On 1 November 2023, the long-awaited amendment to the Slovenian Insolvency Act (Zakon o finančnem poslovanju, postopkih zaradi insolventnosti in prisilnem prenehanju or ZFPPIPP-H) has entered into force.
In the wake of decisions of Slovenia’s Constitutional Court, the implementation of the Directive on restructuring and insolvency (Directive (EU) 2019/1023) and numerous criticisms of existing insolvency legislation by legal experts, this amendment introduced important changes to Slovenian insolvency law. This article examines the newly introduced Judicial Restructuring Procedure (postopek sodnega prestrukturiranja za odpravo grozeče insolventnosti), which was created to eliminate a likely insolvency while also highlighting its differences from the existing preventive restructuring procedure (postopek preventivnega prestrukturiranja). The rules governing the Judicial Restructuring Procedure will take effect on 1 January 2025.
The main purpose of the Judicial Restructuring Procedure is to enable financial restructuring based on a concluded compulsory settlement in cases where voluntary financial restructuring fails or is not confirmed by the creditors well before a company is insolvent. Therefore, the rules applicable to the compulsory settlement procedure generally apply to the Judicial Restructuring Procedure, subject to certain exceptions (e.g. rules enabling creditors to enter into equity or interfering with the debtor’s capital structure are excluded) and adjustments (e.g. if a company is not yet insolvent, a bankruptcy proceeding will generally not be opened automatically if the application for the Judicial Restructuring Procedure is rejected, dismissed or suspended).
The Directive on restructuring and insolvency requires member states to provide debtors with a preventive restructuring framework that enables them to restructure when they are likely to become insolvent within one year. The existing preventive restructuring procedure already covers such situation, so some may question the necessity of introducing the new procedure. The existing preventive restructuring procedure is primarily focused on restructuring financial claims and is mainly applicable to medium and large companies, thus requiring less judicial involvement and supervision. In contrast, the scope of the new Judicial Restructuring Procedure is broader since it encompasses all companies at risk of insolvency.
When comparing the two restructuring procedures, the following differences exist between the two:
- Affected claims: The preventive restructuring procedure only restructures financial claims (secured and unsecured) while the claims of other types of creditors (e.g. suppliers) are not affected unless these creditors expressly consent to be part of the restructuring agreement. In contrast, in the Judicial Restructuring Procedure, all claims can be restructured, except for employees’ claims arising from employment relationships.
- Voting quota: Initiating the preventive restructuring procedure requires the support of financial creditors holding at least 30% of the value of all financial claims, while the restructuring agreement must be approved by financial creditors holding at least 75% of the value of all financial claims (with a separate majority of 75% of all secured financial creditors if the restructuring agreement affects secured financial claims). For the Judicial Restructuring Procedure, no consent of creditors is required to initiate the procedure. In fact, creditors cannot even propose such procedure. The approval of creditors holding 60% of affected claims is required for approval of a restructuring. However, even if the unsecured creditors reject the restructuring, a court can still approve the arrangement as long as it has been approved by the secured creditors and if the debtor's shareholders are treated less favourably than unsecured creditors.
- Administrator: No administrator is appointed in the preventive restructuring proceeding and the proceeding is led by the debtor itself. In contrast, the Judicial Restructuring Procedure is led by an insolvency administrator (appointed by a court) while the debtor’s management continues to operate the company.
- Restructuring measures: The preventive restructuring procedure allows various restructuring measures, such as principal haircut and maturity extension of unsecured financial claims, interest rate reduction and maturity extension of secured financial claims. However, if the debtor seeks other restructuring measures, such as a debt-to-equity swap, principal reduction of secured claims, maturity extension of secured claims beyond five years, haircut and maturity extension of claims held by other non-financial creditors, explicit consent from affected creditors is necessary, meaning no “cram-down” effect can be achieved. In contrast, the Judicial Restructuring Procedure allows for any combination of restructuring measures (e.g. financial, corporate or operational restructuring measures), which must then be approved by creditors with the required majority.
The new Judicial Restructuring Procedure appears to be a combination of the existing preventive restructuring procedure and the compulsory settlement procedure. It is important to consider the different purposes of the two procedures since the compulsory settlement procedure is intended for insolvent companies while the preventive restructuring procedure is intended for companies that are at risk of insolvency. Applying the rules of the compulsory settlement procedure in the Judicial Restructuring Procedure should be done with this difference in mind.
In summary, the aim of the new (pre-)insolvency procedure is to encourage distressed debtors and their creditors to seek restructuring as early as possible in case insolvency is likely to occur in order to preserve the viable part of their business. It remains to be seen, however, whether the Judicial Restructuring Procedure will prove to be more effective than the existing preventive restructuring procedure in achieving higher survival rates of companies undergoing financial restructuring and addressing the problem of the timely restructuring of distressed companies. The preventive restructuring procedure has been little used since its introduction in 2014.
Overview of the main differences of the two restructuring procedures in cases of a likely insolvency:
| PREVENTIVE RESTRUCTURING PROCEDURE | JUDICIAL RESTRUCTURING PROCEDURE |
DEBTORS | Small, medium and large companies | All companies (also sole proprietor) |
AFFECTED CLAIMS | Financial claims (except if other creditors expressly consent to be part of restructuring) | All claims (except claims by employees arising from employment relationship) |
QUOTA FOR PROPOSAL OF PROCEDURE | At least 30% of the value of all financial claims | No consent of creditors is required |
QUOTA FOR RESTRUCTURING AGREEMENT | At least 75% of the value of all financial claims | At least 60% of affected claims |
ADMINISTRATOR | No | Yes, appointed by a court |
RESTRUCTURING MEASURES | Principal haircut and maturity extension of unsecured financial claims, interest rate reduction and maturity extension of secured financial claims, whereas other restructuring measures require explicit consent from the affected creditors | Financial, corporate or operational restructuring measures to be confirmed by the creditors with a required majority |
For more information on this amendment and insolvency law in Slovenia, contact your CMS client partner or CMS experts.
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