Temporary Protection of Entrepreneurs in Financial Difficulties
Who can apply for temporary protection, for how long this protection can be granted, what are the legal effects and duties for the applicant and what does the application process look like? You will find the answers to all these questions below.
The ongoing pandemic situation has caused considerable financial difficulties for many entrepreneurs, and the legislator seeks to provide protection through the institute of temporary protection provided for by the new Act no. 421/2020 Coll. (SR) on Temporary Protection of Entrepreneurs in Financial Difficulties („Act no. 421/2020 Coll.“). The Act no. 421/2020 Coll. entered into force on 1 January 2021 and follows up on the time-limited legal regulation of temporary protection of entrepreneurs adopted during the first wave of the pandemic in Act no. 62/2020 Coll. on Certain Emergency Measures in Connection to the Spread of the Dangerous Contagious Human Disease COVID-19 and in the Judiciary amending certain laws.
The aim of temporary protection according to Section 1 of the Act no. 421/2020 Coll. is the creation of a time-limited framework for protection against creditors and instruments to support entrepreneurs in financial difficulties, which should enable them to continue their business and thus prevent, in particular, job losses, know-how and a higher level of satisfaction of creditors' claims.
In our article, we have prepared for you a summary of the new legal regulation, focusing in particular on the beneficiaries of the temporary protection, its duration, legal effects and the rights and duties of entrepreneurs under the temporary protection.
An entrepreneur who has his registered office or place of business in the territory of the Slovak Republic is entitled to apply for the temporary protection. In comparison with the previous legal regulation, the law does not stipulate other qualitative preconditions of the applicant (e.g. the commencement date of a trade license).
Duration of Temporary Protection and its Extension
Temporary protection is granted for a period of three months, while the entrepreneur can apply for an extension of temporary protection for another three months.
Legal Effects of Temporary Protection of Entrepreneurs
Temporary protection provides the entrepreneur with the following benefits:
- it is not possible to initiate insolvency proceeding against entrepreneur due to his insolvency, i.e. the so-called creditor's petition for the insolvency proceeding;
- entrepreneur is not obliged to file the so-called debtor's petition for the insolvency proceeding (including other obligors);
- it is not possible to seize his business, thing, right or other asset for receivable incurred before temporary protection;
- the exercise of a security right (collateral) relating to the enterprise, thing, right or other asset belonging to the enterprise cannot be commenced against entrepreneur; nor to exercise such a security right (this also applies to a third party who is not a creditor);
- it is not possible to set off related receivable against entrepreneur incurred before temporary protection towards receivable incurred after the temporary protection was granted;
- the other contracting party may not withdraw from the contract or refuse performance under the contract, due to the delay of the entrepreneur under temporary protection, incurred before the temporary protection was granted; and
- periods for exercise of the right against entrepreneur are suspended during the temporary protection, including the periods for exercise of claims from the opposed legal acts.
Duties of the Entrepreneur under Temporary Protection
The entrepreneur under the temporary protection has in particular following duties:
- is obliged to be registered in the register of public sector partners;
- is obliged to pay liabilities directly related to the common business activity and to performances necessary to maintain the operation of the enterprise, incurred after the temporary protection was granted, prior the previously due liabilities and preferably to non-related creditors;
- is obliged to give priority to the common interest of creditors over its own interests or those of others; in particular, the entrepreneur may not distribute profits, other own resources or repay a loan or similar performance which corresponds economically to the loan to which it has committed itself to a related party before the temporary protection was granted;
- must refrain from disposing of the assets of the enterprise and of assets which may belong to it, if there would be a substantial change in the composition, use or destination of these assets, or their non-negligible reduction, or if it is an act outside the common business activity;
- must pursue the above duties also in the persons controlled by the entrepreneur; and
- the above duties also apply to the statutory representatives from the moment, the entrepreneur has begun negotiations with creditors to agree to grant temporary protection.
Jurisdiction to grant the temporary protection is determined by the registered office or place of business of the entrepreneur at the time of submitting the application for temporary protection.
The following courts have jurisdiction in the temporary protection judicial proceeding:
- District court Trnava for the district of Regional court in Trnava and for the district of Regional Court in Bratislava;
- District court Žilina for the district of Regional court in Žilina and for the district of Regional court in Trenčín;
- District court Banská Bystrica for the district of Regional court in Banská Bystrica and for the district of Regional court in Nitra; and
- District court Prešov for the district of Regional court in Prešov and for the district of Regional court in Košice.
An entitled applicant may apply for the temporary protection through the electronic form sent to the electronic mailbox of the competent court.
The following compulsory annexes must be attached to the application:
- written consent of creditors not older than 30 days before the application is submitted;
- a list of the entrepreneur's property together with the designation of the burdens on such property;
- a list of the entrepreneur's liabilities together with the designation of the creditors of related receivables and the designation of the secured creditors;
- list of related persons of the entrepreneur; and
- interim financial statements.
In this application, the entrepreneur is obliged to declare that:
- it is entitled to submit an application and pursues the purpose set out in Section 1 of the Act no. 421/2020 Coll.
- over one half of its creditors agree with temporary protection;
- it is not aware of the reasons for his cancellation, if the applicant is a legal entity;
- it is not obliged to file petition for initiation of insolvency proceeding;
- it is not affected by the effects of the commencement of insolvency proceedings, the declaration of bankruptcy, the commencement of restructuring proceeding or the authorization of restructuring proceeding;
- there are no enforcement proceedings (exekučné konanie) or similar enforcement proceedings ordered or commenced for satisfaction of the claim incurred from the operation of the enterprise;
- the exercise of the lien has not commenced in relation to its enterprise, thing, right or other asset belonging to the enterprise;
- it has not distributed a profit or other own resources in the last 12 months prior to the application;
- it has not taken measures to threaten the financial stability of his business in the last 12 months prior to the application;
- it keeps proper accounting;
- it has not been under temporary protection for the last 48 months; and
- it is registered in the register of public sector partners, if the applicant is a legal entity.
Revocation of Temporary Protection
The court which has decided to grant temporary protection may, on its own initiative or on the basis of qualified petition, decide to revoke the temporary protection.
A qualified petition can be filed by anyone (e.g. a creditor), if there were no preconditions for granting of temporary protection, the preconditions for its granting have ceased or the entrepreneur under temporary protection has breached the duties arising from temporary protection.
Termination of Temporary Protection
The legal effects of the temporary protection of entrepreneurs terminate on the day following the day of publication of the information on its termination in the Commercial Gazette.