Preventive restructuring as a response to COVID-19 – defer financial debt for 5 to 8 months
From the recent developments surrounding the coronavirus disease (COVID-19) situation it is becoming increasingly clear that the global economy will not be able to escape the negative (and likely long term) consequences stemming from it. Companies must therefore ensure that they mitigate the related risks to the fullest possible extent and take the appropriate preventive actions to lessen the impact of the COVID-19 outcome on their business operations.
In Slovenia, one of the preventive measures companies may consider taking in response to the COVID-19 situation is to initiate the preventive restructuring proceedings (postopek preventivnega prestrukturiranja), set forth in the Financial Operations, Insolvency Proceedings and Compulsory Winding-Up Act (ZFPPIPP).
Preventive restructuring is available to corporations (excluding micro companies) that are not yet insolvent, but are likely to become insolvent within 1 year. It is intended to enable the company (debtor) to carry out the appropriate restructuring measures for its financial liabilities and other financial restructuring measures necessary to eliminate the causes of which it may become insolvent. For that purpose, the company and creditors may agree on a financial restructuring agreement setting forth financial restructuring measures (such as reduction or deferral of the maturity of financial claims or the change in interest rates at which the principal of the secured financial claim is repaid).
Companies may generally file for preventive restructuring as soon as they acquire consent to start preventive restructuring from its financial creditors holding at least 30% of the company’s total financial debt. After having applied for preventive restructuring, companies shall negotiate the financial restructuring agreement with the creditors and file for the confirmation of such agreement within 3 months (for small and medium companies) or 5 months (for large companies). These deadlines may be extended by the court for 2 and 3 months respectively, which potentially allows the companies 5-8 months to negotiate the financial restructuring agreements with their creditors. For the negotiated financial restructuring agreement to enter into force, creditors holding at least 75% of financial claims must vote for the approval of preventive restructuring (a separate majority is required for the restructuring of secured claims). In case preventive restructuring is confirmed, the financial restructuring agreement is binding on all creditors (including dissenting).
It is important to note that the companies may not only benefit from the approved financial restructuring agreement, but already during the time period of 5-8 months when negotiations take place. Namely, as soon as preventive restructuring has been initiated, a stand-still period shall apply to the company (debtor). During that time, the courts may not issue enforcement or security orders against the company in relation to the financial claims and all existing enforcement and security proceedings against the company are stayed. Furthermore, the statute of limitations does not run on financial claims during that time. It is also presumed that the company is not in default with the payment of the principal of financial claims during that period. The stand-still period therefore gives the companies some much needed time to better respond to the circumstances causing their likely insolvency. As, on the other hand, preventive restructuring imposes no statutory limitations on the company’s operations and no particular restraints on its management or shareholders, it can be seen as a somewhat low risk / high reward solution that the companies may resort to in difficult times.
It is important to note that preventive restructuring will not have an effect on commercial agreements (e.g. with suppliers), employees, and similar, but only on financial debt.
The precise scope, timeframe and consequences of the COVID-19 pandemic are not yet known. However, it seems very much likely that the global economy will be affected by it for at least some months (likely even years) to come. Companies around the globe must therefore act quickly and preventively, and adopt the necessary measures to address the current difficult situation. In Slovenia, preventive restructuring is one of the measures the companies may take for that purpose. Due to its numerous benefits and very few potential downsides, especially during the stand-still period, it may in some cases even be the best one.