Slovakia: Measures to avert insolvency and ban on termination of certain contracts

In an accelerated legislative proceeding, the National Council of the Slovak Republic yesterday adopted an amendment of Act No 62/2020 Coll. on certain emergency measures in connection with the spread of dangerous contagious human disease COVID-19 and in the judiciary amending certain other acts (hereinafter as “COVID-19 Act”). The proposal is part of a package of legislative measures aimed at helping businesses having place of business in Slovakia. The amended COVID-19 Act thus now includes a legal framework of “temporary legal protection” for entrepreneurs with their place of business in Slovakia, based on an opt-in model. During the protection period, the protected entrepreneurs that cannot fulfil their legal obligations cannot be subject to an initiated insolvency proceedings or enforcement proceedings nor can their business partners terminate an already concluded contractual obligation due to delays on part of the respective entrepreneur. 

TEMPORARY LEGAL PROTECTION

Entrepreneurs and businesses having their place of business in the Slovak Republic can apply for the temporary legal protection. They can receive the temporary legal protection only after applying for it. The effects of temporary legal protection for entrepreneurs and businesses during the period of protection are as follows: 

• Suspension of bankruptcy proceedings initiated by a creditor and filed after 12 March 2020;

• Entrepreneur and persons acting on its behalf will not be obliged to file an application for initiation of insolvency proceedings regarding its assets;

• Suspension of enforcement proceedings initiated after 12 March 2020 (protection will not cover en-forcement proceedings initiated before that date);

• Ineffectiveness of termination of contract or withdrawal from contract due to delay in performance occurred from 12 March 2020 until the cessation of the temporary legal protection (up to 31 Decem-ber 2020!); obligations which arose after the temporary legal protection has been granted but which regard the entrepreneur’s continued operation can be paid first, even when the maturity falls on a later date than obligations towards creditors;

• They cannot be subject to an initiated exercise of a lien regarding enterprise, asset, right, or asset value pertaining to the enterprise; 

• Prohibition to set off claims;

• Suspension of deadline for enforcement of rights from unlawful legal acts. 

HOW ARE ENTREPRENEUR'S CREDITORS AFFECTED BY TEMPORARY LEGAL PROTECTION?

The effects of temporary legal protection granted to entrepreneurs will be significant for the concerned creditors. They should be prepared for delays in payments regarding already existing legal relations of up to six months; the same applies when seeking performance by initiating either bankruptcy proceedings or enforcement proceedings. Creditors will furthermore be able to neither file for insolvency proceedings nor terminate contractual relations with failed performance. 

Entrepreneurs under temporary legal protection will be entitled to prioritise the fulfilment of obligations related to the maintenance of business and business activities, even where such obligations’ maturity falls on a later date than the entrepreneurs’ obligations towards their creditors. 

In order to protect their suppliers, it has been proposed to oblige entrepreneurs holding temporary legal protection in a reasonably required extent to make sincere effort to ensure that their creditors are satisfied in the greatest possible extent. 

NO DISTRIBUTION OF PROFIT OR OTHER OWN RESOURCES

Entrepreneurs granted temporary legal protection and their statutory bodies will have to refrain from such conduct which would lead to the preference of their own interests over the interests of their creditors. They will primarily not be entitled to distribute the company’s profit or other own resources among themselves. 

Furthermore they will be obliged to refrain from managing and deciding on the company’s assets and es-tate in a way that would lead to any changes in its composition, use, determination, or would cause its negligible reduction.

TEMPORARY LEGAL PROTECTION - CREATION AND TERMINATION

The temporary legal protection will be recognised on the basis of a standardised electronic application of the concerned entrepreneur containing its or its legal representative’s authorised signature. If the application is complete, the court will issue a certificate on temporary legal protection without examining the veracity of the information and claims contained in the respective application. The application must contain the entrepreneur’s declaration that it meets the following preconditions for the provision of a temporary legal protection:

• As of 12 March 2020, it had not been in crisis and no insolvency or restructuring proceedings had been initiated;

• There are no reasons for its winding-up (e.g. obligation to convene a general meeting at least once a year, obligation to create a reserve fund) nor had the company been wound up by its shareholders;

• In 2020 no direct or indirect distribution of profit or other own resources has been carried out, or whether the consequences of these actions have been eliminated e.g. by crediting the capital fund with contributions; 

• No measures endangering the financial stability – apart from measures aimed at mitigating COVID-19 pandemic consequences – have been taken; 

• It maintains proper accounting and has fulfilled the obligation to deposit its financial statements.

The entrepreneur will be liable for any damage potentially suffered as a result of a temporary legal protection granted on the basis of false claims and information. 

The concerned entrepreneur will be able to waive the already granted temporary legal protection. The protection can also be annulled by a court’s decision on the basis of an application filed either by the respective entrepreneur or a third party. The temporary legal protection will lapse by law on 1 October 2020 unless prolonged by the Government of the Slovak Republic, but not later than on 31 December 2020.

We hope that you will find the information above helpful and feel free to contact us anytime in case you have any questions or in case you need assistance with completing or submitting the electronic application regarding temporary legal protection.