Navigating through the new additions to the Slovenian insolvency framework

The long-awaited amendment "H" of the Slovenian Financial Operations, Insolvency Proceedings and Compulsory Dissolution Act (the "Act") entered into force on 1 November 2023. The new provisions complete the transposition of Directive 2019/1023,[1] introducing three crucial sets of changes to the Slovenian insolvency and restructuring legislation.

1. Judicial restructuring procedure to remedy impending insolvency

• The legislator added another procedure to the Slovenian preventive restructuring framework. The new (court-supervised) procedure provides an expanded toolbox (for example, debt to equity swaps and creation of common security pools – in addition to haircut and maturity extension) to borrowers who are not yet insolvent but are likely to become insolvent within a year ("impending insolvency").

• This new procedure aims for financial measures to be taken to eliminate the causes of potential insolvency with more measures at creditors' disposal in comparison to the existing preventive restructuring and without the obligation to publicly proclaim the state of insolvency or impending insolvency.

• The new procedure also includes a four-month standstill rule for all enforcement and security proceedings, which may even be extended upon the debtor's proposal based on the progress made in financial restructuring (the maximum standstill period being 12 months).

• The provisions regulating the new judicial restructuring procedure will enter into force on 1 January 2025.

2. Additions and modifications to existing proceedings

• Essential contracts of the debtor: The Act established a concept of essential contracts of the debtor, preventing counterparties from terminating or altering contracts to the detriment of the distressed debtor during judicial restructuring or compulsory settlement solely by virtue of the debtor's financial distress. The concept of essential contracts is limited to mutually unfulfilled bilateral (executory) contracts for the continuation of day-to-day operations, such as those related to energy, water, telecommunications and other utilities supply. For debts incurred after the opening of the aforementioned proceedings, the debtor is not entitled to protection under essential contracts provisions.

• Management's obligations: To enhance the efficiency of insolvency proceedings, the Act introduces changes to the obligations of the management upon the occurrence of financial distress. The previous iteration's complex process for determining the insolvency filing deadline is streamlined in the amendment. Now the management must promptly file for bankruptcy within one month from the onset of insolvency[2] or, if the insolvency is the consequence of a pandemic, natural disaster or emergency, within three months from the onset of insolvency.

• Composition of the creditors' committee: To ensure fair representation, the Act introduces a slight yet significant change to the composition of the creditors' committee, specifying the number of committee members and requiring at least one representative of creditors with priority claims. The committee now also has the right to review the books and documentation obtained by the administrator from the debtor, though this request can be denied for confidentiality reasons or due to potential detriment to the debtor.

• Prohibition of distributing profits: To protect creditors in compulsory settlement, profit distribution, share capital decreases and return of subsequent shareholder contributions are prohibited until all creditors affected by the compulsory settlement are repaid.

3. Reconstruction of simplified compulsory settlement proceedings 

• The chapter "special rules on compulsory settlement for small enterprises" replaces simplified compulsory settlement proceedings due to misuse issues.

• Some highly publicised affairs and dissatisfaction among creditors led to a new procedure with more restrictions, specifically targeting the size of eligible companies.

• Limited to debtors meeting criteria for micro companies under Slovenian corporate legislation and individual entrepreneurs with total liabilities not exceeding EUR 700,000.

• The special rules provide a less strict approach than ordinary compulsory settlement and impose fewer obligations on debtors for reports and documentation by third parties. The provisions on the creditors' committee do not apply.

They say patience is the best remedy, and the same holds true for the legislative framework of insolvency. After patiently waiting for amendment "H" to be adopted, we are now patiently observing and helping to shape the implementation of these novelties in legal practice.

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[1] Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132.

[2] The Act defines insolvency as a situation where the debtor (i) within an extended period of time is not able to settle all of their liabilities falling due within such period of time (illiquidity), or (ii) cannot settle its liabilities in the longer term (e.g. the value of its assets is lower than the value of its liabilities, or the company's losses add up to half of the company's registered capital and those losses cannot be covered by profits or reserves – over-indebtedness).