SLOVAKIA’S low-cost air carrier SkyEurope Airlines is now operating under protection from its creditors while it undergoes restructuring of its business over the next three months. SkyEurope said that it has not filed for insolvency or bankruptcy and that it will pay its suppliers for goods and services provided during the reorganisation. The Slovak Spectator spoke to Adriana Kováčiková, a lawyer at the Ružička Csekes law firm, about conditions for granting protection from creditors and the impact that this has on a company’s operations.
The Slovak Spectator (TSS): What conditions must a company meet in order to be granted a period of reorganisation under creditor protection?
Adriana Kováčiková (AK): First of all the basic condition for a company to be granted a period of reorganisation under creditor protection is that the company is threatened by insolvency or has already become insolvent. The conditions for declaring a company insolvent are determined by the Bankruptcy and Restructuring Act. In brief, an entity is insolvent if it has more than one creditor and is unable to pay its due financial obligations for more than 30 days after the day of its maturity or if the value of the company’s due debts exceeds the value of its assets.
Such a company may then authorise a trustee to elaborate a restructuring report which creates grounds for the court to decide whether to permit the company’s restructuring. It is not possible to grant a period of reorganisation for the company without this report. The main element of the restructuring report is the trustee’s evaluation of whether restructuring of the company is suggested or not.
After the trustee suggests restructuring in the restructuring report, an application may be filed to the court to permit the restructuring. The court then decides on permitting the restructuring according to the suggestion of the trustee and according to the restructuring report – in which the trustee among others provides assumptions about preserving the operation of the company or its significant part, possible methods of restructuring the company and their applicability, and reasons for the assumptions that fulfilling the company’s debts is more likely through restructuring than through bankruptcy proceedings.
To avoid any misunderstanding there is a difference between the decision of the court on starting the restructuring procedure and the decision of the court on permitting restructuring. The decision on permitting restructuring comes later. The court issues the decision on starting the restructuring procedure upon filing a regular application for permitting restructuring. Only after the court determines that the conditions for restructuring are fulfilled shall it issue a decision on permitting restructuring.
TSS: What impact does protection from creditors have on the regular operations of a firm?
AK: Since the restructuring is, besides the greatest possible satisfaction of creditors, also aimed at preserving the existence of the business of the company in some form, the effect of protection from creditors is mainly governed by this goal. During restructuring the operation of the company is supervised by the trustee. Without the approval of the trustee the company may only conduct basic legal acts necessary to preserve the ordinary exercising of the activities within its scope of business. In other words the company continues to provide its services. All the other legal acts of the company require the approval of the trustee. The trustee shall conduct its supervision in such a manner that the company does not decrease the value of its assets or frustrate the successful completion of the restructuring. Taking into account the above the restructuring does not mean direct protection from creditors but protection exercised through a trustee.
TSS: SkyEurope said it will now restructure and reorganise the firm and seek out potential investors. What are the conditions the firm has to meet in order to declare the restructuring successful?
AK: After the court permits the restructuring of the company, the company is obliged to elaborate a restructuring plan which is the document governing the rights and obligations of the participants to the plan (the company, the creditors, etc.). The restructuring plan among others governs also the extent and the manner of fulfilment of the debts of the company and also measures necessary to achieve the purpose of the restructuring. It is very important to mention that a creditor of the company becomes a participant to the plan only if it lodges its claim within the stated time period and in the stated manner. Without lodging its claim the creditor shall have no right to fulfillment of its claims against the company (note that this affects claims which arose before the day of starting the restructuring procedure, not the day of permitting the restructuring).
The company is obliged to submit this restructuring plan for approval within the statutory time periods to a Creditor’s Committee and afterwards to a Meeting of Creditors, as the bodies representing creditors. After approval of the restructuring plan by these creditor bodies, the restructuring plan must also be approved by the court. After fulfilment of these basic conditions the restructuring plan and also the rights and obligations arising thereof become effective. Only after fulfilment of the debts as stated by the restructuring plan may we talk about the success of the restructuring. If the claim of the creditor fails to be fulfilled according to the approved restructuring plan, even in the additional statutory period after a call for fulfilment of the claim, the restructuring plan becomes, in respect of relevant participants of the plan, ineffective. Such participants to the plan may then undertake further steps allowed by the Act on Bankruptcy and Restructuring to collect their claims.
TSS: Might the process still result in SkyEurope being declared bankrupt?
AK: First of all it is necessary to mention that after restructuring is permitted further bankruptcy proceeding against the company cannot be started. If a creditor files an application to the court for declaring bankruptcy after the restructuring has been permitted, the court shall reject such an application. Of course there are several exemptions from this general rule. According to the Act on Bankruptcy and Restructuring the trustee has several obligations to file an application to the court for declaring bankruptcy. These exemptions are related to the basic conditions and steps required for achieving the successful approval and fulfilment of the plan. In brief, such examples include: the Creditor’s Committee could not be elected, the company during the restructuring substantially and repeatedly violates its obligations according to the Act on Bankruptcy and Restructuring, the restructuring plan is not submitted for necessary approval in the stated period, refusal of the restructuring plan by the Creditor's Committee or Meeting of Creditors, failure to submit the restructuring plan to the court for approval, etc.
The Bankruptcy and Restructuring Act also empowers the court to declare bankruptcy in certain situations even without the application of the trustee.
If bankruptcy is declared upon the application of the trustee or by the court itself before the final approval of the restructuring plan, upon the publication of the decision of the court on declaration of bankruptcy the effects of the restructuring procedure shall terminate.
If bankruptcy is declared after the approval of the restructuring plan by the court, but before its regular fulfilment, the restructuring plan becomes ineffective upon the declaration of bankruptcy towards those participants of the plan whose claims according to the plan were not yet fulfilled.
