Starting from March 1, 2017, the Slovak personal insolvency regime will change. The new system aims to make personal insolvency available to a wider debtor audience, while keeping it simple and cost efficient. Today, only individuals with assets over €1,659.70 can seek declaration of bankruptcy. Otherwise, the proceedings could be stopped and the doors to a “fresh start” closed for “poor” debtors (also called No Income No Asset debtors (NINA)). It is important to understand the motivation behind the new rules as one may find the new proceeding too open and accessible, leaving a lot of room for abuse and little protection for creditors. Indeed, the insolvency proceedings could be complicated, with lots of pre-opening scrutiny and much bigger involvement of a court, but that would obviously increase the costs of such proceedings.
So, what is changing? First of all, the law introduces two ways in which a debtor can be relieved of his/her debts. The first is through a bankruptcy proceeding, where the debtor basically gives up all of his/her property. The second is an installment payment plan, in which case the debtor keeps his/her assets but has to pay to unsecured creditors at least 30% of their claims over a five-year period. The final effect of these proceedings is that any outstanding receivable after these two procedures, irrespective of whether it is registered in the proceedings or not, becomes unenforceable.
Also unenforceable is (i) interest exceeding 5% per annum, accrued before the decision on insolvency is issued by a court, (ii) any interest accruing after the declaration of bankruptcy or after the creditor protection kicks in (so-called “decisive date”), (iii) any receivable arising under a promissory note (thus turning promissory notes of individuals into worthless security), (iv) contractual penalties and penalties imposed by state authorities (if obligation triggering the penalty was breached prior to the decisive date), (v) claims of affiliated parties and (vi) fees incurred by the parties to the insolvency proceeding in relation to the proceedings.
There are a group of claims that are not affected by the insolvency proceedings such as (i) the receivable of a creditor – individual − that has not been registered in the proceedings due to the fact that they have not been notified in writing of the insolvency proceedings, (ii) secured claims up to the value of the pledged asset or (iii) non-monetary claims. These claims survive.
Secondly, the law introduces the so-called “homestead exemption” that applies to one property identified by a debtor. The purpose is obviously to secure some housing for a debtor or at least some proceeds for future rent. The amount has not been determined yet, but secured creditors should be safe as the exempted amount is only deducted if the sale proceeds exceed the secured claim. Plus, pledged property is only sold if (i) a creditor with the first ranking pledge registers its claim in the bankruptcy proceedings or (ii) if the value of the pledged asset exceeds the priority secured claim and the second ranking creditor registers its claim in the bankruptcy. In other words, despite the pending bankruptcy proceeding, the priority creditor still has a right to sell the pledged assets outside of the bankruptcy. There is one restriction related to homestead exemption. The sale proceeds, after deducting the homestead exemption amount, have to cover costs of sale and at least part of the registered claims. For this purpose, it will be up to the trustee to estimate the value of real estate and decide whether they will proceed with the sale or not. If the creditor disagrees with the trustee, they may pay for an expert opinion but if the sale proceeds are not sufficient, the creditor would have to cover the costs of auction.
For debtors who decide to keep their assets, an installment payment plan is available. A similar installment payment plan has been available under the existing regime, but it missed several details. Under the new regime, there is a minimum recovery threshold for unsecured creditors − 30% − which at the same time must exceed the potential recovery in bankruptcy by 10%. The debtor should be left with some money to cover the living costs of his/her family and, if not, only bankruptcy would be available. How much is needed for living is to be decided by the trustee and the court and let’s hope they will use their discretion wisely.
Installments can be paid monthly, half-yearly or annually, depending on the overall amount to be paid. In the case of a secured receivable, the installment plan starts to apply once the asset is sold and while there is still some part of the claim outstanding. The amount of installments is determined by a court. The debtor and creditor are free to agree on different installments. Creditors will also have a right to object to the draft installment plan within a 90-day period after its publication in the Official Journal. The plan runs for five years and neither the trustee nor court supervises its fulfillment. If the debtor fails to follow the plan due to anything other than material reasons, the creditor can ask the court to cancel the debt relief.
Petition for the cancellation of debt relief is basically the only protection the creditor has and it can be filled within six years from either the termination of the bankruptcy proceeding or approval of the installment payment plan and only based on specific grounds. One can expect that creditors will find this ex-post protection insufficient but, as mentioned above, the reason behind this was to avoid ex-ante scrutiny that could substantially complicate and slow down proceedings.
Although not related to personal insolvencies, an amendment also introduces significant changes to the restructuring proceedings. Given previous bad experience with the treatment of unsecured creditors, in any new restructuring, unsecured creditors have to get at least 50% of their claims over a maximum of five years and at the same time their recovery has to be 20% higher than recovery in insolvency. Otherwise, the court has to reject the plan. This is not an easy condition to meet and, thus, one can expect that companies will prefer to restructure their debts out of court.
The list of changes could go on and are not restricted to insolvency law only. Court enforcement is changing substantially as well. Let us hope that courts will be familiar with them and will have capacity to deal with the expected increased number of filings.
Merry Christmas and stay with us in 2017!!!!