CHSH Guide - CERHA HEMPEL · The opening of insolvency proceedings requires the existence of certain assets to cover the main costs for the insolvency proceedings. In practice, this

CHSH Austria Belarus Bulgaria Czech Republic Hungary Romania Slovak Republic

CHSH Guide to Insolvency & Restructuring

Laws in Austria & CEE

Media owner and publisher:

CHSH Cerha Hempel Spiegelfeld HlawatiRechtsanwälte GmbH

A-1010 Vienna, Parkring 2

Tel: +43 1 514 35 0Email: [email protected]

Although this brochure was created with the greatest ofcare, we nevertheless do not accept any responsibility orliability whatsoever for its content being correct, completeor up to date.

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INTRODUCTION 3

AUSTRIA 5

BELARUS 19

BULGARIA 33

CZECH REPUBLIC 44

HUNGARY 56

ROMANIA 71

SLOVAK REPUBLIC 84

OUR OFFICES 103

CONTENT

CHSH Austria

CHSH Slovak Republic

CHSH Hungary

CHSH Bulgaria

CHSH Romania CHSH Belarus

CHSH Czech Republic

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This CHSH Guide to Insolvency & Re-structuring laws in Austria and CEE isintended to give the reader a valuable in-sight into this field in select countries inCentral and Eastern Europe where wehave offices. This Guide provides a sum-mary of the subject-matter covered, is ofa general nature, neither purports to becomprehensive, conclusive nor up-to-date and must not be relied upon as legaladvice. If you would like to receive spe-cific legal advice please speak to yourcontact at CHSH or the key contacts re-ferred to in this Guide. All liability fordamages, direct or indirect, from the in-formation provided is explicitly excluded.It is highly recommended that partiesseek professional legal advice prior toconducting any business transactions in-volving insolvency and restructuringmatters.

About CHSH

CHSH is one of Austria's leading lawfirms, with an integrated Central andEastern European practice. With a teamof over 170 lawyers, we offer our clientsexpertise and experience in all areas ofbusiness law in Austria and Central andEastern Europe.

At CHSH, we have a dedicated team ofexperienced lawyers, all of whom havein-depth expertise coupled with a detai-led understanding of the legal and busi-ness environments in which our clientsoperate. Each client is served by an inte-grated team of specialists drawing, wherenecessary, upon experts from otherpractice groups, such as Banking & Fi-nance, Corporate M&A, Labour Lawand Litigation.

The CHSH Insolvency & Restructuringteam handles this multi-faceted area oflaw through every phase of a matter,ranging from pre-insolvency reorganiza-tion and refinancing, the protection ofcreditors’ rights, advice to shareholdersor management of companies in finan-cial difficulty, distressed M&A to insol-vency-related litigation.

Introduction

Aboutthis

Guide

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This expertise – combined with our ex-tensive experience in Central and EasternEurope and our LEX MUNDI network– ensures that our clients receive high-quality, intellectually rigorous adviceacross disciplines and across borders.

Vienna, August 2016

COVERPAGE

On the frontpage of this Guide you can seea photograph of the KunsthistorischesMuseum, the Museum of Fine Arts inVienna, Austria. Located at the Ringstraße

and facing its identical twin, the Natur-historisches Museum (Museum of Na-tural History), the museum took almost20 years of completion and was openedin 1891 by Emperor Franz Joseph I ofAustria-Hungary. Both buildings werebuilt according to plans drawn up byGottfried Semper and Karl Freiherr vonHasenauer. The museums were commis-sioned by the Emperor in order to find asuitable shelter for the Habsburgs' formi-dable (art) collections and to make themaccessible to the general public.

Introduction

For more information please contact our CHSH Insolvency & Restructuring team

Dr. Thomas Trettnak,LL.M./CMPartner - Austria Head of CEE Insolvency & Restructuring [email protected] Tel: +43 1 514 35 531

Hon.-Prof. Dr. Irene WelserPartner – AustriaHead of Department Contentious [email protected]: +43 1 514 35 120

Mag. Heinrich Foglar-Deinhardstein, LL.M. Partner – Austria [email protected] Tel: +43 1 514 35 531

Mag. Georg Konrad, LL.M.Partner – [email protected]: +43 1 514 35 561

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Austria

FORmAl INSOlvENCy PROCEEdINGS ANdTESTS FOR INSOlvENCy

main Insolvency Proceedings

The Austrian Insolvency Act (Insolvenz-ordnung, “IO”) provides for uniform in-solvency proceedings. These are conductedeither as so-called restructuring procee-dings (Sanierungsverfahren) with the ge-neral aim of continuing the operation ofthe business of the debtor (Schuldner) du-ring and after the proceedings, withoutliquidating the debtor, or as bankruptcy(i.e. liquidation) proceedings (Konkurs-verfahren) where the aim is to liquidateall assets and distribute the funds gene-rated from liquidation to the debtor’s cre-ditors.

In restructuring proceedings, the debtorfiles for the opening of restructuring pro-ceedings and simultaneously submits arestructuring plan (Sanierungsplan). Re-structuring proceedings are either self-administrated (mit Eigenverwaltung) oradministrated by a restructuring admi-nistrator (ohne Eigenverwaltung). Self-administration requires the debtor to filean application for self-administrationsupplemented by certain documents anda restructuring plan that provides a mi-

nimum debt repayment quota to the cre-ditors of 30% of registered debt repayablewithin two years. In case of administra-tion by a restructuring administrator, thedebt repayment quota may be as low as20% of the registered debt (repayablewithin two years).

If restructuring proceedings fail, they aretransformed by court order into bank-ruptcy proceedings. The latter involvesthe liquidation of all available assetswith the aim being to terminate the deb-tor and distribute all available funds toits creditors.

Of course, out-of-court restructuring ef-forts and negotiations are very commonand usually made prior to the openingof (in-court) insolvency proceedings. InAustria, no hybrid court-administeredrestructuring proceedings or insolvencyproceedings, such as the German“Schutzschirmverfahren” (i.e. special pre-insolvency, court-administered procee-dings), are available.

TESTS FOR INSOLVENCY

Under the Austrian Insolvency Act, theopening of insolvency proceedings presupposes either the illiquidity (Zah-lungsunfähigkeit) or over-indebtedness(Überschuldung) of the debtor. However,restructuring proceedings may already

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be applied for in case of impending illi-quidity.

While illiquidity is not specifically definedin the Austrian Insolvency Act, it may bepresumed in case the debtor ceases tomake its financial obligations. Case lawqualifies illiquidity as a permanent lackof funds, which prevents the debtor fromdischarging its debts which have fallendue for repayment. Generally speakinghowever, a mere delay in payment (Zah-lungsstockung), which refers to a shortperiod of time only (approx. threemonths), does not qualify as illiquidity.

Over-indebtedness means that (i) the lia-bilities of a company exceed its assets,whereby the latter are assessed on thebasis of their liquidation value, not ontheir going concern value, and (ii) thedebtor has a negative going concern fo-recast (negative Forstbestehensprognose).Moreover, sufficient assets to cover thecosts of the proceedings (kostendecken-des Vermögen) are required to open in-solvency proceedings.

PROCEDURAL ASPECTS

In bankruptcy proceedings, the applicationmight either be filed by the debtor himselfor by a creditor. In contrast, an applicationfor the opening of restructuring procee-dings may only be made by the debtor.

The opening of insolvency proceedingsis made public by an official notice(Ediktsdatei), either as bankruptcy or re-structuring proceedings (with or withoutself-administration).

The official notice contains the most im-portant information on the debtor, thename of the insolvency administrator(Insolvenzverwalter), the kind of procee-dings being opened, the place and dateof the meeting of creditors (Gläubiger-versammlung), and the place and date ofthe examination hearing regarding theclaims registered by the creditors (Prü-fungstagsatzung).

The opening of insolvency proceedingsis also published in other public registers,such as the land register and/or the com-panies register.

Additionally, for the publication of theofficial notice, each known creditor ofthe debtor, the representatives of the cre-ditors and the Austrian National Bankhave to be informed individually. Thereis also a duty to inform the debtor’sbank, the employees of the debtor andthe Austrian courier service. Impor-tantly, after the opening of insolvencyproceedings, mail is only submitted tothe insolvency administrator (so-calledPostsperre).

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After the opening of proceedings, credi-tors are entitled to file their claims, whichwill be examined by the insolvency ad-ministrator at a later stage.

The first meeting of creditors usuallytakes place 14 days after the opening ofinsolvency proceedings and the generalexamination hearing 60 to 90 days aftersuch opening. The period in which claimshave to be filed ends, generally speaking,14 days before the examination hearingis scheduled to take place. The report hea-ring (Berichtstagsatzung) is held 90 daysafter the opening of insolvency procee-dings. The subject matter of the exami-nation hearing is whether the companyshould be closed or not. Usually the exa-mination and report hearings are com-bined into one hearing.

The opening of insolvency proceedingsrequires the existence of certain assets tocover the main costs for the insolvencyproceedings. In practice, this means that as-sets in the amount of at least EUR 4,000must be proven to exist by the debtor.

Pre-Insolvency Restructu-ring & Refinancing

The reorganization of companies in dis-tress obviously requires a good understan-ding not only of the legal aspects, but also

of the economic needs and expectationsof all parties involved, whether debtors,creditors, such as banks, directors, orshareholders. There is a great variety ofcontractual freedom under Austrian lawand common practice, in particular withbanks as a major creditor group, to agreeon a variety of measures with all stake-holders in a pre-insolvency scenario, butalso still during the course of (in-court)restructuring proceedings (Sanierungs-verfahren). In practice, in the latter case,the situation has often not changed dra-matically compared to pre-insolvencynegotiations, unless the debtor is now re-placed and/or supervised by the insol-vency administrator and the threat ofbankruptcy, and therefore liquidation, ismore imminent than before.

DISTRESSED M&A

In practice, in a pre-insolvency scenario,“pre-packaged deals” are very common.Prior to the opening of insolvency pro-ceedings, negotiations are held with apurchaser regarding the sale of all or aportion of a company’s business or assets,and then the insolvency administratoronly effects the sale immediately on, orshortly after, his appointment. Austrianlaw does not provide special rules on pre-packaged deals, so creditors or third partiesmust primarily rely on voidance claims(Anfechtung), should they disagree with or

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suspect irregularities in the sales process.

It should be noted that in the case of bothpre-packaged deals and ordinary salesprocesses during the course of an insol-vency proceeding the insolvency admi-nistrator (as seller) will not be willing toprovide extensive representations andwarranties, other than for ownership andthe non-encumbrance of the assets sold.For M&A deals effected prior to theopening of insolvency proceedings, thegeneral rules applicable to voidanceclaims (Anfechtungsklagen) need to betaken into consideration, but overallsuch transactions follow the standardprocedures for M&A deals.

Creditors’ Role

Generally, creditors, such as banks andother business partners as well as em-ployees, play a key role in all insolvencyproceedings in Austria. In practice, cre-ditor unions (Gläubigerschutzverbände)representing the interests of creditors orgroups of creditors, play an importantrole in all types of insolvency proceedingsin Austria. There are, however, merely twoclasses of creditors - secured (or preferen-tial) and unsecured creditors.

UNSECURED CREDITORS

Any creditor may file his claim, including

for interest, until the opening of insolvencyproceedings. The enforcement of a claimrequires the filing of the claim (Forde-rungsanmeldung) as an insolvency claimwith the insolvency court. The period inwhich the claim must be filed (Anmelde-frist) is published in the official notice.The insolvency administrator summari-zes all claims in a special registration list(Anmeldeverzeichnis), which is then sub-mitted to the court. In practice, all claimsare first examined between the debtor andthe insolvency administrator, and thenagain formally in the examination hearingin court. The insolvency administratorneeds to declare whether he acknowledgesor rejects a claim. In case the insolvencyadministrator acknowledges the claimand no other creditor objects, the claimis deemed to have been acknowledged andthe creditor will be satisfied pro rata in theamount of the insolvency debt repaymentquota (e.g. 10% or 15% in bankruptcyproceedings).

SECURED CREDITORS

Secured creditors usually have a claim ofseparation either to receive the asset (Aus-sonderungsanspruch) or its value after itssale (Absonderungsanspruch). Such se-paration claims are – subject to voidanceclaims (Anfechtung) – unaffected by theopening of insolvency proceedings.

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Claims of separation are made againstthe insolvency administrator. Where theinsolvency administrator does not releasethe asset, an action may be brought againstthe administrator. Claims of separationin order to receive the value of the assetresulting from collateral are claims forpreferential satisfaction on certain secu-red assets in case they are sold by the in-solvency administrator, above all pledgeson movable and immovable assets.

In bankruptcy proceedings, typically the(encumbered) assets are sold, the amountreceived then serves as a pool of separateassets (Sondermasse) and the creditorsof the separation claims are entitled topreferential satisfaction from the salesproceeds.In restructuring proceedings, typically(encumbered) assets are not sold, but thebusiness is kept running. Secured credi-tors of the debtor may generally enforcetheir claims. However, they are barredfrom doing so prior to the expiry of sixmonths after the restructuring procee-dings were opened if such enforcementmight endanger the continuation of thedebtor's business operations.

SET-OFF OF RESPECTIVE CLAIMS

Generally, a creditor may set off (auf-rechnen) claims against counter-claimsby the debtor after the opening of insol-

vency proceedings.Pursuant to Austrian law, set-off is pos-sible if the claims are due and uniform.Under the Austrian Insolvency Act, set-off is not excluded if the claim of thecreditor is not due or the claim is not amonetary claim. As all claims of credi-tors become due and are converted tomonetary claims at the time of the ope-ning of insolvency proceedings, theclaims are converted in any event. Theprerequisites for set-off must exist at thetime of the opening of insolvency pro-ceedings. A claim which only comes intoexistence after the opening of insolvencyproceedings can no longer be set offagainst a claim of the debtor.

Creditors whose claims are secured bycollateral need to inform the insolvencyadministrator and, where the claim isnot acknowledged by the administrator,file a lawsuit against the administrator inorder to enforce their claims.

PRIORITY CLAIMS

Priority claims (Masseforderungen) aredefined as claims against the insolvencyestate that are satisfied prior to all otherinsolvency creditors. Priority claims arereduced to certain kinds of claims andinclude (i) costs of the proceedings, (ii)costs regarding administration, sustain-ment and supply of the insolvency

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estate, (iii) claims of the employees forcurrent salary, (iv) claims in connectionwith the termination of certain kinds ofemployees, (v) claims resulting from thefulfilment of certain contracts, (vi) claimsbased on transactions processed by theinsolvency administrator, (vii) claimsbased on unjust enrichment of the insol-vency estate, and (viii) compensation forthe members of privileged associationsfor the protection of creditors’ rights. Fi-ling priority claims with the insolvencycourt separately is not required. Theseclaims are filed directly with the insol-vency administrator.

INSOLVENCY CLAIMS

As opposed to priority claims, insolvencyclaims (Insolvenzforderungen) have to befiled with the insolvency court by credi-tors whose claims are unsecured. The pe-riod within which their claims must befiled is set forth in the official notice andends 14 days prior to the examinationhearing. More complex insolvency pro-ceedings with numerous creditors usuallyprovide for multiple examination hearings.Claims can also be filed after the filingperiod has ended; however, in this casean additional fee of approx. EUR 70 hasto be paid by the respective creditor.

There also are claims that are excludedfrom insolvency proceedings (ausgeschlos-

sene Forderungen), such as (i) interest re-garding insolvency claims that accruesafter the opening of the proceedings, (ii)costs incurred by creditors due to theirparticipation in insolvency proceedings,(iii) penalties for criminal acts, and (iv)claims against the debtor based uponservices provided free of charge.

VOIDANCE CLAIMS AND CLAW-BACK

The Austrian Insolvency Act providesthat such transactions that unduly de-crease the assets of the debtor prior tothe opening of insolvency proceedingsmay be contested, but only if certain pre-requisites are met. In this regard, trans-actions entered into by the debtor and athird party which discriminate againstother creditors may be contested. For-mally, the transaction in question wouldneed to be contested by the insolvencyadministrator (Insolvenzverwalter) ap-pointed by the court.

The general principles for contestingtransactions are as follows: (i) there is atransaction; (ii) the transaction is enteredinto prior to the opening of insolvencyproceedings; (iii) the transaction undulydecreases the assets of the debtor; and(iv) the transaction discriminates othercreditors; provided that (v) a specificcontesting provision (Tatbestand) of theAustrian Insolvency Act is fulfilled.

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The Austrian Insolvency Act providesfor the following contesting provisions:(i) Intent to discriminate (Benachteili-gungsabsicht): This provision applies inthe case of transactions concluded bythe debtor to intentionally discriminateagainst certain creditors vis-à-vis the ot-hers within the past ten years prior to theopening of insolvency proceedings andthe other contracting party knew of thisintent. If the other contracting partyshould have known of such intent, theperiod in which to contest the transactionis reduced to two years. Regarding “fa-milia suspecta” (related persons) a diffe-rent provision provides for a reversal ofthe burden of proof;(ii) Squandering of assets (Vermögens-verschleuderung): A transaction falls underthis provision if the other contractingparty must or should have known that thetransaction squanders the company’s as-sets and the transaction was entered intowithin the last year prior to the openingof insolvency proceedings;(iii) Dispositions free of charge (Unent-geltliche Verfügungen): Transactions thatwere made free of charge (gifts) and wereentered into within the last two yearsprior to the opening of insolvency pro-ceedings;(iv) Preferential treatment of creditors(Gläubigerbegünstigung): This provisionapplies in case a transaction discrimina-

tes against one creditor vis-à-vis the others,or is intended to give preference to onecreditor over the others; and(v) Knowledge of illiquidity (Kenntnis derZahlungsunfähigkeit): A transaction (afterilliquidity has occurred or after insolvencyproceedings have been commenced) maybe challenged if the other contractingparty knew or was negligent in not kno-wing of the debtor’s illiquidity or the filingof the petition for opening insolvencyproceedings, respectively.

All of the above provisions aim to securethe debtor’s assets prior to the opening ofproceedings. After the opening of insol-vency proceedings and the appointmentof the insolvency administrator, the in-solvency administrator is the debtor’s solerepresentative. This does not apply in casethe insolvency proceedings were openedas restructuring proceedings with self-administration of the debtor (Sanie-rungsverfahren mit Eigenverwaltung). Inspecific circumstances, however, the con-sent of the insolvency administrator, thecourt or the meeting of creditors will berequired to enter into transactions.Hence, any transaction or disposition ofa debtor’s asset can only be undertakenby the administrator, and, under certaincircumstances, requires the consent ofthe court or the meeting of creditors.The claim contesting a transaction must

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be filed within one year of the opening ofinsolvency proceedings by claim or ob-jection (Einrede) by the insolvency admi-nistrator. It must seek a declaration ofineffectiveness of the contested transaction.

Excursus: Austrian Capitalmaintenance Rules

Under Austrian capital maintenancerules, an Austrian company (in the formof a so-called capital company, in parti-cular a limited liability company) mustnot transfer funds or assets or corporateopportunities to its shareholders or torelated parties of its shareholders, unlessexplicitly permitted under statutory law,such as in case of distribution of divi-dends covered by the balance sheet profit,a capital decrease or in liquidation pro-ceedings. This "prohibition of repaymentsof equity" also extends to "hidden" re-payments, meaning unlawful financialassistance, i.e. entering into any transac-tion with a shareholder or a sharehol-der's related party otherwise than atarm's length. In practice, if companies violate the ca-pital maintenance rules described above,the insolvency administrator may claimback the transferred funds or benefitsfrom the recipients, in which case onlythe general limitation periods apply (i.e.usually 30 years). A “short” limitation

period of five years only applies wherethe respective other party did not knowof the unlawfulness of the repayment.

management liability

Directors of a company are obliged tofile for the opening of insolvency procee-dings without undue or culpable delay,but not later than 60 days after the insol-vency criteria are met pursuant to theAustrian Insolvency Act. The violationof this provision generally triggers theliability of directors vis-à-vis all creditorsfor damages caused by delay in filing forthe opening of insolvency proceedings,since the respective provision of the Aus-trian Insolvency Act qualifies as a so-cal-led protective law (Schutzgesetz) to thebenefit of the creditors. The protectiononly covers existing creditors (Altgläubi-ger); the latter are creditors whose claimsexisted prior to the opening of insolvencyproceedings. Such creditors are entitledto claim for so-called quota damage(Quotenschaden), which is defined as thedamage resulting from the late applicationfor the opening of an insolvency procee-ding. As for new creditors (who only be-come creditors after the opening ofinsolvency proceedings), the AustrianSupreme Court has ruled in several casesthat only the negative interest (Vertrau-ensschaden) may be reimbursed.

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Under the Austrian Act of Companieswith Limited Liability (GmbH-Gesetz),the managing director of a company isliable vis-à-vis the company if he effectspayments after being legally obliged tofile for the opening of insolvency procee-dings and hence the company is regardedas having suffered from damages resul-ting from the payment. The company isentitled to claim compensation from therespective managing director.

The Austrian Criminal Code (Strafge-setzbuch) also contains provisions on in-solvency proceedings. The most importantprovisions are (i) grossly negligent inter-ference with creditors’ interests, (ii) frau-dulent intervention with a creditor’sclaims, (iii) preferential treatment of cre-ditors, and (iv) withholding of social se-curity payments.

Running the Business

ROLE OF THE DEBTOR

When opening insolvency proceedings,the debtor generally loses its rights ofadministration and disposition. The deb-tor remains the owner of the assets, butthe assets form the so-called insolvencyestate to be used primarily to satisfy theclaims of creditors. The right to admi-nister and dispose of the assets generallypasses to the insolvency administrator.

Any acts taken by the debtor after the ope-ning of insolvency proceedings are legallyvoid vis-à-vis the insolvency creditors.

ROLE OF THE

INSOLVENCY ADMINISTRATOR

Generally, the insolvency administratorplays the key role in running or disposingof the business of the debtor, respectively.The administrator is called the bank-ruptcy administrator (Masseverwalter)in bankruptcy proceedings or restructu-ring administrator (Sanierungsverwalter)in restructuring proceedings.

In case restructuring proceedings withself-administration are opened, the deb-tor is generally entitled to keep on run-ning the company and take steps andmeasures in the ordinary course of busi-ness, but the consent of the insolvencyadministrator and/or insolvency court isrequired for a number of other (extraor-dinary) measures. Certain actions – suchas contesting transactions prior to theopening of insolvency proceedings –may only be taken by the insolvency ad-ministrator, whereas, for example, thediscontinuation or closure of the com-pany’s business requires the approval ofthe insolvency court. As long as the com-pany is continuing its business, the com-pany may only be sold as a whole. If thecompany had been shuttered when insol-

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vency proceedings were opened, its reo-pening is only admissible by court orderand if no decrease in the debt repaymentquota to the creditors is to be expected.

In all insolvency proceedings, the di-rectors of the debtor are obliged to sup-port the insolvency administrator asmuch as possible.

EFFECT ON WORK FORCE

AND EMPLOYEES

According to the Austrian InsolvencyAct, the insolvency administrator has therights and obligations of the employer.This is the only direct impact on em-ployees in connection with the openingof insolvency proceedings.

Further, the Austrian Insolvency Actprovides special termination rights thatmake it possible to terminate certain em-ployment contracts. Accordingly, the in-solvency administrator has a privilegedtermination right (Kündigungsrecht). Onthe other hand, employees also have a spe-cial right of resignation (Austrittsrecht).

If the business is shut down, the insol-vency administrator has the right to ter-minate the employment contract subjectto giving notice in accordance with thestatutory, collective bargaining agree-ment or the shorter notice period provi-

ded for under contract (but not a con-tractually agreed notice period that islonger than the one provided by statute).The termination has to be declared wit-hin one month of the publication of thecourt’s resolution to shut down the busi-ness. In case a report hearing has nottaken place and the continuation of thebusiness was not published, the privile-ged termination still applies.In case only parts of the company areclosed, only those employment contractsthat are affected by the shutdown can beterminated.

As regards restructuring proceedingswith self-administration, a special termi-nation right may be exercised within thefirst month of the opening of the re-structuring proceedings. Within this timeperiod, the debtor (with the consent ofthe insolvency administrator) may ter-minate the employment contracts of em-ployees engaged in business units orparts of business units that have beenclosed. A further condition is that themaintenance of the corresponding em-ployment contracts would endanger theconclusion of the restructuring plan orthe continuation of the business. In con-trast, in bankruptcy and restructuringproceedings without self-administrationit is only possible to terminate employ-ment contracts after the report hearing.

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EFFECT ON CONTRACTS

AND TERMINATION RIGHTS

The opening of insolvency proceedingshas a different impact on contracts, de-pending on whether or not contractualobligations have already been fulfilled bythe parties.If a contracting party has entirely fulfil-led its contractual obligations prior tothe opening of insolvency proceedings,but has not received the entire conside-ration from the debtor, the contractingparty may solely file an insolvency claim.On the other hand, if the debtor has al-ready fulfilled its obligations, the otherparty is obliged to fully perform towardsthe insolvency estate.Special provisions apply in case bothsides have yet to fulfil each of their obli-gations in their entirety. In such a case,it is at the insolvency administrator’s di-scretion whether to fulfil the contract (inwhich case the contracting party is alsoobliged to fulfil its respective contractualobligations) or to withdraw from thecontract. In case of withdrawal, the con-tracting party may be entitled to claimsin tort which would then be classified asinsolvency claims.

The insolvency administrator may inprinciple decide freely as to whether toexercise his right to withdraw from thecontract or to fulfil the contract, but upon

application of the other contractingparty the insolvency court will prescribea (short) time period within which theinsolvency administrator must decide.An exemption from the general rule isapplicable in case the debtor is obligedto provide performance other than in theform of monetary performance and isalready in delay. In this case the insolvencyadministrator is obliged to give a decla-ration within 5 working days of the requestof the contracting party; otherwise with-drawal from the contract is assumed.

Importantly, contractual partners of thedebtor may only terminate their contractsin the first six months after the openingof insolvency proceedings for good causeif such termination could endanger thegoing concern of the debtor’s business.In this regard, the deterioration of thedebtor’s economic situation is not deemedas being a good cause within the meaningof this provision. Where a contract con-tains clauses for termination relating tothe opening of insolvency proceedings,such clauses are invalid.

Formal RestructuringProceedings

REORGANIZATION ACT The Austrian Reorganization Act (Un-ternehmensreorganisationsgesetz –“URG”)

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contains certain provisions on restructu-ring a company which finds itself in anearly stage of financial distress. In practice,however, the Austrian ReorganizationAct is of rather minor significance andrestructuring proceedings are typicallyconducted in accordance with the provisi-ons of the Austrian Insolvency Act and incourt, if out-of-court settlement is notsuccessful.

RESTRUCTURING PROCEEDINGS

Pursuant to the Austrian InsolvencyAct, it is generally possible to open re-structuring proceedings instead of bank-ruptcy (i.e. liquidation) proceedings(Sanierungsverfahren). The proceedingscan either be conducted by an adminis-trator or by self-administration of thedebtor. The main goal of restructuringproceedings is to adopt a restructuringplan (Sanierungsplan). In case of self-ad-ministration, the debt repayment quotaprovided for in the restructuring planmust amount to at least 30 % of the totalclaims registered, and in case of admi-nistration by the restructuring adminis-trator, to at least 20 % of the total claimsregistered. For the acceptance of the re-structuring plan, a double absolute ma-jority (50 %) by the creditors is required,both in terms of amount of debt regis-tered and head count.

NO DEBT/EQUITY SWAP

Austrian law makes no provision for adebt/equity swap in statutory restructu-ring proceedings. However, it is possibleto agree on such a debt/equity swap ona contractual basis out of court, but inpractice only if the number of sharehol-ders and creditors is relatively low.

CRAM-DOWN OF

DISSENTING CREDITORS

The resolution on the restructuring plantakes place in the restructuring plan hea-ring (Sanierungsplantagsatzung). Onlythe insolvency creditors whose claimsare determined (festgestellt) have a vo-ting right.

In order to adopt a restructuring plan, adouble majority must be achieved: (i)more than half of the creditors presenthave to vote in favour of the restructu-ring plan and (ii) creditors holding morethan 50% of the total amount of all cur-rent creditors’ claims must consent. Therestructuring plan is only adopted ifboth majorities are achieved; in such a case,dissenting creditors are overruled andhave to accept the restructuring plan. The proposal of the restructuring planin the course of insolvency proceedingsbefore court does not require the consentof other stakeholders, in particular notof the shareholders.

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However, in out-of-court restructuringproceedings or restructuring proceedingswith self-administration, the consent ofthe company’s general assembly, i.e. theconsent of its shareholders, may and inpractice usually will be required.

Ending of Insolvency Proceedings

Both bankruptcy and restructuring pro-ceedings are closed by a formal resolu-tion of the insolvency court. Bankruptcyproceedings are closed following the dis-tribution of all assets, i.e. the liquidationof the debtor.Restructuring proceedings are formallyclosed after a restructuring plan is adop-ted by the creditors and all priority claimsare settled. The debtor then has the dutyto fulfil the restructuring plan at the timeand within the period stipulated in therestructuring plan. If payments are notmade at the time and within the periodstipulated in the restructuring plan, in-

solvency proceedings will be reopened.If it becomes apparent during the insol-vency proceedings that the assets are in-sufficient to cover the costs of theproceedings, the proceedings are termi-nated due to insufficient assets.

International Aspects

According to EC Regulation No 1346/2000,insolvency proceedings in other MemberStates of the European Union are recog-nized in Austria.In case the EC Regulation is not appli-cable, the Austrian Insolvency Act containsprovisions referring to the recognition ofproceedings in third countries. Insol-vency proceedings and their impact aregenerally recognized in Austria if (i) themain centre of interest of a debtor is lo-cated in another country, and (ii) theproceedings opened abroad are in theirmaterial aspects comparable overall toAustrian insolvency proceedings.

Austria

For more information please contact

Dr. Thomas Trettnak,LL.M./CMPartner - Austria Head of CEE Insolvency & Restructuring [email protected] Tel: +43 1 514 35 531

Mag. Stefanie HeimelSenior Associate - [email protected]: +43 1 514 35 277

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The principal legislation governing insol-vency proceedings in Belarus is Act No.415-Z dated 13 July 2012 “On EconomicInsolvency (Bankruptcy)”, last restatedon 04.01.2014 (the “Belarusian Insol-vency Act”). Insolvency proceedings in-volve several consecutive steps:

(i) discovery of impending illiquidity,pre-insolvency economic improvement.Under the Belarusian Insolvency Act,the debtor is obliged to control its finan-cial condition to prevent insolvency. Mo-reover, to prevent insolvency the debtoris obliged to take different measures toimprove its economic situation before fi-ling any applications with the court andbefore initiating insolvency proceedings.The debtor’s obligation for pre-trial im-provement measures can be waived if thedebtor provides grounds justifying theinexpediency of such measures (e.g. thereis no longer a market for the debtor’sproducts and/or no demand, which con-sequently means the pre-trial improvementmeasures would not have any influenceon the debtor’s financial standing).

(ii) filing an application with the courtand initiating insolvency proceedings. Ifthe pre-trial improvement measures thatare taken fail, the debtor may file for theopening of insolvency proceedings withthe court. In addition, a creditor mayalso submit such petition provided thatcertain criteria under the insolvency testare met. Based on such application, thecourt initiates proceedings and appointsa temporary insolvency administrator.

(iii) “protection period” (защитныйпериод). The insolvency proceedingsstart with the “protection period”, whichis aimed at preventing the debtor’s finan-cial collapse and improving its economicsituation under external control. In thecourse of this “protection period”, therights of the debtor’s management bo-dies are partly restricted and are underthe control of the temporary insolvencyadministrator. For example, no divi-dends may be paid and all transactionsare made only with the written consentof the administrator. Upon expiry of thisperiod, the court reassesses the financialand economic condition of the debtor.If its situation has not improved the in-solvency proceedings are continued.

(iv) appointment of a permanent insol-vency administrator and beginning ofinsolvency proceedings. Upon initiating

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the insolvency proceedings, the court ap-points a permanent insolvency adminis-trator, who then has sole responsibilityfor overseeing the debtor’s management.All other management bodies (includingthe sole shareholder and shareholders’meeting) lose their control over the deb-tor and its activity. In light of this, allcreditors have the right to file their claimsagainst the debtor with the administra-tor. The claims are assessed by the per-manent insolvency administrator (whetherthey are valid or not) and are included inthe list of claims. Each creditor listed hasthe right to participate and vote in cre-ditors’ meetings, in which the course ofinsolvency proceedings is defined.

(v) “reorganisation” (санация). If thepermanent insolvency administrator canimprove the financial condition of thedebtor, it must draft a “reorganisation”plan and submit it to the creditors’ mee-ting for approval. Otherwise liquidationproceedings begin.

(vi) liquidation proceedings (if it is im-possible to improve the economic situa-tion of the insolvent company). In caseof liquidation proceedings, the perma-nent insolvency administrator drafts a li-quidation plan which is submitted to thecreditors’ meeting for approval. In thecourse of the liquidation proceedings,

the property of the debtor is sold, credi-tors receive monetary funds in propor-tion to their claims and according totheir priority and CEOs and/or share-holders may face subsidiary liability iffound guilty of causing or contributingto the debtor’s insolvency. Upon comple-tion of this step, the debtor is liquidated.

INSOLVENCY TESTS

Under the Belarusian Insolvency Act,there are three cases in which an appli-cation for the initiation of insolvencyproceedings can be filed.

First, the debtor may submit an applica-tion to the court if its illiquidity has be-come permanent or will soon becomepermanent. The criteria for illiquidityare defined by Resolution No. 1672 of theCouncil of Ministers of the Republic ofBelarus dated 12 December 2011 (as amen-ded) and must be calculated based on thedebtor’s accounting books and records.

Second, the debtor must submit an ap-plication to the court if (i) payment of adebt to one creditor makes it impossibleto fulfil obligations vis-à-vis other credi-tors, (ii) the shareholders’ meeting (or thesole shareholder) decides to file a claimor (iii) the amount of the debtor’s pro-perty is not sufficient to pay all creditors’claims in the course of liquidation.

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Finally, an application may be filed by acreditor if the following criteria are metsimultaneously: (i) the creditor obtainsvalid information that the debtor’s illi-quidity has become permanent or willsoon become permanent and (ii) thedebtor fails to pay all debts in the courseof execution proceedings within threemonths (or the debtor does not have suf-ficient property to pay debts).

Procedural Aspects

In Belarus, an application for the initia-tion of insolvency proceedings may befiled either by the debtor itself or by anycreditor. Moreover, it may also be sub-mitted by a public attorney, an employees’representative or (if the debtor is a state-owned company or if the Republic ofBelarus is a creditor) by the Departmentfor Reorganization and Bankruptcy ofthe Ministry of Economics of the Repu-blic of Belarus.

Upon receipt of the application, the courtadopts a resolution on initiating the in-solvency proceedings and appoints thetemporary insolvency administrator (usu-ally, the candidate is proposed by theperson submitting the application) forthe term of the initial “protection period”.From this moment, all other court andexecutive proceedings against the debtor

are suspended and the temporary insol-vency administrator informs banks, taxauthorities and other public authoritiesof the beginning of the insolvency pro-ceedings. In addition, information on thebeginning of the insolvency proceedingsis also published in the media and in theUnified State Register on Bankruptcy(the “USRB”).

If the measures taken in the course ofthe “protection period” appear insuffi-cient to prevent insolvency, the tempo-rary insolvency administrator files arespective report with the court. Thecourt then issues a resolution on the ap-pointment of a permanent insolvencyadministrator and the initiation of insol-vency proceedings. The resolution andinformation on the administrator are pu-blished in the media and the USRB.Within two months of publication, cre-ditors have the right to file their claimswith the permanent insolvency adminis-trator who gathers together all claimsand compiles a list of creditors. Afterthis, but no later than 75 days from theday of the adoption of the resolution oninitiating insolvency proceedings, thefirst creditors’ meeting is held. In addi-tion, creditors are required to appoint acreditors’ committee which is entitled toconvene creditors’ meetings and approvematerial transactions of the debtor.

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All other important steps adopted by thepermanent insolvency administrator (in-cluding the report on completion of “re-organisation”) have to be approved bythe creditors’ meeting and the court.

The initiation of insolvency proceedingsis not expensive in Belarus. The relevantcourt fees amount to 10 basic units (Note:one basic unit is the specific amount inBelarusian rubles determined by the Be-larusian Government for the purpose ofcalculating the amount of duties, fines,rent payments, etc.; as of 1 January 2016,1 basic unit is equal to BYR 210,000 orapprox. EUR 9.5). All other costs (inclu-ding remuneration of the insolvency ad-ministrator) arising in the course of theproceedings are paid at the expense ofthe debtor’s property prior to the reim-bursement of creditors’ claims.

Pre-Insolvency measures& Refinancing

As mentioned above, the debtor is ob-liged to control its financial state to pre-vent insolvency and take differentmeasures to improve its efficiency. TheBelarusian Insolvency Act provides fora list of such measures. For example, thedebtor is entitled to restructure itself orrestructure its debts, to attract invest-ments, to receive credits and loans as well

as to take any other measure that doesnot contradict the law.

It should be noted that fulfillment ofpre-insolvency measures is not a rightbut an obligation of the debtor. Thus,the court may even adopt a resolutionforcing the debtor to take such measures.

distressed m&A

In practice, distressed M&A deals arepossible in Belarus if an amicable agree-ment is reached between the creditors’meeting and the debtor represented bythe insolvency administrator. In that case,creditors’ claims are exchanged for sharesin the debtor’s statutory fund, providedthat the debtor is an open joint stockcompany. Moreover, this exchange mayonly take place if the debtor has reim-bursed all claims of (i) individuals sufferinghealth damage caused by the debtor and(ii) employees for all unpaid salaries andsocial security contributions.

In all other cases, the insolvency admi-nistrator – upon approval of the creditors’meeting – may sell part of the debtor’sproperty as a complex of assets as agoing concern to reimburse creditors’claims. However, such sale is impossibleduring the “protection period”.

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Creditors’ Role

Generally, creditors, such as banks andother business partners as well as em-ployees, play a key role in all insolvencyproceedings in Belarus. Creditors are re-presented by the creditors’ meeting andthe creditors’ committee. The creditors’meeting approves the most significantdecisions of the insolvency administra-tor, whereas the creditors’ committeeonly adopts resolutions on the convoca-tion of the creditors’ meeting and appro-ves material transactions of the debtor.Depending on the priority of theirclaims, all creditors are divided into fivecategories.

CATEGORIES OF CREDITORS

The first category of creditors are indi-viduals who have suffered damage to theirlife and/or health caused by the debtor.They receive all their periodic paymentsin one installment.

The Belarusian Insolvency Act definesthe debtor’s employees as the second ca-tegory of creditors. They have the rightto receive their severance payment andall outstanding salaries. Moreover, theyhave the right to demand from the deb-tor payment of all relevant social secu-rity contributions that are usually paidby the employer.

Tax authorities, customs authorities andother public bodies entitled to collecttaxes and other relevant fees are consi-dered the third category of creditors.However, if a public body submits a claimthat does not arise from its public functi-ons (for example, the debtor was a partyto a commercial contract with it), suchclaims are included in the fourth or fifthcategory (depending on their essence).

Creditors that do not fall into the pre-vious categories, but whose claims are se-cured by a pledge, are considered asbelonging to the fourth category. Never-theless, they are not entitled to take thedebtor’s pledged property in possession.On the contrary, such pledged propertyforms part of the insolvency estate. Ho-wever, fourth category creditors have theright to receive reimbursement for theirclaims prior to fifth category creditors,but only after the claims of first, secondand third category creditors have beenreimbursed in full.Claims of all other creditors are inclu-ded in the fifth category.

REIMBURSEMENT OF CREDITORS’

CLAIMS

As a rule, in Belarus debtor’s monetaryfunds (as well as funds received in thecourse of selling the debtor’s property)are distributed among the creditors.

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First, all monetary funds are used to reim-burse in full the claims of first categorycreditors. Then, the remaining sum isused to reimburse in full the claims of se-cond category creditors and so on. Cre-ditors of the subsequent category maynot receive any installments until all cre-ditors of the previous category receivereimbursement of their claims in full. Ifthe amount of monetary funds is insuf-ficient to reimburse the claims of all cre-ditors of any given category, theremaining money is distributed amongthem in proportion to their claims.

In practice, some creditors may be simul-taneously considered creditors of two ormore categories. In that case, each claim– depending on its legal basis – is reim-bursed in the course of the satisfaction ofclaims of the relevant category of creditors.

Finally, if a creditor fails to submit a claimto the insolvency administrator within theperiod established by law, it has the rightto satisfaction of the claim (irrespective ofthe legal basis of such claim) only uponsatisfaction of all other creditors’ claims.


In Belarus, no set-off of debtor’s claimsagainst creditors’ claims is possible uponexpiry of the “protection period” and onceinsolvency proceedings have begun unless

the liquidation or “reorganisation” planapproved by the court states otherwise.

Moreover, as insolvency proceedings inBelarus aim to satisfy the claims of allcreditors, the insolvency administratorhas the right to file claims with the courtrequesting due payment of all installmentsby a creditor even if such creditor couldhypothetically set off such claim. The re-ceived monetary funds are then includedin the insolvency estate and used for reim-bursement of the claims of all creditors.

PRIORITY CLAIMS

The Belarusian Insolvency Act definesthat certain claims against the insolvencyestate have priority over ordinary credi-tors’ claims and must be satisfied priorto all other insolvency creditors. Priorityclaims are certain sorts of claims thathave arisen after insolvency proceedingswere commenced and include (i) reim-bursement of damage to individuals’ he-alth and life, (ii) payment of salaries andseverance payments to employees thatwere working for the debtor during theinsolvency proceedings, (iii) payment oftaxes and other state fees including so-cial security contributions paid by theemployer, (iv) costs of the proceedings,(v) costs of the insolvency administra-tion, and (vi) costs of publication of in-formation on the insolvency proceedings.

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INSOLVENCY CLAIMS

As opposed to priority claims, insolvencyclaims have to be filed with the insol-vency administrator in the course of in-solvency proceedings. These claims mustbe filed within two months of the date ofpublication of information on the termi-nation of the “protection period” and thebeginning of the bankruptcy procee-dings in mass media. The insolvency ad-ministrator examines the claims andincludes the creditors on the relevant list.Any resolution of the insolvency admi-nistrator on inclusion of a creditor onsuch a list or on rejection of a claim maybe retried on merits by the court uponapplication of that creditor or other cre-ditors requesting rejection of the claim.

Any claim submitted after terminationof the two month period is also includedon the list. However, such a claim will besatisfied only upon satisfaction of allother creditors’ claims. Moreover, inte-rest accrued on the amounts of insol-vency claims submitted after the openingof the proceedings are fully excludedfrom the scope of the proceedings.

Voidance Transactions and Claw-backThe Belarusian Insolvency Act providesthat transactions which unreasonablydecrease the assets of the debtor may becontested. Transactions in question would

have to be contested by the insolvencyadministrator in court.

The following types of transactions maybe contested according to the BelarusianInsolvency Act:

(i) transactions concluded by the debtorto intentionally discriminate against cer-tain creditors vis-à-vis the others withinthe last six months prior to the openingof insolvency proceedings;

(ii) gifts granted by the debtor within thelast six months prior to the opening ofinsolvency proceedings, directly or indi-rectly resulting in the debtor’s financialdistress and regardless of the intent ofthe contracting parties;

(iii) debts paid by the debtor within thelast six months prior to the opening ofinsolvency proceedings, if the debt waspaid under circumstances contradictingthe law or the underlying contract or ifthe amount paid results in the debtor’sfinancial distress and is not an ordinarypayment under routine circumstances;

(iv) pledge agreements concluded by thedebtor within the last six months prior tothe opening of insolvency proceedings;(v) transactions concluded by the debtorto intentionally impair the creditors’ po-

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sitions within the last year prior to theopening of insolvency proceedings, ifthe other contracting party was aware ofthis intent;

(vi) transactions contradicting criminallaw provisions and resulting in intentio-nal distress for the debtor which are con-cluded within three years prior to theopening of insolvency proceedings, ifthe other contracting party was aware ofthis intent;

(vii) gifts granted by the debtor withinthe last year prior to the opening of in-solvency proceedings, unless the partiesprove that upon making the gift the deb-tor still had sufficient funds to satisfyclaims of all relevant creditors;

(viii) debts paid by the debtor to a con-tracting party that was affiliated with thedebtor (i.e. parent companies and subsi-diaries, members of debtor’s governingbodies, chief accountant, relatives of chiefaccountant and members of debtor’smanagement bodies, hereinafter “Affi-liate”) within the last year prior to theopening of insolvency proceedings unlessthe parties prove that such payment did notresult in the debtor’s financial distress;

(ix) pledge agreements concluded by thedebtor with an Affiliate within the last

year prior to the opening of insolvencyproceedings, unless the parties prove thatsuch payment did not result in the deb-tor’s financial distress;

(x) severance payments and salaries paidby the debtor within the last eighteenmonths prior to the opening of insol-vency proceedings, if paid under cir-cumstances contradicting the law or theunderlying contract;

(xi) transactions concluded by the deb-tor with an Affiliate to intentionally im-pair the creditors’ positions within threeyears prior to the opening of insolvencyproceedings, if the Affiliate was aware ofthis intent;

(xii) gifts granted by the debtor to an Af-filiate within three years prior to the ope-ning of insolvency proceedings, unlessthe parties prove that upon making a giftthe debtor still had sufficient funds to sa-tisfy claims of all relevant creditors.

Termination of these transactions aimsat securing the debtor’s assets prior tothe opening of proceedings. After theinitiation of insolvency proceedings andthe appointment of the insolvency admi-nistrator, the insolvency administrator isthe sole representative of the debtor (withthe exception of the “protection period”).

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In the course of the “protection period”,only the temporary insolvency adminis-trator may approve all debtor’s transac-tions, while the debtor’s managementbodies resolve on all other issues. Howe-ver, if the debtor’s CEO prevents the in-solvency administrator from fulfilling hisduties, the temporary insolvency admi-nistrator may file an application with thecourt for dismissal of such CEO fromhis position.

The claims contesting a transaction canbe filed within the duration of all insol-vency proceedings both by the insol-vency administrator and by any creditor.


Filing an application for opening insol-vency proceedings without undue or cul-pable delay is an obligation of thedebtor’s governing bodies. In case of fai-lure to file such application within onemonth upon discovery of impending il-liquidity, the debtor’s officials who arefound guilty of such failure are jointlyand severally liable for all unsettled cre-ditors’ claims. The permanent insolvencyadministrator may bring a relevant ac-tion to the court after initiating insol-vency proceedings if the debtor’s assetsare not sufficient to settle all claims.

Moreover, if the debtor’s insolvency wascaused by its shareholders, members ofits governing bodies or other individualsentitled to determine the course of thedebtor’s activity, such persons are jointlyand severally liable for unsettled credi-tors’ claims. Any creditor, public attor-ney or governmental body may bring anaction against such an individual withinten years of the date of initiating the in-solvency proceedings. Termination ofshareholdings in a company or the gran-ting of discharge to its governing bodiesbefore initiation of the insolvency pro-ceedings does not preclude the above-mentioned liability.

The Code of the Republic of BelarusNo. 194-Z dated 21.04.2003 “On Admi-nistrative Violations” also contains pro-visions with respect to insolvencyproceedings. The most important provi-sions are (i) culpable negligence resultingin the company’s insolvency; (ii) conce-alment, sale or destruction of propertyin order to impede satisfaction of credi-tors’ claims; (iii) failure to file an appli-cation on insolvency by the debtor withthe court; (iv) deliberate filing of an ap-plication on insolvency by the creditorcontaining false information; (v) propo-sition of persons for the position of in-solvency administrators that do notsatisfy legal requirements; (vi) illegal in-

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fluence over the insolvency administra-tor; (vii) non-fulfillment of duties by theinsolvency administrator; and (viii)other culpable non-fulfillment of legalrequirements.

In addition, the Criminal Code of theRepublic of Belarus No. 275-Z dated09.07.1999 envisages liability in the fol-lowing cases: (i) false insolvency; (ii)concealment of insolvency; and (iii) de-liberate insolvency.


ROLE OF THE DEBTOR

The role of the debtor and its rights toadminister its property vary in the courseof insolvency proceedings. During the“protection period”, the debtor may ma-nage its assets and enter into any trans-action, but only upon written approval ofthe temporary insolvency administrator.

However, upon the commencement ofbankruptcy proceedings, the debtor losesits administration and disposition rights.All assets are included in the so-calledinsolvency estate that are primarily usedto satisfy creditors. The right to adminis-ter and dispose over the assets generallypasses to the insolvency administrator.

ROLE OF THE INSOLVENCY

ADMINISTRATOR

Generally, the insolvency administratoris the key figure running the business ofthe debtor. There are two types of insol-vency administrators in Belarus. Thetemporary insolvency administrator con-trols the debtor’s activity in the course ofthe “protection period”. If the measuresundertaken in the course of this periodfail and the debtor is still in financial dis-tress, a permanent insolvency adminis-trator is appointed by the court.

The temporary insolvency administratoris appointed by the court and controls theactivity of the debtor, but does not defineit. However, he is entitled to approve anytransaction or payment of the debtor.Without such approval, the transactioncould be found to be void. Nevertheless,the temporary insolvency administratorcan gain full control over the debtor ifthe court finds the debtor’s CEO guilty ofhampering the insolvency proceedings.

If the measures undertaken in the courseof the “protection period” fail to improvethe debtor’s financial situation, the courtbegins the insolvency proceedings andappoints the permanent insolvency ad-ministrator, who has full rights to ma-nage the debtor and dispose of its assetsinstead of all management bodies of the

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debtor (including CEOs, supervisory bo-ards, shareholders’ meetings, etc.).


AND EMPLOYEES

Under the Belarusian Insolvency Act,the insolvency administrator is requiredto ensure contracts with all of the debtor’semployees are fulfilled. The insolvencyadministrator amends and terminatesemployment contracts and collectivebargaining agreements on behalf of thedebtor. However, he may hire new em-ployees or enter into new employmentcontracts or collective bargaining agree-ments only upon the prior consent of thecreditors’ meeting (or the creditors’ com-mittee).

In any case, upon the commencement ofthe insolvency proceedings, the insol-vency administrator should inform thedebtor’s employees of their pending lay-off no later than two months in advance.In that case, every employee is entitled toreceive a severance payment amountingto his/her three-month average salary.

To ensure the payment of all salaries andseverance payments, employees elect arepresentative. Only such person has theright to participate in the insolvency pro-ceedings as creditor acting on behalf ofall employees. Employees have a preemp-

tive right of satisfaction of their claims.The employees’ claims are satisfied in fullbefore all other creditors’ claims (exceptfor claims of individuals that have suffereddamage to their life and health caused bythe debtor).

EFFECT ON CONTRACTS AND

TERMINATION RIGHTS

As a rule, in the course of the “protectionperiod” the debtor should fulfil all itsrights and obligations under all contracts.However, upon initiating the insolvencyproceedings, the debtor suspends all payments to the creditors under all con-tracts. Creditors may only file an insol-vency claim.

On the other hand, any contracting partyshould fulfil all its due obligations vis-à-vis the debtor, both monetary and inkind. The insolvency administrator – onbehalf of the debtor – may request en-forcement of a contract in court.

Special provisions apply in case bothsides have not yet fulfilled their respectiveobligations partly or in full. In such case,the insolvency administrator may res-cind the contract if (i) fulfillment of thecontract will lead to damage exceedingdamage arising in the course of fulfill-ment of similar contracts, or (ii) the con-tract is concluded for more than one year

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and the debtor receives any positive re-sults only upon expiration of this periodor more, or (iii) fulfilment of the contractwill lead to additional damage, or (iv) thereare other circumstances that prevent thedebtor from overcoming the insolvency.

If any of the aforementioned criteria ismet, the insolvency administrator mayrescind the contract by giving prior writ-ten notice to the contracting party withinthe period specified by the court. Thecontracting party has the right to com-pensation for real damage.


RESTRUCTURING PROCEEDING

The Belarusian Insolvency Act providesfor the possibility to open restructuringproceedings instead of bankruptcy (i.e.liquidation) proceedings. This can be donevia an amicable agreement concludedbetween the creditors and the debtor re-presented by the permanent insolvencyadministrator, but only upon reimburse-ment of all claims of (i) individuals whohave suffered health damage caused by thedebtor and (ii) employees for all unpaidsalaries and social security contributions.Such restructuring can be implementedin different forms, for example, by delay ofdebtor’s payments, assignment of debtor’s

rights or obligations under contracts, ful-filment of debtor’s obligations by a thirdparty, novation, waiving of debt, etc.In any case, creditors and the permanentinsolvency administrator are free to definethe amount of claims to be reimbursedin the course of such restructuring pro-ceedings. Thus, the amicable agreementmay provide, for example, repaymentranging from 1% to 100% of all claims.

DEBT EQUITY SWAP

In case the debtor is an open joint stockcompany, the amicable agreement mayprovide for reimbursement of creditors’claims by means of exchange for sharesin the debtor. As described above, suchexchange may take place only upon pay-ment of all claims of (i) individuals thathave suffered health damage caused bythe debtor and (ii) employees for all un-paid salaries and social security contri-butions. Thus, such creditors do notparticipate in the exchange and have norights to receive shares.

CRAM-DOWN OF AMICABLE

AGREEMENT

The creditors’ resolution on enteringinto an amicable agreement is adoptedin the creditors’ meeting. The resolutionmay be adopted in case the following cri-teria are met simultaneously: (i) morethan 50% of all creditors have voted in

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favour of an amicable agreement; and(ii) all creditors whose claims are securedby a pledge have also voted in favour.The resolution on entering into an ami-cable agreement is adopted by the per-manent insolvency administrator.

The executed amicable agreement thatprovides for the adoption of a restructu-ring plan is approved by the court. Howe-ver, the court may reject the agreementif it contradicts the law or violates therights of third parties. Nevertheless, thisdoes not prevent parties from enteringinto a new amicable agreement later on.


Insolvency proceedings are closed by aformal resolution of the court. Irre-spective of the status of the proceedings,

they are closed if any of the followingcriteria is met: (i) the insolvency has beenprevented in the course of “reorganisation”;(ii) all parties to the insolvency procee-dings have entered into an amicableagreement; (iii) all creditors’ claims havebeen satisfied; (iv) the amount of deb-tor’s assets is insufficient for satisfactionof all creditors’ claims and the insolvencyadministrator has distributed them amongthe creditors of the relevant category.


As Belarus is not a member of the Eu-ropean Union, no relevant internationalagreements apply in the course of insol-vency proceedings in Belarus.Currently, no international act on insol-vency proceedings has been adopted bythe Eurasian Economic Union to whichBelarus is a party.

Belarus


Sergei Makarchuk, Managing Partner – Belarus [email protected] Tel: +375 17 266 3417

Nikita TolkanitsaSenior Associate – Belarus [email protected] Tel: +375 17 266 3417

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Bulgaria



The Bulgarian Commerce Act (Търгов-ски закон) provides for uniform insolvencyproceedings. They either take the form of (i)so-called restructuring proceedings (Озд-равяване на предприятието), where thegeneral aim is to keep the business of thedebtor running both during the procee-dings and after they have ended, withoutthe debtor being liquidated; or (ii) bank-ruptcy (i.e. liquidation) proceedings (Не-състоятелност), where the aim is toliquidate all assets and distribute theavailable funds to the creditors.

Restructuring proceedings are opened ifa petition is filed by the debtor, the insol-vency administrator, creditors, sharehol-ders or employees. A restructuring plan(План за оздравяване) must be submit-ted together with the petition.

In case the restructuring proceedingsfail, the proceedings are transformed intobankruptcy proceedings by a court order.Bankruptcy proceedings aim to wind upthe debtor, realise its assets and distri-bute all available funds to the creditors.

Tests for Insolvency

Under the Commerce Act, the opening ofinsolvency proceedings requires eitherthe illiquidity (Неплатежоспособност)or over-indebtedness (Свръхзадълже-ност) of the debtor.

According to the definition in the Com-merce Act, a debtor is considered illiquidif the debtor is unable to meet its financialobligations under a commercial transac-tion or a public obligation towards thestate or a municipality which is relatedto its commercial activity, or a privateobligation towards the state. Illiquidityis presumed where the debtor stops pay-ing its debts when they have fallen due.

Over-indebtedness is defined as a condi-tion where the assets of a debtor are in-sufficient to cover its liabilities.It is further required that the assets ofthe debtor are sufficient to cover the ini-tial costs of the proceedings in order toinitiate the insolvency proceedings. Ifthis is not the case, insolvency procee-dings can still be initiated if creditorscover the initial costs.

Procedural Aspects

A request for opening insolvency procee-dings can be filed by the debtor, a credi-

35

tor or the National Revenue Agency inthe case of obligations vis-à-vis the state/municipalities. Restructuring proceedingsmay be initiated upon an applicationbeing made by the debtor, the insolvencyadministrator, creditors, shareholders oremployees of the debtor.

The initiation of insolvency proceedings ismade public by an announcement of thecourt resolution in the commercial register.The court resolution for the initiation ofinsolvency proceedings declares the deb-tor to be illiquid/over-indebted and setsthe initial date for the proceedings. Inthis resolution, the court also appointsan interim insolvency administrator, im-poses security measures and schedulesthe date of the creditors’ first meeting.

At the first meeting the creditors reviewthe report of the interim administrator,appoint a permanent insolvency admi-nistrator (whose appointment still has tobe confirmed by the court) and elect acreditor’s committee.

After the initiation of the proceedingscreditors are entitled to file their claims,which are then examined by the insol-vency administrator. The claims must befiled within one month of the announ-cement of the initiation of insolvencyproceedings in the commercial register.

Creditors may still file claims after thisperiod has expired; however, this canonly be done for a period of two monthsfollowing the end of the initial one monthterm. Such creditors are, however, not en-titled to challenge claims which were al-ready accepted or the distribution offunds already performed.

The insolvency administrator prepares alist of the filed claims and indicates foreach claim whether it is accepted or not.All claims of employees, as well as enfor-ceable public claims, are ex officio inclu-ded by the insolvency administrator. Thelist of claims has to be approved by theinsolvency court.

The initiation of insolvency proceedingsrequires the existence of certain assetswhich have to cover the initial costs. Theinitial costs are determined by the courton the basis of the remuneration of theinterim insolvency administrator andother expected costs such as court fees,payments to employees in case the deb-tor’s business is not shut down, and costsfor managing, assessing and distributingthe assets of the insolvency estate.

Out-of-Court Restructuring

Out-of-court restructuring efforts areusually made prior to the initiation of

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insolvency proceedings. The parties in-volved (debtor and creditors) are free toapply various measures. Special pre-in-solvency court-administered proceedingsare not available under Bulgarian law.

The debtor and all creditors with accep-ted claims can reach a settlement agree-ment at any point during the insolvencyproceedings. In such a case, the debtoracts independently and is not represen-ted by the insolvency administrator.

Provided the executed agreement meetsthe statutory requirements, and on con-dition that there no court proceedingschallenging accepted claims are pending,the court terminates the insolvency pro-ceedings. As creditors with unacceptedclaims are not party to the settlementagreement, they can only protect theirrights by initiating regular court procee-dings, which, however, do not preventthe settlement agreement from becomingeffective and the insolvency proceedingsfrom being terminated.

Should the debtor fail to perform its ob-ligations under the settlement agree-ment, the creditors are entitled to requesta renewal of the insolvency proceedingswithout once again having to prove theilliquidity/over-indebtedness of the debtor.

distressed m&A

Bulgarian law does not provide specialrules on pre-packaged insolvency. ForM&A deals effected prior to or after theopening of insolvency proceedings, thegeneral rules relating to voidance claimsneed to be taken into consideration.

Creditors’ Role

Creditors play a key role in all insolvencyproceedings. Creditors’ meetings (Събра-ние на кредиторите) representing theinterests of creditors or groups of credi-tors play an important role in all typesof insolvency proceedings. There are twoclasses of creditors: secured (or privile-ged) and unsecured creditors.

UNSECURED CREDITORS

Creditors must file their claims in writingwithin one month of the announcementof the opening of the insolvency procee-dings in the commercial register. Eachcreditor must indicate the grounds andamount of its claim and whether theclaim is secured.

The debtor or a creditor may challengea claim, regardless of whether it is accep-ted by the insolvency administrator, bysubmitting an objection to the insol-vency court. The court resolves on any

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such objection and approves the final listof claims accepted by the insolvency ad-ministrator. The court’s ruling in this re-gard is announced in the commercialregister. Creditors claims included in thelist approved by the court are consideredas acknowledged claims in the insol-vency proceedings.

If the court does not respect an objectionmade by a debtor (against an acknowled-ged claim) or a creditor (against anothercreditor’s acknowledged claims or againstits own unacknowledged claim), the deb-tor or the creditor, respectively, may ini-tiate regular court proceedings to be heldin parallel to the insolvency proceedings.In such cases, the distribution of funds (or,respectively, the restructuring plan) mustmake provisions in order to cover the pen-ding claims in case they will be respected.

SECURED CREDITORS

Secured creditors are entitled to receivethe value of the assets sold. Such securedclaims are – subject to voidance claims –unaffected by the opening of insolvencyproceedings.

Secured claims are claims for preferen-tial satisfaction on certain secured assetsin case they are sold by the insolvencyadministrator. These are claims securedby a mortgage, pledge, injunction (залог),

distraint (възбрана) or right of retention(право на задържане).

In bankruptcy proceedings, the assets ser-ving as collateral are sold and the amountreceived serves as preferential satisfac-tion of the respective secured creditor(s).

In restructuring proceedings, all claimsare reorganised in accordance with therestructuring plan approved by the cre-ditors. Generally speaking, the securedclaims remain preferential.


Generally, a creditor may set off (при-хващане) its claims against counter-claims of the debtor after the opening ofinsolvency proceedings.

A set-off is possible if both claims areuniform and the creditor’s claim is due.Under Bulgarian law all claims of credi-tors are converted to monetary claims atthe time of the opening of insolvencyproceedings. Further, all claims of credi-tors become due by virtue of the courtdecision declaring the debtor bankrupt.

A set-off may be declared invalid withrespect to other creditors if both theclaim of the creditor and its obligationwere acquired prior to the opening of in-solvency proceedings, but the creditor

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knew at the time of the acquisition ofthe claim or the obligation that the debtorwas illiquid/over-indebted or that an ap-plication for the opening of insolvencyproceedings had been filed.

PRIORITY ORDER OF CLAIMS

Creditors’ claims are satisfied in the fol-lowing order:

(a) Claims secured by a pledge, mort-gage, distraint or prohibition – with respectto the funds received from the sale of therespective asset;(b) Claims with regard to which the rightof retention is exercised – with respect tothe value of the respective asset;(c) Costs of the insolvency proceedings;(d) Claims of employees which arose be-fore the opening of insolvency procee-dings;(e) Alimony obligations owed by the deb-tor to third persons by operation of law;(f) Public claims of the state and muni-cipalities, such as taxes, customs duties,fees, social security contributions and ot-hers, which arose before the opening ofinsolvency proceedings;(g) Claims acquired after the opening ofinsolvency proceedings;(h) Any remaining unsecured claimsacquired before the opening of insol-vency proceedings;

(i) Statutory or contractual interestaccrued on unsecured claims, due afterthe opening of insolvency proceedings;(j) Loans extended to the debtor by ashareholder;(k) Dispositions free of charge (без-възмездни сделки);(l) Expenses incurred by the creditors inthe course of insolvency proceedings.


The Commerce Act provides that certaintransactions and actions that unduly de-crease the assets of the debtor may becontested. The insolvency administratorand each creditor are entitled to contestsuch transactions within one year of theopening of insolvency proceedings.

The following transactions and actionscan be contested:

(a) transactions/actions executed afterthe opening of insolvency proceedings,if they relate to:

the performance of an obligation that occurred prior to the opening of insolvency proceedings.

pledges or mortgages over real estate or movables included in the debtor’s assets (insolvency estate).

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transactions regarding rights or pro-perty included in the insolvency estate.

(b) transactions/actions executed by thedebtor after the initial date of illiqui-dity/over-indebtedness (determined bythe court), if they relate to:

the performance of a monetary oblig-ation which is not due (within oneyear prior to the opening of insolv-ency proceedings; the term is twoyears if the creditor was aware of theilliquidity or over-indebtedness ofthe debtor).

mortgages and pledges created by thedebtor to secure claims which werenot secured before (within one yearprior to the opening of insolvencyproceedings; the term is two years ifthe creditor was aware of the illiqui-dity or over-indebtedness of the debtor).

the payment of due monetary obligat-ions of the debtor (within six monthsprior to the opening of insolvencyproceedings; the term is one year ifthe creditor was aware of the illiquid-ity or over-indebtedness of the debtor).

(c) transactions executed by the debtor priorto the date of the request for the opening ofinsolvency proceedings, if they relate to:

dispositions free of charge, with theexception of ordinary donations(обичайни дарения), which were per-formed for the benefit of a party related to the debtor, executed withinthree years prior to the date of the request for the opening of insolvencyproceedings.

dispositions free of charge executedwithin two years prior to the date ofthe request for the opening of insol-vency proceedings.

transactions against consideration, where the items given exceed conside-rably in value the items received, exe-cuted within two years prior to the date of the request for opening insol-vency proceedings and after the dateof illiquidity/over-indebtedness.

mortgages, pledges or personal colla-terals (such as guarantees) securing obligations of third persons, executedwithin one year prior to the date ofthe request for opening insolvencyproceedings and after the date of illi-quidity/over-indebtedness.

mortgages, pledges or personal colla-terals securing obligations of third persons in favour of a creditor who is a related party to the debtor, executed

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within two years prior to the date of the request for opening insolvency proceedings.

transactions through which creditorsare damaged, executed with a party related to the debtor, effected within two years prior to the opening of in-solvency proceedings.


Directors of a company are obliged tofile for the opening of insolvency procee-dings within 30 days after illiquidity/over-indebtedness occurs. Failure tocomply with this obligation makes thedirectors liable vis-à-vis all creditors fordamages caused by the delay in filing forthe opening of insolvency proceedings.

The Bulgarian Criminal Code (Наказа-телен кодекс) also contains provisionsin connection with insolvency procee-dings. The most important provisionsare (i) failure on behalf of the debtor (itsdirectors) to file for the opening of insol-vency proceedings within the requiredterm; (ii) intentional bankruptcy (умиш-лен банкрут); and (iii) careless bank-ruptcy (непредпазлив банкрут).


ROLE OF THE DEBTOR

When opening insolvency proceedingsthe debtor generally loses its administra-tion and disposition rights. The debtorremains the owner of its assets, but theassets form the so-called insolvencyestate to be used to primarily satisfy thecreditors. The right to administer anddispose of the assets generally passes onto the insolvency administrator.Any acts taken by the debtor after theopening of insolvency proceedings re-quire the prior consent of the insolvencyadministrator.In case of restructuring proceedings, thedebtor is generally entitled to keep onrunning the company and take steps andmeasures in the ordinary course of busi-ness. However, the restructuring plancan contain restrictions on the debtor’sactivities. The scope and duration of thecreditors’ control has to be regulated inthe restructuring plan.


ADMINISTRATOR

The insolvency administrator (синдик)plays the key role in running or dispo-sing of the business and assets of thedebtor, respectively.During insolvency proceedings the di-rectors of the insolvent company are ob-

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liged to support the insolvency admin-istrator and provide the necessary infor-mation related to the property and thebusiness of the company.


AND EMPLOYEES

As mentioned above, claims of employeesare automatically included by the insol-vency administrator in the list of ack-nowledged claims. The debtor’s employeesthus do not have to file their claims.

Employees have the possibility to pro-pose a restructuring plan. This requiresa quorum of twenty per cent of the totalnumber of the debtor's employees. Ascreditors, its employees also participatein adopting the restructuring plan.

Further, the Bulgarian Labour Codeprovides special termination rights forboth employees and the insolvency ad-ministrator. In case the business is shutdown, employees have a right to resign.Respectively, the insolvency administra-tor has the right to terminate employ-ment contracts by observing a one monthnotice period. If only parts of the com-pany are closed, only those employmentcontracts affected by the shutdown canbe terminated.In case of restructuring proceedings, therestructuring plan has to define what

kind of impact the restructuring willhave on the workforce.

EFFECT ON CONTRACTS


The opening of insolvency proceedingshas different impacts on contracts, de-pending on whether or not contractualobligations have already been fulfilled bythe parties.

Where a contracting party has fulfilledits contractual obligations in full prior tothe opening of insolvency proceedings,but has not received the full considera-tion due from the debtor, it should gene-rally qualify as an insolvency creditor. Ifthe debtor has already fulfilled its obli-gations, the receivable owed to the con-tracting party will be part of the insolvencyestate and could be claimed by the insol-vency administrator.

Where both sides have yet to fulfil theirrespective obligations, the contract canbe terminated by the insolvency admi-nistrator by giving 15 days’ notice. Uponthe request of the contracting party, theinsolvency administrator must informthe other party within 15 days of whet-her the contract remains in effect or isterminated. Should there be no response,the contract is considered to have beenterminated. In the case of termination,

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the contracting party may be entitled toclaims in tort, which would then be clas-sified as insolvency claims.


RESTRUCTURING PROCEEDING

Restructuring proceedings are initiatedby proposing a restructuring plan (Планза оздравяване). The following personsare entitled to propose a restructuringplan: the debtor, the insolvency adminis-trator, creditors holding at least one-thirdof the secured claims, creditors holdingat least one-third of the unsecured claims,shareholders holding at least one-thirdof the share capital of the debtor’s com-pany, an unlimited liability shareholderor twenty per cent of the total numberof the debtor's employees.A restructuring plan may be proposednot later than one month following the dateof the announcement in the commercialregister of the court’s ruling on the appro-val of the list of acknowledged claims.

The restructuring plan may provide fora deferment or rescheduling of payments,a cancellation of the debts in full or inpart, a restructuring of the debtor’s com-pany (e.g. a spin-off) or undertaking otheracts or transactions, such as a sale of thegoing concern or a part of it. The plan

may also propose the sale of the entireor a part of the debtor’s enterprise, aswell as a debt-equity swap.

The restructuring plan may provide forthe appointment of a supervisory bodyto exercise control over the debtor's acti-vity for the duration of the restructuringplan or for a shorter period. In case suchsupervisory body is installed, the debtormay make decisions only upon the ap-proval of the supervisory body. This re-lates to matters such as: transformationof the company, winding down or trans-fer of the enterprise or of considerableparts thereof, property transactions bey-ond the customary actions or transac-tions related to the normal businessoperations of the debtor, any materialchange in the business activity and anymaterial organisational change.

ADOPTION OF THE RESTRUCTURING

PLAN. CRAMDOWN OF DISSENTING

CREDITORS

The adoption of the restructuring plantakes place at the creditors’ meeting.Only creditors whose claims are ack-nowledged (by both the insolvency ad-ministrator and the court) have a votingright. However, the court may also granta specific voting right to a creditor whoseclaim is subject to pending litigation.

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In order to adopt a restructuring plan, adouble majority must be achieved: (i)each class of creditors (which has to voteseparately) has to accept the plan by amajority exceeding 50% of the amountof the claims of the respective class; and(ii) creditors holding more than 50% ofthe total amount of all current creditors’claims must consent. The dissenting cre-ditors are overruled and have to acceptthe restructuring plan.The proposal of a restructuring plan inthe course of pending insolvency procee-dings does not require the consent of otherstakeholders; in particular no consent ofthe shareholders is required. The consentof shareholders will, however, be requi-red in an out-of-court restructuring.


Both bankruptcy and restructuring pro-ceedings are closed by a resolution of theinsolvency court. Bankruptcy proceedingsare closed after the distribution of all as-

sets or once all claims have been settled.Restructuring proceedings are formallyclosed after a restructuring plan is adop-ted by the creditors and the court. Thedebtor then has the duty to fulfil the re-structuring plan under the terms andconditions stipulated in the restructuringplan. If the debtor does not fulfil its ob-ligations under the restructuring plan,insolvency proceedings will be reopened.


According to EC Regulation No. 1346/2000, insolvency proceedings in otherMember States of the European Unionare recognised in Bulgaria.In those cases in which the EC Regula-tion is not applicable, the BulgarianCommerce Act contains provisions onthe recognition of proceedings in thirdcountries. A foreign court ruling on thebankruptcy of the debtor is generally re-cognised in Bulgaria if it is issued by anauthority of the state where the debtorhas its seat.

Bulgaria


Boyko Gerginov Managing Partner – [email protected]: +359 2 401 09 99

Kalin Bonev Senior Attorney – [email protected]: +359 2 401 09 99

CZECH

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In the Czech Republic, insolvency pro-ceedings are governed by Act No. 182/2006 Coll. on insolvency proceedings, asamended (“Insolvency Act”). The pur-pose of insolvency proceedings is toovercome the insolvency (or impendinginsolvency) of the debtor by one of thelawfully prescribed means in a way thatensures the fair, proportional and hig-hest possible satisfaction of creditors’claims. Furthermore, it also regulates thedebtor’s discharge of its debts.

Certain conditions have to be met inorder to declare insolvency. Accordingto the Insolvency Act, the debtor has tohave (i) more than one creditor, (ii) morethan one outstanding financial liabilitywhich is already overdue by more than30 days and (iii) the debtor must be un-able to pay these debts. In case of entre-preneurs (legal entities or naturalpersons), insolvency can also occur inthe form of over-indebtedness. This isthe case if the debtor (i) has more thanone creditor and (ii) the total of its liabi-lities exceeds the value of its assets.

However, insolvency cannot be declaredif the debtor has only one creditor, evenif its debt is of significant value and al-ready long overdue.

The Insolvency Act also covers situati-ons in which the debtor is not yet insol-vent, but given all the circumstances itcan be assumed the debtor will not beable to duly and timely fulfil a substan-tial part of its obligations (i.e. imminentinsolvency).

Initiation of InsolvencyProceedings

Insolvency proceedings can only be com-menced on the basis of an insolvency pe-tition. This petition can be filed by boththe creditor and the debtor. However, ifinsolvency is only imminent, the petitioncan only be filed by the debtor.

In order for a petition to be valid, it hasto meet certain criteria prescribed by sta-tute. In brief, it has to include the basicinformation about the petitioner and thedebtor (e.g. name/business name, resi-dence address or the address of the re-gistered office of the company, and wherethe debtor is an entrepreneur, its identi-fication number). The petition must spe-cify on what grounds it is seekinginsolvency or imminent insolvency and

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the petitioner has to attach all the rele-vant documentation in support of the al-leged insolvency.

If the petition is filed by the debtor, thedebtor is obliged to submit a list of itsassets (including the receivables it hasagainst its debtors), a list of all its credi-tors and their receivables, a list of its em-ployees (if applicable) and all relevantdocuments that demonstrate its insol-vency or imminent insolvency. Such in-formation has to be submitted in orderto prove that the conditions for insol-vency are met. When submitting this do-cumentation, the debtor is obliged tostate explicitly that all of the informationprovided is both accurate and complete.

If the petition is filed by a creditor, thepetition – in addition to the above men-tioned requirements – must also includeproof of the fact that it has an overduereceivable. The petition has to be filed byusing a form that can be downloadedfrom the homepage of the Ministry ofJustice of the Czech Republic. If morecreditors have receivables that are overdue,they can also file a petition as the firstpetition does not constitute a lis pendensobstacle. The creditors can do so untilthe court's decision on the debtor’s in-solvency is published in the InsolvencyRegister.

Consequences of Filing aPetition for Insolvency

Once the petition for insolvency hasbeen filed and delivered to the competentcourt (which is assigned based on the re-sidence of the debtor), severe conse-quences will arise which affect both thedebtor and its creditors.

The petition will first be published in theInsolvency Register. From this momenton, the insolvency proceedings are le-gally initiated and the debtor must refrainfrom any disposal of its assets which areoutside the scope of its regular course ofbusiness (i.e. an act that would constitutemajor changes in the composition, useor determination of such assets or wouldlead to a significant reduction in its as-sets). Such acts are ineffective towardscreditors, unless the debtor obtained theprior consent of the court.

The main consequence of the initiationof insolvency proceedings with regard tocreditors is that they are only entitled toenforce their claims in the course of theinsolvency proceedings. In other words,they are generally barred from filing anaction against the debtor, enforcing acourt ruling regarding their claim, andclaiming or acquiring the right of satisf-action by secured receivables, nor can the

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creditors’ claims be settled by wage de-ductions of the debtor (in the case of anatural person) if the creditor is entitledto these deductions on the basis of anagreement with the debtor.

moratorium

A moratorium is a specific legal instru-ment that can only be used by entrepre-neurs as debtors in order to prevent thedebtor from insolvency for a certain timeperiod. It can only be declared by thecourt on the basis of a petition filed bythe debtor, usually together with his in-solvency petition. However, a court's de-cision on a moratorium can only bemade if the debtor’s respective request issubmitted within a certain time period.The debtor can only file the proposal ona moratorium within seven days of its in-solvency petition; if the petition wasfiled by a creditor, the proposal has to besubmitted within 15 days from the re-ceipt of the insolvency petition.

The main consequence of a moratoriumis that the court cannot declare insol-vency over the debtor. However, theabove described consequences of the ini-tiation of insolvency proceedings alsoapply in the case of a moratorium. Amoratorium can only be used for a shortperiod of time; the maximum period

being three months. During this period,the debtor is entitled to prioritise itsdebts that accrued in the last 30 daysprior to the moratorium being declared,the settlement of which are crucial formaintaining its business operations. It isat the sole discretion of the debtor to de-cide which of its debts will be settled, aslong as they fulfil the abovementionedcriteria. These debts can then be paidprior to all other overdue claims.

In order to keep the business of the deb-tor up and running, the supply of energyand commodities for the debtor is pro-tected as well. Creditors cannot with-draw from such contracts due to paymentdelays that occurred before the declara-tion of the moratorium. Unless statedotherwise in a preliminary injunction,the debtor cannot set off its claimsagainst the creditor.

As stated above, a moratorium is desig-ned to protect the debtor from insolvency,which leads to certain disadvantages forcreditors. Thus, the debtor is obliged todiscuss the moratorium with its credi-tors, and at least a simple majority of itscreditors has to agree and their consentmust be attached to the proposal for thedeclaration of moratorium; otherwise,the proposal for a moratorium will be re-jected by the Insolvency Court.

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Creditors in InsolvencyProceedings

Creditors who exercise their rights againstthe debtor are one of the procedural bo-dies and, together with the debtor, themain participants in the insolvency pro-ceedings under the Insolvency Act in theCzech Republic.

To organize the creditors and representtheir interests, so-called creditors’ bodiesare established, i.e. the creditors’ mee-ting, creditors’ committee and/or the cre-ditors’ representative.

CREDITORS’ MEETING

The creditors’ meeting has the right toelect and remove members of the credi-tors’ committee and its substitutes or re-presentatives. The creditors’ meeting mayreserve any right or action that falls wit-hin the scope of the other creditors' in-stitutions for itself. In the event that thecreditors’ committee or a creditors’ re-presentative have not been appointed,the creditors’ meeting may assume suchtasks as well.

The creditors’ meeting is convened andgoverned by the Insolvency Court. It isconvened on the court’s own initiative oron the basis of a petition of the insol-vency administrator, the creditors’ com-

mittee or at least two creditors, whosetotal value of receivables exceeds onetenth of all filed receivables.

In the first creditors’ meeting, the mem-bers of the creditors’ committee are electedand the creditors vote on the method forresolving the insolvency or imminent in-solvency of the debtor, respectively.

With regard to all subsequent meetings,a list with the matters that should be dis-cussed has to be provided to the credi-tors beforehand. Matters not includedon the list can only be heard if all credi-tors are represented at the meeting.

CREDITORS’ COMMITTEE

The creditors’ committee generally takesthe role of the creditors’ bodies with theexception of matters falling within thescope of the creditors’ meeting or whichthe creditors’ meeting reserved for itself.The three to seven obligatory membersare elected by the creditors’ meeting. Theyare elected out of all registered creditors.In case the debtor has more than 50 re-gistered creditors, the establishment of thecreditors’ committee is even mandatory.

The main function of the creditors’ com-mittee is the supervision of all actionstaken by the insolvency administrator.For this purpose, it is entitled to file mo-

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tions with the Insolvency Court concer-ning the course of insolvency procee-dings (i.e. it can convene creditors'meetings etc.).

CREDITORS’ REPRESENTATIVE

If a creditors’ committee is not establis-hed, the creditors’ meeting may also electa creditors’ representative, who is entrus-ted with the same powers and has thesame obligations as the creditors’ com-mittee would have.

DIFFERENT TYPES OF CLAIMS

In the context of insolvency proceedingsseveral types of claims must be distin-guished. On the basis of these types ofclaims, the creditors can be divided intoseveral groups.

The most common receivables are thosewhich were established before the initia-tion of the insolvency proceedings of thedebtor, e.g. on the basis of a purchaseagreement. Creditors can claim their re-ceivables by filing an application for theinsolvency proceedings in which theyspecify their receivables and the title outof which each arose. However, they canonly submit their application during acertain time period which is set forth inthe court’s decision on insolvency (usu-ally 30 days or two months from the daythe decision on insolvency was issued).

Another very common type of receivab-les is those secured by the property ofthe debtor. Secured receivables also haveto be claimed by the creditor via their re-spective application. The application hasto specify the security, indicate the cir-cumstances that certify it and securityhas to be proven by relevant documents.Secured receivables are generally settledvia the sale of the secured property at any-time during the insolvency proceedings.

Furthermore, there are claims againstthe estate of the debtor (pohledávky zamajetkovou podstatou). These debts canbe paid in full at any time following thecourt’s decision on insolvency. They areclassified as follows:

a) claims against the estate incurred after the initiation of insolvency proceedings or after the declaration of a moratorium (e.g. reimbursement of cash expenses and remuneration of the interim insolvency administrator, of the liquidator of the debtor and the members of the creditors’ committee, etc.);

b) claims against the estate which arose after the court’s decision on insolvency (cash expenses and remuneration of the insolvency administrator, taxes, duties, etc.); and

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c) receivables that are equivalent to claims against the estate (labor claims of the debtor’s employees, creditors’ claims on maintenance, etc.).

Some types of claims cannot be satisfiedin the insolvency proceedings. These in-clude inter alia interests, interests on latepayments and fees for late paymentsconnected to receivables of registeredcreditors as well as sanctions affectingthe debtor’s assets.

REVIEW OF APPLICATIONS

Applications filed by the creditors are firstsubjected to an examination by the in-solvency administrator. They are reviewedon the basis of the submitted documentsand accounts of the debtor or the registerskept under special legislation. Further-more, the insolvency administrator will ob-tain the opinion of the debtor on registeredreceivables, i.e. whether it agrees with thereceivable or denies it (especially with re-gard to the title out of which it arose, the al-leged amount or the order of the claim).

The insolvency administrator shall thendraw up a list of all submitted claims inwhich he should expressly state whichdebts are denied. Secured creditors shallbe listed separately. This list shall be pu-blished in the insolvency register at least15 days prior to the review hearing.

REVIEW HEARING

In order to review all registered receivab-les, a review hearing is scheduled by theinsolvency court. The attendance of both,the insolvency administrator and thedebtor is compulsory. During the reviewmeeting, the insolvency administratorcan change his opinion regarding the de-nial of certain claims. Creditors may alsostill change the amounts of their registe-red receivables via an application untilthe end of the review hearing or until themoment their claims are identified or ef-fectively denied via decision of the courtin interlocutory disputes.

If a receivable is denied by the insol-vency administrator, the debtor or anot-her creditor, the concerned creditor is nolonger allowed to vote at the creditors’meeting as to the amount that was de-nied. If the creditor disagrees with thedenial, it can object via interlocutory dis-putes by filing an action against the in-solvency administrator. The decision ismade by the same court that also leadsthe insolvency proceedings. Hence, theInsolvency Court is also competent todecide on disputes concerning the exis-tence, amount or order of filed claims aswell as disputes on the exclusion ofthings, rights, claims or other assets fromthe estate, disputes on the settlement ofthe joint property of the debtor and its

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spouse, etc. The final judgment issued ininterlocutory proceedings is binding forall parties and has to be regarded in theinsolvency proceedings.

COURT DECISION ON INSOLVENCY

If the insolvency petition was filed pro-perly and if it was established that thedebtor is in fact insolvent or that insol-vency is imminent, the court will issue adecision on the insolvency of the debtor.This decision usually contains (i) the ap-pointment of insolvency administratorfor this proceeding, (ii) a notice for thecreditors to register their claims againstdebtor, (iii) information on where andwhen the creditors' meeting will takeplace and (iv) a notice for the debtor tosubmit a list of its assets and liabilitiestogether with a list of its creditors anddebtors. The court may issue a decisionon the method of a resolution of the in-solvency together with the decision oninsolvency, if certain conditions are met.

The effects of the commencement of theinsolvency proceedings continue. Hence,the debtor cannot dispose over its pro-perty. With the court’s decision on insol-vency of the debtor, the authorisation todispose over the property of the debtoris transferred to the insolvency adminis-trator. The most important aspect of thisdecision is that all court and arbitration

disputes concerning creditors´ claims aresuspended. All receivables have to becharacterised in an application filed bythe creditor and shall be submitted tothe insolvency court.

different Proceedings related to Insolvency

In the Czech Republic, the InsolvencyCourt can decide to solve insolvency ofa debtor by the following methods:

BANKRUPTCY

Bankruptcy is the most frequent methodof dealing with a debtor’s insolvency inthe Czech Republic. It usually ends withthe winding-up of the debtor’s business.Its main goal is the sale of the bank-rupt’s estate and the subsequent propor-tional distribution of the acquired assetsamong the (unsecured) creditors, whileclaims of certain creditors still keep theirpriority position (secured creditors).

The effects of bankruptcy proceedingscome into force as soon as the decisionon the declaration of bankruptcy is is-sued by the Insolvency Court and pu-blished in the Insolvency Register. Bank-ruptcy is used as a method on resolutionof insolvency of the debtor in case the in-solvency petitioner proposes so (either thedebtor himself or the creditors), and also

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in case the insolvency cannot be solvedby any other method (because conditi-ons as set forth for the reorganisation ordebt relief are not met). The commence-ment of bankruptcy proceedings has aserious impact on the business activitiesof the debtor. Since the bankruptcy orderis issued by the court, the insolvency ad-ministrator is entitled to dispose of thedebtor’s property, perform other rightsand liabilities and run the debtor’s busi-ness (if still possible).

In case the debtor is a natural person, anon-entrepreneur, or where the annualturnover of the debtor does not exceed2 million CZK (approx. EUR 75,000)and provided that the debtor does nothave more than 50 creditors, the courtmay decide to carry out a so-called minorbankruptcy, which is a shortened andsimplified version of bankruptcy.

REORGANISATION

Reorganisation is a rather new and pre-ferred method of dealing with a debtor’sinsolvency and may only be used to dealwith the insolvency of entrepreneurialentities. The main purpose of reorgani-sation is to satisfy the creditors’ by gra-dual fulfillment of their claims whilemaintaining the business of the debtor.This has to be done in accordance with theconditions set out in the reorganisation

plan. In other words, unlike bankruptcywhich aims at the liquidation of the deb-tor, reorganisation aims at the financialrehabilitation of the debtor.

In order to use reorganisation as the me-thod of resolving insolvency, severallegal criteria must be met. Only the deb-tor and registered creditors are entitledto file a motion for a decision on the per-mission of reorganisation with the court.Reorganisation requires the debtor tocarry on its business activities for profit.Further, the debtor has to have either atleast 50 employees or a turnover of atleast CZK 50 million (approx. EUR1,852,000) for the last accounting pe-riod. The requirements relating to a cer-tain turnover or the number of employeesare neglected if the debtor submits a re-organisation plan which has been appro-ved by at least half of all secured creditorsand half of all unsecured creditors or, al-ternatively, if the plan has been approvedby at least 90 % of the creditors presentat the creditors’ meeting (quorum of thecreditors is calculated based on the amountof their claims).

REORGANISATION PLAN

The reorganisation plan constitutes avery extensive and detailed documentlaying out the process of reorganisationand has to be approved by the Insolvency

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Court. Its main aim is to organise the re-lationships between the debtor and itscreditors. It includes the determinationof the way of reorganisation, the identi-fication of possible measures to imple-ment the reorganisation plan, particularlyin terms of dealing with the assets, infor-mation on whether the debtor’s businessor part of it is going to continue its ope-rations and, if so, under which conditi-ons this shall be done, information aboutthe anticipated amount of obligationsvis-à-vis creditors after the end of reor-ganisation and other information statedin the Insolvency Act.

Reorganisation may be terminated inthree different ways: satisfaction of thereorganisation plan, transformation intobankruptcy or cancellation of the deci-sion on the approval of the reorganisa-tion plan, if the court finds that any ofthe creditors gained special benefits inconnection with the reorganisation planor that the approval of the plan wasachieved fraudulently.

DEBT RELIEF

Debt Relief (or “personal bankruptcy”)is an institute under which sociologicalaspects of debts are put before their eco-nomical aspects. It is supposed to enablethe debtor to a “fresh start” and at thesame time motivate it to actively repay

its debts in an amount of at least 30 %(in case of unsecured creditors).

The institute of Debt Relief was prima-rily designed for natural persons, alt-hough it can be used for entrepreneursas well. The Insolvency Act stipulates thatDebt Relief is not an option for legal per-sons or for the coverage of debts whicharose out of business activities of thedebtor. Nevertheless, there are also situa-tions in which Debt Relief can be used bya person who has debts from its businessactivities, e.g. if the creditors concernedagree; or in case the debt that arose outof debtor's business activities is secured.

The application for the approval of DebtRelief can only be submitted by the deb-tor itself by means of using a certain formalongside with the insolvency application.It must contain the following information:

identification of the debtor and the persons authorised to act on its behalf;

information on the expected incomeof the debtor in the next 5 years;

information on the debtor’s income inthe last three years;

proposal on how Debt Relief shall becarried out, or a statement that such a proposal is not given.

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Together with the proposal, the debtor isobliged to enclose the following informa-tion:

list of its assets and obligations; documentation on the income of the

debtor during the last three years; written consent of unsecured creditors

stating that less than 30 % of their claims will be satisfied.

The Insolvency Court will not allow tosolve insolvency via Debt Relief if:

the debtor pursues a dishonest intent; the debtor is proven to be an unreliable

person; the amount of debt that would be

covered in case of Debt Relief would be less than 30 %.

In case the Insolvency Court denies thesuggested Debt Relief, it shall decide tosolve the insolvency of the debtor bybankruptcy proceedings. In all othercases, the Insolvency Court will permitthe Debt Relief and decide on the mannerby means of which it is to be carried out.There are two possibilities: (i) sale of allassets of the debtor or (ii) creating a re-payment schedule.

The sale of the debtor’s assets solely re-lates to its current assets. Future income

or income which is gained during insol-vency proceedings but after the approvalof Debt Relief is not affected.

The repayment schedule, however, alsoaffects the debtor’s future assets. For aperiod of five years, the debtor must giveits creditors part of its income. As forthat, the debtor is obligated to work andif it is unemployed, it must immediatelyand actively seek a suitable occupation.Twice a year the debtor must provide theInsolvency Court with a report on its in-come and shall honestly declare all its in-come during this period to the insolvencyadministrator.

In general, the debtor’s debt, up to thedate of the approval of the Debt Relief,ceases to exist. The insolvency procee-dings formally end by a decision of theInsolvency Court.


On the basis of Council Regulation ECNo. 1346/2000, insolvency proceedingsin any other Member state of the EU arerecognized in the Czech Republic aswell. In this case, national law does notapply and all creditors, regardless oftheir seat, are entitled to submit theirclaims to the competent Insolvency Court.

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In case the Regulation is not applicable,based on Act No. 91/2012 Coll., foreignjudgments in insolvency matters fromany other countries (outside of EU) arerecognized in the Czech Republic on areciprocal basis.

Czech Republic


JUDr. Petr Kališ, Ph.D.Partner – Czech [email protected] Tel: +420 221 111 715

Mgr. Jan MorávekSenior Attorney – Czech [email protected] Tel: 420 221 111 715

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Formal Insolvency Proceedings

The Hungarian Restructuring and Insol-vency Act (Csődtörvény, “Cstv.”) regulatestwo types of insolvency proceedings: (i)the so-called restructuring proceeding(csődeljárás) with the general aim of kee-ping the business of the debtor (adós)running during and after the proceeding(without liquidating the debtor) by meansof concluding an agreement with the cre-ditors (hitelezők) on the settlement of thedebts; and (ii) the compulsory liquida-tion proceeding (felszámolási eljárás) withthe aim of dissolving the debtor withouta legal successor, and selling and distri-buting all of its assets to the creditors.

A restructuring proceeding can be initia-ted only by the debtor and requires theprior approval of its main decision-ma-king body (i.e. the approval of the generalmeeting in the case of a limited liabilitycompany). In a restructuring proceeding,the debtor is granted a moratorium andis allowed to reach a settlement agree-ment regarding its debts with the credi-tors in order to restore its solvency.Hungarian law does not stipulate any re-

quirements regarding a minimum debtrepayment quota; however, the settlementagreement must comply with the conceptof exercising rights in good faith (jóhis-zemű joggyakorlás elve).

If a restructuring proceeding fails, it istransformed by a court order into acompulsory liquidation proceeding. Themain goal of the liquidation proceedingis to terminate the debtor and to distributeall of its available assets to the creditors.

Of course, out-of-court restructuring ef-forts and negotiations are very commonand are usually made prior to the ope-ning of (in-court) insolvency procee-dings. In Hungary, there are no hybridcourt-administered restructuring or in-solvency proceedings, such as the German“Schutzschirmverfahren” (i.e. a specialpre-insolvency, court administered pro-ceeding) available.

In this article, the main aspects of com-pulsory liquidation proceedings will bediscussed first, followed by a discussionof the main characteristics of restructu-ring proceedings (under the title “FormalRestructuring Proceedings”).

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Compulsory liquidationProceedings


Under the Hungarian Restructuring andInsolvency Act, the opening of compul-sory liquidation proceedings requires theinsolvency (fizetésképtelenség) of thedebtor. In case of impending insolvencya company can only apply for a re-structuring proceeding.

The cases in which a debtor is consideredbeing insolvent are specifically defined inthe Hungarian Restructuring and Insol-vency Act. The most common case ofinsolvency is where a debtor fails to paya debt that has incurred due to a con-tractual obligation (that was previouslyexpressly acknowledged or not disputedby the debtor) within 20 days after thedue date expires and remains unpaid de-spite a written notice given by the credi-tor. The court will also establish thedebtor’s insolvency if the debt collectionprocedure was unsuccessful or if thedebtor failed to pay its debts within thedeadline specified in a final and bindingcourt decision.

A debtor is not required to have suffi-cient assets to cover the costs of the in-solvency proceeding in order for it to beopened. However, in this case the com-

pulsory liquidation procedure must beconducted as a simplified compulsory li-quidation procedure (egyszerűsített fels-zámolási eljárás), in which the assets ofthe debtor are directly distributed to thecreditors in an expedited procedure.

Procedural Aspects

A compulsory liquidation procedure caneither be initiated by the debtor or by acreditor. Further, also other persons orentities such as the liquidator in a voluntaryliquidation (végelszámoló) or the Courtof Registration (cégbíróság) may petitionfor the opening of compulsory insolvencyproceedings. A creditor can only requestthe opening of a compulsory liquidationproceeding if the amount of its (due)claim (excluding interest and taxes) ex-ceeds HUF 200,000 (approx. EUR 645).

The effective date of a liquidation pro-cedure is the day on which the court’sfinal decision on commencing the liqui-dation procedure is published in theCompany Gazette (Cégközlöny). Theproceeding is conducted by a liquidator(called felszámoló). All of the debtor’sliabilities become due and payable on theeffective date of the liquidation, and fromthis date forward only the liquidator willbe entitled to represent the debtor and tomake decisions in connection with its as-

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sets. The liquidator will be appointed bycourt using a random electronic se-lection process.

The Company Gazette will publish themost important information regardingthe liquidation procedure: (i) the name ofthe court conducting the liquidation pro-cedure, (ii) the case number, (iii) the nameof the appointed liquidator and the deb-tor, and (iv) an invitation for the creditorsto file their claims and to pay the regis-tration fee within 40 days after the pu-blication of the liquidation order in theCompany Gazette. The fee currentlyamounts to 1% of the filed claim but islimited with a maximum of HUF 200,000(approx. EUR 645). It is essential thatcreditors regularly check the CompanyGazette since debtors are not obliged toinform their creditors individually aboutthe opening of compulsory liquidationprocedures.

If a creditor fails to report its claim intime, i.e. within 40 days after the openingof the procedure, it can still do so for upto 180 days following such date; howe-ver, the chances of such claims being sa-tisfied will be significantly reduced, sincesuch creditors can be satisfied only afterthe complete (i.e. 100%) satisfaction of“in-time” creditors. No more claims maybe filed after the 180th day.

Claims involving debts that have incurredduring the liquidation procedure mustbe announced within 40 days from thedate when they become due and payable.

The National Tax Authority, the rele-vant local office of the EmploymentAgency, the competent Land Registryand the Court of Registration will be in-formed about the opening of the insol-vency proceeding.

After the deadline for creditors to filetheir claims expires, the liquidator has 45days to examine and register the claims.In case circumstances previously unknownto the liquidator require a modificationof the registration, said registration can stillbe modified by the liquidator later on.

The first meeting of the creditors takesplace within 75 days after the opening ofthe insolvency proceeding. All creditorswhose claims were registered will be in-vited to the creditors’ meeting by the li-quidator. The main aim of the meeting isto elect a creditors’ committee (hitelezőiválasztmány) or a creditors’ representative(hitelezői képviselő). Further, the creditorsare given information about the debtor’sassets which are available for distribution.

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Pre-Insolvency Restructuring & Refinancing

There is a great variety of contractualfreedom under Hungarian law and it iscommon practice, in particular withbanks as a major creditor group, to agreeon a variety of measures with all stake-holders in a pre-insolvency scenario. Thisis also still possible in the course of re-structuring proceedings and compulsoryliquidation proceedings. Hungarian lawdoes not provide special rules on deals inpre-insolvency scenarios, so that creditorsor third parties must primarily rely on voi-dance claims, in case they disagree with orsuspect irregularities in the sales process.

Creditors’ Role

Creditors, such as banks and other busi-ness partners as well as employees, shouldplay a key role in all insolvency procee-dings. In practice, however, compulsoryliquidation proceedings are still largelydominated by the liquidators. Creditorscan elect creditors’ committees or credi-tors’ representatives to represent their in-terests. Compared to individuals andordinary creditors, creditors’ committeesand creditors’ representatives have addi-tional rights to request information fromthe liquidator and to control his activities.

However, creditors still often fail to takeadvantage of this possibility.

There are two classes of creditors: secured(or preferential) and unsecured creditors.

UNSECURED CREDITORS

Any creditor may file its claim, includinginterest, within 40 days after the publi-cation of the order on the proceeding inthe Company Gazette. The enforcementof a claim requires the filing of the claim(hitelezői igénybejelentés) as an insol-vency claim with the liquidator and thepayment of the registration fee. The li-quidator summarises all claims in a spe-cial registration list (hitelezői jegyzék). Asmentioned before, all claims are examinedand registered by the liquidator within45 days from the expiry of the deadlinefor filing claims. After the examination ofeach claim, the liquidator decides whetherit qualifies as a secured or an unsecuredclaim and how it must be ranked accor-ding to the priority ranking prescribed bythe Hungarian Restructuring and Insol-vency Act.

The liquidator must further declarewhether a claim is confirmed or rejected.If the liquidator confirms a claim, othercreditors (in certain cases) have the rightto dispute the confirmation in court. If the liquidator disputes the legal basis

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or the amount of a creditor’s claim, hemust discuss this with the creditor. If noagreement is achieved, he must submitthe claim to the court, unless the legalbasis for such claim is already being con-tested in a separate court proceeding. Inthis latter case the liquidator is not ob-liged to submit the claim to the court,because the claim qualifies ex lege as acontested claim.

SECURED CREDITORS

Secured creditors’ claims are secured bya pledge. Under Hungarian law, ‘pledge’is a general term for all types of securi-ties, including pledges on movable assets(ingózálog), pledges over receivables (kö-vetelészálog), mortgages (ingatlan-jelzá-log) and floating charges (vagyontterhelő or körülírással meghatározottzálog). If an asset was already seized infavour of a creditor in a previous debtcollection procedure, the creditor is alsotreated as a pledgee in the compulsory li-quidation procedure.

Creditors with a fix pledge are entitled toreceive nearly the entire value of an assetafter its sale (up to the amount of theirclaims). Creditors with a floating chargeare entitled to receive nearly half of thevalue of the charged assets after theirsale; they are entitled to the other halfonly after the liquidation costs have been

paid from the debtor’s assets (includingthe said proceeds).

In a liquidation proceeding, (encumbe-red) assets are typically sold and the re-spective secured creditors have a claimof separation to receive the asset’s valueafter its sale.

On the other hand, in a restructuring pro-ceeding, assets are generally not sold, asthe business is kept running. In order toprotect the debtor’s assets, secured credi-tors are barred from enforcing pledgesafter the court decision on the start of theproceeding is published in the CompanyGazette.


In compulsory liquidation proceedings,a set-off is permitted if the creditor’s claimis registered by the liquidator as a con-firmed claim and the claim has not beenassigned to another entity during the li-quidation procedure. As a prerequisite fora set-off under Hungarian law, the cre-ditor’s claim must be due. This requirementis fulfilled ex lege in a compulsory liqui-dation proceeding as all creditors’ claimsbecome due with the opening of the in-solvency proceeding. A claim based on adebt that has incurred after the openingof the insolvency proceeding can also beset off against a claim of the debtor.

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PRIORITY CLAIMS

Priority claims are claims against the in-solvency estate that are satisfied prior toall unsecured creditors. Priority claimsmainly include (i) costs of the procee-dings; (ii) costs regarding administration,sustainment and supply of the insol-vency estate; (iii) claims of the debtor’semployees for current salary; (iv) claimsin connection with the termination of cer-tain kind of employees; (v) claims resul-ting from the fulfilment of certaincontracts; (vi) claims of private personsfrom non-professional activities; (vii)claims of small or micro enterprises; and(vii) taxes. It is not required to separatelyfile certain priority claims (such as thecosts of the liquidation proceedings)with the liquidator.


Hungarian law provides that certaintransactions that unduly decrease the valueof the debtor’s assets prior to the start ofa compulsory liquidation proceeding maybe disputed. Avoidance is, however, sub-ject to certain conditions and relates totransactions that were entered into bythe debtor and a third party. Formally,such a transaction can be contested bythe liquidator as well as by the creditors.

The conditions that must be met in order todispute such transactions are as follows:

(i) a transaction was concluded; (ii) thetransaction was entered into prior to thestart of the compulsory liquidation pro-ceeding; (iii) the transaction unduly de-creased the value of the debtor’s assets;and (iv) one of the specific reasons forwhich the transaction can be disputedunder the Hungarian Restructuring andInsolvency Act applies.

The Hungarian Restructuring and Insol-vency Act lists the following specific rea-sons that allow creditors and liquidatorsto contest a transaction:

(i) Fraudulent transactions (csalárd ügy-letek): This provision applies if a trans-action was concluded by the debtor tointentionally deceive (certain) creditorswithin the last five years prior to (orafter) the court’s receipt of the requestfor opening the compulsory liquidationproceeding, provided that the other con-tracting party knew or should have knownof the fraudulent intent. As for “familiasuspecta” (related persons), a differentprovision provides for a reversal of theburden of proof;

(ii) Transfers free of charge (ingyenes eli-degenítés) and undervalued transactions(laesio enormis or feltűnően aránytalanértékkülönbözet): Transactions that wereconducted free of charge (gifts) or where

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the difference between the value of theservice, product or asset given differsfrom the consideration to a grossly un-fair amount, if entered into within the lasttwo years prior to (or after) the court’sreceipt of the request for the compulsoryliquidation proceeding. As for “familiasuspecta” (related persons) a differentprovision provides for a reversal of theburden of proof;

(iii) Preferential treatment of creditors(hitelező előnyben részesítése): This ap-plies where a transaction discriminatesagainst one creditor in favour of (an)othercreditor(s), or is intended to prefer onecreditor over (an)other creditor(s), if en-tered into within the last 90 days prior to(or after) the court’s receipt of the re-quest for the compulsory liquidationproceedings.

(iv) Claw-back (visszakövetelés): A serviceperformed outside the ordinary courseof business might be claimed back if itwas performed within the last 60 daysprior to (or after) the court’s receipt ofthe application for the compulsory liqui-dation proceedings, if it resulted in thepreferential treatment of a creditor vis-à-vis the others.

All of the above provisions aim at secu-ring the debtor’s assets prior to the ope-

ning of the proceeding. Once the insol-vency proceeding is opened and the li-quidator is appointed, the liquidator isthe sole representative of the debtor.Hence, only the liquidator has the rightto dispose of the debtor’s assets. Suchdecisions require the consent of the cre-ditors’ committee in a limited number ofcases only (for example, if the liquidatorintends to continue the business activitiesof the debtor, this decision to continue thebusiness requires consent of the creditors’committee, which is then valid for a year).

A claim disputing a transaction must befiled with the court within 90 days afterthe claimant acquired knowledge of it,but in no event later than one year afterthe publication of the court’s order onthe start of the proceedings in the Com-pany Gazette. It must seek the declarationof invalidity of the contested transaction.

Excursus: Hungarian Capital maintenance Rules

Under Hungarian capital maintenancerules, a company (in the form of a so-cal-led capital company, in particular a limitedliability company) must not transferfunds or assets to its shareholders on thebasis of the shareholders’ status, unlessexplicitly permitted under statutory law,

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such as in case of distribution of divi-dends covered by the balance sheet profit,a capital decrease or in liquidation pro-ceedings. Dividends are also not payableif the amount of equity has fallen or, asa result of the payment, would fall belowthe amount of the registered capital or ifthe payment would endanger the com-pany's solvency.

The same rules apply if the payment ismade on the basis of a contract betweenthe shareholder and the company.

If companies violate the above describedcapital maintenance rules, the liquidatormay claim back the transferred funds orbenefits from the recipients, in whichcase only the general limitation periodsapply (i.e. usually five years).


Under Hungarian law, there is no specificobligation for the directors of a com-pany to request the opening of insolvencyproceedings. However, if a company isthreatened by insolvency, its managingdirector(s) must also consider the credi-tors’ interests when managing the com-pany’s affairs. “Threatening insolvency”means a situation in which the managingdirector(s) can or should be able to foreseethat the company will not be able to pay

its liabilities when they fall due. A mana-ging director who has taken all reasona-ble measures to reduce the creditors’ lossesand to convene the shareholders’ mee-ting cannot be held liable. However, if themanaging director has not filed and pu-blished the annual report in accordancewith the relevant legislation, it will be pre-sumed that the creditors’ interests wereviolated.

If the liability of the managing directoris stated by a court, any creditor whoseclaim remained unsatisfied in the com-pulsory liquidation process may bring anaction against the managing director toseek payment of its claims.

The Hungarian Criminal Code (BüntetőTörvénykönyv) also contains provisionsin connection with insolvency procee-dings. The most important provisionsstate that the following actions qualify asacts of crime: (i) the actual or feigned re-duction of the value of company’s assetsin violation of the requirement of prudentbusiness management at a time when thecompany is threatened by insolvency oris already insolvent and (ii) the preferen-tial treatment of certain creditors after acompulsory liquidation procedure hasbeen ordered.

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ROLE OF THE DEBTOR

In compulsory liquidation proceedings,the debtor generally loses the right tomanage its business. The debtor remainsthe owner of its assets, but the assetsform the so-called insolvency estate to beused primarily to satisfy the creditors.The right to manage and dispose of as-sets therefore passes to the liquidator.

ROLE OF THE LIQUIDATOR

Generally, the liquidator plays a key rolein running the debtor’s business or sel-ling its assets. The debtor loses controlover the assets on the date when the li-quidation proceeding starts; hence, onlythe liquidator is authorised to representthe debtor in connection with the assetsforming the insolvency estate.

As mentioned before, creditors have 40days from the date when the court’s de-cision on ordering the liquidation is pu-blished in the Company Gazette toannounce their claims to the liquidator.The claims will be registered and exami-ned by the liquidator.

All debts owed by the debtor becomedue and payable on the effective date ofthe liquidation procedure. During the li-quidation procedure, the liquidator col-

lects the debtor’s due receivables, enfor-ces its claims against third parties andsells the debtor’s assets in order to satisfythe creditors’ claims. From the startingdate of the liquidation proceeding on-wards, any claim against the debtor canonly be enforced in line with the rules ap-plicable to the liquidation procedure.

The liquidator is responsible for the pro-per book keeping and for complyingwith the respective reporting obligations(preparing balance sheets, annual re-ports, tax returns etc.).

If the liquidator fails to comply with thelaw, the creditors and the debtor are en-titled to file a formal objection againstthe liquidator’s actions in court, provi-ded that they suffered any damage orloss as a result of any action of the liqui-dator. Such an objection must be sub-mitted to the court within eight daysafter acquiring knowledge about the un-lawful action.

EFFECT ON EMPLOYEES

The Hungarian Restructuring and Insol-vency Act states that once the liquida-tion procedure starts, the liquidator isentitled to exercise the rights and obliga-tions normally held by the employer.Employment contracts will not be termi-nated automatically due to insolvency

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proceedings; however, the liquidator hasa privileged termination right with regardto certain employment contracts. If thedebtor’s assets do not cover all of theemployees’ claims which are statutorilyentitled to privileged satisfaction, em-ployees will receive payment from a spe-cial government fund known as the salaryguarantee fund (bérgarancia alap).

EFFECT ON CONTRACTS


An insolvency proceeding can have dif-ferent impact on a contract, depending onwhether or not contractual obligationshave already been fulfilled by the parties.

If a contracting party has fulfilled all ofits contractual obligations prior to thestart of the insolvency proceeding but hasnot received the entire consideration fromthe debtor, it may file an insolvency claim.On the other hand, if the debtor has al-ready fulfilled its obligations, the otherparty is obliged to fully perform its obli-gations towards the debtor. However, theHungarian Restructuring and InsolvencyAct generally authorises the liquidatorto terminate all contracts concluded bythe debtor prior to the start of the liqui-dation procedure with immediate effect.

Special provisions apply if neither partyhas fulfilled its obligations in their entirety.

In such a case, the decision on whetherthe debtor should fulfil the contract (inwhich case the contracting party is alsoobliged to fulfil its respective contractualobligations) or rescind it, is made by theliquidator at his own discretion. In caseof rescission, the other contracting partyis entitled to enforce its claims based onthe rescission by announcing the claimin the liquidation proceeding.


The Hungarian Restructuring and Insol-vency Act contains certain provisions thatallow the restructuring of a company atan early stage of financial distress.

INITIATION OF RESTRUCTURING

PROCEEDINGS AND MORATORIUM

Pursuant to the Hungarian Restructu-ring and Insolvency Act, it is possible toopen a restructuring proceeding (csődel-járás) instead of a compulsory liquidationproceeding (felszámolási eljárás). The re-structuring proceeding is conducted bya restructuring administrator (vagyonfe-lügyelő). The main goal of restructuringproceedings is to conclude a settlementagreement (csődegyezség) which is basedon a restructuring plan (reorganizációsterv) prepared by the debtor.

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As in the liquidation procedure, claimsare examined and registered (i.e. confir-med or disputed and secured or unsecu-red claims) by the administrator.

A restructuring proceeding can only beinitiated by the debtor and requires theprior approval of its main decision-ma-king body (i.e. the approval of the generalmeeting of a limited liability company).The effective date of the restructuringprocedure is the day on which the court’sfinal decision on ordering the restructu-ring procedure is published in the Com-pany Gazette. Besides the publication ofthe decision, each known creditor of thedebtor has to be informed individuallyby the debtor. The Company Gazettecontains the most important informa-tion regarding the restructuring proce-dure, such as the request to the creditorsto file their claims with the administratorand to pay the registration fee within 30days from the publication of the court’sdecision in the Company Gazette. Thefee currently amounts to 1% of the filedclaim, but is limited with a maximum ofHUF 100,000 (approx. EUR 322). If asettlement agreement is concluded andapproved by the court, creditors, whofailed to file their claims may only enforcetheir claims in a subsequent liquidationprocedure initiated by a third party.

In case of a restructuring proceeding,the debtor is granted a moratorium andhas the chance to reach a settlement agree-ment with the creditors in order to res-tore its solvency. If the application meetsthe formal requirements prescribed bylaw, a temporary moratorium is imme-diately and automatically granted to thedebtor upon its application for a re-structuring proceeding. If the court de-cides to commence the restructuringprocedure, the temporary moratoriumwill be replaced by a moratorium whichlasts for 120 days from the date of theorder onwards. The moratorium may beextended to 240 days (with a simple ma-jority of each of, the secured and unsecu-red classes of creditors) or to 365 days(with a two-thirds majority of each of, thesecured and unsecured classes of creditors).

The moratorium serves the protection ofthe debtor’s assets. This means, in parti-cular, that during the moratorium (i) set-offs against the debtor are not possible(however, a set-off claim may be enfor-ced in ongoing lawsuits filed by the deb-tor if submitted before the start of therestructuring proceeding); (ii) in princi-ple, payment orders may not be satisfiedfrom the debtor’s accounts or submittedagainst the debtor; (iii) the enforcementof money claims is suspended (with cer-tain exceptions); and (iv) secured cre-

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ditors are barred from enforcing theirpledges.

In the case of a restructuring proceeding,the debtor does not lose the right to dis-pose of its assets. He is generally entitledit in the ordinary course of business. Ho-wever, for assuming new obligations andpaying debts, the consent of the admi-nistrator (vagyonfelügyelő) is required.

RESTRUCTURING PLAN HEARING

The first settlement conference (csődegy-ezségi tárgyalás) takes place within 60days after the start of the restructuringproceeding. All registered creditors areinvited by the administrator. However,only creditors whose claims have beenconfirmed by the administrator have theright to vote.

A settlement agreement will only qualifyas adopted if a simple majority of eachof the secured and unsecured classes ofcreditors vote in favour of it. In suchcase, dissenting creditors are overruledand bound by the settlement agreement(if it is also approved by the court).

The debtor and the creditors can freelydetermine the terms of the settlementagreement, including an agreement onthe release of debts, payment relief ar-rangements, the establishment of securi-

ties, debt-equity swaps etc. A minimumdebt repayment quota is not prescribedby law. However, the settlement agree-ment must be approved by the court.The court is obliged to deny its approvalif the settlement agreement does notmeet the concept of exercising right ingood faith (jóhiszemű joggyakorlás elve).

Ending of Insolvency Pro-ceedings

Both compulsory liquidation and re-structuring proceedings are closed by aformal resolution of the court. Liquida-tion proceedings are closed after the dis-tribution of all assets, i.e. the liquidationof the debtor.Restructuring proceedings are formallyclosed after a settlement agreement –which is based on the restructuring plan– is adopted by the creditors and appro-ved by the court. The debtor is then ob-liged to fulfil the terms of the agreementat the time and within the period stipu-lated in it. If payments are not made insuch a timely manner, a compulsory li-quidation procedure can be initiated.

If no settlement agreement is reached inthe restructuring proceeding or if it is notapproved by the court, the court closesthe restructuring proceeding and ordersthe company's compulsory liquidation.

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Special Rules for Insolvency Proceedingsof Strategically Important Companies

The Hungarian government may issue adecree stating that a company is of stra-tegic importance. A company can onlybe declared strategically important if (i)its operations are strategically importantfor the Hungarian economy; (ii) reorga-nisation is in the national interest; or (iii)its winding up in a swift, transparent andunified process is important for the na-tional economy.

The Hungarian Restructuring and Insol-vency Act includes special rules thatapply to insolvency proceedings of stra-tegically important companies. Most ofthese rules aim at (i) a swift process, the-refore the general deadlines set forth inthe Hungarian Restructuring and Insol-vency Act are reduced; and (ii) the saleof the assets on a going concern basis.For a company of strategic importance,the Hungarian court will appoint a stateliquidator to act as the supervisor withregard to the company’s assets.

Further special rules apply if a companyof strategic importance or its facilitiesare also under national security pro-tection or provide public service of stra-

tegic significance. It is again the Hunga-rian government that can order the ap-plication of these further rules, providedthat it is unlikely that the insolvency si-tuation of the company can be rectifiedand a state or shareholder subsidy can-not be granted either, but it is in the pu-blic interest to sell the company’s assetsas a going concern.


According to EC Regulation No. 1346/2000, insolvency proceedings performedin other Member States of the EuropeanUnion are recognized in Hungary.

If the EC Regulation is not applicable,an insolvency proceeding involving a fo-reign company and its outcome are ge-nerally recognised in Hungary, unless (i)the recognition of the relevant court or-ders would violate Hungarian publicorder; (ii) the debtor did not participatein the process; or (iii) the proceeding sig-nificantly violated the principles of Hun-garian laws on due process.

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Hungary

Dr. Edina Nagy, LL.MPartner – [email protected] Tel: +36 1 457 8040

Dr. Magdolna Macsuga, LL.M.Senior Attorney – [email protected] Tel: +36 1 457 8040

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Insolvency proceeding are regulated bythe Romanian Insolvency Act, No. 85/2014 on Insolvency Prevention and Pro-ceedings, published in the Official Journalof Romania of 25 June 2014, subse-quently amended and supplemented byLaw No. 312/2015 on the Recovery andResolution of Credit Institutions and In-vestment Companies as well as on amen-ding and supplementing certainnormative acts in the financial area (the“Romanian Insolvency Act”).

The changes implemented by the Ro-manian Insolvency Act are intended tobring together both the provisions on in-solvency prevention and proper insol-vency proceedings. Its main purpose isto create the conditions for the recoveryof indebted companies.

The two proceedings provided by theRomanian Insolvency Act are: (i) judi-cial reorganization proceedings (reoga-nizare judiciară), which aim to give thedebtor the chance to recover its businesseffectively and (ii) bankruptcy procee-

dings (faliment), which aim to liquidateall assets and satisfy creditors. Generalinsolvency proceeding are complex pro-ceedings, characterised by several specificstages. The first stage is the observationperiod (perioada de observație), whichtakes place prior to the opening of insol-vency proceedings in front of the syndicjudge (judecător sindic). The observationperiod is important due to the fact thatwithin such period, the debtor takesbusiness decisions in order to overcomethe financial distress it is experiencing.Contracts and any other agreementsconcluded during the observation periodhave to be analysed by the syndic judge,who may decide whether or not such con-tracts and agreements may be effective.

After the observation period and provi-ded that the business of the debtor canbe carried on, the proceedings continuewith the judicial reorganization phase. Incase the business of the debtor cannot becontinued, the rules relating to bank-ruptcy proceedings will apply.

Another classification made by the Ro-manian Insolvency Act stipulates thatgeneral insolvency proceedings, as pro-vided above, and simplified insolvencyproceedings, are applicable only to cer-tain categories of professionals (naturalor legal persons).

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During simplified insolvency procee-dings, the debtor is directly subjected tothe bankruptcy proceedings (i.e. bank-ruptcy proceedings are commenced eit-her immediately or after an observationperiod of 20 days).

JUDICIAL REORGANISATION AND

REORGANISATION PLAN

In case the debtor’s business is recover-able, the debtor may apply for judicial re-organization proceedings to be initiated.The syndic judge approves judicial reor-ganization proceedings for the businessof the debtor based on a court decision.

Where the claim for judicial reorganiza-tion proceedings is approved, the debtorprovides its creditors and the syndicjudge with a reorganisation plan. Themain purpose of the reorganisation planis in displaying how the restructuring ofthe debtor’s business should be effected.The reorganisation plan needs to be ap-proved by the creditors and confirmedby the court.

The reorganisation plan may include therestructuring and continuation of theactivity of the debtor or the liquidationof certain assets. In practice, the reorga-nisation plan contains both the re-structuring and the liquidation of certainassets or activity sectors.

Under the Romanian Insolvency Act, itis generally possible to open restructu-ring instead of bankruptcy (i.e. liquida-tion) proceedings if the business of thedebtor is recoverable. The proceedingscan either be conducted by an adminis-trator or by means of self-administra-tion of the debtor. The latter is onlypossible if the syndic judge does notdeny the right to self-administration.

If the reorganization proceedings fail,the debtor becomes subject to bank-ruptcy proceedings.

BANKRUPTCY PROCEEDINGS

Bankruptcy proceedings apply in the fol-lowing situations:

a) the debtor expresses its intention toundergo simplified proceedings;

b) the debtor did not express its inten-tion to reorganise its activity or the reor-ganisation plan is invalid for not observingone of the mandatory legal provisions;

c) the debtor expresses its intention to re-organise its activity, however, the reorga-nisation plan is invalid for not observingone of the mandatory legal provisions;

d) the report of the insolvency adminis-trator proposing the opening of bank-

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ruptcy proceedings was approved by thesyndic judge;

e) if an application for insolvency is filedby a creditor and relates to a debtamounting to at least RON 40,000.00(approx. EUR 9,000.00) and which isolder than 60 days.


Under the Romanian Insolvency Act,insolvency is the state of patrimony ofthe debtor characterised by insufficientfunds to fulfil its payment obligations forcert (i.e. uncontested), liquid (i.e. deter-mined and determinable) and due debt(creanță certă, lichidăși exigibilă) vis-à-vis its creditor(s), as follows:

(i) the debtor’s insolvency can be presu-med if, within 60 days of maturity, thedebtor has not fulfilled its payment ob-ligation(s) vis-à-vis its creditor(s). The pre-sumption is relative (prezumție relativă);

(ii) the insolvency of the debtor is immi-nent when it can be proven that upon ma-turity, the debtor will not be able to fulfilits payment obligations vis-à-vis its credi-tor(s) with the funds available at maturity.

Insolvency/bankruptcy proceedings areopened by a decision of the syndic judgebased on a motivated court decision.

All costs relating to the proceedings andas provided by the Romanian InsolvencyAct, including all document communi-cation costs, are borne by the debtor.

If there is a lack of funds in the accountof the debtor or only limited funds areavailable, payments for insolvency pro-ceedings are paid from a special liquida-tion account (c.f. Government EmergencyOrdinance no. 86/2006 related to the acti-vity of the insolvency practitioner).

Procedural Aspects

Insolvency proceedings start with a claimfiled either by the debtor, by one or moreof the creditors or by certain persons orinstitutions expressly stated by law.

A claim filed by the debtor itself has tobe submitted within 30 days of insol-vency occurring and must include an at-tachment that serves as proof that thecompetent fiscal authority has been no-tified of the intention to open insolvencyproceedings.

If the claim is filed by a creditor, it mustcontain the amount and the basis of thedebt and, if applicable, the existence of aright of preference established by the deb-tor or by law, existence of insurance mea-sures on the debtor’s goods, a declaration

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of intent to participate in the debtor’s re-organisation and, at least in principle,the way the creditor will participate inthe reorganisation.

According to the provisions of the Ro-manian Insolvency Act, the minimumamount of debt required to file a claimfor opening insolvency proceedings (eit-her by the creditor or by the debtor) isRON 40,000.00 (approx. EUR 9,000.00)for debts other than salary debts. Foremployees, the minimum amount is sixgross average salaries.

Summons, notifications and communi-cations relating to procedural acts per-formed by the court and the insolvencyadministrator/liquidator as well as otheracts which are mandatory as per the law,are published in the Insolvency Procee-dings Bulletin, once the insolvency pro-ceedings get under way.

Once the court has issued a final decisionto initiate insolvency proceedings, all do-cuments and correspondence issued bythe debtor, the insolvency administratoror the liquidator will mandatorily in-clude the wording “în insolvență”, “in insol-vency”, “en procedure collective”, writtenin Romanian, English and French. Afterthe beginning of the judicial reorganisa-tion proceedings or the bankruptcy pro-

ceedings, documents and correspon-dence will include the wording “in reor-ganizare judiciară”, “in judicial reorgani-zation”, “en redressement” or “in faliment”,“in bankruptcy”, “en faillite”. The same willapply in the case of simplified insolvencyproceedings (i.e. “in faliment”, “in bank-ruptcy”, “en faillite”).

If the debtor owns or administers one ormore internet pages, its representativesare obliged to publish on such internetpages information on the situation ofthe company as well as the number ofthe decision which initiated the procee-dings, the date on which the decision wasissued and the court which issued the de-cision. This has to be done within 24hours from the communication date ofthe decision by means of which the in-solvency proceedings were initiated.

The creditors’ summons has to be pu-blished in the Insolvency ProceedingsBulletin at least five days prior to themeeting. It has to include the agenda ofthe meeting.

Pre-Insolvency Restructu-ring & Refinancing

The reorganisation of companies in dis-tress obviously requires a good understan-ding not only of the legal aspects, but

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also of the economic needs and expecta-tions of all parties involved, such as deb-tors, creditors (e.g. banks), directors andshareholders. There is a great variety ofcontractual freedom under Romanianlaw and it is common practice, in particu-lar with banks as a major creditor group,to agree on certain measures with all sta-keholders in a pre-insolvency scenario.

Once the court opens insolvency procee-dings, such proceedings will follow thecourse provided by the Romanian Insol-vency Act. Thus, it is no longer possibleto conclude an out-of-court agreement.

DISTRESSED M&A

Romanian law does not provide specialrules on “pre-packaged deals” in a pre-in-solvency scenario.

It should be noted that, in the event ofinsolvency, both the insolvency adminis-trator and the creditors’ assembly maysubmit claims for the annulment of frau-dulent acts taken by the debtor, as well assuch acts and operations that damagedthe creditors.

M&A deals concluded prior to the ope-ning of insolvency proceedings shouldnot prejudice the creditors’ rights. Hence,they may also be subject to avoidance.

Creditors’ Role

The creditors have an important role ininsolvency proceedings in Romania.They are acting through the creditors’assembly which may appoint a creditors’committee composed of three or fivecreditors during the first meeting. It hasto be noted that only creditors with a vo-ting right can be appointed.

The creditors’ role is highlighted by theprerogatives given to the creditors’ com-mittee, such as analysing the report draf-ted by the insolvency administrator orliquidator, the possibility of challengingthe report, requesting withdrawal of thedebtor’s right to manage its business, sub-mitting claims regarding the annulmentof the debtor’s fraudulent acts and ope-rations that damaged the creditors, if suchclaims were not already submitted by theinsolvency administrator or the liquidator.

The creditors are divided into two cate-gories: (i) secured or preferential credi-tors and (ii) unsecured creditors.

UNSECURED CREDITORS

Unsecured creditors (creditori chirografari)are creditors registered in the table ofdebts which are not entitled to preferen-tial treatment. This category also inclu-des secured creditors whose claims are,

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however, not fully covered by the valueof the privileges, mortgages or pledges.

After insolvency proceedings have beenopened, the insolvency administrator willsend a notification to all creditors inclu-ded in the list submitted by the debtor aswell as to the debtor and the Trade Regis-try Office, or, if applicable, to the Agri-cultural Registry of the Companies orany other registers in which the debtor isregistered, in order to announce the com-mencement of the proceeding.

Any creditor may submit a claim for re-gistration with the creditors’ assemblywithin the period provided for notifica-tion, as mentioned above. The RomanianInsolvency Act, however, stipulates thatthis period may not exceed 45 days fromthe date of the opening of insolvencyproceedings.

After verifying the claims, the insolvencyadministrator/liquidator will draft the pre-liminary table including all debts againstthe debtor’s goods. This table then has tobe submitted to the competent court.The preliminary table will be publishedin the Insolvency Proceedings Bulletin.

Upon publication of this preliminarytable, the insolvency administrator/liqui-dator will send notifications to the credi-

tors whose debts or preferential rightswere partially included or not includedin the table, where applicable giving rea-sons for their non-consideration.

SECURED CREDITORS

Secured debts are defined by the Ro-manian Insolvency Act as debts with aright of privilege and/or a right of mort-gage and/or a right equivalent to a mort-gage and/or a right of pledge over thedebtor’s goods.

Secured debts will be registered in the finaltable of creditors up to the market valueof the assets established as guarantee (e.g.a pledge or mortgage). The respective eva-luation is done by the insolvency adminis-trator or the liquidator.

If assets linked to preferential rights aresold at a higher price than the amountregistered in the final table of creditors,the difference will also benefit the secu-red creditor (even if the exceeding partof its debt had been registered as an un-secured debt. This procedure also appliesin case the reorganisation plan fails andthus the debtor’s goods are sold in thecourse of bankruptcy proceedings.

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OPPOSITION TO THE OPENING

OF INSOLVENCY PROCEEDINGS

Pursuant to the Romanian InsolvencyAct, creditors can file an objection to thecommencement of proceedings within10 days of the receipt of the notification.

Any creditor unsatisfied by the openingof proceedings has the legal possibilityto file such an objection.

PRIORITY CLAIMS

Priority claims are defined as claimsagainst the insolvency estate that are sa-tisfied prior to the claims of all other in-solvency creditors. Priority claims arereduced to certain kinds of claims suchas (i) certain liquid and due claims ari-sing during insolvency proceedings and(ii) expenses related to insolvency pro-ceedings.

INSOLVENCY CLAIMS

According to the Romanian InsolvencyAct, an insolvency claim is defined as thepossibility provided to any creditor tosubmit a claim for registration with thecreditors’ table within a period stipulatedin the court’s decision on the opening ofinsolvency proceedings.

Such insolvency claims may be submit-ted by any creditor irrespective of the ca-tegory the creditor belongs to.

VOIDANCE CLAIMS

According to the Romanian InsolvencyAct, the insolvency administrator/liqui-dator may submit to the syndic judgeclaims for the annulment of certain actsand transactions of the debtor that wereundertaken in the two years prior to theopening of insolvency proceedings.

The following acts and operations maybe subject to such claims:

(i) free of charge acts, except for huma-nitarian sponsorship;

(ii) operations where the debtor’s perfor-mance clearly exceeds the considerationreceived, performed within 6 monthsprior to the opening of insolvency pro-ceedings;

(iii) acts concluded within two yearsprior to the opening of insolvency pro-ceedings with the intention of all partiesinvolved to (a) withdraw goods from thecreditors’ control or (b) damage theirrights in any other way;

(iv) property transfers to a creditor inorder to settle a former debt or provideit with a benefit of any kind, performedwithin six months prior to the openingof proceedings if the amount that maybe obtained by the creditor in case of

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bankruptcy of the debtor is smaller thanthe value of the transfer;

(v) establishment of a preferential rightfor a claim that was an unsecured debtwithin six months prior to the openingof insolvency proceedings;

(vi) advance payments performed withinsix months prior to the opening of insol-vency proceedings if their due date hadbeen fixed for a date after the openingdate of insolvency proceedings;

(vii) acts of transfer or undertaking ob-ligations by the debtor within a periodof two years prior to the opening of in-solvency proceedings with the intentionto hide or delay insolvency or commitfraud against a creditor.

A claim for the annulment of such atransaction must be filed within one yearof the expiry date set for drafting the re-port on the causes and circumstanceswhich led to insolvency of the debtor,however no later than 16 months fromthe date on which insolvency procee-dings were opened.


According to the Romanian CompaniesAct, the administrative board of a com-

pany has the fundamental competenceof filing the claim for the opening of theinsolvency proceedings, which cannot bedelegated to the executive.

It should be noted that the RomanianInsolvency Act provides the possibilityof submitting claims against the mem-bers of the management, directors andauditors if they can be made responsiblefor the debtor’s insolvency. It also estab-lishes the possibility to notify the crimi-nal investigation authorities in this regard.


ROLE OF THE DEBTOR

During the observation proceedings or thereorganisation period, the debtor’s rightof administration is exercised through aspecial administrator under direct super-vision of the insolvency administrator.The right of self-administration is lost asa result of bankruptcy proceedings.

Any act performed by the debtor thatviolates the above is sanctioned with ab-solute nullity.


ADMINISTRATOR

The insolvency administrator plays animportant role throughout the procee-dings. Its main duties are to analyse the

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economic situation of the debtor and allnecessary documents, draft a report pro-posing either the commencement of sim-plified proceedings or continuation ofthe observation period within the gene-ral proceedings, draft the reorganisationplan and terminate certain contractsconcluded by the debtor.

The insolvency administrator is obligedto notify the syndic judge in connectionwith any important matter related to thedebtor company that should be solvedby the syndic judge (e.g. submittingclaims for the annulment of the debtor’sfraudulent acts or operations concludedat the expense of the creditors’ rights).

Also, it is mandatory for the insolvencyadministrator to submit a monthly re-port describing the fulfilment of its du-ties, justifying the expenses made inconnection with the administration ofthe insolvency proceedings and, if neces-sary, the inventory status.

Once the syndic judge appoints a liqui-dator, the insolvency administrator’spowers are passed to the liquidator, whothen has administrative power over thedebtor.


AND EMPLOYEES

According to the Romanian InsolvencyAct, all active employment contracts stayin force during insolvency proceedings.

Nevertheless, an employer who is subjectto insolvency proceedings is not prohibi-ted from terminating employment con-tracts after the proceedings were opened.This management decision will be madeeither by the debtor itself if its adminis-tration right has not been withdrawn orby the insolvency administrator.

Thus, the Romanian Insolvency Act pro-vides the possibility for the insolvencyadministrator/liquidator to terminate in-dividual employment contracts. Howe-ver, this requires prior notice to be givenin accordance with the Romanian La-bour Code.

Unless the administration right has beenwithdrawn from the debtor, the prior ap-proval of the insolvency administrator ismandatory if restructuring measures orother changes are made with respect tocollective employment contracts.

Please note that even though the insol-vency administrator is obliged to ob-serve the collective dismissal procedure,the terms provided by certain articles of

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the Romanian Labour Code are reducedin the course of insolvency proceedings.


TERMINATION RIGHTS

The opening of insolvency proceedingshas different impacts on contracts, depen-ding on the type of the contract concluded.

If a contracting party has entirely fulfil-led its contractual obligations and hasnot received the entire considerationfrom the debtor after the opening of in-solvency proceedings, such contractingparty, in its capacity as creditor, may filea claim for opening insolvency procee-dings. If the debtor has already fulfilledits obligations, the other party is obligedto perform its obligations vis-à-vis theinsolvency estate in full.

The Romanian Insolvency Act providesthat ongoing contracts remain in forceonce insolvency proceedings are opened.Within three months of the date onwhich insolvency proceedings are ope-ned, the insolvency administrator/liqui-dator may terminate any contract,unexpired lease contracts or other long-term contracts as long as these contractswere not entirely executed by all con-tractual parties. Should the insolvencyadministrator or liquidator deem it ne-cessary to maintain the contract, it is ob-

liged to report every three months onwhether the debtor has the necessaryfunds to fulfil its contractual obligations.

It should also be noted that, under theRomanian Insolvency Act, service pro-viders (such as electricity, natural gases,water, telephone services, etc.), have noright to change, refuse or temporarily in-terrupt the services they provide to thedebtor or in connection with its propertyif the debtor has the quality of a captiveconsumer (consummator captiv) duringthe observation period or during the re-organisation period. The debtor is ob-liged to pay for such services within apayment term of 90 days.


The Romanian Insolvency Act containscertain provisions in relation to the re-structuring of a company at an earlystage of financial distress. In practice,however, the provisions for restructuringa company at an early stage of financialdistress are of rather minor significanceand restructuring proceedings are typi-cally conducted in accordance with thelegal provisions in court, if out-of-courtsettlement is not successful.

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The Romanian Insolvency Act furtherprovides insolvency prevention procee-dings such as the ad hoc mandate (man-dat ad-hoc) or the preventive arrangement(concordat preventiv); these are legal in-struments that serve the purpose of avoi-ding typical insolvency proceedingbefore the syndic judge.

AD HOC MANDATE

The ad hoc mandate represents a confi-dential procedure initiated before thesyndic judge upon the request of a deb-tor in financial distress. In this case, thecourt appoints an ad hoc trustee who ne-gotiates with the creditors of the debtorin distress. The aim of the ad hoc man-date is to reach agreement so as to over-come such financial distress.

PREVENTIVE ARRANGEMENT

The preventive arrangement is a legal in-strument by which a debtor in financialdistress may ask the syndic judge to ap-prove an agreement with its creditors re-presenting more than 75% of the debt inorder to obtain financial recovery.

ENDING OF INSOLVENCY

PROCEEDINGS

Both bankruptcy and restructuring pro-ceedings are closed by a formal resolu-tion of the insolvency court. Bankruptcyproceedings are closed after the distribu-

tion of all assets, i.e. the liquidation ofthe debtor.

Restructuring proceedings are formallyclosed after the creditors adopt a re-structuring plan. The debtor then hasthe duty to fulfil the restructuring planat the dates and within the periods stipu-lated in the restructuring plan. If thepayments are not performed in due timeas stipulated in the restructuring plan,bankruptcy proceedings will apply.


According to EC Regulation No. 1346/2000, insolvency proceedings in otherMember States of the European Unionare recognised in Romania.

The Romanian Insolvency Act containsprovisions with respect to the applicableprocedural rules in private internationalrelations as regards insolvency procee-dings as well as provisions referring tothe recognition of proceedings in thirdcountries.

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Romania


Mirela NathanzonPartner – [email protected] Tel: +40 21 311 12 13

Anca StîngăSenior Attorney – [email protected]: +40 21 311 12 13

sLOVAK REPUBlIC

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Introduction

Slovakian insolvency proceedings are re-gulated by Act No. 7/2005 Coll. onBankruptcy and Restructuring (Zákon okonkurze a reštrukturalizácii, “InsolvencyAct”) which was significantly amendedin 2015. The most recent amendment ofthe Insolvency Act established severalnew instruments which provide betterprotection for creditors and ensure hig-her proportional satisfaction of theirclaims, mainly by imposing more rigidobligations on debtors and trustees byadopting preventive and restrictive mea-sures. On the other hand, the new regu-lation has also raised many questionsregarding its interpretation as it suffersfrom several imperfections and is contra-dictory in some aspects. Most impor-tantly, it changed the legal regime relatingto restructuring proceedings that werestarted on the basis of the former regu-lation, which might be in contradictionwith the legal principles of non-retro-activity and legal certainty.

In this guide we will provide a generaloverview of the most important aspects

of the Slovakian insolvency regime.

MAIN INSOLVENCY PROCEEDINGS

The Insolvency Act provides for uniforminsolvency proceedings. They are eithercarried out as so-called restructuringproceedings (Rešrukturalizácia) wherethe general aim is to keep on running thebusiness of the debtor during and afterthe proceedings without the debtorbeing liquidated; or a bankruptcy pro-ceeding (Konkurzné konanie) with theaim to liquidate all assets and distributeall funds available to the creditors.

In restructuring proceedings, the debtorfiles for the opening of proceedings andat the same time submits a restructuringplan (Reštrukturalizačný plán). Re-structuring proceedings are administeredby a restructuring administrator (Reštruk-turalizačný správca).

If restructuring proceeding fails, they aretransformed by court order into bank-ruptcy proceedings. The latter are liqui-dation proceedings related to all availableassets. Its aim is to terminate the debtorand distribute all available funds to thecreditors.

The debtor or its creditors may file forthe opening of bankruptcy proceedingdirectly, i.e. without previously filing for

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restructuring proceedings, if the statu-tory conditions are met.


Under the Insolvency Act, the openingof insolvency proceedings requires eitherilliquidity (Platobná neschopnosť) orover-indebtedness (Predlženosť) of thedebtor. Restructuring proceedings, ho-wever, may already be applied for wheninsolvency is impending.

Illiquidity, as defined by the InsolvencyAct, is the inability to fulfil (i) at leasttwo monetary obligations, (ii) to morethan one creditor, (iii) within 30 days oftheir due date. Illiquidity may be presu-med (i) when enforcement of a monetaryobligation against the debtor by meansof an enforcement proceeding does notsucceed; or (ii) when the debtor fails tofulfil certain obligations which apply if acreditor files a petition for the initiationof bankruptcy proceedings (i.e. as des-cribed below, the obligation to give astatement to the creditor’s petition andthe obligation to supply evidence of itssolvency within a certain period).

Over-indebtedness only applies to deb-tors which are obliged to keep accounts(e.g. corporations). Over-indebtednessmeans that the debtor (i) has more thanone creditor and (ii) the value of its ob-

ligations exceeds the value of its assetsand property.

It should be noted that in order to openinsolvency proceedings sufficient assetsare required to cover the costs of theproceedings.

Bankruptcy Proceedings

Initiation of Bankruptcy Proceedings,Declaration of Bankruptcy and its Effects

The petition for opening bankruptcyproceedings might either be filed by thedebtor himself or by a creditor.

The opening of bankruptcy proceedings,as well as other crucial acts during theseproceedings, is made public by means ofpublishing the respective court’s resolu-tions or acts of the administrator in theCommercial Bulletin (Obchodný vestník).

If the petition for bankruptcy is perfect,the court issues a resolution on the ope-ning of the bankruptcy proceedings wit-hin 15 days of delivery of the petition.Such resolution must be published in theCommercial Bulletin without unduedelay. Publication of this resolutionmeans the bankruptcy proceedings arelegally effective and the proceedings areofficially initiated. The initiation of

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bankruptcy proceeding has the followingeffects: (i) the debtor is only entitled toexecute common legal acts; any otheracts may be contested in bankruptcy; (ii)pending enforcement proceedings againstthe debtor are suspended and no new en-forcement proceedings are initiated; (iii)the exercise of a security right may notbe initiated or continued (however, thereare certain statutory exemptions); (iv)proceedings on winding-up the debtorwithout liquidation are suspended; and(v) no resolutions on mergers or dissolu-tions of the debtor are passed or enteredinto the Commercial Register.

If the petition for bankruptcy procee-dings was filed by the debtor, within 5days the court either declares the debtorbankrupt (if there are no doubts aboutthe insolvency of the debtor) or appointsa preliminary administrator (Predbežnýsprávca) whose task is to investigate thedebtor’s insolvency status. In case the pe-tition for bankruptcy was filed by a cre-ditor, the court (also within 5 days of theinitiation of the bankruptcy procee-dings) sends a counterpart of the peti-tion to the debtor, requesting its statementon the matter. The debtor then has thepossibility to prove its solvency within 20days of delivery of the request. Further,the court sets a date for a court hearingto which the debtor and the creditors

specified in the petition must attend. Ifthe debtor fails to prove its solvency ordoes not give its statement within theabove mentioned period, the court de-clares bankruptcy. If there are anydoubts as to the debtor’s insolvency, thecourt will appoint a preliminary admi-nistrator before declaring bankruptcy.

In case the insolvency of the debtor isproved, the court declares bankruptcy ofthe debtor, provided that the debtor hassufficient assets to cover the costs of thebankruptcy. In Slovakia, there is a signi-ficant difference between the initiationof bankruptcy proceedings and the ini-tiation of the bankruptcy (Konkurz),which is a certain stage, namely the mainstage of bankruptcy proceedings. The ini-tiation of each stage has different effects.

Bankruptcy is initiated upon publicationof the resolution on the declaration ofbankruptcy (Vyhlásenie konkurzu) in theCommercial Bulletin. In its resolution,the court (i) declares bankruptcy, (ii) ap-points an administrator and (iii) calls forcreditors to lodge their claims within thestatutory period of 45 days from the de-claration of bankruptcy.

The declaration of bankruptcy has thefollowing main effects: (i) from now on,the debtor is defined as “the bankrupt”

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(Úpadca); (ii) the right of dispositionwith regard to the bankruptcy assets (asdefined below) is transferred to the ad-ministrator (Správca); (iii) any undue re-ceivables and obligations of the bankruptare deemed as being due; (iv) no securityright may arise in relation to the bank-ruptcy assets, except for a lien relating tofuture property if it was established andduly registered before the declaration ofbankruptcy; (v) termination of or with-drawal from an unfulfilled contract is go-verned by special rules; (vi) any receivablessubject to bankruptcy shall be fulfilledby debtors to the administrator; (vii) thebankrupt’s unilateral legal acts becomeextinct if they relate to bankruptcy as-sets; (viii) the possibility of offsettingreceivables is limited by statutory condi-tions; (ix) contractual agreements prohi-biting the assignment of receivables areineffective; (x) authorisation to act onbehalf of the bankrupt in employmentrelationships passes to the administrator;(xi) all court and other proceedings thatrelate to bankruptcy assets are suspen-ded, save for certain statutory excepti-ons; (xii) court and other proceedingsare initiated only upon a petition of theadministrator or upon a petition filedagainst the administrator; (xiii) no enfor-cement proceedings may be initiatedwith respect to bankruptcy assets; (xiv)any pending enforcement proceedings

are terminated; and (xv) the administra-tor must grant consent to any merger ordissolution of the bankrupt.

BANKRUPTCY ASSETS

AND LIST OF PROPERTY

The term “bankruptcy assets” (Kon-kurzná podstata) defines the bankrupt’sproperty which is subject to bankruptcy.They include (i) property that belongedto the bankrupt at the time of the decla-ration of bankruptcy; (ii) property acqui-red during bankruptcy; (iii) propertythat secures the bankrupt’s obligations;and (iv) other property stipulated by law.

The bankruptcy assets are divided intogeneral assets (Všeobecná podstata) andindividual, separated assets of securedcreditors (Oddelená podstata). Separatedassets are assets securing a receivable ofa secured creditor (Zabezpečený veriteľ)with the consequence that only this par-ticular creditor may be satisfied from theproceeds of the separated asset. The ge-neral assets, however, are assets to whichno creditor has any special rights. Unse-cured creditors (Nezabezpečení veritelia)are satisfied from those general assets.Furthermore, secured creditors whowere not fully satisfied from their sepa-rated assets receive payment from theproceeds of the general assets.

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Moreover, the Insolvency Act stipulatesthat certain property cannot be subject tobankruptcy (e.g. property that may not bethe subject of enforcement proceedings).

For the purpose of proper and completeconversion of the bankruptcy assets(Speňažovanie) into money as well as thehighest possible satisfaction of the bank-rupt’s creditors, the administrator is ob-liged to ascertain the bankruptcy assetsthroughout the bankruptcy proceedings.The ascertainment (Zisťovanie majetku)is based particularly on the list of pro-perty submitted by the bankrupt, state-ments of the bankrupt and other parties andthe administrator’s own investigations.

The administrator prepares a list of thebankruptcy assets (Súpis majetku) whichis a document entitling the administratorto convert the listed property into money.The administrator draws up separatelists for the general assets and for eachseparated asset. As soon as property isincluded in the list, no person other thanthe administrator may transfer this pro-perty, lease it long-term, establish theright of another over the property or ot-herwise reduce its value or liquidity. Thelist must be drawn up within 60 days ofthe declaration of bankruptcy and hasto be published in the Commercial Bul-letin without undue delay. Furthermore,

the administrator is obliged to updatethe list on a regular basis. If property whichis legally owned by someone else otherthan the bankrupt is included in the list,the rightful owner may file an action forthe exclusion of said property (Vylučova-cia žaloba) against the administrator.

ADMINISTRATION OF THE PROPERTY

The administration of the bankruptcyassets is vested in the administrator whois bound by instructions and recommen-dations of the creditors’ committee (Ve-riteľský výbor), the secured creditors or thecompetent court and is required to admi-nister the property with professional care.

CONVERSION OF BANKRUPTCY

ASSETS INTO MONEY

After the bankruptcy assets are duly as-certained, the administrator attends totheir conversion into money. This meansthat all bankruptcy assets are convertedinto funds in order to satisfy the credi-tors, securing the cash of the bankrupt,receiving fulfilment from the bankrupt’smonetary receivables and payments re-lated to the transfer of the bankrupt’senterprise or part(s) thereof. The pur-pose of the conversion of the bank-ruptcy assets into money is to maximisethe proceeds in a short period of timeand keep expenses low. The manner ofconversion of property into money is sti-

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pulated by the Insolvency Act and readsas follows: (i) public tender; (ii) authori-zation of an auctioneer to sell the pro-perty; (iii) authorization of a securitiestrader to sell the property; (iv) organi-sing an auction, tendering procedure orother competition processes which leadto the sale of the property; and (v) otherappropriate manners. While convertingthe property into money, the administra-tor is bound by the instructions of thecreditors’ committee, the secured credi-tors or the competent court and mustproceed with professional care.

Creditors’ Role

Generally, creditors such as banks andother business partners as well as em-ployees play a key role in bankruptcy pro-ceedings in Slovakia. There are, however,merely two classes of creditors: securedand unsecured.

UNSECURED CREDITORS

Unsecured creditors are creditors whosereceivables against the bankrupt are notsecured by any security right and do notbelong to any other category of receiv-ables within bankruptcy proceedings. Un-secured creditors are satisfied from theproceeds from the sale of general assets.Their claims are enforced in bankruptcyproceedings by means of lodging a claim.

SECURED CREDITORS

Secured creditors are creditors whose re-ceivables against the bankrupt are secu-red by a security right. Their claims aresettled (to the ascertained extent) from theproceeds from the conversion of the se-parated assets (after deducting priorityclaims against the separated assets). If asecured receivable is not fully satisfied,the remaining part is settled as an unse-cured receivable. Secured creditors’ receiv-ables are enforced in bankruptcyproceedings by means of lodging a claim.

LODGING OF CLAIMS

A claim is lodged in one counterpart withthe administrator and in one counter-part with the court within 45 days of thedeclaration of the stage of bankruptcy.If a creditor delivers the claim to the ad-ministrator after this deadline has expi-red, the claim is taken into account butthe creditor may not exercise any votingright or other rights in connection withthe lodged claim. However, the right toproportionate satisfaction of the credi-tor is not affected.

Where a secured receivable is concerned,the security right is also duly specified ina timely manner and described in the claimdelivered to the administrator within aperiod of 45 days from the declaration ofbankruptcy, otherwise it will expire.

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A lodged receivable may be disputed(Popretá pohľadávka). The administratoror other creditors with lodged receivab-les may dispute another creditor’s lodgedclaims on legal grounds or due to enfor-ceability, amount, order, the existence ofa security right or the order of the secu-rity right. Each creditor has the right torequest determination of a disputed re-ceivable by a court decision.

In case the administrator acknowledgesthe claim and no other creditor contestsit, the claim is deemed acknowledgedand the creditor will be satisfied pro ratain the amount of the bankruptcy debtrepayment quota (this quota is usuallyrather low, e.g. 5 % or 8 % in bankruptcyproceedings).

CREDITORS’ BODIES

Meetings of creditors (Schôdza veriteľov)are convened during the bankruptcy inorder to identify the opinion of creditorswith lodged receivables, elect and removemembers of the creditors’ committeeand replace the administrator. Creditorsof acknowledged unsecured receivableselect the creditors’ committee at such ameeting of creditors. The first meeting ofcreditors is convened by the administra-tor within 55 days after the declarationof bankruptcy. Other meetings of credi-tors are convened by the administrator

on his own initiative or at the request ofthe court, the creditors’ committee orone or more creditors whose voting rightsconstitute more than 10 % of all votingrights.

PRIORITY CLAIMS

Priority claims (Pohľadávky proti pod-state) are receivables that arose after thedeclaration of bankruptcy and concernthe administration of the bankruptcy as-sets, the conversion of the property intomoney and the running of the bank-rupt’s business.

Priority claims are enforced by the admi-nistrator and will be settled from eithergeneral assets or separated assets on acontinual basis and in the order stipula-ted by the Insolvency Act. If the admi-nistrator is unable to settle receivables ofthe same order in full, he must settlethem on a pro rata basis.

SATISFACTION OF CREDITORS

Claimed receivables are settled by the ad-ministrator on the basis of a distributionplan (Rozvrh).

Unsecured receivables are settled fromthe distribution of general assets, whe-reas secured receivables are settled fromthe distribution of separated assets. If asecured receivable cannot be settled fully,

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the remaining part must be treated as anunsecured receivable. Unsecured receiv-ables are settled on a pro rata basis ac-cording to their mutual amounts.

Priority claims are satisfied preferenti-ally. Within 45 days of the expiry of theperiod for contesting priority claims, theadministrator draws up a distributionplan which has to be submitted to thecreditors’ committee and the secured cre-ditors for approval. If the competentbody (creditors’ committee and securedcreditors) does not approve the distribu-tion plan, the administrator subsequentlyhas to submit the plan to the court forits approval.

Based on the approved distribution plan,the administrator releases that part ofthe proceeds that is not disputed to thecreditors without undue delay. The partof the proceeds that is disputed is keptin custody by the administrator and mayonly be released to the creditors in accor-dance with the final decision of the court.


Generally, a creditor may set off (za-počítať) claims against counter-claims ofthe bankrupt after the opening of bank-ruptcy proceedings.

Pursuant to Slovakian law, a set-off ispossible if the claims are due and of thesame kind.

However, the Insolvency Act also desig-nates certain receivables that cannot beset off. For instance, a receivable of thebankrupt that arose after the declarationof bankruptcy may not be set off againsta receivable of a creditor that arose be-fore declaration of bankruptcy.


The Insolvency Act provides that trans-actions which unduly decrease the assetsof the debtor prior to the opening of in-solvency proceedings may be contestedif certain prerequisites are met. In thisregard, transactions which were enteredinto by the bankrupt and a third partyand which discriminate against othercreditors might be contested. Formally,the transaction in question would needto be contested by the administrator orby a creditor of a lodged receivable.

The general principles and prerequisitesfor contesting transactions are as fol-lows: (i) there is a transaction; (ii) thetransaction was entered into prior to theopening of the bankruptcy proceedings;(iii) the transaction unduly decreases theassets of the bankrupt; and (iv) the trans-action discriminates other creditors;

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provided however that (v) a specific con-testing provision of the Insolvency Actis fulfilled.

The claim for contesting a transactionmust be filed within one year of the de-claration of bankruptcy against the li-able party at court.


The insolvent debtor is obliged to file apetition on declaration of bankruptcywithin 30 days of the ascertainment ofits over-indebtedness. This obligation ap-plies only in the case of over-indebted-ness (however, the debtor may file apetition also in the case of illiquidity).The debtor’s statutory body or its mem-bers, as well as the debtor’s liquidator,also have to observe this obligation onbehalf of the debtor. If they fail to meetthis obligation, they have to pay a statu-torily stipulated contractual penaltywhich amounts to half of the statutorilystipulated minimum registered capital ofa public limited company. Any damageexceeding the amount of the contractualpenalty can also be claimed from thedebtor’s statutory body, its members orthe debtor’s liquidator.

The Slovakian Criminal Code (Trestnýzákon) also contains provisions in con-

nection with bankruptcy proceedings.The most important provisions are: (i)damage to a creditor, (ii) favouring of acreditor, (iii) machinations in connectionwith the bankruptcy and restructuringproceedings, and (iv) obstruction of bank-ruptcy and restructuring proceedings.


ROLE OF THE DEBTOR

When bankruptcy proceedings are ope-ned, the debtor generally loses its admi-nistration and disposition rights. Thedebtor remains the owner of the assets,but the assets form the so-called “bank-ruptcy assets” to be used to primarily sa-tisfy the creditors. The right to administerand dispose of the bankruptcy assets ge-nerally passes to the administrator.

Any acts taken by the bankrupt after theopening of bankruptcy proceedings thatreduce the bankruptcy assets are inef-fective towards the creditors.


AND EMPLOYEES

According to the Insolvency Act, the in-solvency administrator has the authori-sation to act on behalf of the bankruptin employment relationships once bank-ruptcy has been declared. This is theonly direct impact on employees in con-

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nection with the opening of insolvencyproceedings.

Further, the Slovakian Act No. 311/2001Coll. Labour Code, as amended, provi-des special termination rights that offeremployers the possibility to terminateemployment contracts in case the busi-ness is shut down. If only parts of thecompany are closed, solely employmentcontracts affected by the shutdown canbe terminated.

Employees may claim receivables arisingfrom their employment in bankruptcyproceedings. Claims of employees whichhave originated after the declaration ofbankruptcy and during the month in whichbankruptcy was declared are consideredpriority claims and are therefore subjectto preferential treatment and satisfaction.

If an employer becomes insolvent and isnot able to satisfy statutorily specified claims,such as wage compensation for holidaysof its employees, employees are entitledto guaranteed insurance benefit paid bythe Slovak Social Insurance Agency.


TERMINATION RIGHTS

The opening of bankruptcy proceedingshas different impacts on contracts whichdepend on the status of their fulfilment.

In case a contracting party has entirelyfulfilled its contractual obligations priorto the opening of bankruptcy procee-dings, but has not received the entireconsideration from the bankrupt, thecontracting party may withdraw fromthe contract. However, entitlements re-sulting from the withdrawal of the othercontracting party may solely be filed inthe bankruptcy proceedings as a claimof a contingent receivable. On the otherhand, in case the debtor has already ful-filled its obligations, the administratormay demand fulfilment of the contractby the other party or may withdrawfrom the contract.

Special provisions apply in case bothsides have not yet fulfilled each of theirobligations in their entirety. In such case,the administrator, as well as the othercontractual party, is entitled to withdrawfrom the contract. Entitlements of theother contracting party which resultfrom withdrawal may solely be filed inthe bankruptcy proceeding as a claim re-lating to a contingent receivable.

If the bankrupt concluded a contract sti-pulating an obligation to perform a conti-nuous or repeated activity or an obligationto refrain from a certain activity or tole-rate a certain activity before the declara-tion of bankruptcy, the administrator

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may terminate the contract by givingtwo months’ notice, unless a shorter pe-riod is stipulated by law or under the re-spective contract.

If the other contracting party is obliged toprovide fulfilment in advance under a con-tract concluded before bankruptcy is de-clared, it may withhold its fulfilment untilmutual fulfilment is provided or secured.


Pursuant to the Insolvency Act, it is ge-nerally possible to open restructuringproceedings instead of bankruptcy pro-ceedings. The proceedings are also con-ducted by an administrator. The maingoal of restructuring proceedings is toadopt a restructuring plan, thus avertingilliquidity or impending insolvency of adebtor by collective satisfaction of cre-ditors in a manner agreed in the re-structuring plan. It aims at keeping thedebtor’s business or at least part of thebusiness alive. The debtor’s business acti-vity continues under the strict supervi-sion of the administrator, the court andthe creditors’ bodies. For a successful re-structuring, a higher satisfaction of cre-ditors than in bankruptcy proceedings isexpected and required. Contrary tobankruptcy proceedings, the debtor is

only limited in its disposition rights re-garding its business activities, but thedisposition rights are not transferred tothe administrator.

RESTRUCTURING OPINION,

INITIATION OF RESTRUCTURING

PROCEEDINGS AND ITS EFFECTS

In case a debtor is illiquid or if insol-vency is impending, such debtor or itscreditors may authorise an administratorto draft a restructuring opinion (Reštruk-turalizačný posudok) for the purpose ofdetermining whether the prerequisites ofrestructuring are met. The administratorsubsequently inspects the financial andbusiness situation of the debtor’s busi-ness activity. In the restructuring opi-nion, the administrator has to give arecommendation on whether or not re-structuring is feasible. Generally spea-king, the administrator recommends therestructuring of a debtor if maintenanceof a substantial part of the debtor’s busi-ness is possible and if a higher satisfac-tion of creditors can be expected(compared to bankruptcy proceedings).

The petition for opening restructuringproceedings may be filed either by thedebtor itself or by a creditor. However,the creditor’s filing for opening of re-structuring proceedings requires the deb-tor’s consent which must be attached to

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the petition. The petition must be filedwith the competent court. Together withthe petition, a restructuring opinion hasto be submitted which recommends a re-structuring of the debtor. The opinionmay not be older than 30 days.

Should the filed petition be perfect, thecourt issues a resolution on the initiationof restructuring proceedings within 15 daysof delivery of the petition. The resolutionis published in the Commercial Bulletinwithout undue delay. By publishing theresolution in the Commercial Bulletin,the restructuring proceeding is initiated.

The initiation of restructuring procee-dings has the following effects: (i) thedebtor is obliged to limit the performanceof its activity to common legal acts; otheracts are subject to the consent of the ad-ministrator who drew up the opinion; (ii)no enforcement proceedings over pro-perty belonging to the debtor may be ini-tiated in respect of receivables that couldbe claimed in the restructuring and anypending enforcement proceedings aresuspended; (iii) any exercise of a securityright over property belonging to the deb-tor may not be initiated or continued inrespect of a secured receivable that couldbe enforced in the restructuring; (iv) con-tracting parties may not terminate con-tracts concluded with the debtor on the

grounds that the debtor defaulted in theperformance of its obligations undercontracts concluded before restructuringproceedings were initiated; (v) con-tractual agreements allowing the othercontractual party to terminate the con-tract concluded with the debtor or with-draw from such contract on the groundsof restructuring proceedings or bank-ruptcy proceedings are ineffective; (vi) areceivable that could be claimed duringrestructuring may not be set off; and (vii)no decision on a merger or dissolutionof the debtor may be made or enteredinto the Commercial Register. The ef-fects of the initiation of restructuringproceedings listed under (ii) to (vi) aboveform the so-called “debtor’s temporaryprotection against creditors”.

RESTRUCTURING PERMIT

AND ITS EFFECTS

The competent court decides on whetherto grant permission for restructuring wit-hin 30 days of the initiation of restructu-ring proceedings.

The court permits the restructuring if re-structuring is recommended in the re-structuring opinion and if such opinionis drawn up in accordance with statutoryprovisions and all conditions for the re-commendation of restructuring are met.

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Permission is granted by the court in theform of a resolution published in theCommercial Bulletin and by means ofwhich the restructuring, as the main stageof restructuring proceedings, is initiated.

In its resolution, the court (i) appointsan administrator (the administrator whodrew up the restructuring opinion); (ii)calls for creditors to submit their claimsfor receivables within the statutory pe-riod of 30 days, and (iii) determines thescope of legal acts that are to be subjectto the administrator’s consent in thecourse of the restructuring.

The initiation of restructuring has thefollowing effects: (i) the debtor may per-form legal acts stipulated in the court’sresolution only with the administrator’sconsent; (ii) enforcement proceedingsover property belonging to the debtorwhich have been suspended are termina-ted; and (iii) court and arbitration pro-ceedings on receivables that could beclaimed in the restructuring are suspen-ded. Receivables which are not claimedin restructuring are not forfeit; however,they cannot be judicially enforced.

LODGING OF CLAIMS FOR RECEIVAB-

LES AND RIGHTS OF CREDITORS

Claims have to be lodged in one coun-terpart with the administrator within 30

days of the day on which restructuringwas permitted. Any claim lodged afterthis may not be taken into account.

Lodged claims may be disputed solely bythe administrator within 30 days of thelapse of the period for lodging theclaims. However, the debtor or creditorswith lodged claims are entitled to sug-gest to the administrator that a claimedreceivable should be disputed. The admi-nistrator has to inform the respectivecreditors of the fact that their claimshave been contested. Within 30 days ofthe end of the period for disputing receiv-ables, the creditor of a contested receiva-ble may demand the approval of its claimfrom the court by filing a respective action.

Creditors who claimed their receivablesin the restructuring can exercise theirrights through creditors’ bodies, i.e. mee-ting of creditors (Schôdza veriteľov) andthe creditors’ committee (Veriteľský výbor).

The purpose of the meeting of creditorsis to ascertain the opinion of the credi-tors and elect a creditors’ committee. Itis convened and presided over by the ad-ministrator who is further supervised bythe court. The administrator convenesthe meeting by publishing an invitationin the Commercial Bulletin within 30days of the restructuring permit. All cre-

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ditors who lodged their receivables in therestructuring are entitled to participatein the meeting of creditors.

The creditors’ committee has three orfive members, comprising both securedand unsecured creditors.

SUPERVISION BY THE ADMINIS-

TRATOR AND THE COURT DURING

RESTRUCTURING

The administrator supervises the deb-tor’s business activity during restructu-ring so that the debtor does not reducethe value of its property and does notobstruct the successful completion ofthe restructuring. On the other hand, thecourt supervises the administrator aswell as the debtor and creditor’s bodies.

RESTRUCTURING PLAN

The restructuring plan is a document sti-pulating the creation, change and expiryof the rights and obligations of the par-ties stated therein as well as the extentand manner of satisfaction of the credi-tors of claimed receivables or sharehol-ders of the debtor.

It is drawn up by the debtor (if the peti-tion for restructuring permit was filed bythe debtor) or by the administrator (ifthe petition was filed by a creditor). Theplan is divided into a descriptive part

(Opisná časť) and a binding part (Zá-väzná časť).

The binding part of the plan shall spe-cify all rights and obligations that – ac-cording to the plan – are to arise, changeor expire with regard to the participantsof the plan (Účastníci plánu). For thepurpose of voting on the adoption ofthe plan, the binding part shall containa separation of creditors into severalgroups: (i) a group for secured receivab-les; (ii) a group for unsecured receivables;(iii) a group for proprietary rights of thedebtor’s shareholders (if the plan assu-mes a change in the proprietary rights ofdebtor’s shareholders, the transfer of thedebtor’s enterprise or a merger or disso-lution of the debtor); and (iv) a groupfor receivables not affected by the plan.

Receivables and proprietary rights of thedebtor’s shareholders which are classi-fied in the same group shall be settled tothe same degree and in the same manner.

The final draft of the restructuring planshall be submitted within 90 days fromthe issuing of the restructuring permit.

PLAN APPROVAL

The restructuring plan shall be approvedon two stages: (i) preliminary approvalby the creditors’ committee; and (ii) ap-

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proval by the approval meeting (Schvaľ-ovacia schôdza).

If the creditors’ committee rejects thesubmitted draft of the plan or does notapprove within statutory periods, the ad-ministrator shall petition the court to declare bankruptcy. If, however, the cre-ditors’ committee approves the plan, theadministrator has to convene the appro-val meeting.

The approval meeting is presided over bythe administrator who is supervised bythe court.

The adoption of the plan by the appro-val meeting requires that (i) each groupfor secured receivables votes for theadoption of the plan; (ii) in each groupfor unsecured receivables, an absolutemajority of voting creditors votes for theadoption of the plan; (iii) in each groupfor the proprietary rights of sharehol-ders, an absolute majority of sharehol-ders votes for the adoption of the plan;and (iv) an absolute majority of votes ofthe creditors present votes for the adop-tion of the plan. The group of receivab-les which are not affected by the planshall be deemed to consent to the plan.

CONFIRMATION OF THE PLAN

BY THE COURT

The approved plan shall be subsequentlyconfirmed by resolution of the court.If the required majority is not reached inone or more of the groups, the plan sub-mitter may demand that the court sub-stitutes the approval within such group,provided that the conditions stipulatedby the Insolvency Act are fulfilled. SinceApril 2015, approval of the group forunsecured receivables cannot be substi-tuted by court if the creditors of thisgroup are satisfied within a period excee-ding 5 years.

If there are no reasons to reject the plan,the court must confirm the submittedplan by resolution. In this resolution, thecourt also decides on the completion ofrestructuring. The resolution is publis-hed without undue delay in the Com-mercial Bulletin.

By publishing the resolution, (i) the planbecomes effective in relation to all parti-cipants, including creditors who did notvote for its approval; (ii) the effects of therestructuring are terminated; (iii) thesuspended court and arbitration procee-dings are terminated; and (iv) creditorsof receivables not claimed in the restructu-ring within the statutory period cannotjudicially enforce their receivables.

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RECENT AMENDMENT OF THE

SLOVAK INSOLVENCY ACT RELATING

TO RESTRUCTURING

In April 2015, an important amendmentto the Insolvency Act was adopted. Themost important changes are two new re-gimes relating to creditors’ claims andthe prohibition of distribution of profitand own funds. Following the publica-tion of the court’s decision on the com-pletion of restructuring, the debtor maynot distribute its profit or own funds toits members before all submitted andacknowledged claims of unsecured cre-ditors are satisfied. In other words, it mayonly distribute them in case of full (i.e.100 %) satisfaction of all submitted andacknowledged claims. In this regard, theamendment has introduced two regimesrelating to claims.

At least 50 % of the amount of submit-ted and acknowledged claims must bemaintained in full and can be enforcedby the creditor by means of a standardenforcement procedure directly after dueand complete fulfilment of the restructu-ring plan. This means that in case the re-structuring plan provides for a quotalower than 50 % (e.g. 30 %), the residualamount of the claim up to 50 % (i.e. 20%) can be enforced directly after fulfil-ment of the restructuring plan. Until

such time as or until the court’s ruling onthe ineffectiveness of the plan, this resi-dual amount of the claim is unenforce-able. The legal title for such enforcementprocedure is an excerpt from the list ofsubmitted and acknowledged claims de-posited with the restructuring court.

According to the new regulation, theother 50 % of a submitted and ack-nowledged claim should be consideredas another proprietary right. In case therestructured debtor generates profitswhich exceeds the amount needed formaintaining the operation (of majorparts) of its enterprise, the other proprie-tary right, as stated in the previous sen-tence, should be satisfied before theprofits are distributed to a shareholder.Similar to the residual amount of theclaim up to 50 %, the other proprietaryright is also unenforceable until com-plete fulfilment of the plan or until thecourt ruling on the ineffectiveness of theplan. The main difference between theresidual amount of 50 % of the claimand the other proprietary right is thatthe latter can only be satisfied from fu-ture profits of the restructured debtor,whereas the first half of the claim can besatisfied from any property of the re-structured debtor.

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In case a debtor infringes the prohibitionof distribution of profits and own fundsbefore satisfaction of all claims, the re-structuring plan becomes ineffective exlege. Creditors are entitled to file a peti-tion for declaring the infringement ofthe prohibition of distribution of profitsand funds. If the restructured debtor ge-nerates profit, but does not distribute it toits members, the creditors are entitled tofile a petition seeking additional satisf-action of their claims from the profit sti-pulated in the debtor’s financialstatements (except for the part of the pro-fit that the debtor needs to maintain theoperation [of major parts] of its enterprise).

DEBT EQUITY SWAP

Pursuant to the recent amendment ofthe Insolvency Act, the possibility of aswap of unsecured creditors’ receivablesfor equity participation in the debtor is amandatory part of the restructuring plan.

INEFFECTIVENESS OF THE PLAN

A participant of the plan who votedagainst the adoption of the plan andfurther also raised a justified objectionagainst the plan has the right to demandthat the court determines the plan asbeing ineffective in relation to this credi-tor if certain conditions stipulated by theSlovakian Insolvency Act are fulfilled.

If the court determines the plan inef-fective in relation to the creditor, the deb-tor is obliged to settle the originalreceivable of the creditor to the extent towhich the receivable was claimed and as-certained within the original maturity.

If the plan is ineffective towards a sha-reholder of the debtor, then the debtoris obliged to pay the shareholder thevalue of the performance that wouldcorrespond to their participation in theliquidation balance of the debtor at thetime the plan was confirmed by the court.

SUPERVISORY ADMINISTRATION

After restructuring is complete, a super-visory administration may be imposed inthe binding part of the restructuringplan. The supervisory administration isoptional and is performed by a supervi-sory administrator until the completefulfilment of the plan.


Both bankruptcy and restructuring pro-ceedings are terminated by a formal reso-lution of the insolvency court. Bankruptcyproceedings are terminated after the dis-tribution of all assets, i.e. the liquidationof the debtor.

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Restructuring proceedings are formallyclosed after the restructuring plan isadopted by the creditors and confirmedby the court. The debtor then has theduty to fulfil the restructuring plan wit-hin the time and period stipulated in therestructuring plan. If payments are notmade on time, the insolvency procee-dings will be reopened.

If it becomes apparent during insolvencyproceedings that the assets are not suffi-cient to cover the costs of the procee-dings, the proceedings are terminateddue to insufficient assets.


According to the EC Regulation No. 1346/2000, insolvency proceedings in otherMember States of the European Unionare recognised in Slovakia.

In case the EC Regulation is not appli-cable, the Slovakian Insolvency Act con-tains provisions referring to the recognitionof proceedings in third countries. Insol-vency proceedings and their impact aregenerally recognised in Slovakia in thosecases where (i) the main centre of interestof a debtor is located in another country,and (ii) the proceedings opened abroad areoverall comparable in their material aspectsto Slovakian insolvency proceedings.

Slovak Republic


JUDr. Jozef Bannert Partner – Slovak [email protected] Tel: +421 2 2064 8580

JUDr. Radka Skapcová Senior Associate – Slovak [email protected]: +421 2 2064 8580

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Documents

CHSH Guide - CERHA HEMPEL · The opening of insolvency proceedings requires the existence of certain assets to cover the main costs for the insolvency proceedings. In practice, this