What changes are in the pipeline for insolvency law?

The amendment ZFPPIPP-H envisages the introduction of an essential new institute for cases where a debtor is facing imminent insolvency, i.e. when it is likely that the debtor will become insolvent within a period of one year. 

In addition to the already established (out-of-court) preventive restructuring procedure, the amendment introduces a new judicial restructuring procedure to remedy imminent insolvency. Lying at the heart of this procedure is the option to apply compulsory settlement at the imminent insolvency stage. This means general insolvency rules and compulsory settlement rules will apply mutatis mutandis to this procedure (with a few exceptions, notably vis-à-vis the conversion of claims into equity). This procedure will also involve the restructuring of operating receivables (and not only financial ones), and see more significant involvement by the court in the procedure, which increases the level of protection for creditors. The initiation of a judicial restructuring procedure to eliminate imminent insolvency is contingent on the debtor having settled its liabilities towards the Financial Administration of the Republic of Slovenia (FURS) and having submitted all tax returns regarding payroll and benefits, and VAT returns for the last 24 months. The debtor proves this by submitting a tax clearance certificate issued by the tax authority. 

Irrespective of the introduction of the new procedure, the amendment places considerable emphasis on timely action and more effective insolvency prevention. To that end, it imposes certain obligations on management when insolvency is only threatening the company. Under the amendment, a debtor’s management and other bodies have certain obligations when insolvency is imminent (and not only after its occurence), in particular (i) to avoid actions that jeopardise or reduce the company’s assets or which could lead to unequal treatment of creditors; and (ii) to take into account the interests of creditors, equity holders and other stakeholders in their decision-making. Furthermore, the management must prepare a report on the financial restructuring measures within one month of the onset of imminent insolvency. In the event of insolvency, management must, within one month of the insolvency, file a petition to initiate insolvency proceedings. 

The new regulation is designed to impose certain obligations on a debtor’s management and other bodies during imminent insolvency, as timely action is crucial to curbing insolvency and safeguarding creditors’ interests. Once the debtor becomes insolvent, insolvency proceedings should be initiated without undue delay. In the light of the climate, the amendment also provides that the time limit for filing a petition to initiate insolvency is extended from one to three months after the onset of insolvency, if the insolvency is caused by a natural disaster or other similar circumstances (e.g. an epidemic). 

Once insolvency proceedings have been launched against an insolvent debtor, no enforcement or security order may be issued against the insolvent debtor. Under the amendment, this also applies to judicial restructuring procedures occasioned by imminent insolvency, but in this case for a maximum period of four months. The court may extend this deadline by up to a maximum of one year, provided certain conditions are met. After the expiry of this period, the enforcement or security proceedings may continue. 

The amendment further protects the debtor in the event of imminent insolvency and insolvency, respectively, by also prohibiting the debtor’s key suppliers (i.e. the contracting parties to the debtor’s so-called key contracts, e.g. suppliers of electricity, water, gas, etc.) from terminating, suspending performance of, or otherwise modifying, to the detriment of the debtor, any such contract on the sole basis of the commencement of imminent insolvency or insolvency proceedings or based on unpaid debts owed. In practice, the early termination of key contracts has often proved a significant obstacle to the conduct of restructuring proceedings and has further contributed to the deterioration of the debtor’s position. Against that background, such a provision is more than welcome from a debtor protection perspective. On the other hand, given the generality of the provision from a creditor protection perspective, care will need to be taken to ensure that its purpose is not “over-extended” in practice. The point of it is to prevent termination by those contractual partners who, through interrupting or worsening the terms of the contract, could stop the debtor from carrying on its business and thus jeopardise its existence. However, this prohibition should not apply in general, as might be inferred from the wording of the amendment, which refers to contracts the performance of which is necessary for the smooth operation of the debtor’s business (which can apply to virtually all supply contracts). 

The amendment further introduces some changes to the institute of simplified compulsory settlement, which will in future be referred to as compulsory settlement for small businesses. This institute will continue to be reserved for micro-companies and entrepreneurs who meet the criteria set out in the first and second indent of Article 55, paragraphs 2 and 3, respectively, of the Companies Act (ZGD-1). However, the amendment introduces an additional restriction: the institute may only be applied to entities whose total liabilities do not exceed EUR 350,000.00. According to the proposer of the amendment, a company whose business activities generate higher liabilities would no longer be considered a company able to continue its economic activity after the compulsory settlement procedure for small businesses, which is the primary purpose of this institute. 

The compulsory settlement procedure for small businesses will also be less “simplified” than the current simplified compulsory settlement procedure, as it will now also involve the appointment of an administrator to supervise the debtor’s business and verify the claims lodged. That said, it remains that a filing to initiate proceedings does not have to be accompanied by an auditor’s report and a certified appraiser’s report. The latter will continue to be replaced by an adequate debtor statement that the report on the debtor’s financial standing and business operations is true and fair. The compulsory settlement for small businesses will not affect tax claims, unless the state, as a creditor, votes to approve the compulsory settlement. 

Under the amendment, micro-companies will now be able to initiate “ordinary” compulsory settlement proceedings in addition to compulsory settlement for small businesses. The initiation of these proceedings on foot of a creditors’ petition is also subject to change, as creditors of operating receivables will now be able to petition for such proceedings in addition to financial creditors. However, given the additional risks associated with extending such entitlement to non-financial creditors, the proceedings will not be initiated directly on foot of a creditors’ petition but will first be served on the debtor, who will be given an opportunity to file an objection to the initiation of the compulsory settlement proceedings. 

The current ZFPPIPP provides for appropriate application of the Contentious Civil Procedure Act (ZPP) to insolvency proceedings in respect of matters not otherwise regulated by it, but at the same time expressly prohibits the possibility of filing an appeal on a point of law. The amendment allows appeals on a point of law in insolvency proceedings, but only against a decision issued at second instance terminating the insolvency proceedings and against a decision on the remission of liabilities as well as a decision rejecting an application for remission of liabilities. 

Appeals on a point of law will be admissible under the conditions laid down in the ZPP, i.e. the Supreme Court will decide whether to admit the appeal and will admit it in the event of a so-called important question of law, inconsistent application of the law and the development of the law through case-law. 

The amendment also foresees the establishment of an online search engine for sales in bankruptcy proceedings. Bankruptcy administrators will be able to enter assets into the search engine to allow for transparent and successful sales, while interested buyers will be able to search for items by type (e.g. movables, immovables), time and venue of the auction, by administrator and bankruptcy case number. 

The amendment also introduces the option of selling assets via an online public auction, which will be conducted as provided for in the law governing enforcement and security. 

Authors: Jernej Jeraj, Partner and Martin Pirkovič, Associate