Improved position for debtors in creditor compulsory settlement proceedings

The ruling stemmed from an application to review the constitutionality Article 221j (10) of the Financial Operations, Insolvency Proceedings, and Compulsory Dissolution Act (Official Gazette of the Republic of Slovenia, No. 13/14, as amended; hereinafter: ZFPPIPP).  Article 221j (10) of the ZFPPIPP stipulates that a debtor has no right of appeal against an order to initiate compulsory settlement issued on foot of a creditor’s compulsory settlement petition and that the order can be challenged only subsequently, by way of an objection on grounds of insolvency.

Namely, Article 221j of the ZPPIPP regulates the option of creditor compulsory settlement, which allows creditors that jointly hold financial claims exceeding 20 percent of a debtor’s total financial obligations to file a petition to initiate compulsory settlement proceedings. However, creditor petitions are not required to prove that the debtor is in fact insolvent (unlike debtor-initiated compulsory settlement proceedings), rather the sole requirement is that they furnish documentation proving they are in fact creditors of the claims which when combined account for more than 20 percent of the debtor’s total financial obligations.

In the case of creditor compulsory settlement, current legislation makes no provision for assessing whether the debtor is in fact insolvent. That said, debtors do have the option of filling of an objection to demonstrate that they are financially sound but only after the court has issued an order initiating compulsory settlement. This means that until the court rules on the debtor’s objection, the debtor is subject to numerous restrictions, inter alia, it may only carry on those operations that constitute day-to-day business; its assets are frozen, it can not borrow, stand surety or carry on any activity that would result in creditors being treated unevenly. In addition, the powers of the debtor’s supervisory bodies and general meeting are significantly limited, and in addition, the debtor has a duty to provide creditors – petitioners with all information, reports and documentation needed to prepare a financial restructuring plan, thus giving petitioners access to commercially sensitive information.

The constitutional review application at hand was filed by the District Court in Celje, which pointed out that in practice this can also lead to abuses, as creditors can exert additional pressure on a debtor by “threatening” them with compulsory settlement proceedings (i.e. even if the debtor is financially sound).

The Constitutional Court found that the legislator has by way of the creditor compulsory agreement mechanism pursued a constitutionally permissible goal of accelerating the debtor restructuring process. However, it also found that the regulation in the tenth paragraph of Article 221j of ZFPPIPP constitutes excessive interference with a debtor’s right to a statement and the right to a fair trial enshrined in Article 22 of the Constitution. In its ruling, the Constitutional Court ordered the legislator to remove the unconstitutional provision under Article 221j (10) of ZFPPIPP and at the same time determined a temporary regime valid until the unconstitutional provision is removed.  This temporary regime allows the debtor the right to appeal an order initiating compulsory settlement proceedings issued on foot of a creditor petition, which provides the debtor with a faster avenue of proving that there are not grounds for compulsory settlement.