Following heavy criticism from legal practitioners and business interests alike, some fundamental flaws permitting the abuse of restructuring procedures have finally been addressed. The amendment to the Act on Bankruptcy and Restructuring, prepared by the new Minister of Justice who is a former counsel of the Bratislava TW office, has recently been enacted. These changes are, admittedly, an instant ‘fix’ that will lead to a steep reduction in the number of restructurings in Slovakia. However, based on previous experience, these will give the legislature some space to rethink the Slovak restructuring rules.
Slovak restructuring procedure has in the past been extremely debtor-friendly, serving various Slovakian businesses (ranging from the largest construction companies building infrastructure projects to local pubs) and their equity holders as a safe last resort. This has isolated smaller and strategically unimportant unsecured creditors, and erased any ‘distressed debtor’ liabilities for breaches of duty of care relating to the failure to provide new monies. The system has given – at the expense of creditors – a fresh start to many non-viable businesses that should have gone bankrupt.
A court may approve the restructuring of a debtor, based on a restructuring opinion prepared by a trustee selected and paid by the debtor.
This is still the case, but the amendment prescribes that the seized court must now appoint a randomly selected trustee who will take over the case once approval has been granted. This is a fundamental game-changer because until now, it was the trustee paid by the debtor (often using its last liquid resources) who ran the show. That trustee not only prepared the restructuring opinion recommending the debtor’s viability, but the same trustee also decided – without effective recourse – which unsecured creditors would hold voting rights when deciding on the restructuring plan. This naturally encouraged ‘behind the scenes’ deals with strategic (secured and unsecured) creditors even before the beginning of the restructuring procedure. The script of the restructuring has in the past been drawn up long before some unsecured creditors even found out that their debtor was distressed, and had applied for restructuring.
The previous legislation did not provide for fair negotiations with unsecured creditors.
Pursuant to the amendment, the restructuring plan submitted for creditor approval should now guarantee to all non-affiliated unsecured creditors a dividend which is at least 20 per cent higher than for unsecured claims in a hypothetical bankruptcy. At the same time, a ‘bottom line’ has been stipulated: a creditor-approved restructuring plan may be approved by court only if it provides a minimum 50% dividend for any unsecured claim (excluding subordinated claims and claims of the debtor’s affiliated entities). Furthermore, the period for satisfaction of such claim cannot exceed 5 years.
Every creditor has a right to consent to a lower dividend rate or to a longer satisfaction period.
The amendment should halt practices that had a devastating effect on the business environment and payment discipline. It should be perceived as the first step towards implementing restructurings which start serving their original purpose in Slovakia.
The relevant provisions of the amendment will come into force on 1 March 2017.