Amendment to Slovenian Insolvency Act impacts duties of company management and supervisory boards

The latest amendment to the Slovenian Insolvency Act (Zakon o finančnem poslovanju, postopkih zaradi insolventnosti in prisilnem prenehanju or ZFPPIPP-H), which entered into force in late 2023, introduced the concept of likely or threatening insolvency and additional duties for the company and its management, which were first described in the article Amendment to the Slovenian Insolvency Act brings additional duties to the management and supervisory bodies, published in CEE Legal Matters (Slovenia: Amendment to the Insolvency Act Brings Additional Duties to the Management and Supervisory Bodies (ceelegalmatters.com)).

While the general duties of the company’s bodies are defined in the Companies Act, the Insolvency Act imposes additional duties on the management of the company to maintain the short and long-term solvency of the company and ensure that necessary measures are taken in the event of a company’s insolvency. In this article, we will take a closer look at these duties and compare the old and new rules.

Firstly, a company’s management and supervisory board have fundamental responsibilities when running a business.

The company’s management must conduct the company’s business in accordance with the standards of the business and financial professions, employing consistent implementation of risk-management strategies and other relevant measures appropriate to the nature and scale of the business. This includes identifying, assessing, managing and monitoring risks and ensuring the implementation of risk-management measures in relation to credit risk, market risk, operational risk, liquidity risk and capital adequacy. In addition, management is responsible for managing resources and investments to meet liabilities and to maintain sufficient long-term funding. Management must also exercise the professional diligence of business and financial professionals, striving to maintain a company’s solvency in both the short and long term. The members of the supervisory board are responsible for overseeing the company’s business operations, regularly reviewing whether the company is solvent and determining whether the management of the company is complying with the aforementioned rules.

The latest Insolvency Act amendment has not changed the basic responsibilities of the management and the supervisory board. The management’s responsibilities to identify the likelihood of insolvency and take necessary measures have been expanded, however, and now apply to situations where insolvency is likely but has not yet occurred. The Insolvency Act now specifically requires management to monitor the company’s operations on an ongoing basis and to identify any developments that may threaten the existence of the company. If such risks are detected, the management must implement financial restructuring measures to prevent the likelihood of insolvency and report these measures to the supervisory body without delay. If the measures fall under the responsibility of other corporate bodies (e.g. the supervisory board or the general meeting), management must ensure their consideration and action.

In addition, management and other corporate bodies also have specific duties to protect the legitimate interests of creditors against management decisions that could affect the structure of the company’s estate. This is crucial when these decisions could further reduce an asset’s values available for restructuring or distribution to creditors. Management must not act deliberately or with gross negligence in a way that could bring them profits at the expense of other stakeholders, authorise transactions below market value or take actions that could lead to unfair advantage of one or more stakeholder.

Secondly, the company’s management and supervisory board have duties in the event of insolvency. Previously, management had to ensure the equal treatment of creditors when a company becomes insolvent. Now this duty extends to pre-insolvency scenarios where management must also consider the interests of creditors, shareholders and other affected parties. Management must also refrain from actions that could jeopardise or reduce the company’s assets or its very existence.

There are also other changes to the duties of management in the event of insolvency that should be noted. Previously, management were required to perform tasks in the event of insolvency, including preparing a report on financial restructuring measures and submitting it to the supervisory board within one month. Now, however, with a company’s increased responsibilities in the period before insolvency, this requirement has been deemed redundant and is no longer required. Management was also previously required to file for a compulsory settlement proceeding within three months if the probability of a successful restructuring was greater than 50% or for filing for bankruptcy proceedings within three business days if the likelihood of successful financial restructuring was less than 50%. Now, management is required to file immediately for insolvency proceedings, but no later than one month, after the insolvency has occurred. (In the case of an exceptional event causing insolvency, the deadline is three months).

ZFPPIPP-H also introduced a new liability for management members during the two years prior to the start of the insolvency proceedings. They are now obliged to cover the costs of advance for initiating an insolvency proceeding if the value of the liquidated estate is inadequate to repay this amount. An individual member can only avoid this obligation by demonstrating they had no influence over the circumstances.

The concept of this new liability may not be well designed because it will prolong insolvency proceedings since liability can arise only after the main insolvency proceeding is over and it is clear that the liquidated assets were insufficient to cover the advance costs. Furthermore, the person initiating the insolvency proceeding must agree to pursue the management’s liability within 30 days after the administrator informs them of this intent, which forms the basis of the court decision. In contrast, management has only eight days to challenge the court’s decision and prove that they did not cause the company’s failure to cover the amount of the advance costs. Another problem occurs if the court dismisses the management’s objection. Although the decision can be appealed, an appeal does not stop enforcement. The administrator can therefore recover the claim from management in the enforcement proceedings before the outcome of the appeal procedure. To conclude, the provision in question is likely to cause problems in practice and be subject to challenges in the future.

For more information on these amendments to Slovenian insolvency proceedings, contact your CMS client partner or these CMS experts.