A bond issuer in bankruptcy or restructuring: what a bondholder must do and within what periods

The issuer is late paying the yield, stops communicating, and one day a resolution declaring bankruptcy appears in the insolvency register. At that moment the bondholder still holds a valid claim for repayment of the nominal value and the yields, but the way it is pursued changes. A claim that is not a claim against the estate is pursued in bankruptcy by registration (Section 28(1) of Act No. 7/2005 Coll.). Individual recovery gives way, and whether the investor receives anything depends on a correct and timely registration.

Who files the registration

If the issue has no common representative, each holder registers its claim itself. Where the terms of issue or the bondholders’ meeting have appointed one, the representative is entitled and obliged to exercise, on behalf of all holders, the rights attached to the bonds to the extent conferred on it by the terms of issue or by the resolution of the meeting (Section 5d(2)(a) of Act No. 530/1990 Coll.). The statute adds:

To the extent that the common representative exercises the rights of bondholders attached to the bonds, the bondholders may not exercise those rights individually.

— Section 5d(3) of Act No. 530/1990 Coll. (unofficial English translation)

The first question after bankruptcy is declared is therefore exactly what the terms of issue confer on the common representative and whether registering claims in bankruptcy falls within its scope. If it does, the investor verifies that the representative filed the registration in time and for the full amount. If it does not, or if the terms leave the point unclear, it is safer to coordinate with the representative in writing rather than wait.

The period, the form and the impossibility of correction

The registration is filed within the basic registration period of 45 days from the declaration of bankruptcy, electronically on the designated form to the trustee’s electronic mailbox, and it must be authorised; where it is filed by a representative, a power of attorney is attached (Section 28(2)). A foreign creditor, typically a Czech investor, files the registration with the trustee and must appoint a representative for service in Slovakia, failing which documents are served on it by publication in the insolvency register (Sections 28(2) and 29(8)). A later registration is taken into account, but the creditor may not vote or exercise other rights and is satisfied only from distribution schedules announced after its delivery (Section 28(3)).

An error in the registration cannot be put right afterwards:

A filing by which a claim that is pursued in bankruptcy by registration has been asserted may neither be corrected nor supplemented.

— Section 30(2) of Act No. 7/2005 Coll. (unofficial English translation)

What belongs in the registration for a bond

The essential particulars are the details of the creditor and of the bankrupt, the legal basis on which the claim arose, its ranking for satisfaction and the total amount; without them the registration is disregarded (Section 29(1)). The amount is broken down into principal and accessories according to the legal basis (Section 29(4)). With a bond, the nominal value, the yields due and unpaid and default interest are therefore stated separately, each item with its own calculation and legal basis. Documents evidencing the content of the registration are attached to it (Section 29(6)): the terms of issue, the subscription or purchase agreement, proof of payment and, for book-entry bonds, an extract from the holder’s account.

Ranking deserves attention. A subordinated bond is satisfied in bankruptcy only after all other claims except equally subordinated ones (Section 20a(1) of the Bonds Act) and this must be stated in the registration.

Secured bonds

With a secured claim, the security right must be properly asserted in the registration within the basic 45-day period, failing which it is disregarded (Section 28(4)), and a separate registration with details of the security is filed for each secured claim (Section 29(2)). In bond issues the secured creditor may be the common representative or another third party exercising the security right in its own name for the account of the holders (Section 20b(4) of the Bonds Act). Who registers the security must therefore be clarified while the period is still running.

In project issues the security is sometimes provided not by the issuer but by the company owning the property. If that company ends up in bankruptcy, the bondholder registers its claim in that bankruptcy too, but can be satisfied only from the proceeds of the charged assets (Section 28(7)).

Restructuring: a shorter period and a harsher consequence

If the court permits the issuer to restructure, the registration must be filed within 30 days of the permission, in the same manner as in bankruptcy, failing which it is disregarded (Section 121). A claim not asserted properly and in time can no longer be enforced once the restructuring plan is confirmed (Section 120(1)).

A Czech issuer

If the bonds were issued by a Czech company, its insolvency is governed by the Czech Insolvency Act with different periods and rules. What happens to actions and enforcement once insolvency proceedings begin is examined in our answer on a Czech customer in insolvency.

What to do

Monitor the insolvency register, gather the terms of issue, the extract from the holder’s account and the documents evidencing acquisition, and establish whether the issue has a common representative or a security agent. We prepare the registration under our registering a claim in bankruptcy service and conduct the whole process against the issuer, including coordination of several holders, under our recovery of claims from bonds service.