Since its introduction in 1991, the Slovak bankruptcy law has not been frequently enforced.
The main obstacle in the past, besides the actions of the government to prevent its application, was the so-called "revitalization procedure". After filing for bankruptcy, this mandatory procedure must commence in each case. The aim is to enable bankrupts to run their businesses in cooperation with creditors to settle their claims. However, in most cases this leads to substantial delays for the whole bankruptcy procedure.
At the beginning of the year the government proposed to abolish the revitalization procedure. Instead, the bankrupt may propose a settlement procedure which should become more attractive for creditors in the future.
However, the recent amendment to the bankruptcy law introduced an obligation to apply for a declaration of bankruptcy or a settlement in the case where an entrepreneur is overburdened with debt (has negative equity) continuously during a 60 day period. Generally, "negative equity" occurs where the owners' equity is negative as losses and liabilities exceed assets.
This rule does not apply to entities financed by the state budget, municipalities and legal entities established by the state. In the agriculture sector it is not applied during the period from 1 April to 30 September. The law became effective from 1 February 1998, which means that the first mandatory bankruptcy procedure could have been applied for after the beginning of April 1998.
The new law stipulates that the company's representative is obliged to lodge a proposal for bankruptcy proceedings when the above mentioned criteria are met. It does not stipulate how the company will identify its negative equity.
There are different legal opinions about how to identify negative equity. Some state that an entity's negative equity can only be determined from its financial statements after the accounting period is closed.
The Accounting Act does not stipulate an obligation to prepare monthly balance sheets. It only requires the directors to arrange proper bookkeeping. However, this approach is risky given that there are other persons who have the power to lodge a proposal for bankruptcy, such as a creditor or other persons. There is also a risk of criminal prosecution of the company's representative in the case of non-compliance, while this individual may also be personally liable.
How often should equity be checked? Obviously, if the directors of a company have applied for bankruptcy and the situation then improves (equity becomes positive), they should withdraw the application to the court. Recent legal opinions have been published which argue that the company, or its representative, should check for negative equity regularly, on a monthly basis during the whole accounting year, in order to find out whether the company has negative equity or not.
To avoid the risk of non-compliance, the company's equity should be checked regularly (monthly) based on the preliminary financial statements and appropriate measures should be carried out.
There are several alternatives how to turn negative owner's equity to positive in order to avoid a mandatory petition for bankruptcy proceedings. The possibilities are as follows:
* Increase of registered capital;
* Increase of other capital funds;
* Covering of losses by shareholders;
* Increase of legal reserve fund.
Andrea Alföldyová is a tax analyst for Deloitte & Touche