Slovak Republic
Borrowers should be aware of the potential implications of the EU's Bank Recovery and Resolution Directive (BRRD), which outlines certain measures for dealing with failing financial institutions. The BRRD has been implemented mainly by the Act on Resolution in the Financial Market.
This regulative framework is applicable to financial institutions incorporated in the European Economic Area (EEA), but does not apply to EEA branches of non-EEA incorporated entities.
The Act on Resolution in the Financial Market which has, among others, implemented also the Article 55 of the BRRD, gives authorities the power to ‘bail in’ obligations of failed EEA financial institutions. Institutions to whom the resolution applies shall include a contractual term in any agreement creating a liability. The creditor or party to the agreement recognizes that the liability may be subject to write-down or conversion, and agrees to be bound by any reduction in the principal or outstanding amount due, or conversion or cancellation that is effected by the exercise of the write-down or conversion power by the resolution authority, provided that such liability is:
- not excluded;
- not a deposit under Slovak law;
- governed by the law of third country; and
- entered into or changed after the date on which the Act on Resolution in the Financial Market became effective (this does not apply to a change of obligation, including an automatic change, that does not affect the fundamental rights and responsibilities of the party of this obligation).
Are there any restrictions on giving and taking guarantees and security?
Some of the key areas affecting the giving of guarantees and security are as follows.
Capacity
It is important to check the constitutional documents of a company giving a guarantee or security to confirm whether it is duly established, and whether a separate resolution of the shareholders is not required in order to duly provide such guarantee or security. The safe approach is often to have the shareholders of the company approve the giving of the guarantee or security by resolution. Furthermore, it is necessary to ensure that the directors of the company act on behalf of the company in compliance with the way of acting prescribed by the constitutional documents and way of acting registered in the Commercial Register.
Insolvency
Guarantees and security may be at risk of being contested in bankruptcy proceedings, if the guarantee or security was granted by a company without adequate consideration, caused the debtor's bankruptcy or made during the debtor's bankruptcy and granted during one year prior to the initiation of bankruptcy proceedings. If it is a legal act without adequate consideration made in favor of a party related to the debtor, it is also possible to contest the guarantee or security made during the three years prior to the initiation of bankruptcy proceedings.
What are common types of guarantees and security?
Guarantees
In general, by providing a guarantee, the guarantor undertakes that it will fulfil the obligation of the debtor (as a whole or part), in case the debtor fails to duly perform its obligation. The law does not differentiate between the performance of payment obligations or any other kind of obligation. Therefore, the guarantee may also be granted in order to secure the obligation of the debtor to provide services etc.
Common forms of security
Basic types of security that can be created under Slovak law include:
- pledges;
- secured transfer of a right; and
- bills.
Under Slovak law it is possible to grant security over all of the assets of a company or individual assets. Granting security will tend to be achieved by way of:
- pledge over a business share;
- pledge over the real estate;
- pledge over the receivables or over accounts receivables;
- a pledge over assets which are identifiable and can be controlled by the creditors (such as equipment); or
- secured transfer of right to the real estate.
Are there any other notable risks or issues around giving and taking guarantees and security?
Giving or taking guarantees
To be valid, a guarantee has to be granted in writing. A guarantee may be provided with or without consideration.
If several guarantors secure the same obligation, each of them is liable for the entire obligation. In case one of the guarantors fulfils the obligation, it has the right to recourse towards the other guarantors.
The guarantee does not expire if:
- the obligation expired due to the debtor’s inability to fulfil it and the obligation may be fulfilled by the guarantor; or
- due to the dissolution of the legal entity that is the debtor.
Giving or taking security
Depending on the type of security, security may have to be granted in writing and notarization may be required.
Once granted, security in the form of a pledge needs to be properly perfected before it is valid against third parties. Perfection formalities can range from having the secured asset delivered to the security holder, registration of the pledge in the notarial register of pledges or in the Commercial register and notice being given to third parties.
Like guarantees, a pledge may be at risk of being contested in bankruptcy proceedings, if the security was granted by a company without adequate consideration, caused the debtor's bankruptcy or was made during the debtor's bankruptcy and was granted during the one year period prior to the initiation of bankruptcy proceedings.
Péter Györfi-Tóth
Partner
Horváth & Partners Law Firm
[email protected]
T +36 1 510 1120
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