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COVID-19 in Slovakia: New Moratorium Framework for Borrowers

COVID-19 in Slovakia: New Moratorium Framework for Borrowers

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On January 1, 2021, Act No. 421/2020 Coll. – the “2021 Moratorium Act” – took effect in Slovakia, introducing a protective framework for businesses affected by the ongoing COVID-19 pandemic and temporarily shielding them from a run on assets by creditors. The 2021 Moratorium Act replaced the temporary moratorium scheme introduced in May 2020, which had been in effect until that point.

The 2020 Moratorium

Arguably, the most remarkable feature of what we will call the “2020 Moratorium” was the combination of its availability and effects, which protected the debtor from, among other things, creditor- and debtor-initiated insolvency, enforcement of adjudicated claims, and all enforcement of security such as pledges and mortgages. While the process to obtain a moratorium under the 2020 scheme was managed by courts, and, in theory, was subject to judicial review, in reality, the process was primarily administrative in nature and, as a general rule, applications meeting the formal requirements were granted. For that reason, the 2020 Moratorium framework became the subject of debate and some criticism among lenders and the legal community because of the borrower-friendly broad-brush approach the legislator took in response to the then-emerging pandemic.

Lenders adapted to the 2020 Moratorium largely through the use of negative covenants and the definition of event of default. However, given the emergency and mandatory nature of the framework, the primary answer was that the emergency framework would expire in time. In some cases, though, lenders’ concerns that the 2020 Moratorium would create an avenue for some borrowers to delay the inevitable insolvency and facilitate asset-siphoning proved legitimate. Also, the 2020 Moratorium generated interesting practical questions such as its cross-border effect on insolvency and security enforcement.

Some courts in other Member States have hinted that a COVID-19 moratorium issued by a Slovak court might have cross-border effects, including, potentially, granting a debtor with a center of main interest in another Member State protection from insolvency initiated by a creditor in that Member State, meaning that the assets provided as security by that debtor could not be liquidated in that Member State. However, no authoritative conclusion has been reached in this respect.

The 2021 Moratorium Act

The legitimate expectation was that the 2020 Moratorium framework would come to a natural end. However, because of the ongoing nature of the COVID-19 pandemic, the new 2021 Moratorium Act was adopted, allowing some of the concerns related to the 2020 Moratorium to remain. The key difference of the new 2021 Moratorium Act is that debtors’ applications for moratoria must be backed by the consent of a majority of their creditors, and an extension of a moratorium must be backed by a two-third majority of creditors. The 2021 Moratorium Act even includes provisions preventing debtors from using non-transparent intra-group debt to outvote third party creditors, which is certainly a commendable feature. While the legal effects of a moratorium under the 2021 Moratorium Act are largely the same as under the 2020 Moratorium framework, the key difference is that the 2021 moratorium framework is significantly less available.

The primary concern is that while the 2020 Moratorium framework was confined to the period between May 2020 and January 2021, the 2021 Moratorium Act allows debtors to apply for a moratorium of up to six months until December 31, 2022. In addition, some of the questions which were unanswered with respect to the 2020 Moratorium framework remain unanswered under the 2021 Moratorium framework, which extends some of the uncertainty among lenders during a time when the market is arguably more likely to see borrowers default. On the other hand, while we have already seen some moratoria granted under the 2021 Moratorium Act in the first weeks of 2021, because an application for the moratorium must be now backed by creditors, it is, in our view, likely that the 2021 Moratorium Act will not result in widespread applications for temporary protection. In turn, the market will likely see more cases of restructuring or insolvency than in 2020, and creditors will have more transparency in the process.

By Robert David, Partner, and Bruno Stefanik, Counsel, Wolf Theiss Slovakia

This Article was originally published in Issue 8.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.