Slovakia: A company is in crisis. What should the statutory body do?

The amendment of the Slovak Commercial Code of 2016 introduced into Slovak law a new legal concept: a company in crisis. Nowadays, in the current economic circumstances characterised by decline in sales and capital shortfalls, this concept comes again into focus of many companies. 

So, when is a company deemed to be in crisis? What are the consequences? And what should companies – and primarily their statutory bodies – do to emerge from the crisis?

When is a company in crisis?

A company is in crisis if it is bankrupt or at risk of becoming bankrupt. A company is bankrupt if it is over-indebted or insolvent. In most cases, such over-indebtedness or insolvency leads to bankruptcy proceedings or restructuring. 

When bankruptcy is imminent, measures must be taken to prevent the company from becoming bankrupt. It is important to monitor the ratio of the company’s equity to its liabilities as, under statutory provisions, a company is in crisis when the ratio is less than 8 to 100.

What does the risk of becoming bankrupt imply?

A company in crisis must not return loans and similar payments received by a company in crisis from its shareholders, members or affiliated persons (e.g. intra-group loans) while it is still in crisis. The law specifically refers to these as performance replacing a company’s own resources. 

If the company, in breach of the above prohibition, returns such performance replacing a company’s own resources to the respective creditors, such performance must be re-paid to the company, whereby the statutory bodies are obliged to demand return of the payments. 

Moreover, the law regulates specifically a situation when the person the financial performance of which would be considered performance replacing company’s own resources is, at the same time, a guarantor or pledgor of the company’s liabilities. In such a case, the company’s creditors can satisfy their claims from the guarantee or pledge without having to exercise their rights towards the company first. 

What steps should statutory bodies take? And what should they watch out for? 

First of all, it is critical that all statutory bodies regularly monitor the company’s financial standing, its assets and liabilities. If they find out that the company is in crisis, they must immediately implement measures aimed at overcoming it. They also must make sure that, during the life of crisis, the company does not return performance replacing company’s own resources to its shareholders, members or other affiliated persons.

If it does indeed return such payments, the company’s statutory bodies, carrying out their functions at the time the prohibited return took place, are liable for repayment back to the company. The same applies to members of statutory bodies who carried out their functions in the period in which the company did not claim the repayment. All members of statutory bodies should be aware of a significant negative financial impact of not complying with the statutory regulations. 

How to emerge from the crisis?

There are various ways in which an imminent bankruptcy can be prevented; the ones most commonly applied include capital increase, value reduction of the company’s liabilities, and debt-to-equity conversion. 

The overview above provides only a brief introduction to the legal concept of a company in crisis. The statutory regulation is much more complex and its application requires detailed examination of each case. We are ready to assist you in examining whether your company is at a risk of becoming bankrupt, and are prepared to provide you with a set of measures to overcome such a crisis.