Preventive restructuring in the light of current economic situation (COVID-19)

Uncertainty of current economic situation, as a result of the COVID-19 epidemic, leads to inevitable decline in consumption and companies’ revenues and, therefore, puts unavoidable pressure on small and medium-sized companies (SMEs). The current state of Slovenian economy is starting to resemble situation which emerged after the economic crisis in 2008 and which resulted in introduction of a completely new legal procedure under the insolvency legislation, i.e. preventive restructuring which is now available from year 2013. The response to the current situation could be, to some extent, facilitated by mentioned preventive restructuring proceedings, which, in addition to the restructuring of financial claims (as the ultimate aim of proceedings) also facilitates a stay of enforcement proceedings (i.e. “stand still” position) and moratorium on payment of financial claims.

The purpose of the court preventive restructuring proceedings (hereinafter: the PRP) is to enable companies to respond circumstances which could lead to insolvency at the earliest possible stage. Early restructuring of financial obligations helps to avoid unnecessary insolvency measures at the later stage, secures position of employees and helps to maintain debtors’ business operations. Furthermore, the benefit of the PRP is that, unlike in out-of-court restructurings, the unanimity of creditors for adoption of restructuring agreement is not required.

Access to restructuring and restructuring measures

The PRP can be accessed by capital company (e.g. private limited company, joint-stock company) which is, pursuant to Article 55 of Slovenian Companies Act, considered as small, medium or large company and against which compulsory settlement proceedings may be initiated. For this reason, banks, insurance companies, brokerage companies and other financial institutions cannot be restructured under the PRP.

The PRP provides distressed debtor with necessary measures which allow to restructure its financial obligations and enables other financial restructuring measures which are necessary to eliminate potential causes of insolvency and ensure company’s long-term viability. In comparison to other proceedings provided with the Financial Operations, Insolvency Proceedings, and Compulsory Dissolution Act, the PRP regulates a situation of still solvent debtor who only anticipates its insolvency within the period of one year.

The PRP facilitates restructuring of financial liabilities (i.e. claims based on credit agreements, bank guarantees, financial leasing agreements, sureties which secure financial liabilities of third parties, financial instruments issued by the debtor and other similar contracts). On the other hand, operating receivables, such as obligations owed to suppliers, customers, employees and others, can not be restructured under the PRP. Mentioned obligations can only be restructured on voluntary basis.

Debt restructuring under the PRP primarily facilitates a restructuring of unsecured claims which can be performed either by postponement of the maturity of claims and/or by their reduction. In addition, a restructuring of secured claims can only be performed by postponement of a maturity of claims for a maximum period of 5 years and/or by reduction of applicable interest rate. It is necessary to point out that the PRP imposes principle of equal treatment of creditors and therefore requires that creditors in the same position towards the debtor are treated equally. With other words, creditors’ claims within the same class shall be subject to equal restructuring conditions, i.e. the same duration of postponement of maturity or the same proportion of reduction of claims. Nevertheless, there is no obstacle for an individual creditor to voluntarily agree to restructure its claims under less favorable conditions.

Preventive restructuring petition

Preventive restructuring petition may be filed by a debtor who anticipates its insolvency within the period of one year. Furthermore, a petition must be furnished with a list of all financial claims against the debtor (i.e. basic list of claims).

Moratorium and “stand still“ position

There are two legal institutes which facilitate debtor’s breathing period and may be especially relevant in the course of current economic situation. Firstly, a publication of court decision to initiate the PRP provides the debtor with a stay of proceedings or so called “stand still” position, which applies to all debtor’s financial obligations included in the basic list of claims. This means that after the initiation of proceedings no writ of enforcement can be issued and all enforcement proceedings must be suspended. And secondly, initiation of the PRP also implies a statutory moratorium on payments of all financial claims included in the basic list of claims. Such favorable legal consequences apply until the moment when decision on the termination of the PRS becomes final. In practice this usually means that maturity of debtors’ financial obligation is prolonged for duration of 2-5 months, if a debtor is SME, or 5-8 months in case of restructuring of a big company.

Voting and the effects of restructuring agreement

Restructuring agreement becomes binding once approved by required majority of creditors. In case of restructuring of unsecured claims, the law requires unanimity of unsecured creditors whose financial claims amount to at least 75 percent of all claims included in the basic list of claims. Please note that the same threshold applies also in the case when restructuring affects secured creditors. Once the threshold is met, the restructuring agreement binds all creditors who have expressed their consent by signing the restructuring agreement. For all the creditors who opposed the restructuring, the restructuring agreement becomes binding only after finality of the court decision on confirmation of such agreement.

In consideration of the foregoing, the PRP can be considered as one of legal mechanisms which could help distressed companies to cope with financial crisis caused by epidemic of COVID-19, especially if they anticipate their future insolvency in a period of one year. By accessing to the PRP, distressed companies will benefit from stay of enforcement proceedings and statutory moratorium and be, therefore, allowed to bore efficiently restructure their financial obligations.

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Law Firm Kavčič, Bračun & Partners, o.p., d.o.o.

Ljubljana, 19 March 2020 

All information contained herein is obtained from publicly available data or other sources believed to be reliable. This document is for general information purposes only, may be subject to change and may not be used instead of a legal opinion/advice. KBP does not guarantee the accuracy of the information and shall not be liable for any damages or costs in connection with the use of, or reliance on, the information contained herein.