Managers, do not repeat mistakes of others from the past – when restarting the company, abide by the rules of financial management of companies
Given the expected economic consequences of the CoVID-19 epidemic and current staying of the economy, we present a short overview of duties which the management must perform during the restart of the business operations. It is especially important to take into account the provisions of Financial Operations, Insolvency Proceedings, and Compulsory Dissolution Act (hereinafter: ZFPPIPP), whereas we also mention measures envisaged by the so-called “Mega” CoVID-19 Act (Zakon o interventnih ukrepih za zajezitev epidemije CoVID-19 in omilitev njenih posledic za državljane in gospodarstvo). As this law has already been adopted but is not in force yet, we list the regulation from the Mega Act in italics.
We can summarize that, even in the current circumstances, the management must also primarily act in accordance with the rules of corporate finance profession and profession of management of companies. This entails mainly the performance of risk assessment as well as other measures which ensure that the company at all times retains its short- and long-term solvency. In doing so, the company should take into account all incentives to which it may be entitled under the interim CoVID-19 legislation, and, if necessary, undertake additional financial restructuring measures. If the management however determines that the company already meets the legal requirements for insolvency, it must promptly proceed with the analysis of financial restructuring measures and the review of whether the company can still be restructured so that it becomes solvent again.
Upon the restart of the company, special emphasis should be awarded to fundamental rules of financial management
During the course of their business, companies often neglect the fundamental rules of financial management, which are also included in ZFPPIPP. Even if this is usually the case, now is the time for consistent upholding of these rules, especially since we can expect most companies to find themselves in various problematic situations. This, inter alia, requires the implementation of all actions to ensure the long-term and short-term solvency of the company, particularly the assessment and management of various risks to which the company is exposed in the course of its business (in the current situation, particularly liquidity risk), and monitoring and ensuring capital adequacy (ensuring sufficient long-term sources of financing). In so doing, it is appropriate to take into account all the supporting measures provided by the so-called CoVID-19 legislation, including the possibility of obtaining reimbursement of wages, the possibility of obtaining various tax benefits, deferring the payment of credit obligations of the company, the possibility of obtaining loans offered to small, medium and large companies by SID bank, etc.
Upon the commencement of problems, consider the possibility of financial restructuring of the company by making concrete proposals to the supervisory board and the shareholders of the company
If you estimate that the risks of insolvency are increased and that the causes cannot be eliminated by all the supporting measures provided for by CoVID-19 legislation or other existing legislation, then it is advisable to consider the financial restructuring of the company as soon as possible. Restructuring measures can also be carried out out-of-court, in agreement with stakeholders who would be affected by the concrete measures (especially creditors or business partners and employees). If necessary, you may also include qualified external consultants in the planning of these measures. You should also assess the possibility of initiating so-called preventive restructuring proceedings, as a special proceeding regulated by ZFPPIPP, which is intended for companies, which are not yet insolvent but are likely to become insolvent within one year and who wish to restructure their financial liabilities (primarily liabilities arising from loan agreements and credit and other agreements with banks, financial institutions and other financial corporations).
You should also check whether the company is insolvent
If, given the current circumstances, there is a possibility that your company is insolvent, it is necessary to check whether the insolvency conditions laid down in Article 14 of ZFPPIPP have already been fulfilled. Pursuant to the above-mentioned provision, a company is insolvent if (i) it is illiquid in the long term – i.e. when it is unable to fulfill, in a longer period of time, its obligations as they mature; or, if (ii) it is permanently illiquid / over-indebted – i.e. when the company is permanently unable to fulfill all of its due and payable obligations. Legal presumptions from paragraphs 2 and 3 of Article 14 of ZFPPIPP can be used to aid in the assessment of insolvency, however these are mostly rebuttable presumptions. The only non-rebuttable insolvency presumption is the presumption from paragraph 4 of Article 14 of ZFPPIPP regarding a default in payment of wages and contributions for more than two months, whereas also the new Mega Act provides for a new non-rebuttable insolvency presumption, in the case where a company is in default with the payment of wages and contributions to workers for more than one month from the time when it received reimbursement of wages and contributions under the interim CoVID-19 legislation (Article 95 of the Mega Act).
A timely determination of the occurrence of insolvency is important, because Article 33 of ZFPPIPP introduces a non-rebuttable presumption that a company became insolvent when such a position could have been determined by management if it had acted in accordance with due diligence. This means that from that moment on, all deadlines for the execution of actions related to the occurrence of insolvency (presented below) commence, whereas the omission or untimely execution of such action can also entail personal liability for damages of the members of the management.
When a company becomes insolvent, and even if none of the ZFPPIPP proceedings (bankruptcy, compulsory settlement, etc.) have been formally initiated, the interests of creditors become especially important. As a result of this, additional obligations under ZFPPIP arise.
Here we refer particularly to two sets of obligations:
i) obligation of equal treatment of creditors and the prohibition of the execution of all payments and the assumption of new liabilities, except those necessary for the regular operation of the company (namely payment of priority claims such as wages and contributions, payment of running costs of business operations such as electricity, water and similar, payment of running deliveries of goods or services, required for regular business operations of the company, and payment of compulsory taxes and contributions (Article 34 of ZFPPIPP);
ii) obligation of analyzing the causes of insolvency and taking appropriate measures (Article 35 of ZFPPIPP). We can expect a much higher number of managements to be faced with this set of duties than in the past. If a company becomes insolvent, the management must, within one month after the occurrence of insolvency, submit to the supervisory board a report on the financial restructuring measures, which must include, among other things, an analysis of the causes of the insolvency, the management’s opinion on whether the company can still be successfully restructured and (in the case of a positive opinion) a proposal of all of the financial restructuring measures needed to eliminate insolvency. Financial restructuring means a set of measures taken to make a debtor short-term and long-term solvent, e.g. the reduction and deferral of the debtor’s liabilities, implementation of the increase in share capital and all other measures, the implementation of which enables elimination of the causes of insolvency. If the management shall be able to successfully implement all of these measures and thus re-ensure the solvency of the company, then such an out-of-court restructuring will be sufficient and there will be no need to initiate court insolvency proceedings.
The supervisory board must give its opinion on the report on the financial restructuring measures within five working days of receiving the report. If the management has also envisaged the measures of the shareholders meeting, special provisions of Articles 36 and 37 of ZFPPIPP, which provide for the implementation of these measures within specified deadlines, must be followed when convening the shareholders meeting and paying for new shares or contributions. Please note that the adopted Mega Act extends the deadlines set out in these two articles by 1 month after the termination of measures taken under the Mega Act, if, due to the consequences of the announcement of the CoVID-19 epidemic, the measures cannot be implemented earlier.
The above provisions apply if the company has a supervisory board or a supervisory body. If the company does not have a supervisory board, the rules on the supervisory board do not apply, which means that in such cases there is generally no need to prepare a written report on the financial restructuring measures. In some cases, it shall nevertheless be advisable to send such a report to the shareholders meeting. In any event, in cases when a company does not have a supervisory board, the management shall still have to carry out the analyses provided for in the second paragraph of Article 35 of ZFPPIPP – that is, to determine the financial position of the company, to analyze the causes of insolvency and to decide whether there exists at least a 50% probability that the company shall successfully carry out the financial restructuring so that it shall become solvent again. It is only on such a basis that the management will be able to decide whether it will be possible to restructure the company already by measures of out-of-court restructuring, or by filing a motion for the initiation of compulsory settlement or bankruptcy proceedings (while also having to comply with deadlines from Articles 38 and 39 of ZFPPIPP, as mentioned above).
Filing a motion to initiate compulsory settlement proceedings or to initiate bankruptcy proceedings
In Articles 38 and 39, ZFPPIPP further determines when management is obliged to file a complete motion for the initiation of compulsory settlement proceedings (i.e. if the shareholders meeting would not adopt the proposed measures from the management’s report) or for the initiation of bankruptcy proceedings (i.e. primarily when assessing that successful restructuring is not possible). The deadlines envisaged by the law are very short – the deadline for the motion to initiate compulsory settlement is 3 months from the occurrence of insolvency, and for the motion to initiate bankruptcy proceedings, the deadline is 3 working days from the occurrence of the circumstances referred to in the second paragraph of Article 38 of ZFPPIPP. The adopted Mega Act extends these deadlines by up to three months after the termination of measures taken in relation to the CoVID-19 epidemic, but only if the company became insolvent due to the epidemic (Article 96 of the Mega Act).
Pay attention to management’s liability, including liability for damages
The above overview is intended mainly to give an outline of the procedures or steps to be followed by the management of the company. The failure to comply with the provisions of ZFPPIPP regarding financial operations may result in both the liability of the management and the supervisory board to the company (Articles 28 and 29 of ZFPPIPP) and, further, under certain conditions, the direct liability of the members of the management and the supervisory board to creditors who did not reach full repayment in bankruptcy (Articles 42 and 43 of ZFPPIPP).
We suggest that you closely follow the situation with regard to adopting new measures. We remain at your disposal for any questions or assistance regarding the above.
