TEMPORARY PROTECTION OF COMPANIES (APPROVED WORDING)

Yesterday, the National Council of the Slovak Republic approved an act[1] introducing temporary protection measures for businesses (“Act”). Here is the summary of the salient provisions of the Act.

The objective of the Act is to create a legal framework for the granting of temporary protection to those companies:

(i) which have their registered seat or place of business in the Slovak Republic;

(ii) which were licensed for business before 12.3.2020; and

(iii) which have been affected by the negative impacts of the spread of COVID-19.[2]

 

Granting of temporary protection

 

Temporary protection may be granted by the relevant court[3] based on an application submitted through an application form to be published by the Ministry of Justice of the Slovak Republic. Apart from providing general information[4] in the application, the applicant must declare his compliance with the requirements for the granting of temporary protection, namely that:

1. he is eligible to submit the application and, by submitting the application, he seeks temporary protection due to a considerable increase in his overdue receivables or a considerable decrease in his revenues compared to the same period of 2019 which represents a significant risk to the operation of his business; [5]
2. he was not insolvent as of 12.3.2020;
3. as of the application date, no grounds exist for the applicant’s dissolution and that the applicant is not subject to the effects of adjudicated bankruptcy or permitted restructuring;
4. as of 12.3.2020, the applicant was not subject to any enforcement proceedings for the satisfaction of a business claim;
5. as of 12.3.2020, no foreclosure proceedings were initiated in respect of the applicant’s company, as well as any items, rights, values or other assets;
6. in the calendar year of 2020, the applicant did not distribute profits or equity funds or, if such distribution took place, the applicant has remedied its consequences;
7. in the calendar year of 2020, apart from taking the measures aimed at mitigating the impacts of the spread of COVID-19, the applicant took no other measures jeopardising his financial stability or, if he took such measures, the applicant has remedied their consequences;
8. the applicant maintains proper accounting books and records and is not in breach of the duty to submit his annual and extraordinary financial statements to the register of corporate documents pursuant to Section 40(2) of the Commercial Code.

 

If the application meets the requirements, the court will grant the applicant temporary protection and will issue a confirmation to that effect. The court will publish information about the applicants subject to temporary protection in the Commercial Journal. Temporary protection is deemed effectively granted one day after publication in the Commercial Journal.

 

Effects of temporary protection

 

• Temporary protection basically prevents the petitions for bankruptcy filed by creditors from being tried or otherwise acted on. Hence any proceedings in respect of a creditor’s petition for bankruptcy filed after 12.3.2020 against a company under temporary protection will be stayed. The same applies to the petitions/motions filed by creditors during the temporary protection period. Equally, any bankruptcy proceedings commenced upon a creditor’s petition for bankruptcy filed after 12.3.2020 in which bankruptcy has not been declared are also stayed.

 

• During the temporary protection period, the company under temporary protection is not bound to file a petition for bankruptcy in respect of its own assets. The same applies to the individuals who have a statutory duty to file a petition for bankruptcy on behalf of the company (members of statutory bodies).

 

•  The enforcement proceedings (exekúcia) initiated after 12.3.2020 against a company under temporary protection for the satisfaction of a business claim will be stayed for the entire duration of the temporary protection period. The provisions of the Enforcement Code[6] which regulate the suspension [of enforcement] without blocking [of assets] will apply mutatis mutandis also to situations in which the proceedings are stayed after the enforcement itself has started.

 

• A company under temporary protection is immune from foreclosure in respect of the company itself, as well as any items, rights, values or other assets belonging to the company. If a notice of foreclosure is given, the grace period after the lapse of which the foreclosure may be effected will be reset to start over after the temporary protection has ended.

 

• A claim due to a company shielded by temporary protection that arises after the company has been granted temporary protection cannot be offset against an earlier claim pursued against the company if such claim is or was payable to the company’s related party as defined by the Bankruptcy Act[7].  

 

• A counter-party may not terminate a contract concluded with a company under temporary protection, nor may it rescind such a contract due to a delay in the performance of the company under temporary protection which occurred in the period from 12.3.2020 through the effective period of the Act and was caused by the consequences of the spread of dangerous communicable human disease COVID-19. The foregoing does not apply where the counter-party would instantly jeopardise its business operation. This is without prejudice to the right of the counter-party to terminate a contract, or to rescind such a contract due to a delay in the performance of the company under temporary protection after the expiration of the Act.

 

• The time limits for the exercise of the rights against a company shielded by temporary protection, including the time limits for the pursuit of actionable claims, shall be stayed for the duration of the temporary protection period.

 

• A company under temporary protection is required, insofar as it may reasonably be expected to do so, to exert sincere endeavour to satisfy its creditors to the maximum extent possible. Also, the company has a duty to place the common interest of its creditors above its own interest and that of other parties. A company under temporary protection may not, in particular, distribute its profits and other equity funds, and must refrain from disposing of its estate and the assets it may include, insofar as such disposal could lead to material changes in the composition, use or intended purpose of assets or to their other-than-negligible diminishment. A company under temporary protection, including its statutory bodies and/or members of its statutory bodies, is bound by these duties from the moment it has filed the application for temporary protection. Where a bankruptcy has been declared in respect of the assets of the company shielded by temporary protection, any legal act taken in conflict with this provision is ineffective vis-à-vis the creditors. This is without prejudice to the liability for damage and statutory liability. Claims arising from violations of these obligations are exercised by a trustee.

 

• A company under temporary protection may pay the liabilities it has incurred in direct connection with its business operations after it was granted temporary protection ahead of the liabilities maturing earlier.

 

• Any credit or quasi-credit facilities provided on a non-cash basis during the period of temporary protection, relating directly to the maintenance of the company’s business, are exempt from the provisions of the Commercial Code on ‘undertakings in a crisis’ and from the provisions of the Bankruptcy Act[8] on subordinated debt. These claims are not deemed secured in bankruptcy proceedings.

 

Expiry of temporary protection

 

The temporary protection facility will expire on 1.10.2020, but the Government may extend the coverage until 31.12.2020. Temporary protection may be lifted upon request of the company which enjoys it or revoked by a court decision.

The decision on the revocation of temporary protection will be taken by the court which granted it, acting either ex officio or on a qualified motion. The court will revoke temporary protection (i) if the granting thereof was ungrounded, (ii) if the grounds for its granting ceased to exist, or (iii) if the company under temporary protection breaches its duties ensuing from the temporary protection facility.

 

Zuzana Judiaková