> Insolvency Law and Restructurings

Key highlights of the amendment to ZFPPIPP (ZFPPIPP-H)

Latest insolvency law amendment introduces certain partial solutions, which have only brought additional uncertainty into (pre-)insolvency proceedings, and haveprovided significantly less answers relative to the new questions and dilemmas it has raised. We highlight certain key dilemmas in our contribution.

More than two years after the expiry of the deadline for the implementation of Directive (EU) 2019/1032 on restructuring and insolvency into the Slovenian legal order, the National Assembly finally adopted the much-awaited amendment to the Financial Operations, Insolvency Proceedings, and Compulsory Dissolution Act in September. ZFPPIPP-H entered into force on 1 November 2023, and the provisions on the new judicial restructuring procedure in the event of threatened insolvency will apply as of 1 January 2025. Despite its many novelties, the amendment has been subject to numerous criticisms by the professional community, which mostly point out the lack of comprehensive and consistent solutions for the reform of key insolvency law procedures and even that ZFPPIPP-H is in some parts explicitly contrary to the regime of the directive.

This contribution covers some of our highlights and the issues raised by ZFPPIPP-H from a legal perspective.

The challengeable period of transactions is no longer limited

One of the novelties of ZFPPIPP-H is the right also to challenge those legal transactions or other legal acts concluded or performed by the bankruptcy debtor before the challengeable period (i.e., more than 12 months or, in case of gratuitous disposals, 36 months prior to the commencement of the bankruptcy proceedings).

For some transactions, ZFPPIPP-H prolongs the so-called “suspect period” indefinitely (with an ex tunc effect, as the regime will apply to all transactions in the insolvency proceedings governed by the new rules).

A successful challenge will require (in addition to the other criteria for challengeability) proof that the bankruptcy debtor was already insolvent at the time the transaction was entered into or the act was performed, or that the insolvency was a consequence of such transaction.

The purpose of such new provision is to end the abusive practices by debtors who, prior to the opening of bankruptcy proceedings, resorted to compulsory settlement proceedings, even when they had no realistic prospects for restructuring, with the sole intention to cover up practices with characteristics of challengeable acts. This raises the question of legal certainty for the bankruptcy debtor and, in particular, for third parties doing business with such debtor, as well as the impact of this provision on the speed of insolvency proceedings, since creditors will now be able to challenge virtually any legal act of the debtor within an unlimited timeframe before the bankruptcy proceedings are actually opened.

The regulation of an indefinite suspect period is contrary to the principles of predictability and legal certainty and is a novelty and a unique feature of the Slovenian legal order. Such a regime for challenging legal acts is not known even in the more general Obligations Code (OZ) (nor was it known in the Obligations Act (ZOR) from the time of Yugoslavia). The question arises whether such a regulation of legal relations is really the best way to prevent abuses of a very specific legal regime.

(Over)strict restrictions on entities’ access to judicial restructuring procedure

As of 1 January 2025, a new procedure will apply which, in addition to the existing preventive restructuring procedure, will be designed to remedy the situation of threatened insolvency, namely the so-called judicial restructuring procedure to remedy threatened insolvency. Threatened insolvency is now explicitly defined as a situation where the debtor is not yet insolvent but is likely to become insolvent within one year.

This procedure will not be available to an entity that (i) has been convicted of certain criminal offenses, (ii) has failed to (timely) submit an annual report to the Slovenian Agency for Public Records and Services in accordance with the provisions of the Companies Act, or (iii) has failed to submit certain tax returns for a period of the last 24 months, or has been subject to an additional or subsequent tax assessment or a levy of at least EUR 50,000 by a tax authority within the last five years.

The provision is supposed to implement the provisions of the directive; however, we consider that the Slovenian legislator has even exceeded the permissible framework of the directive by (over)strict restrictions and has significantly limited the accessibility of the new judicial restructuring procedure to Slovenian companies. The directive allows debtors who have been convicted of serious breaches of accounting and bookkeeping obligations under national law to be granted access to preventive restructuring only on condition that they have previously taken appropriate measures to remedy the breaches that led to the conviction. Furthermore, it follows from the recitals to the directive that Member States should not be precluded from prohibiting access to preventive restructuring also in cases where the debtor’s books and records are incomplete or deficient to such an extent that it is impossible to ascertain the debtor’s business and financial situation.

Can an entity that has, for example, submitted its annual report late because of possible disagreements with the auditor, really be accused of serious accounting infringement? More importantly, is this really a good enough reason to prevent a debtor from avoiding insolvency by using preventive restructuring, thereby potentially disadvantaging its creditors, who are usually left entirely unpaid in insolvency proceedings?

It is even less arguable that the non-payment of the EUR 50,000 in taxes makes the judicial restructuring procedure to remedy threatened insolvency impossible. Insolvency is, after all, a situation in which several creditors will be unpaid, while the purpose of insolvency relief is to ensure payment (or at least better payment) of the creditors. ZFPPIPP-H de facto introduces the position of a super-privileged creditor, i.e., (what a coincidence) the State. There is no real reason for this arrangement; why should the state’s claim be in a different position than, for example, a supplier’s claim amounting to EUR 50,000?

Voidness of ipso facto provisions in key agreements

In line with the provisions of the directive, the amendment prohibits a party to a key agreement from terminating the agreement, suspending its performance, or otherwise modifying the performance of the agreement to the detriment of the debtor solely because of the opening or consequences of judicial restructuring proceedings to remedy threatened insolvency or the opening of compulsory settlement procedure, even if it has expressly agreed to such a right in the agreement, all provided that the debtor complies with the obligations arising after the opening of such a procedure. Contractual provisions that would allow creditors to do so are null and void.

ZFPPIPP-H defines a key contract as an unfulfilled bilateral contract, the performance of which is necessary for the uninterrupted day-to-day business of the debtor, including supply contracts, the termination of which would stop the debtor from carrying on its business.

While the amendment mentions contracts for the supply of energy products, water, and telecommunications services as examples, the provision is open-ended in its meaning and can cover the widest possible catalogue of agreements. Where and based on what criteria should the line be drawn in each specific case between contracts that are necessary for the uninterrupted day-to-day business of the debtor and those that are not sufficiently important? We believe that rental and lease agreements will be considered as the key contracts; but what about loan agreements that provide financing to the debtor (and are otherwise not covered by the Financial Collateral Act), or perhaps agreements for the supply of raw materials that the debtor needs to continue to manufacture products? Or employment agreements providing labour services to the debtor? At first sight, electricity, water, and telephone seem to be historically clearly defined as “essential suppliers”, but in reality, they are no different from other suppliers (which are also covered by the general clause), since, for example, a trading company cannot operate on a regular basis if the suppliers do not supply the goods that the company sells on its shelves. A manufacturing company cannot be in regular business if suppliers do not supply raw materials, and no company can conduct its day-to-day business if the employees leave.

It seems that all these questions will only be answered by case law, which will take some time to develop. We believe that it will interpret the provision broadly, meaning that creditors (contractual partners) will generally be at a disadvantage in the event of insolvency. Additionally, the openness of the concept of key contracts in terms of substance is also detrimental to the legal certainty of debtors and their creditors.

Auditors and accountants, beware!

The amendment has placed significant responsibilities on auditors, accountants, or other persons who provide services to the company related to the company’s business or the review of the company’s business. These persons, who, in addition to the members of the company’s management and supervisory bodies, have the best insight into the company’s business, are now obliged to warn the company’s management in writing that a situation of a threatened insolvency or insolvency has arisen if they become aware of it in the course of performing their services. Although not explicitly mentioned, tax advisers and potentially even lawyers are likely to be bound by the same provisions, following the German model.

Shortening the time limits for filing for bankruptcy and compulsory settlement proceedings

Until the adoption of ZFPPIPP-H, the management of a company that became insolvent had to prepare a report on financial restructuring measures within one month of the insolvency. Only if the management concluded that there is not at least a 50% probability that the financial restructuring of the company can be successfully implemented in a manner that leads to the remedy of the insolvency, or if the financial restructuring measures envisaged in the report had not been implemented, they were obliged to file a petition for the opening of insolvency proceedings. In the meantime, out-of-court insolvency recovery procedures could be implemented.

However, under the new regime, the management is obliged to initiate the compulsory settlement proceedings or bankruptcy proceedings without delay, but at the latest within one month of the insolvency occurring. This is an attempt to force the management to consider preventive restructuring and to take timely action already at the stage when insolvency is (just) threatening the company.

In fact, such a regime now abolishes the possibility of out-of-court restructuring after insolvency has occurred, as the management that does not file for bankruptcy or compulsory settlement proceedings, is subject to a very strict presumptive joint and several liability for the debtor’s debts. Thus, there will be no post-insolvency out-of-court restructuring unless the management acts at its own risk or obtains a sufficient waiver from the creditors. This, however, reduces the chances of a successful restructuring.

Providing false or incomplete information or being insolvent automatically results in bankruptcy

According to the amendment, a creditor or an administrator will be able to object, inter alia, that the conditions for initiating a new judicial restructuring procedure to remedy threatened insolvency are not met because the debtor has provided untrue, incorrect, or incomplete information in the report on its financial situation and business operations, or because the creditor has not been given access to the debtor’s documentation, or because the debtor is already insolvent. If the court upholds such an objection and rejects the application to open the judicial restructuring procedure, it will of its own motion issue a decision on opening the bankruptcy proceedings. The court will have no other option.

Thus, if a debtor fails to disclose its financial situation fairly or unduly conceals information from the creditors, it will automatically end up in bankruptcy proceedings and will no longer have the right to restructuring within the compulsory settlement proceedings. The same will apply if the debtor is found to be insolvent. Consequently, the question arises as to the effectiveness of the new procedure – will the debtors even dare to opt for a judicial restructuring procedure? Namely, if the court finds that the debtor is insolvent based on a creditor’s or administrator’s objection, the debtor will immediately lose the possibility to restructure (also within the compulsory settlement proceedings) and thus continue its business. This means that such a debtor will be in a worse position than if it had immediately proposed the compulsory settlement proceedings, which are otherwise also available to the debtors that are already insolvent. We have not found any reason in the draft law why the legislator decided to prevent the debtor from accessing compulsory settlement proceedings in these cases.

Bankruptcy as a sanction for the debtor is, in our view, a concept that does not stand up to scrutiny. The main loser of the bankruptcy is not the debtor, but its creditors. Why should the debtor’s misdeeds put its creditors at a disadvantage?