Newsroom / News / Media / Info Magazine LGP NEWS 01/2021 / Temporary Protection for entrepreneurs

Temporary Protection for entrepreneurs

Temporary Protection for entrepreneurs

The Slovak legislator has adopted a legal instrument for the temporary protection of entrepreneurs in financial difficulties, which has been in force since the beginning of this year. The main purpose is to protect entrepreneurs from creditors and to create instruments to support entrepreneurs in bankruptcy. 

The pandemic has currently created a situation that is unprecedented in recent decades. Many sectors and branches of business have to remain closed or are only allowed to open to a very limited extent. This causes enormous damage, not only in the primarily affected areas, but also in business areas that would not be directly affected by the pandemic. This is currently happening worldwide – and Slovakia is unfortunately no exception. In a temporary framework, a new package of laws is therefore intended to enable financially stricken entrepreneurs to continue their business, prevent the loss of jobs and know-how, and lead to a higher satisfaction of creditors’ claims. 

This temporary protection is based on the previous protection package that Slovakia had created in the first half of 2020 to provide quick assistance to crisis-stricken entrepreneurs. In contrast, the new legislative package is a more permanent instrument in the Slovak legal system, because in this case it is not only about helping entrepreneurs who got into trouble due to the Corona crisis. 

The adaptation of this instrument is particularly relevant because experience shows that restructuring measures are difficult to implement in Slovakia. For example, according to Slovak law, the restructuring of a company requires the satisfaction of at least 50% of the creditor’s claims. No wonder that the number of restructurings has dropped rapidly since the introduction of minimum creditor satisfaction in 2015. Therefore, it can be assumed that without the interim legal protection, even higher damages would occur and thus the financial difficulties would lead directly to bankruptcy for many entrepreneurs. 

Requirements for provisional protection 

Entrepreneurs who wish to apply to the court for interim protection must meet two basic requirements. The main centre of their business activity is demonstrably located in Slovakia. This means that it can also be a foreign entrepreneur operating in Slovakia. However, its management must make most decisions in the Slovak Republic and the main part of the entrepreneurial assets must be in Slovakia. Similarly, the applying entrepreneur must not be a bank, insurance company, broker or any other form of enterprise excluded by law. 

In addition, entrepreneurs must fulfil other conditions prescribed by law. These include the consent of the absolute majority of creditors to the provisional protection, which must be proven in writing. Likewise, the creditors must thoroughly examine whether there is still a real chance for the entrepreneur to overcome the financial crisis. 

Entrepreneurs must also fulfil other conditions, such as 

  • There must be no enforcement proceedings against them to satisfy a claim arising from the business activity or exercise a lien on the assets 
  • They are not obliged to file for bankruptcy and no bankruptcy proceedings have been opened yet 
  • There has been no declaration of bankruptcy and no restructuring proceedings have yet been opened against them 
  • They must not have distributed any profit or other own funds and they must not have taken any measures that jeopardise their financial stability in the last 12 months 
  • They are registered in the official Slovak register identifying the final beneficiaries (if the applicant is a legal entity) 

Effects, rights and obligations 

One of the most important functions of the government’s protection package is “bankruptcy immunity”. This means that during the temporary protection, no decision can be taken to open bankruptcy proceedings against the entrepreneur (so-called passive bankruptcy immunity) and the entrepreneur is also not obliged to file a petition for bankruptcy (so-called active bankruptcy immunity). Another important effect is the enforcement immunity, which has the consequence that the rights or assets of the entrepreneur may not be impaired in the enforcement proceedings during Temporary protection for the claim that arose before the Temporary protection – with the exception of claims excluded by law. 

During temporary protection, the entrepreneur is entitled to pay liabilities arising from his normal business activities as well as services for the maintenance of current operations arising after the granting of temporary protection before the liabilities due earlier. Every entrepreneur who avails himself of the assistance of the government is also obliged to give priority to the common interest of creditors over his own interests and to refrain from disposing of his assets. 

As a rule, enterprises are often forced to overcome financial difficulties through credit financing. Since the entrepreneur enters into a new obligation through such financing, the terms of the protection package provide that such credit financing may only be granted on standard terms. The funds from the credit financing may only be used in connection with the maintenance of the entrepreneur’s business. 

Duration of the entitlement to protection and its extension 

An entrepreneur’s entitlement to temporary protection lasts for 3 months from the day it is granted, i.e. from the publication of the relevant notification in the Slovak Business Journal. The Act also provides that an entrepreneur may apply for an extension for another 3 months no earlier than 30 days and no later than 10 days before the expiry of the temporary protection. Such an extension is only possible if the entrepreneur negotiates with his creditors on changes in the content of the obligations, a partial exemption from the obligations or credit financing. He also needs at least a two-thirds majority of creditors to agree to the extension of temporary protection.

In summary, the new legal instrument created by the government is intended for entrepreneurs who proactively and in good faith seek to resolve their critical financial situation with creditors. It provides an adequate legal framework to help entrepreneurs in short-term financial difficulties and thus enables them to continue their business. At the same time, we believe that it provides adequate safeguards for creditors against abuse by the debtor. As this legal instrument has only been in force for a short time, we are not yet able to assess in detail whether it will ultimately achieve the intended goals. Only time will tell whether the temporary protection will become a permanently effective instrument. 


AUTHORS:

JUDr. Martin Jacko, Attorney-at-Law and Managing Partner at LANSKY, GANZGER + partner Bratislava
Mgr. Martin Holý, Attorney-at-Law at LANSKY, GANZGER + partner Bratislava

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