Inability to pay

What it means

Inability to pay is the state in which a company cannot, within a certain time after the due date, settle monetary debts owed to at least two creditors. Together with over-indebtedness, Slovak bankruptcy and restructuring law treats it as one of the two forms of insolvency.

It is judged by the actual ability to pay, not by whether the company has more assets than debts on paper. Even a company with valuable property can be unable to pay if it has no cash for overdue invoices and cannot quickly turn its assets into money.

What separates it from a short-term liquidity dip is duration and scale. One invoice paid a week late is not insolvency. But when a company repeatedly fails to pay several creditors with no realistic prospect of improvement, the line is crossed and legal duties apply.

How it works in practice

For our clients we monitor the ageing of payables and cash flow. If overdue invoices start piling up with several suppliers, we warn management before the situation turns into insolvency and look for a solution together, such as a repayment schedule or preventive restructuring.

Once a company is unable to pay, its statutory body has a legal duty to file for bankruptcy within the statutory deadline from when it learned, or should have learned, of the insolvency. Missing that deadline has serious consequences.

In the assessment we help compile an overview of overdue liabilities, realistically collectable receivables and available cash. The lawyer handling restructuring or the bankruptcy petition needs the same document, and it also serves as evidence of when insolvency began.

What to watch out for

The greatest risk is waiting. A director who does not file in time is liable for the damage caused to creditors and may face further sanctions under the law. The question of director’s liability cannot be avoided by ignoring unpaid bills.

Steps taken just before insolvency are also dangerous, such as repaying a shareholder’s loan ahead of others or selling assets below value. The administrator can later challenge such acts, and those who benefited may have to return what they received.