New financial consumer protection rules
Financial consumer protection has increased with the new act No 483/2015 Coll. (the Act) amending inter alia the Slovak Consumer Credit Act No 129/2010 Coll, which became effective on 23 December 2015. The Act restricts the amounts (including interest, fees or any other payments of any nature) payable by a consumer in connection with a consumer loan. The cap is twice the current market average APR and currently stands at 37.5%. The strict cap is already forcing some of the non-banking creditor servicing lower segments of the lending market to cease their operations in the Slovak Republic.
Restrictions on assignability of consumer credit claims
The Act also introduces major restrictions on transferability of rights under consumer credit agreements aimed at protecting a defaulting consumer from some of the more questionable practices of debt collectors. As a general rule, creditors' claims under consumer credit contracts cannot be assigned and do not pass to a third party. The Act specifies a few exceptions to this rule. First, overdue receivables under non-performing loans may pass or be assigned to creditors entitled to provide consumer credits in Slovakia (ie licensed non-banking institutions or banks) provided that they are transferred together with all related rights. Secondly, an assignment or passage of rights is permitted in bankruptcy or resolution proceedings. Finally, the Act explicitly allows the passage of rights belonging to a credit institution or CRR financial institution to another credit institution or CRR financial institution, in each case with the prior consent of the National Bank of Slovakia.
These restrictions have three major market implications. Firstly, the management of non-performing consumer credits has to be changed as the creditors may no longer transfer their receivables to specialised debt collecting companies. Secondly, consumer credit-related claims have become non-eligible as collateral. Thirdly, the securitisation of consumer credit-related claims by transfer of these claims to an SPV has become virtually impossible in Slovakia.
The restrictions do not apply to certain housing loans.
Hidden distributions to shareholders and related-party security – new laws affect security risk
New rules concerning hidden distributions to shareholders need to be considered when transacting with Slovak counterparties, especially if a Slovak company is offering security for a third-party debt.
An amendment to the Slovak Commercial Code No 87/2015 Coll. (Amendment) has developed the existing rules prohibiting repayment of shareholder contributions (hidden distributions) by Slovak companies. The Amendment has introduced a new test for determining whether there has been a prohibited hidden distribution:
Firstly, has there been adequate consideration for the company's act? Relevant factors are whether the consideration is adequate include: the ability of the counterparty to perform, the usual market price, and the price at which the counterparty normally provides similar performance on an arm's length basis.
Secondly, who has the performance been provided to? In order to be caught, it must have been provided to (i) an existing, former, future, direct or indirect shareholder or person acting on their account, (ii) a person close to a shareholder, or (iii) a company whose beneficial owner cannot be determined (each a beneficiary). If beneficial owners cannot be determined, the law provides a rebuttable legal presumption that any performance received without adequate consideration from a Slovak company represents a hidden distribution.
Hidden distributions are prohibited and the beneficiary must pay the company the difference between the consideration actually obtained by the beneficiary and the adequate consideration that would have been obtained by the company on an arm's-length basis.
Credit risk is aggravated by the fact that directors of Slovak companies are under an express legal duty to enforce the repayment of any hidden distribution. They are bound by statutory guarantee obligations up to the amount of any prohibited hidden distribution, not only towards the company, but also indirectly towards its creditors (who may sue the directors on behalf of the company).
If a transaction involves a Slovak company providing security to secure a third-party debt, a bank should check whether that third party may be regarded as a beneficiary vis-à-vis the Slovak company. If so, banks should check that the Slovak company receives adequate consideration for the security in question.
There are also new rules introduced relating to companies in crisis and a ban on the repayment of loans to related creditors. International businesses should take the new rule concerning related creditors into consideration when providing intra-group financing to Slovak subsidiaries and branch offices as the rules may make its repayment more difficult or indeed even prohibited.
Special rules on related-party security
Where an obligation of a debtor in crisis is secured by a security granted by a related party at the time when the debtor was in crisis, a creditor can enforce that security directly against that related party, without demanding the performance of the secured obligation from the debtor first. Any contractual provisions to the contrary are null and void. The related party is not allowed to seek compensation from the debtor for its performance if the debtor is in crisis or would enter into crisis as a result of it. Nevertheless, should the debtor become insolvent, the claim for compensation can be lodged in bankruptcy or restructuring proceedings.
If a creditor demands from a debtor in crisis performance of an obligation secured by a related-party security, the debtor may require the related security provider to perform to the creditor up to the secured amount. Should a debtor in crisis perform to the creditor, it is obliged to claim compensation from the security provider up to the secured amount.
Restriction on enforcement of loans
Perhaps the most important change with direct implications for bank loan transactions is that any creditor, who provided a credit or a similar performance to a debtor in crisis and at the relevant time knew, or from the debtor's last published financial statements could have known, of its crisis, may enforce its claim against the debtor only up to the difference between the amount of its claim and the value of the related-party security coverage.
For example, if a loan to a debtor in crisis is secured by a parent guarantee at the time when the debtor is in crisis, the bank may enforce against the debtor only the difference between the amount due under the loan agreement and the parent guarantee, unless it can prove that it did not know, and from the debtor's financial statements could not have known, about its crisis.
The above restriction on enforcement of loans applies only until the debtor recovers from the crisis, is declared bankrupt, or until the debtor's restructuring is officially opened.