Over-indebtedness

What it means

Over-indebtedness is the state in which a company’s liabilities exceed the value of its assets. Together with inability to pay, Slovak bankruptcy and restructuring law treats it as a form of insolvency. It applies only to those required to keep accounts, mainly commercial companies.

It is not judged solely by accounting equity. When calculating it, the law disregards certain liabilities, such as subordinated debts to shareholders, and takes into account the real value of assets and the prospect of the business continuing, where that can reasonably be expected.

A company can be over-indebted and still pay its invoices on time, for example thanks to a bank loan or a shareholder loan. Unlike inability to pay, which creditors feel immediately, over-indebtedness often shows no outward signs, which is exactly why it is easy to overlook.

How it works in practice

When preparing the financial statements, we alert clients if equity turns negative. That does not automatically mean over-indebtedness, but it is a signal for closer assessment. Together with the director, we go through which liabilities count in the calculation and what the assets are really worth.

Solutions may include strengthening equity, for example by a shareholder contribution outside share capital, converting a shareholder loan into equity or agreeing to subordinate the shareholder’s claim. For more serious problems, preventive restructuring may be an option.

If the company is over-indebted and cannot fix the situation quickly, the director must file for bankruptcy within the statutory deadline. That is another reason we recommend assessing the financial position continuously, not just once a year at closing.

What to watch out for

Over-indebtedness is often confused with simply having a lot of debt. A company with a large loan is not over-indebted if it has sufficient assets. Conversely, a company with no loans can be over-indebted if it has accumulated losses and its debts to suppliers and the state exceed its assets.

Failing to file for bankruptcy when over-indebted gives rise to director’s liability for damage to creditors and may have criminal consequences. Over-indebtedness cannot simply be waited out if the company has no realistic plan to restore positive net worth.