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Slovakia: Bankruptcy or reorganisation following mergers

Martin Provazník takes a retrospective look at mergers in Slovakia where the legal successors ended up in bankruptcy or reorganisation between 2012 and 2019.

S lovakia saw a huge increase in the number of merged companies between 2012 and 2017. Thousands of companies were merged into fewer than 200 successor companies, which subsequently ended up in bankruptcy.

Abuse of the merger process

A merger is a procedure that is quite common in M&A transactions and is often the desired way to dissolve companies. However, when a merger is carried out in order to avoid liquidation, bankruptcy or reorganisation, the insolvent company is often merged with a successor company and liabilities of the insolvent company are transferred to the legal successor. Thus, the creditors’ claims cannot be satisfied in the liquidation, bankruptcy or reorganisation of the dissolved company and the liabilities of the dissolved company remain with the legal successor.

Moreover, the merger is often planned so that the legal successor is also insolvent or becomes insolvent by the merger itself. As a consequence, the legal successor files for bankruptcy after the merger. In the subsequent insolvency proceedings of the legal successor the insolvency administrator has difficulty obtaining information about the dissolved company. If the bankrupt successor company is the legal successor of a large number of dissolved companies (10 or more), it is almost impossible for the insolvency administrator to get the essential information about the dissolved companies.

In addition, under this merger “model”, the sole shareholder of the successor company is often a person who has no funds and/or is difficult to find, often a foreign national from an Asian or African country, making it extremely difficult to communicate and hold them accountable. Creditors thus have nothing to satisfy the claim, leaving them with only one option: to ask the police for help. In the context of criminal proceedings, the investigation focuses on whether the debtor has reduced its assets with the intention of harming the creditor or whether there has been an attempt to prevent the winding-up of the business.

More information here.