December 2011 – An amendment to the Slovak Insolvency Code has been recently approved by the Parliament (the “Amendment“). The Amendment, which is considered to be the most significant amendment to the current Slovak Insolvency Code since its introduction back in 2006, seeks to revise those provisions of the Insolvency Code that have proven to be problematic in their application, or less effective than originally intended.
The most important legislative changes introduced by the Amendment concern the test of over-indebtedness and the liability of the directors of insolvent companies.
Although the Amendment will enter into force on 1 January 2012, the key changes relating to the test of over-indebtedness, filing obligation and directors’ liability that are described below in this article will enter into force only as of 1 January 2013, so as to enable the business community to get acquainted with the newly adopted rules and also to take the appropriate measures.
Insolvency Tests
There are two insolvency tests under the Slovak Insolvency Code: financial liquidity test (in brief, the ability of the company to serve its due debts) and test of over-indebtedness (the ratio of the company’s total assets and – until the Amendment – overdue debts).
The Amendment (inspired by Czech law and other EU insolvency codes) introduces a substantial change to the over-indebtedness test. Under the Amendment, a debtor’s financial situation will be assessed taking into account its total debts, i.e. not just its overdue debts. The reason behind this change was that the Slovak Insolvency Code, as effective prior to Amendment, allowed those debtors who recorded a loss in the long term to continue their business activities.
As a novel change, the Amendment also expressly provides how the over-indebtedness test should be run under the newly defined over-indebtedness criteria, as the rigorous application of the ‘total assets vs total debts’ rule could cause (perhaps undesired) business distortions. Accordingly, the test will be run taking into account certain additional matters such as the debtor’s future (expected) economic results relating to its assets and operations. In addition,subordinated and similar debts shall be excluded from the assessment of a debtor’s financial situation.
Filing for insolvency proceedings
The legislation effective prior to the Amendment obliged directors (or liquidators, as applicable) of insolvent companies to file for insolvency proceedings within 30 days after they have determined or, acting with due care, should have determined that the company is insolvent (i.e. either failing to meet the liquidity test or over-indebted).
As a novelty, the Amendment grants to creditors more rights to commence insolvency proceedings against a debtor if the debtor fails the financial liquidity test.
Since the Amendment grants to creditors the right to commence insolvency proceedings more actively and efficiently against a debtor in the case of illiquidity (i.e. it leaves up to creditors as to how long they will tolerate a debtor that is not financially liquid), the filing obligation of the directors will be limited to over-indebtedness only.
Liability of directors
Under the newly amended Insolvency Code, directors of an over-indebted company are liable for a breach of their statutory obligation to file for insolvency proceedings in time.
The new provision implemented by the Amendment introduces straightforward calculation of the amount of directors’ liability (although, according to some critics such sanctions operate as aliability cap). Accordingly, directors could be held liable (and such liability is likely to be frequently recognised by courts) for the amount equal to the amount of debtor’s registered capital - capped however at EUR 10,000 in the case of directors of limited liability companies and EUR 50,000 in the case of directors of joint-stock companies. It remains to be seen whether in the case of a breach of their duty to file in time, directors can also be held liable for damages exceeding these capped amounts.
For further information please contact Viliam Myšička, Counsel, at .