Are creditors really powerless during the pandemic?
Example: Debtor D d.o.o. owes creditor C d.o.o. the payment for 5 invoices totalling EUR 50,000, 4 of which were due even before the outbreak of the pandemic and one that was due in early April 2020. C already has a final enforcement order against D regarding 2 of the invoices. D continues to operate during the pandemic and is receiving income, however its transaction account remains blocked. In the meantime, C has heard D is allegedly planning on selling the real estate in which it operates to a friend at a below-market price and transferring the business operations to a new company founded by D’s wife. Does C have any recourse at all during this pandemic to obtain actual repayment of his claims?
In short: no. C cannot recover the claims during this pandemic. However, C can initiate proceedings for securing claims, even during the pandemic to increase the likelihood of a successful recovery of claims after conditions have normalized.
Intervention measures that have been passed in order to contain the spread of the new SARS-CoV-2 coronavirus have also had a significant impact on the current situation of creditors, as they have temporarily limited their options for recovering claims from debtors in Slovenia:
- The courts are not issuing new enforcement orders (Decision of the Supreme Court of the Republic of Slovenia on the extraordinary measures due to the conditions from the first paragraph of Article 83.a of the Courts Act and the reasons from Article 1 of the ZZUSUDJZ) – until no later than 1 July 2020 or until the Government issues a decision on the cessation of the reasons for the introduced measures;
- The execution of enforcement orders has been postponed for those orders that had been issued prior to the declared emergency situation in enforcement proceedings (i.e. postponed enforcement), except in the case of the enforcements of maintenance claims (Article 93 of the ZIUZEOP i.e. #PKP1) – until 31 May 2020, with an option of an additional 30-day extension.
Until further notice, creditors will therefore not be able to effectively recover their claims through a judicial process. Creditors can submit an appeal for enforcement by electronic means or by mail, but the court will not issue an enforcement order or serve neither the creditor nor the debtor.
The good news for creditors is that, even in the current situation, they can at least secure their claims, which will enable easier enforcement after the intervention measures have been lifted. This is a way to increase the likelihood of recovering the claims once all the enforcement proceedings are up and running.
Creditors with enforceable instrument (e.g. final decision, court settlement or enforceable notarial deed) for a monetary claim can propose the establishment of a pledge on the debtor’s real estate, business share or movable assets. Creditors who have already obtained an enforceable instrument can therefore obtain a pledge on the debtor’s assets in advance, and thus secure the order of repayment from these assets or a right to separate satisfaction in the case of an insolvency proceeding.
Creditors who have not (yet) obtained an enforceable instrument can also utilize certain means to secure claims, including issuance of:
- a preliminary injunction;
- an interim injunction and
- the European Account Preservation Order pursuant to Regulation (EU) no. 655/2014.
The issuing of a preliminary injunction can be proposed by the creditor based on a qualified document on the existence of a monetary claim (e.g. decision of the court or another authority) that is not yet enforceable. In this case, the creditor must already have e.g. a non-final decision. In addition, the creditor must demonstrate the likely risk that otherwise, the repayment of the claim will be prevented or hindered. Generally, the court can issue one or multiple of the legally foreseen preliminary injunctions:
- seizure of movable property and entering the seizure into the register if such a register is kept;
- seizure of a receivable or claim for the items to be handed over;
- seizure of other property or material rights;
- seizure of the funds on the debtor’s account with a payment institution;
- entering a pledge into the court register on the shareholder’s business share or into the register of non-materialized securities on the non-materialized security;
- preliminary notice of a pledge on the debtor’s real estate or on a right entered on the real estate.
In terms of the current limitations to proceedings for securing claims, the court is limited to issuing decisions only on those preliminary injunctions that do not require actions involving personal contact, which is something creditors should consider when composing a proposal. In light of this, the most problematic are the seizure of the debtor’s movable property and the seizure of a receivable, to hand over items, because physical contact is usually unavoidable in these cases.
Prior to court proceedings (as well as during and after the end), a creditor can propose the issuance of a interim injunction to secure monetary or non-monetary claims. In order to succeed with the proposal, a creditor must demonstrate the likelihood that a claim exists or will exist against the debtor as well as the likely risk to enforcement, wherein the case of a monetary claim requires the demonstration of a “subjective risk” (i.e. the debtor’s actions that are endangering the success of the enforcement), while the demonstration of “objective risk” suffices for cases of non-monetary claims. The creditor does not need to demonstrate the existence of risk for both types of interim injunctions if it demonstrates as likely that the debtor will suffer only negligible damages with the proposed injunction. The risk is deemed demonstrated if the claim is to be enforced abroad, except in an EU member state. The scope of interim injunctions is broader, as it can be used to both secure claims (security interim injunctions) and to achieve a temporary regulation of the contested relationships (regulatory interim injunctions).
The court can issue any interim injunction that achieves the purpose of securing the claim. Compared to preliminary injunctions, the creditors have less restrictions on forming a proposal for a interim injunction, however they must account for the condition of no personal contact to implement the security measures during the period of the intervention measures.
In cross-border cases, the European Account Preservation Order (EAPO) is available to creditors as an alternative to the measures in accordance with the national law. The EAPO allows creditors to freeze funds in a debtor’s bank account located in another EU Member State prior to commencement of the main proceedings against the debtor. Considering the nature of the measure, we believe that the limitations stemming from the intervention measures due to COVID-19 should not affect the possibility of issuing the EAPO.
Even though enforcement proceedings have been halted in most matters and the courts are not issuing new enforcement orders, debtors have several measures at their disposal to achieve a greater likelihood of recovering their claims after the court activities have normalized. Proceedings for securing the claims also make if creditor knows the debtor is operating successfully during the pandemic. By securing its claims, the creditor can prevent the debtor’s assets draining away during the period in which the enforcement is not possible.
Creditor C from the introduction could therefore secure the claims for which it has enforceable instrument with a pledge on the debtor’s assets. The claims for which C does not have an enforceable instrument (yet) could be secured by means of an interim injunction.