21. 5. 2020

ZIUZEOP-A and changes to the insolvency landscape

Due to the consequences of the COVID-19 pandemic, the Act Determining the Intervention Measures to Contain the COVID-19 Epidemic and Mitigate its Consequences for Citizens and the Economy (ZIUZEOP) introduced certain changes related to the obligations of managers in the event of company insolvency. The changes relate mainly to the extension of deadlines for the performance of legally obligatory acts, but due to additional conditions, the extension of these deadlines must also be assessed with caution.

With the amendment ZIUZEOP-A, the provision of Article 95 of the ZIUZEOP, which introduces an additional presumption of insolvency, thus supplementing other presumptions from Article 14 of the ZFPPIPP, remains unchanged. As an additional incontrovertible presumption that the company is insolvent, the Act includes situations where a company has been late in paying employee salaries and contributions, more than one month after receiving refunds of paid compensation of salaries and contributions under the intervention legislation. This presumption of insolvency remains valid for four months after the termination of the measures under the ZIUZEOP. The purpose of that provision is to ensure that employers actually use the salary and contribution subsidies to pay wages and contributions within one month at the latest, and not for any other purpose.

The provision of the second paragraph of Article 96 of the ZFPPIPP also remains unchanged, which stipulates that if a company's bodies cannot carry out the acts and measures referred to in Articles 36 and 37 of the ZFPPIPP in time due to objective consequences of the pandemic being declared, they must start implementing them no later than one month after the measures under the ZIUZEOP have been terminated (given that the pandemic has been declared over, the measures under ZIUZEOP will end on 31 May 2020, at which time the foregoing one-month period will also begin to run). This makes it possible to delay the taking certain actions envisaged by the management in the report on financial restructuring measures, that relate mainly to the convening of the shareholders assembly, which will decide on the increase of share capital and publish a call for subscription and payment of shares based on share capital increase.

The changes are introduced in Article 96 of the ZIUZEOP, which extends the deadlines for the performance of legally obligatory acts from the ZFPPIPP at the time of the onset of insolvency. Namely, according to the new first paragraph of Article 96 of the ZFPPIPP, the management is not obliged to file a bankruptcy petition or compulsory settlement petition referred to in Articles 38 and 39 of the ZFPPIPP if the company's insolvency is due to the pandemic. The law also stipulates that this measure applies from the pandemic declaration date and for three more months after the lifting of measures in accordance with Article 20 of the ZIUZEOP, unless there is no prospect of the company surviving insolvency.

In assessing whether the insolvency of a company is the result of the pandemic, it is necessary to rely on the third paragraph of Article 96 of the ZIUZEOP, which stipulates that the insolvency of a company is considered a consequence of the pandemic declaration if (i) a governmental, ministerial, or municipal ordinance or act stipulates that the activity carried on by the company is to be temporarily prohibited or substantially restricted due to the pandemic, or (ii) if the company was not insolvent as at 31 December 2019. These are rebuttable presumptions, which means that it is possible to prove that, despite the fulfillment of these conditions, the insolvency of the company was not the result of the pandemic. At the same time, it is also possible that the company's insolvency was the result of the pandemic declaration, even if none of these conditions were met - which the management will have to prove separately.

In the event that the company's insolvency is the result of the pandemic declaration, the obligation to file a compulsory settlement petition or bankruptcy petition will be postponed for three months after the termination of ZIUZEOP measures (until 31 August 2020). However, that extension does not apply in the event that there is no prospect of the company surviving insolvency.

In our opinion, in assessing whether the company is likely to be able to reverse insolvency through restructuring measures, it will be necessary to rely primarily on the opinion of management from the report on financial restructuring measures, which management must prepare within one month of insolvency, in accordance with Article 35 of the ZFPPIPP. Therefore, if management assesses in the preparation of the report that it is unlikely that the company will survive insolvency through financial restructuring, then (according to the amendment to ZIUZEOP-A) the deadline for filing a bankruptcy petition will not be extended. The legal diction is broad enough to cover ex-post circumstances, which subsequently (after the preparation of the financial restructuring report) indicate that the company will not survive insolvency.

We would like to point out that ZIUZEOP does not extend the deadlines for performing actions from Article 35 of the ZFPPIPP, which stipulates that the management must submit a report on financial restructuring measures to the supervisory board within one month of insolvency, in which it must describe the company's financial position, provide an analysis of the causes of insolvency and an opinion on whether there is a greater than 50% probability that it is possible to successfully financially restructure the company to take it out of the red. ZIUZEOP also does not extend the deadlines for the performance of other business and finance related actions, as regulated in the ZFPPIPP. It is therefore still the case that companies must actively monitor their financial situation, immediately identify any insolvency situation and also quickly analyze the causes of the insolvency and examine the possibility of restructuring; failure to act within those deadlines can also have consequences for management and supervisory board liability (more on this in our previous post).

Articles 96 and 97 of the ZIUZEOP also provide for the extension of certain other ZFPPIPP deadlines, which is why we suggest that you carefully examine these provisions as well.

Author: Ana Kastelec, attorney-at-law
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