Ministry of Justice announces simplified restructuring procedure

In response to act BSWW’s request for legislative actions, the Ministry of Justice has announced that it is working on a simplified restructuring procedure for enterprises.

At the onset of the epidemic, act BSWW asked the Ministry of Justice to suspend the obligation to submit bankruptcy petitions. This solution was included in the Anti-Crisis Shield 2.0. However, it was somewhat different from our recommendations. Last Friday, we received an official response to our legislative suggestions. The Ministry explained why it had not decided to suspend the declaration of bankruptcy upon the creditor’s request in case the debtor’s insolvency is caused by COVID-19. The Ministry believes that the best way to ensure protection against the creditor’s motion for declaration of bankruptcy is the debtor’s submission of a restructuring application. In case of concurrence of the bankruptcy and restructuring petitions, the latter is generally considered to prevail. However, the situation is far from simple here.

Unfortunately, the current restructuring procedure is not adjusted to mass insolvencies that we are witnessing right now. Courts were not keeping pace with demand even before the epidemic, when the number of incoming petitions was usual. The period between the submission of a restructuring application and the opening of proceedings or the creditors’ meeting (aimed at voting on arrangement) was often so long that the company was losing the ability to perform the arrangement and was left with no other option than bankruptcy. If all enterprises suffering from financial difficulties submitted restructuring applications now, courts would get stuck for years. It would be advisable to simplify the regulations, making it possible for courts to open restructuring proceedings almost automatically. Also, the restructuring procedure is expensive and (subject to some exceptions) can be afforded primarily by large enterprises that have sufficient resources to pay the costs. In practice, the enterprise should have over PLN 100,000 assigned for costs alone. Of course, the exact amount depends on the specific circumstances of a given case. The fee of an administrator in remedial proceedings varies from approx. PLN 15,000 (extremely rare in practice) to over PLN 1 million. It is strongly recommended to introduce regulations minimizing those costs. Additionally, preparation of the restructuring application, all appendices and the initial restructuring plan is time-consuming and complicated. The procedure should be streamlined.

In its letter, the Ministry mentioned that it was working on legal amendments to make it possible to conduct restructuring procedures during the state of epidemic and over a limited period after its end, using a simplified procedure. This is very good news. What we need is a simple, quick and comprehensible procedure that would allow businesses to recover from the epidemic-induced crisis. Hopefully, the new regulations will indeed make restructuring procedures much more accessible.

Please feel free to contact us for any questions you might have.

New Insolvency Rules Resulting from the COVID-19 Pandemic

The current unusual situation caused by the COVID-19 pandemic will undoubtedly have substantial consequences for the economy of the Czech Republic. It can be expected that the amount of debts will rise sharply not only on the side of the state, but also on the side of citizens and business entities. Subsequently, many of these debts are not going to be repaid. Therefore, such debts will be claimed before the courts and other competent authorities sooner or later and subsequently enforced (either individually through enforcement proceedings or collectively through insolvency proceedings).

The current emergency may thus lead to the bankruptcy of many entrepreneurs, both in the form of insolvency and in the form of over-indebtedness. In spite of the current extraordinary situation, entrepreneurs are still obliged to file an insolvency petition without undue delay after they have learned of their insolvency or should have learned about it exercising due care. This obligation is also not affected by the fact that the insolvency could have been caused by the current emergency and it could be expected that the debtor will be able to recover from the inability to pay its debts in the near future (the so-called temporary insolvency). This puts many entrepreneurs at considerable risk, as their personal property may also be at stake. Failure to file the insolvency petition creates the liability of these persons (including members of the statutory body) for damages.

On March 31, 2020, the Government of the Czech Republic tried to mitigate the negative consequences of the COVID-19 pandemic on the economic situation of citizens and entrepreneurs by passing a bill (adopting draft legislation) to amend, inter alia, the Insolvency Act and the Act on Private Enforcement Procedure (hereinafter referred to as the “Amendment”). The Czech Republic thus follows the countries such as Germany or Spain which have already adopted certain changes to their enforcement or insolvency regulations.

The most important proposed changes to the Czech insolvency law can be summarized as follows:

1.Limitation of the obligation of entrepreneurs to file debtor insolvency petitions: A new rule is introduced for entrepreneurs not being obliged to file a debtor insolvency petition within the period from the effective date of the Amendment until 6 months from the termination or cancellation of an emergency anti-epidemic measures (but no later than by December 31, 2020). An exception to this rule exists when (i) the insolvency occurred even before an emergency anti-epidemic measure was adopted, or (ii) the insolvency was not mostly caused by the emergency anti-epidemic measure that would make it impossible or substantially difficult for the debtor to fulfil its payment obligations.

2. Limitation of creditor insolvency petitions: Creditor insolvency petitions filed from the effective date of the Amendment till August 31, 2020 will not be taken into account. Thus, there is a legal fiction that no such insolvency petition will have been filed. Therefore, such filing will not even be published in the insolvency register. The purpose of this measure is, inter alia, to prevent the debtor from spending money to defend against a creditor’s insolvency petition. However, the creditors will still be entitled to exercise their civil-law rights (e.g. by offsetting or enforcing a collateral), in court proceedings or out of court. [1] This measure – unlike the limitation of the obligation of entrepreneurs to file debtor’s insolvency petitions – affects all debtors (i.e. not only entrepreneurs) and regardless of why and when the insolvency occurred.

3. Introducing an extraordinary moratorium: The Amendment establishes the rule that a debtor who is an entrepreneur and who has not been in bankruptcy at the date of March 12, 2020 can file a request for a so-called extraordinary moratorium by August 31, 2020. The effect of the moratorium is that: (i) the debtor cannot be declared insolvent for the duration of the moratorium, (ii) the debts required to maintain the debtor’s enterprise that arise after the extraordinary moratorium is introduced can be paid by the debtor during the moratorium preferentially, before previously due liabilities are met and (iii) the time limits for exercising rights against the debtor for the duration of the extraordinary moratorium neither commence nor continue to run. The debtor may file a motion for a moratorium order even before the filing of an insolvency petition and the commencement of the insolvency proceedings. In addition, unlike the current “normal” moratorium, the proposal for an extraordinary moratorium does not need to be approved by the majority of the debtor’s creditors.

4. Suspension of performance of a reorganization plan: A debtor whose reorganization plan has been legitimately (finally) approved as of March 12, 2020 at the latest is entitled to propose to the insolvency court to state that the debtor is entitled to temporarily suspend performance of the reorganization plan (provided that the plan has not yet been fully fulfilled). The performance of the reorganization plan may be interrupted for the period of time during which the obligation of entrepreneurs to file debtor’s insolvency petitions is to be limited (see section 2 above). During the said period, it will not be possible to convert reorganization into bankruptcy (i.e. the liquidating way of the bankruptcy solution). However, the insolvency trustee and the creditor committee must comment on the debtor’s proposal to suspend the reorganization plan.

5. Discontinuation of time limits for relative ineffectiveness of legal acts: During the period of limitation of the obligation of entrepreneurs to file debtor’s insolvency petitions (see section 2 above), time limits for objections to relative ineffectiveness of legal acts should be suspended. By claiming ineffectiveness of a legal act, creditors can defend themselves within the statutory time limit against legal acts of the debtor that jeopardize the payment of their enforceable claim. When the measures described above provide special protection to the debtor, it is equally fair, during the period of such emergency measures, to discontinue the time limits for creditors within which they can defend themselves against the debtor’s prejudicing acts. Nevertheless, it is recommended that creditors should, even during the state of emergency, carefully monitor changes in the structure of their debtors’ assets (e.g. in the land registry) so that they can effectively defend themselves against any prejudicing disposal of the debtor’s assets.

The Government proposes that the Amendment is to be discussed by both chambers of the Parliament of the Czech Republic in an abbreviated procedure. Therefore, it can be expected that the Amendment may be passed in a few days. However, before the described changes to insolvency law become effective, entrepreneurs still have the obligation (i) to perform the so-called insolvency test and (ii) to file a debtor’s insolvency petition without delay after the defined prerequisites of insolvency are met. Failure to comply with this obligation may have far-reaching consequences not only for the legal entity, but also for the members of its statutory body, consisting mainly in incurring liability for damage caused thereby.

We would like to assure you that we have extensive practical experience with insolvency law, from the point of creditors and debtors (and their statutory bodies). We also continuously monitor the current changes in Czech insolvency law. Please feel free to contact us if you have any questions regarding the above.

At the same time, we are ready to provide you with comprehensive legal advice on imminent or already existing bankruptcy situation (if any) and solutions thereto under insolvency law, including protection against personal liability of members of statutory bodies of legal entities. Such advice can be provided in connection with your (imminent) bankruptcy situation, but also in the case of bankruptcy of your contractual partners (either suppliers or customers). Should you decide to enforce your receivables in a different manner than by insolvency, we will be happy to propose the best solution for you and to provide you with comprehensive legal representation. If you are in danger of bankruptcy as a result of the crisis-related measures of the Government of the Czech Republic, we are ready to provide you with comprehensive legal advice regarding claiming damages towards the state. [2]

At the same time, insolvency can be an opportunity to expand your business activities, for example by buying a debtor’s enterprise. We also have considerable experience with insolvency acquisitions and, therefore, we can provide you with the necessary assistance in this regard.


[1] For out-of-court dispute resolution options at the time of the coronavirus epidemic, see the ŘANDA HAVEL LEGAL newsletter called “Impact of the COVID-19 Epidemic on Dispute Resolution” that is available here: https://www.randalegal.com/download/files/newsletter_newsletter_praktickprvninformace_vii._engid244236.pdf.

[2] For the possibility of claiming compensation from the State for crisis measures, see the ŘANDA HAVEL LEGAL newsletter on “Recent Developments in the Matter of State Liability for Damage in Connection with Measures in Crisis” that is available here: https://www.randalegal.com/download/files/newsletter_newseletter_praktickprvninformace_viii.engid244494.pdf.

Further relief for companies affected by COVID-19: Germany adopts suspension of the statutory obligation to file for insolvency!

In order to mitigate the economic impact of the spreading SARS CoV-2 virus (“COVID 19 Pandemic”), the German government has introduced a protective shield for companies in crisis, which, in addition to short-time work benefits and tax deferrals, also provides for an unlimited credit line from the Kreditanstalt für Wiederaufbau (“KfW”).

As an accompanying measure, the German legislative bodies additionally now adopted a temporary suspension of the obligation to file for insolvency, since due to organizational and administrative reasons stemming from the approval process it cannot be guaranteed that such government aid will reach the affected companies in time. As a direct legal consequence, the management of such companies might be legally obligated to file for insolvency on behalf of the company in the meantime if over-indebtedness or insolvency occurs. This welcome suspension of such obligation will give companies that have fallen into economic difficulties as a result of Covid-19 more time to survive the crisis without necessarily having to file for insolvency.

1.Which companies are exempt?

Prerequisites for the suspension of the obligation to file for insolvency are that  

  • the insolvency or over-indebtedness is caused by the consequences of the COVID 19 pandemic, and
  • there are reasonable prospects of eliminating the existing insolvency.

However, these prerequisites are legally considered to be met if the company concerned had not already been insolvent on 31 December 2019.

2. What does “suspension of the obligation to file for insolvency” mean exactly?

If these prerequisites are met, the persons normally obligated to file for insolvency pursuant to section 15a of the German Insolvency Code (e.g. the managing directors of a limited liability company) are temporarily not required to do so during the suspension period. If the crisis of the company is not averted even after the end of the suspension period, the regular 3-week period to file for insolvency starts to run again.

3. How long does this suspension apply?

The suspension applies retroactively from 1 March 2020 and for the time being until 30 September 2020 but may be extended by the Federal Government until 31 March 2021.

We will keep you updated!

Article 43 of RD-Law 8/2020, of 17 March, on extraordinary urgent measures to face the economic and social impact of COVID-19

Article 43 of RD-Law 8/2020, of 17 March, on extraordinary urgent measures to face the economic and social impact of COVID-19, modifies the deadlines set by the Spanish Bankruptcy Act to request a declaration of bankruptcy.

Current legislation

Article 5 of the Spanish Bankruptcy Act specifies the debtor (be it a natural or legal person) must file for bankruptcy within two months since becoming aware of the situation. This realization will be deemed to exist when one of the following situations occurs:

  1. The general cessation of obligation-related payments.
  2. Seizures or repossessions that generally affect the debtor’s equity.
  3. Ruinous clearance or asset stripping.
  4. The non-payment, during the last three months, of tax obligations, social security contributions and labor debts.

The consequences of not meeting the obligation to request a bankruptcy declaration within the deadlines set are that, in the event the debtor is finally declared bankrupt, said person can be blamed for the situation. As a result, the members of the board may be banned from exercising these duties again and can be made personally responsible for the company’s debts (whether partially or totally).

Extraordinary regulations

The RD-Law suspends, while the state of alarm is in force, the need to request a declaration of bankruptcy (even if the conditions that make such request compulsory are met). The norm, however, does not clarify if, once the state of alarm is over, a new two-month period is launched in which to submit that request or whether said period needs to be calculated on the basis of the time lapsed until the Royal Decree-Law entered into force.

The new norm, however, does specify that new requests for bankruptcy declarations will not be processed by judges (even if the debtor is insolvent) for as long as the state of alarm lasts plus the two following months. If the debtor requested a voluntary insolvency process after an involuntary process was launched, the voluntary request will be processed first.

The RD-Law does not prevent any voluntary insolvency requests from being filed while the state of alarm is in force but notes that their processing will be suspended for as long as it lasts.

If the debtor was already in the first stages of an insolvency situation (article 5 bis of the Spanish Bankruptcy Act), the RD-Law suspends, while the state of alarm is in force, the obligation to request a declaration of bankruptcy if, within the four-month period specified by the Bankruptcy Act, no agreement is reached or the number of necessary endorsements has not been obtained to process an early agreement proposal.

Act to mitigate the consequences of the COVID-19 pandemic

The German Bundestag today unanimously adopted the act to mitigate the consequences of the COVID-19 pandemic in civil, insolvency and criminal proceedings in expedited legislative action. With this, the extensive protective measures for companies and private individuals, which the Federal Government already recommended on Monday, will enter into force soon. The law now only has to be approved by the Bundesrat and executed by the Federal President, which is generally regarded as a formality.

If you want to know more about the detailed contents of the passed legislation make sure to check out our detailed reports.

Insolvency: https://blog.actlegal.com/the-planned-changes-by-the-act-to-mitigate-the-consequences-of-the-covid-19-pandemic-in-insolvency-law/

Corporate: https://blog.actlegal.com/the-planned-innovations-in-company-law-resulting-from-the-act-to-mitigate-the-consequences-of-the-covid-19-pandemic/

Commercial/Supply Chain: http://blog.actlegal.com/rights-to-refuse-performance-for-debtors-in-the-corona-crisis-planned-creditors-can-take-countermeasures/

Banking/Finance: http://blog.actlegal.com/corona-crisis-special-features-of-lending-law-from-the-banks-perspective/

Public support for restructuring


The legislative efforts to help business in the face of the coronavirus epidemic are gaining steam. One of the legal acts currently under consideration is the act on public support to rescue or restructure businesses, a draft of which was published on March 20, 2020. The document has gone to the Social Dialog Council (Rada Dialogu Społecznego) for assessment. Its final shape is yet unknown.

The solutions under consideration cover public support for businesses who are in need of: (a) rescue, (b) provisional restructuring support, (c) restructuring. The main form of help to be provided are loans which can be taken out in each of the above cases. In accordance with the draft bill, such a loan would be secured, with the available security types including a mortgage, a civil-law pledge or a registered pledge, claims assignment, a statement on submission to enforcement and a blank promissory note. Other support offered to businesses which have the option of restructuring is, i.a. shares or bonds subscription, payment of an administrative fine in instalments or cancellation of the fine.

The governmental aid proposed in the draft bill is worth PLN 100m a year, with up to 69% of this amount (PLN 69m) earmarked for loans, further 29% (PLN 29m) for shares or bonds subscriptions and the remaining 2% (PLN 2m) intended to cover the cost of providing the support.

CONDITIONS FOR RECEIVING FINANCIAL SUPPORT

Conditions regarding the purpose of the support

Eligible business should show that the governmental aid will be used to prevent and mitigate social difficulties or overcome market challenges (as defined in detail in the act) as well as demonstrate that in case the support is not provided, these goals will not be fulfilled or will not be fulfilled as fully. Additional conditions have been determined for businesses with assets acquired from another business which received governmental aid before the transaction, as well as for businesses belonging to capital groups. Further detailed requirements have been also defined with respect to the different purposes the aid may be used for: (a) company rescue, (b) provisional restructuring support, (c) restructuring.

Conditions regarding the business

The financial aid is addressed to a limited number of businesses. Eligible businesses must be able to show that they are insolvent, as defined in the Bankruptcy Law, or are facing insolvency, as defined in the Restructuring Law. In the latter case, businesses are also required to satisfy additional conditions related to showing the incurred losses and/or the debt-to-equity ratio.

The financial aid will not be available to businesses which, i.a.:
1) have been operating less than 3 years before applying for the government’s help,
2) operate in the steel, coal mining or finance industry,
3) operate in a market with long-term structural overcapacity or facing long-term structural overcapacity,
4) have already been provided with public support within the last 10 years, with some exceptions allowing to apply for the help sooner. The exceptions cover cases where the help is sough as part of the same procedure regarding the grant of financial aid as on the previous occasion of using governmental support. For instance, it will be possible to obtain help for company rescue, followed by provisional restructuring support and, finally, restructuring.

The abovementioned restrictions will not apply to a business providing services of general economic interest, where the help is necessary to ensure their continuity, however, only until the obligation to provide these services is transferred to another business.

HOW TO APPLY?

Generally, in accordance with the draft bill, a business should apply for the financial support to the minister competent to handle economic affairs, however, the minister may delegate its powers to the extent of this aid program to the Industrial Development Agency (Agencja Rozwoju Przemysłu).

The application should be appended with information and documents similar to the ones required in the case of filing for restructuring, with some types of information required to be provided in more detail (thus, the formal requirements regarding the application may be quite high). The application for company rescue will require the narrowest scope of information. Next in the order of complexity is the application for provisional restructuring support, with the most detailed information being required in the case of the application for restructuring support.

The applications will be processed in the course of administrative procedure. The decision issued as a result will be appealable. Once filed, the application should be examined within the deadline of 30 days, which may be extended up to 60 days if a given case is especially complex.


The proposed changes are a step in the right direction to help struggling businesses obtain the government’s support at the time of epidemic. However, there are some doubts as to the relatively long period of application processing and the lack of practical consequences in case the application is not examined on time.

Let us know if you have any questions.

The planned changes by the ‘Act to Mitigate the Consequences of the COVID 19 Pandemic’ in insolvency law

The changes in insolvency law planned by the German government are intended to enable and facilitate the continuation of companies that have become insolvent or are experiencing financial difficulties as a result of the spread of the SARS CoV-2 virus (‘COVID 19 Pandemic‘). It is essentially what the German government wants to achieve with its proposed wording for a new ‘law to mitigate the consequences of the COVID-19 pandemic’  in insolvency law with a bouquet of measures, such as:

  • Temporary suspension of the obligation to file for insolvency for companies that become insolvent in the period from 1 March to 30 September 2020 (‘Suspension Period‘);
  • Liability privilege for managers in respect of payments during the Suspension Period which serve to maintain or resume business operations or to implement a restructuring plan;
  • Privilege and protection against insolvency avoidance for the contractual partners and the financing creditors of the company affected by the COVID 19 Pandemic for any (legal) transactions during the Suspension Period
  • Suspension of liability for the protraction of insolvency proceedings due to so-called ‘selfish’ or otherwise immoral restructuring loans;
  • Protection against the avoidance of so-called congruent coverages (section 130 German Insolvency Code) during the Suspension Period;
  • Protection against the avoidance of certain incongruent coverages (section 131 German Insolvency Code) during the Suspension Period;
  • Protection against creditors’ insolvency applications for 3 months from the day after the promulgation of the ‘Act on Mitigation of the Consequences of the COVID 19 Pandemic’. 

1. Suspension of the obligation to file for insolvency and protection against insolvency applications by creditors

The cornerstone of the package of measures recommended by the Federal Government is a temporary suspension of the obligation to file for insolvency in the period from 1 March 2020 to initially 30 September 2020. The Federal Government can extend the Suspension Period until 31 March 2021. The retroactive effect of the suspension of the obligation to file for insolvency as early as 1 March 2020 will also benefit companies that are already insolvent today. However, the suspension does not apply to companies whose insolvency maturity is not due to the consequences of the COVID 19 pandemic or to companies that have no prospects of eliminating their insolvency. If the affected company, however, was not yet insolvent on 31 December 2019, it is assumed that these reasons for exclusion from the suspension do not apply and that there is therefore no obligation to file for insolvency for the duration of the Suspension Period. This will considerably simplify the practical application of the suspension rule.

However, it is not clear from the proposed wording what are the consequences of an insolvency maturity that has already occurred after 1 March 2020 and whether the suspension also suspends an already realised delay in insolvency. There is much to suggest that the three-week period for filing for insolvency is interrupted during the Suspension Period and therefore, in individual cases, even insolvency maturity that occurred less than three weeks before 1 March 2020 can be covered by the suspension. 

The draft legislation provides that within the first three months from the day after the announcement of the ‘Act on Mitigation of the Consequences of the COVID 19 Pandemic’, a creditor insolvency application for the assets of the company affected by the pandemic is justified if the reason for opening insolvency proceedings already existed on 1 March 2020.

2. Suspension of directors’ liability for payments after insolvency

The liability privilege for the managing directors with regard to payments in the Suspension Period, which serve to maintain or resume business operations or to implement a restructuring concept, as provided for in the draft legislation, ensures that the continuation of the (insolvent) company (permitted under the plans of the Federal Government in the Suspension Period) does not lead to personal liability of the managing director. The directors covered by this include AG management board members, GmbH management board members, cooperative management board members as well as representatives of partnerships in which no personally liable partner is a natural person. 

3. Facilitated liability-free crediting of (insolvent) companies during the Suspension Period

According to the current legal situation, the investor or the financing shareholder is exposed to considerable liability and rescission risks if it grants the company restructuring loans during the crisis. This is because, on the one hand, shareholder loans are generally subordinated in insolvency and, thus, regularly fail completely, and on the other hand there is the risk that the crediting in the crisis could trigger the offence of aiding and abetting insolvency and therefor sensitive liability consequences for the investor. To make matters worse, even a bona fide investor must expect, in the event of successful repayment (or collateralisation) of the loan, that the subsequent insolvency administrator will demand the back payment . It is precisely these risks that the German government plans to eliminate with the formulation aid ‘Law to mitigate the consequences of the COVID 19 Pandemic’: 

a) Loans from third parties outside the company

According to the scheme provided for in the draft legislation, the challenging by the insolvency administrator  of payments (or security) provided by a company up to 30 September 2023 on loans granted during the Suspension Period is per definition not (any longer) disadvantageous to creditors and thus cannot be challenged in the insolvency of the company. 

Furthermore, according to the proposed regulation, granting loans and collateral during the Suspension Period is not to be regarded as an immoral contribution to the protraction of insolvency proceedings , which is why the risk of an obligation to repay and/or liability for immoral damage to the investor no longer threatens.

b) Shareholder loans

The repayment of shareholder loans and payments on claims arising from legal acts that are economically equivalent to such a loan, are also not challengeable. However, this does not include the provision of “new” collateral for shareholder loans already granted.

Notwithstanding para. 39, subsection 1, No. 5 and para.  44a, German Insolvency Code, shareholder loans granted during the Suspension Period will not only be satisfied subordinate in insolvency proceedings concerning the assets of the company, which are applied for by 30 September  2023, but will also be taken into account as insolvency claims in the final distribution on a pro-rata basis in the rank of para. 38 German Insolvency Code.

c) Suspension of bankruptcy challenge in free circulation 

In order to protect the other contractual partners of the company affected by the pandemic, the draft legislation also provides for a partial suspension of the insolvency challenge per se: The insolvency avoidance of congruent cover (section 130 German Insolvency Code) during the Suspension Period is excluded, unless the opponent of the avoidance was aware at that time that the debtor’s restructuring and financing efforts were not suitable to remedy an insolvency which had occurred. The same suspension effect applies to selected cases of incongruent cover (section 131 German Insolvency Code), namely

  • services in lieu of or on account of performance;
  • payments by a third party on the instruction of the debtor;
  • the provision of security other than that originally agreed, if this is not more valuable;
  • shortening of payment terms and
  • granting of payment facilities.

In particular, however, the regulations on the challenge of intent (section 133 German Insolvency Code) and on the challenge of gifts (section 134 German Insolvency Code) remain largely unaffected by these changes.

4. Entry into force

The ‘Law on Mitigation of the Consequences of the COVID 19 Pandemic’ is expected to be adopted on 27 Friday March 2020 and to enter into force shortly thereafter. The changes in insolvency law described here will then apply from 1 March 2020 to 31 March 2021. 

COVID-19 Pandemic: Action Plan on Insurance, Insolvency Proceedings and Relations with State for Slovak Entities and Foreign Entrepreneurs in Slovakia

Insurance

  • Administration and thorough documentation will be decisive for the successful enforcement of claims. Know and understand the details of the insurance policies and applicable terms and conditions. Prepare a summary of them – even of those you find marginal or unimportant. Taking into consideration the fact that the COVID-19 pandemic is still unfolding, it is unclear what approach will be taken by the insurance companies when assessing insurance claims. Whether you are a big player or a small company, the only practical approach is to audit all insurance conditions and to set up internal processes aimed at safeguarding their fulfillment.
  • In the case of receivables insurance comply with obligations and deadlines under the insurance conditions. Make mandatory notifications to insurance companies and debtors. 
  • If you are covered by insurance against failed payments or business interruption, it is essential to fulfill all obligations on time, even if they are administrative.
  • Read and study all policy provisions that eliminate coverage for some type of risk. The insurance company will inform you about such exclusions. However, it is important to be active and to communicate with the insurance company to make sure that the existence of a possible exclusion is assessed correctly.

Bankruptcy and restructuring proceedings, court and administrative proceedings

  • Monitor your business partners and other relevant entities concerning any ongoing insolvency proceedings, especially the ones you provided collateral for. We can expect a rapid increase in such proceedings in the next months. The process of early identifying the commencement of insolvency proceedings will be essential not only for the assertion of claims but also for the legal possibility to terminate the contract or enforcement of collaterals or securities. Do not miss the opportunity to claim your receivables by not making the effort to monitor bankruptcy and restructuring proceedings.  
  •  Use re-negotiations of contractual relationships with business partners under the risk of insolvency as a tool to targeted contractual changes or to improve your contractual position. Combine agreements on extensions of the maturity of receivables with changes of other outstanding issues such as acknowledgment of debt, the set-up of set-off mechanisms, tightening of supplier’s liability, collateral security, etc. Take hold of the situation and try to turn the existing negatives into an improvement of your contractual position.
  • Introduce internal monitoring of indicators pointing to insolvency to avoid applications for bankruptcy filed by your creditors against your company or the liability of statutory bodies for (not) filing for bankruptcy.
  • Also, the judiciary has been affected by the COVID-19 pandemic. However, court hearings were not yet adjourned by a measure or regulation. Bear in mind that periods still run in proceedings. Actively communicate with the courts. Submit requests for adjournment of the court hearing or for extensions of procedural deadlines set for submitting briefs. The consequence of neglecting the communication with the court may be significant (e.g. judgment in default). Apply these principles also in proceedings before other public authorities (administrative proceedings, etc.).
  • Pay special attention to such legal acts where the legislation explicitly precludes parties to the proceedings to request the remission of a deadline (time period) or its extension. Such legal acts are e.g. statement to the protocol of tax control or administrative actions against the decision of public authorities. Foresee and plan such legal acts.

Relations with a state

  • Monitor support measures and tools adopted by the State. Government officials repeatedly announce that there will be packages of support measures to companies and entrepreneurs suffering the COVID-19 pandemic consequences.  However, not all of them will be effective en bloc. Carefully monitor which measures will be agreed and when. Pay attention to whether they will be applied to all without distinction, or whether they will be granted only to entities requesting or applying for them in some administrative proceedings. Ensure that all documents and evidence is properly collected at all times, do not forget to track by evidence the negative impact of COVID-19 pandemic on you.
  • The “Anti-Letterbox Act” legislation does not allow for exceptions, not even in emergencies. If you enter into contractual relations with the State, e.g. when selling medical supplies, the registration into Register of Public Sector Partners is still mandatory. Begin this process on time as the current situation is slowing down the decision-making process of the courts.
  • Monitor the possibility of claiming compensation for damages caused by emergency measures adopted by the State. One cannot rely on the assumption that the State will compensate for the negative economic impact everyone and everything. Monitor the web pages of public authorities and the Collection of Laws, do not rely only on the information coming from media.  

Revision of bankruptcy law: pre-pack bankruptcy


As the coronavirus epidemic upends Polish reality, the effective date of the bankruptcy law amendment, introduced on the basis of the act of August 30, 2019, remains unaffected. New laws enter into force today (March 24, 2020). Next to personal bankruptcy, which may now be sought by almost anybody, debt release procedure regarding sole proprietors and trustees’ duties connected with proof-of-debt submissions, pre-pack bankruptcy is also up for a makeover.

Pre-pack bankruptcy – how does it work?

Pre-pack bankruptcy is one of bankruptcy strategies provided by Polish law, which is meant to enable smooth transition of an insolvent business from one owner to another soon after bankruptcy is declared. Thanks to this solution the business carries on, workers keep their jobs and contracts with clients and suppliers remain intact. A successful pre-pack bankruptcy reduces the bankruptcy process and costs involved, as well as ensures fuller satisfaction of creditors. In this type of proceedings, the petition for bankruptcy is filed along with the petition for approval of the sale terms regarding the insolvent company’s assets. Pre-pack bankruptcy may cover the entire enterprise, its business unit or a major portion of its assets. The pre-pack petition also includes a description and an appraiser’s valuation of the assets in question, the proposed price and the name of the prospective buyer (who can be almost anybody).

If the court finds that it would be more beneficial to sell the assets in the course of a pre-pack procedure than a regular bankruptcy procedure, it will approve the sale terms in addition to declaring the debtor bankrupt. Following a pre-pack sale, the whole enterprise may be handed over to the buyer on the same day the court issues its decision.

Key changes introduced by the revision:

  1. The pre-pack bankruptcy petition may be filed at any stage of bankruptcy proceedings (before the amendment, the pre-pack bankruptcy petition and the regular bankruptcy petition were to be filed together);
  2. All the entities involved in bankruptcy proceedings will have standing to file for pre-pack sale; so, the pre-pack bankruptcy petition may now be filed by:
    – a creditor filing for debtor’s bankruptcy,
    – a debtor filing for bankruptcy,
    – a debtor whose bankruptcy was instigated upon a creditor’s petition, especially, in response to the creditor’s petition (also as an alternative petition filed in case the court declares the debtor bankrupt, against the debtor’s will);
  3. The petition for sale terms approval may cover more than one buyer;
  4. The buyer will be required to post a bond equal to 10% of the price. If the sale falls through due to reasons within the buyer’s control, the trustee keeps the bond;
  5. The protection of creditors with security over the debtor’s assets will be expanded – the petitioner will be required to submit a list of securities over the debtor’s assets, with copies of the petition for all identified secured creditors. The court will notify them about pending proceedings and serve them copies of the petition. Secured creditors will have the option to report comments about the petition to the court within 14 days of being served. They should remember to check if the petitioner’s valuation of the asset backing the relevant claim is accurate;
  6. A provisional court supervisor (or a court-imposed administrator) will be appointed as a matter of obligation. Their duties will include examining the debtor’s situation and preparing a report covering information relevant to the sale terms approval petition. The idea behind this change is to ensure that the pre-pack process runs smoothly and is transparent;
  7. The filing of a pre-pack bankruptcy petition will be advertised in the Court and Commercial Gazette (Monitor Sądowy i Gospodarczy). Advertising the petition is meant to reach out to other prospective buyers who may want to take part in the pre-pack bankruptcy procedure as well and protect those involved in the procedure against claims of acting against creditors’ interests by selling at an undervalue and neglecting to see if any other investors may be interested in purchasing the debtor’s assets;
  8. If two or more petitions for sale terms approval are filed, an auction between the prospective buyers will be held in order to select the best offer. Auction, designed to obtain the highest possible price, is surrounded by much debate. Some argue that the pre-pack process, the main advantage of which has been its speed, will be dragged out, especially since 30 days have to pass from advertising the petition for sale terms approval before it can be examined by the court. There are also concerns about the fact that the new law does not provide for a case where two pre-pack petitions cover different subject matter. How is an auction to work and what rules it should follow when one of the petitions concerns the enterprise as a whole, while the other covers only its business unit? Only by putting the new laws into practice can these and many other questions be answered.

The amendment dispelled many doubts surrounding pre-pack bankruptcy and, to some extent, legitimized the judicial practice spanning 4 years (i.e. the appointment of provisional court supervisor). The introduction of a bond, stronger secured creditor rights and increased transparency of the procedure are definitely an improvement. However, some of the new solutions have led to a new set of questions regarding the application of the revised law, with the obligatory auction in the case of two or more petitions being the most controversial of them. In the end, all the issues related to pre-pack bankruptcy will be worked out in practice by legal scholars and courts in the years to come.

Contact us in case of any questions.

State of epidemic threat vs. management board’s liability for failure to file for bankruptcy on time

There is no doubt that the coronavirus pandemic and the ensuing state of epidemic threat will affect many businesses, some of which may even suffer cash flow difficulties. Struggling businesses may be faced with the question whether their financial troubles are serious enough to lead to insolvency.

This brings us to another question, i.e. whether the restrictions imposed as a result of the state of epidemic threat and legislation passed in connection with it affect Polish businesses’ obligations related to filing for bankruptcy within the prescribed deadline.

Obligation to file for bankruptcy

Unfortunately, none of the legislative acts adopted so far in response to the pandemic modifies the obligation to file for bankruptcy. After the Cabinet Council meeting of March 18, 2020, the President and Prime Minister announced a number of relief measures to mitigate the coronavirus’ impact on businesses. With detailed legislative solutions still in progress, the government remains silent on a regulation that would match the one adopted in Germany, where the obligation to file for bankruptcy was suspended until September 30, 2020.

In all likelihood, the insolvency criteria and deadlines for filing for bankruptcy will remain unchanged in spite of the crisis caused by the coronavirus pandemic.

Consequently, we need to bear in mind that:
– each insolvent business is required to file for bankruptcy within 30 days from the day of becoming insolvent;
– this deadline is triggered irrespective of the subjective impossibility to determine if a business has become insolvent; in other words, even if someone cannot tell whether their business is insolvent, they are still required to file for bankruptcy within 30 days of the day when the company is no longer able to pay its financial obligations;
– any potential difficulties resulting from the recently restricted operation of courts, authorities or banks do not prevent this deadline from being triggered, either.

Liability for damage resulting from failure to file for bankruptcy on time

The potential liability of a company’s directors might be assessed from a somewhat different perspective when a creditor suffers damage as a result of failure to file for bankruptcy on time (article 21 section 3 of the Bankruptcy Law; article 299 § 1 of the Commercial Companies Code; article 116 § 1 of the Tax Code).

In each of the above cases, a management board member may be exempt from liability if s/he is able to demonstrate (among others) that s/he is not at fault for the failure to file for bankruptcy on time.

Will it be possible for management board members to avoid liability due to the coronavirus pandemic in each case? Of course not.

The situation of a management board member who is hospitalized or quarantined due to coronavirus infection, and is consequently unable to manage company affairs, seems relatively clear. An infected management board member has very limited options of signing any document, e.g. a bankruptcy petition or a relevant power of attorney, which may potentially be used as the basis for exemption from liability for failure to file for bankruptcy on time.

It should be noted, however, that if the aforesaid circumstances apply to only one of several members of a governing body, its other members remain liable for failure to file for bankruptcy on time.

The situation might get more complex when management board members are able to run company affairs (e.g. none of is hospitalized or quarantined) but have limited access to financial information necessary to assess the company’s condition because the accounting staff member responsible for providing them is hospitalized, quarantined or has limited access to documents by reason of working from home. Situations of this kind should be analyzed closely on a case-by-case basis.

Undoubtedly, management board members should always remember about three basic issues:
– a management board member occupies a special place in the company structure. His/her actions must pass the test of increased due diligence required of professionals;
– if, as a result of the coronavirus pandemic, a company finds itself in financial distress, its management board should make sure that a proper record of the difficulties is kept. For instance, if access to electronic documents is limited by reason of server malfunction, a relevant e-mail message should be sent to the service provider or an internal memo should be prepared. These solutions may seem trivial but will be important once a management board member runs the risk of being held accountable for damage suffered by a creditor as a result of failure to file for bankruptcy on time;
– a management board member who steps down or is dismissed after the bankruptcy filing deadline is triggered may still be held accountable for damage, which is all the more reason to keep in mind the issues discussed above.

Recommended actions:

  1. Staying on top of the company’s financial situation and taking notice of all problems (incl. minor and temporary ones) with timely payments because seemingly trivial events may have serious consequences when a crisis hits the market.
  2. Responding immediately to any difficulties (e.g. negotiating with business partners, renegotiating payment deadlines and terms).
  3. Recording diligently any difficulties the company encounters and remedial actions taken in response.

We are available to help businesses and management board members through this difficult time. Our law firm is a one-stop shop for any questions you may have. Do not hesitate to contact us for any assistance.