Two major Slovakian construction companies, both heavily dependent on large state contracts, have recently been restructured. Both of these cases have proven that Slovakian entrepreneurs, even those who live off of public money, perceive and utilise the current regulation of the restructuring procedure as a “legally safe way” to restart their businesses and get rid of a large portion of creditors. This option is viable also in a moment, when the only solution clearly is a bankruptcy petition. Understandably, this led hundreds of subcontractors (mostly one-man businesses) to severe financial difficulties.
The regulation of the restructuring procedure was widely criticised by the professionals, including TaylorWessing, and due to a massive campaign started in media by the latest restructuring cases, the Slovakian government had to react. It presented, within couple of days, an amendment to the Act on Bankruptcy and Restructuring. Its first provisions, which concern mostly with the claims of unsecured creditors, entered into force towards the end of April 2015, and are applicable for all restructurings, even those commenced prior to the enactment of the amendment (most of the other amended provisions shall be effective as of 1 January 2016 – we will provide further information on these in next RCR updates).
Sadly, it is clear at first sight that the aim of the amendment is not to fix the systematic faults of the restructuring procedure in its current form (i.e. the appointment of the administrator, who remains a de facto paid agent of the debtor; the broad competences of the restructuring administrator to refuse the admission of the lodged claims and granting voting powers to the creditors and the lack of any enforceable liability mechanism towards the administrator; no possibility for creditors to review the situation of the debtor). Instead, the amendment represent a shakily written and even constitutionally problematic attempt to provide a politically sellable “patch” for the particular cases subject to media attention.
Nevertheless, the amendment contains a peculiar new regulation on satisfaction of unsecured claims which is effectively undermining the role of restructuring plan. The unsecured creditors shall not only be entitled to payments pursuant to the restructuring plan, but immediately after the plan is fulfilled, they will have the right to claim the difference between the satisfaction received pursuant to plan and 50% of the nominal value of their unsecured claims. To this end, 50 per cent of the nominal value of each lodged unsecured claim does not cease to exist with the approval of the restructuring plan.
On top of this, the unsecured creditors shall have the right to claim satisfaction of their claims from the future profits of the debtor up to the other half of their claims – the debtor will not be entitled to distribute profits until the claims of unsecured debtors are fully satisfied. It is clear that the legislator naively attempts to convey the “hope” that unsecured creditors will be able to receive 100% of their claims. How naïve this is, when there is no time limit for the duration of restructuring plans – in practice five and more years plans prevail and in the future we predict that these periods shall be even longer.
To make situation worse, the new regulation does not rule out the possibility for the debtor to “voluntarily” provide a particular creditor, anytime during the duration of the restructuring plan, with a payment beyond the satisfaction rate granted to that creditor in the restructuring plan (up to 50% of the lodged claim of that creditor).
This basically legalizes the preference of creditors and introduces “prisoners’ dilemma”: it literally opens the door for “behind the scenes” deals with strategic creditors with enough voting power to pass the restructuring plan. At the end of the day, the small unsecured creditors will not have any legally enforceable tools to protect their rights or any negotiation power and will end up with long restructuring plans with low satisfaction rate (at or below 5 per cent).
As the new regulation beats the purpose of restructurings and continues to invite speculators, it would be probably better if Slovakia “freezed” the restructurings until it adopts a completely new set of rules.