EU Harmonisation of avoidance actions from Slovak perspective

On 7 December 2022, the EU Commission issued a proposal for a Directive harmonising certain aspects of insolvency law. In this article, we focus on insolvency avoidance rights from a Slovak law perspective and the impact of the Proposed Directive.

Avoidance rights are an important tool of creditors in enforcing their claims against a default debtor and represent a punitive threat to debtors to avoid speculative transactions. Slovak law recognises (avoidance rights under general civil law, which can be applied irrespective of insolvency if the conditions are met, and insolvency avoidance rights triggered upon the insolvency of the respective debtor.

Current legal situation in Slovakia

Slovak insolvency law recognises the right of a trustee or a creditor to challenge certain transactions of a debtor, which can result in the ineffectiveness of such transactions against creditors if the petition is successful with the respective court. The primary petition right is with the trustee. The creditor may only apply this right if the trustee does not comply with his motion in time.

The avoidance right must be applied within one year from the declaration of a debtor´s insolvency with the obliged person (if the obliged person recognises such right in writing) or in a petition with the court. Afterward one year, this right expires.

A general precondition for successfully initiating an avoidance action is that the challenged act of the debtor is harmful to the satisfaction of other creditors. Such a condition would not be met if the challenged act is neutral (i.e. the value of the debtor´s assets remains generally unaffected) or even to the benefit of creditors. For example, if the debtor has not paid for energy supplies, the energy supplier could cut energy to the debtor and thus damage the entire production. In this case, a preferential invoice payment would not be considered as curtailing other creditors.

Slovak insolvency law recognises the following main types of avoidable transactions:

1. Preferential treatment transactions

This applies to a debtor’s legal acts that offer preferential treatment from some creditors to other creditors (e.g. preferential satisfaction, security creation, waiver or another amendment to the burden of a debtor and unjustified advantage of a creditor).

Such act can be declared ineffective if made while the debtor was insolvent, or if such a transaction led to the debtor’s insolvency. The debtor’s insolvency is presumed if the preferred creditor was closely related to the debtor. Insolvency is presumed in the case of confiscation of property following the commission of a criminal offence.

The avoidance right applies to transactions that have occurred up to the following:

• one year before insolvency is opened;
• three years before the opening of insolvency if made in favour of a closely related party; or
• five years prior to an insolvency declaration in case of a criminal penalty of property confiscation.

2. Transactions at undervalue

The trustee may also challenge a debtor’s transaction made without consideration, or for a consideration substantially lower than the fair market price if at the time of the transaction the debtor was insolvent or the transaction led to the debtor’s insolvency. The debtor’s insolvency is presumed if the creditor was closely related to the debtor or in case of a criminal penalty of property confiscation.

A transaction at undervalue is voidable if it was made within up to the following:

• one year before the opening of the debtor’s insolvency;
• three years before the opening of insolvency if made in favour of a closely related party; or
• five years prior to declaration of debtor´s insolvency in case of the criminal penalty of property confiscation.

3. Intentionally detrimental transactions

Any legal act taken by the debtor with the actual intention to curtail creditors’ rights is voidable provided that the beneficiary knew or should have known about such an intention. The knowledge of intention is presumed in case of a closely related party.

Such a transaction can be challenged if it was made within up to the following:

• five years before the opening of the debtor’s insolvency; or
• ten years prior to declaration of debtor´s insolvency in case of the criminal penalty of property confiscation.

4. Transactions after cancellation of insolvency

It is also possible to challenge transactions made by the debtor within six months after the cancellation of insolvency if the new insolvency was declared over the debtor and such acts cannot be considered as having been made within the ordinary course of business.

The general condition that the transaction must have been detrimental to other creditors has to be met.

Consequences of avoidance actions

A party that benefits from a voided transaction must surrender the debtor’s performance to the debtor’s estate. The same obligation applies to heirs, legal successors of the beneficiaries, or in case of a series of transactions, parties further involved in the transactions, if they:

1. knew or should have known the circumstances justifying the avoidance actions;
2. acquired the challenged rights or assets without any compensation; or
3. are closely related to the debtor, unless they can prove that they could not have known the circumstances justifying the avoidance actions even when acting with due professional care.

The avoidance action can also be applied in a manner of rejection of a registered claim or security if acquired through an avoidable transaction.

The debtor’s performance of a voidable legal act becomes a part of the insolvency estate. In case of multiple obliged parties, they are obliged to perform jointly and severally. Depending on the nature of challenged transaction, they may be obliged to natural restitution or to monetary compensation.

Small insolvency

If certain conditions are met, a “small” insolvency may be opened. In this case, creditors take a more active role than a trustee. This includes the exclusive avoidance right of creditors. If more creditors successfully challenge the avoidable transactions of the debtor, the creditor filing the petition first shall be satisfied preferentially.

Major expected changes due to the Proposed Directive

Slovak insolvency law already observes the principles and solutions of the Proposed Directive to a major extent. Given that the Proposed Directive enables EU member states to provide a greater level of creditor protection and current Slovak law seems to be stricter in many aspects, we assume that only some amendments to Slovak insolvency law will be necessary to fully comply with the “minimum” requirements of the Proposed Directive. These include the following:

• Exception for bills of exchange and cheques for preferential transactions

Current Slovak insolvency law does not contain an exception for bills of exchange and cheques as stipulated in Article 6(3)(b) of the Proposed Directive.
 

• Exception for symbolic donations for transactions at undervalue

There is currently no exception in case of transactions at undervalue for gifts and donations of symbolic value as set forth in Article 7(2) of the Proposed Directive.
 

• Consequences of avoidance actions

Pursuant to Article 9(3) of the Proposed Directive, the limitation period for all claims resulting from the legal act that can be declared void against the other party is three years from the date of the opening of insolvency proceedings. This extension from the current one year under Slovak law will definitely benefit creditors and provide them with more time for investigating all past transactions and undertaking respective actions.

Moreover, the possible assignment of receivables to obtain full compensation from the voidable transaction to a creditor or a third party also must be implemented into Slovak insolvency law.

Naturally, these are only the major observations of the Proposed Directive on avoidance actions. The actual implementation and later enforcement will depend on how other aspects are put into practice.

For more information, contact your CMS client partner or this CMS expert.