New act promises to improve financing environment in Slovakia

On 28 June 2023, the Slovak Parliament approved the Act on Company Transformations No. 309/2023 Coll. (the “Act”). The Act incorporates several changes that may have an impact on the financing market in Slovakia.

1.Whitewash

Until now, Slovakia implemented the EU Directive 2017/1132 and the previous Second Company Law Directive in a strict manner, and financial assistance was completely prohibited for joint-stock companies. This transpired to be very impractical for acquisition financings, which had to be structured to avoid the prohibition, such as through an upward merger or a change of legal form.

Under the Act, financial assistance will now be permitted subject to at least the following conditions:

1. Articles: a company’s articles must allow financial assistance; they can also stipulate further conditions;
2. Fair market conditions: financial assistance has to be provided under fair market conditions (especially regarding interest and security); in this respect, a qualified assessment of fair market conditions in light of adequate consideration (i.e. through an independent third party report) can be expected;
3. Free funds: financial assistance can be practically provided only from free funds of the entity, as it cannot cause a decrease in equity below the paid registered capital increased by (reserve or other) funds that cannot be distributed among the shareholders under the articles or the law and decreased by the amount of unpaid registered capital;
4. Creation of a special reserve fund to the extent of the provided financial assistance;
5. Corporate resolutions/documents:
   1. Board report: the board has to submit a written report to the general meeting analysing the financial assistance, as required by law, covering the financial soundness of each party, the reasons, conditions, risks related to the financial assistance, and the price for acquiring the shares;
   2. Supervisory board report: in certain cases, a report from supervisory board is also required;
   3. Two-thirds majority approval of the shareholders at the general meeting: the approval has to be based on the boards’ report(s).

Corporate reports must be deposited with the Collection of Deeds maintained with the Commercial Register as soon as possible after the approval at the general meeting.

A failure to observe any of these conditions can result in the liability of the board members for not complying and even the invalidation of the transaction.

However, the obligation to create a special reserve fund has transpired to be very limiting in the Czech Republic, because only a few companies have sufficient free funds to create such reserve fund and keep it for the whole term while the financial assistance is provided. Therefore, financial assistance and white-wash are rarely used with joint-stock companies in practice in the Czech Republic, and a similar approach can be expected to be taken in Slovakia.

2.Related party

Since 2019, banks have been alerted of the related party issue in bank financing in Slovakia, when the courts qualified a bank as a related party to an insolvent borrower. More can be read here: Slovak case low qualifies banks as related parties in insolvencies (cms-lawnow.com)

To remove this risk, the Act introduced a special amendment to the Slovak Insolvency Act stating that the contractual provisions or legal rights of a creditor will not be considered managerial influence over the debtor if the purpose is to protect the rights or legal interest of the creditor regarding the financial services provided to the debtor, including the security. The creditor is entitled to monitor the debtor’s financial situation and take steps including the enforcement of the security. Compared to the findings of the courts, the creditor is not to be deemed as related to the debtor due to such proceedings: the creditor is solely interested in the repayment of its receivables and its managerial influence is thus limited to that purpose and duration.   

3.Insolvency Register

The Act also intends to ensure better digitalisation and thus more transparency to all insolvency proceedings and processes. The new Insolvency Register includes several updates, such as:

1. replacing the current Register of Debtors with more mandatory and standardised publicly available information, e.g. lists of all claims and bankruptcy assets and regular trustee reports;
2. replacing the publication and delivery obligations currently performed through the Commercial Journal;
3. containing both insolvency and liquidation data on entities; it will be sufficient to approach the new register to check the solvency and liquidation status of the borrower or other entities involved in financing.

The first two changes will take effect on 1 March 2024 with the new Insolvency Register to follow from 1 January 2025.