What Does the ZFPPIPP-H Amendment Bring?

What Does the ZFPPIPP-H Amendment Bring?

Author: Lenart Kmetič

After more than two years of coordination, the National Assembly of the Republic of Slovenia on 20 September 2023 finally adopted the ZFPPIPP‑H amendment to the Financial Operations, Insolvency Proceedings, and Compulsory Dissolution Act (ZFPPIPP). The preparation of the amendment began in 2020 and was initially aimed at transposing the Directive on restructuring and insolvency[1] into Slovenian law. However, due to decisions by the Constitutional Court of the Republic of Slovenia, which declared certain provisions of the law unconstitutional since the last ZFPPIPP amendment in 2016, and numerous criticisms of the existing law by legal experts, ZFPPIPP‑H now addresses several additional issues that exceed the requirements of the Directive. Despite facing criticism from legal experts, who suggested a comprehensive overhaul of insolvency legislation, the Ministry, under the pressure of the deadline for transposing the Restructuring and Insolvency Directive expiring on 17 July 2021, persisted with its original proposal, which underwent only minor changes during the legislative process.

The amendment addresses various areas, from introducing a new judicial restructuring procedure – to address imminent insolvency and the obligations of management in the event of impending insolvency – to the introduction of electronic auctions modelled after enforcement proceedings.

Imminent Insolvency and Judicial Restructuring Procedure for Preventing Imminent Insolvency

As the name suggests, the Directive on restructuring and insolvency was adopted to provide companies and entrepreneurs facing financial difficulties, but capable of survival, with access to effective national frameworks for preventive restructuring that allow them to continue their operations. Despite already introducing a preventive restructuring procedure in line with EU recommendations in 2014, Slovenia decided to introduce a new procedure called the judicial restructuring procedure for preventing imminent insolvency. Its purpose is to enable financial restructuring based on a concluded compulsory settlement, which shall eliminate the causes that could lead the debtor into insolvency. This procedure is based on and conducted in accordance with the provisions governing the compulsory settlement procedure, with some adjustments. It remains to be seen whether this procedure will more effectively address the issue of timely restructuring of companies in distress, compared to the existing preventive restructuring procedure, which has been used in only 13 cases since its introduction in 2014.

With the introduction of this new procedure, the amendment also introduces the concept of imminent insolvency, defined in the new Article 13.a as a situation likely to lead to the debtor’s insolvency within one year. Given that this definition follows entirely the existing assumption for initiating the preventive restructuring procedure under Article 44d of ZFPPIPP, it raises questions about the suitability of addressing essentially the same financial situation with two separate procedures.

Key Contracts of the Debtor

In the spirit of providing the best opportunities for the successful restructuring of debtors, the amendment also addresses situations where a debtor requires the cooperation of key suppliers for its continued operations. To this end, the amendment introduces the concept of key contracts of the debtor in the new Article 24.c. These are defined as mutually unfulfilled bilateral contracts necessary for the debtor’s seamless ongoing operations (such as the supply of energy, water, and telecommunications services), including contracts regarding supplies that, if terminated, would halt the debtor’s activities. These contracts cannot be terminated or withheld in individual cases, provided that the debtor regularly fulfils obligations arising after the start of the appropriate procedure.

Expansion of Management’s responsibilities

Existing provisions of ZFPPIPP already require company management to regularly monitor the solvency and liquidity of companies and take appropriate action when the company becomes insolvent. The amendment now extends such management’s responsibilities to the period before insolvency occurs. It requires company management and other corporate bodies to continuously monitor developments that could jeopardize the company’s continued existence in situations where insolvency is imminent but has not yet occurred. In such situations, they must act to avoid unequal treatment of creditors, consider the interests of all stakeholders whose interests may be affected, and avoid actions that would jeopardize or reduce the company’s assets or otherwise threaten its ability to survive.

Despite the expansion of management’s responsibilities to the period before insolvency, the amendment notably removes the previous Article 35 of ZFPPIPP, which required management to prepare a report on financial restructuring measures in the event of insolvency.

Abolition of the Simplified Compulsory Settlement Procedure

In light of numerous scandals that have marked simplified compulsory settlement procedures in the past, the legislator has decided to abolish this procedure and replace it with special rules for compulsory settlements for small businesses. This still allows micro companies and entrepreneurs who qualify as a micro company to restructure effectively but under increased judicial oversight, as the procedure is now conducted in accordance with the provisions otherwise applicable to compulsory settlements (with some exceptions). At the same time, the possibility of such restructuring is limited to debtors whose debts do not exceed EUR 700,000.

Possibility of Revision

In accordance with the amended Article 121 of ZFPPIPP, it will now be possible to propose revisions (i.e., a type of extraordinary legal remedies decided upon by the Supreme Court) in insolvency proceedings, but only against rulings issued at the second instance that either reject a proposal to initiate insolvency proceedings, terminate bankruptcy proceedings without distribution to creditors, grant an objection to discharge of debt or reject a proposal for debt discharge.

Change in the composition of Creditors’ Committees

The amendment also changes the composition of creditors’ committees. These will continue to consist of between 3 and 11 members, however at least one member must now be a creditor holding a preferred claim, unless there is no proposal for the election of such a creditor.

Reimbursement of the advance for bankruptcy costs by members of management

The amendment retains the possibility of advancing costs for the bankruptcy proceedings from the court’s account. However, in cases where the value of the realized bankruptcy estate is insufficient to repay the advanced amount, the amendment introduces an obligation for individuals who were members of the company’s management in the two years prior to the commencement of bankruptcy proceedings to cover the bankruptcy costs. An individual member of management can be exempted from this liability if they can demonstrate that they could not have influenced the occurrence of these circumstances.

Prolongation of the rebuttable period for debtor’s transactions

Following the prolongation of the rebuttable period in personal bankruptcy proceedings introduced by the previous ZFPPIPP amendment, the ZFPPIPP‑H amendment also prolongs the rebuttable period in bankruptcy proceedings for legal entities. In accordance with the new second paragraph of Article 269 of ZFPPIPP, legal transactions or other legal acts carried out by the bankruptcy debtor before the rebuttable period may also be challenged if the party challenging such a legal transaction or legal act proves that, at the time when the transaction was concluded or the act was carried out, the bankruptcy debtor was already insolvent or that the transaction or act resulted in insolvency.

Streamlining procedures for the sale and purchase of debtors’ assets

The sale of assets via online auctions, successfully implemented in enforcement proceedings, is now extended to insolvency proceedings.

Additionally, the amendment introduces a new Article 339.a, addressing the financing of the purchase price for the assets of the debtor by a loan. While the previous regulation practically prevented financing the purchase through a loan, the new regulation is expected to enable access to sale procedures for individuals seeking to finance the purchase with a loan.

Shortening the probation period in personal bankruptcy proceedings

In line with the requirements of the Directive on restructuring and insolvency, the maximum duration of the probation period in personal bankruptcy proceedings is shortened. It must now be no less than one year (except in specially defined cases) and no more than three years (previously five years).

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In summary, with increasing economic and financial uncertainty, there are high expectations for the solutions implemented by the ZFPPIPP‑H amendment, particularly due to the introduction of the new judicial restructuring procedure for preventing imminent insolvency. However, whether these expectations will be justified remains an open question, one that practice will have to answer as it develops under these new provisions

[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.