkih zaradi insolventnosti in prisilnem prenehanju, Official Gazette of Republic Slovenia no. 126/2007 et seq., ZFPPIPP) and its application in practice to a real test. Although it is a young act, which itself reformed the legal framework of insolvency in Slovenia, the legislator has been forced to amend it three times already, while the fourth amendment is currently in parliamentary.

The recent amendment

The most recent amendment came into force on 15 July 2010 and has brought several important changes. Firstly, the position of a receiver will become professional and will impose additional mandatory qualifications and other conditions on receivers. Until now, it was not uncommon that a receiver of a large company in a bankruptcy proceeding was a full-time primary school teacher or an engineer with limited experience or knowledge in economics and law. The obvious consequence was (is) that receivers were (are) not always up to the task of guiding a company through insolvency proceeding and protecting the best interests of the creditors of the company.

The legislator has also increased the competences of the chamber of receivers and laid down more strict and defined rules regarding the supervision of receivers’ work, including fines and other disciplinary measures.

The legislator has also resolved the long pending question of whether the initiation of an insolvency proceeding affects the agreements on close-out netting; it has explicitly stated that they are not. The legislator has also put some efforts into improving the possibilities for survival of the debtor in a compulsory settlement proceeding and also into saving sound parts of the debtor in a bankruptcy proceeding over the assets of a natural person or an entrepreneur. In a compulsory settlement proceeding, the creditors may now, through the creditors’ board, propose an increase in the debtor’s share capital through new contributions and the issuance of new shares, which may be paid in by creditors, current shareholders and other persons – if this is foreseen in the resolution on the increase of share capital. Such decision must be adopted within four months after the initiation of the compulsory settlement procedure. Until now, an increase of the debtor’s share capital could have been proposed only by the debtor’s management, provided that this measure was a part of the plan of the financial restructuring of the debtor.

Additionally, the possibility of a debt-to-equity swap via conversion of creditors’ claims into debtor’s shares remains a further possibility for reorganisation of the debtor. The most recent amendment has thus enabled the creditors to take over control of the debtor and ensure the continuation of its business even if this is not in the interest of the debtor’s management and/or shareholders.

Assets of a natural person or entrepreneur

With regard to bankruptcy proceedings over the assets a natural person or entrepreneur, the legislator has foreseen the possibility that the debtor after the initiation of the insolvency proceeding (again) starts conducting business as an entrepreneur or a sole proprietor, subject to prior approval of the insolvency court. The debtor must file a motion containing the information on the planned scope of business, planned turnover and description of circumstances which make it possible for the court to assess whether there is a sufficient probability that the debtor will conduct his business at a profit. The debtor may further propose that certain assets of the debtor (with the exemption of real estate) are exempted from the bankruptcy mass, whereas he is obliged to pay an appropriate monthly remuneration for the use of these assets. The aim of this amendment is to motivate the debtor to remain active and continue his business while improving the position of the creditors.

Improving the payment culture

The most recent amendment to the Insolvency Act, which has not been passed yet, aims to improve the overall payment discipline and culture in Slovenia. All companies, entrepreneurs and public authorities shall become obliged to regularly report to the Agency of the Republic of Slovenia for Public Legal Records and Related Services (AJPES) their total sum of due and unpaid obligations, and the average term of default, towards creditors. Data about creditors and individual claims will not be disclosed. This data will be made public in order to enable businesses to check the creditworthiness of potential partner debtors.

This, however, gives rise to a question that may not have been considered by the legislator. Namely, whether by making itself familiar with this data, and thus with the potential insolvency of the debtor, the potential creditor may be obliged to return payments received from the debtor as it should have suspected that the debtor was breaching the rule on equal treatment of creditors by paying it. It is thus quite possible that the planned solution will quickly turn out to be an additional problem for creditors, and the business environment generally.