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The Handbook on Central and Eastern Europe Insolvency and Restructuring Laws, edited by Christian Hoenig and Christian Hammerl, and recently published by Wolf Theiss, is an introduction into the local insolvency and restructuring laws of 14 CEE countries. CEE Legal Matters spoke with Hoenig about the challenges involved in putting together such a survey of this size and scope.

Addressing a “White Spot”

Hoenig believes that the Handbook was prepared to address what he describes as a “white spot” in coverage of the region. In his opinion, the critical element in filling this gap was providing a similar level of analysis and insight in all markets. He explained: “One of the most important aspects for us was consistency. Specifically, we tried to make sure we provide the same structure across all chapters [each of which address one jurisdiction] and attempted to develop a standardized terminology. The goal for this was to offer a guide which, if, for an example, an Austrian insolvency practitioner would look at the Austrian chapter, he/she could then easily understand the logic and structure of each chapter and much more easily digest the briefing on any other jurisdiction. The basic assumption was that it is easier to follow if you see familiar concepts and are able to use them to create a structural map for analyzing other jurisdictions.”

Hoenig also believes that the topic – insolvency and restructuring law – “is at the crossroads between the legal field and general economic issues.” According to him, what really drives insolvency law is the same everywhere: striking the right balance between being fair towards creditors and making sure that businesses can survive. Drawing a comparison with tax law, which “can make or break a great economy,” Hoenig explained: “In the case of insolvency law, the bottom-line questions are how to best distinguish between viable businesses and artificially propped up businesses – no one wants economic zombies roaming around – and how to create a system that is both not too harsh on creditors to cause a backlash and doesn’t drive viable companies into liquidation proceedings.” Because the handbook addresses issues that are particularly relevant in current market conditions, this was a prime period to undertake the project, according to the Wolf Theiss Partner. 

Ensuring Quality Control

When asked how the editors ensured quality control over the accuracy of the information in the handbook, as neither had much regular interaction with rapidly evolving insolvency codes across the variety of CEE jurisdictions the guide covers, Hoenig said it was “not easy” – especially, as he pointed out, because the many contributing authors had different expertise and backgrounds. 

He explained that, in some markets, the practice of insolvency law “hardly exists.” To illustrate he pointed to Albania, which “has a full code comparable with any Western country, but the legislative/administrative bodies have not passed regulations for some reason (the law is designed to come into force with the issue of its implementing regulations).” Another example he gave was Serbia, where “insolvency is very much dependent on solving things out of court” since court proceedings “tend to not yield the best results,” meaning that, where possible, courts are avoided. 

How was this overcome? First, the editor of the handbook explained that, with Wolf Theiss Vienna being the firm’s hub, there was a collective body of knowledge based on coordinating many multi-jurisdictional proceedings and restructurings over the years. However, with respect to jurisdictions where such experience was limited, authors with “some form of relevant experience” such as having obtained good results in informal proceedings, litigation, and other venues were chosen. Second, a four-eye policy was implemented, with each of the countries covered by two authors. 

Finally, Hoenig and his colleague, Hammerl (who, in a previous position, oversaw the EMEA operations of a large consumer electronics company for almost a decade and thus had a sense of the commercial realities on the ground), “read through every single line – more than once – and had each chapter read by a group of experienced, and thankfully, rather patient colleagues.” Hoenig also pointed to an extremely thorough editing process, in which he spent many hours working side by side with the contributing authors in front of the computer and, when necessary, could challenge them directly: “Hah, that sounds rather strange. Are you sure that is how it works in your country?” 

“It was a considerable challenge but also a learning processes which we will use when we launch subsequent editions of the handbook,” Hoenig stated. “We do not see this as a one-off project and are excited to build on what we have learned and address pending ambiguities based on both developments in the law as well as discovering new case law – all to increase the value of the handbook going forward.” 

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

I remember well when, back at the University, not long after the demolition of the Berlin Wall, we learned about possible scenarios expected after the collapse of the Soviet empire. Francis Fukujama’s popular theory, expressed in his book The End of History and the Last Man, predicted the worldwide spread of liberal democracies and free market capitalism of the West in a world where no wars are fought. In Fukujama’s vision such a peaceful era would be coupled with an unquestionable US leadership.  

By contrast, Huntington predicted a much dimmer scenario in his Clash of Civilizations thesis. Huntington foresaw a “clash” occurring violently and along the ruptures of cultural, rather than ideological, differences. Until recently the majority opinion gave credit to Fukujama’s theory, and while many accepted Huntington’s theory as intellectually interesting, not many believed that it predicted a likelier scenario. 

I thought it worth starting out with this bird’s eye view of the state of affairs in Central and Eastern Europe, as our region has and will be heavily impacted by intentions of great powers to expand their political and cultural influence. While suddenly it may seem that Huntington’s predictions better describe the actual happenings in the political arena, I believe such a conclusion can only be drawn if we do not dig into the details and look behind the surface.

What we who live in this region experience is that there are several cooperations among countries of “different cultures” – including many mutually beneficial business initiatives. As the Head of Legal of a Turkish-owned group operating in CEE I am privileged to have a very close perspective of such cooperations on a daily basis.  

From the perspective of the legal landscape, we can see that CEE countries have been heavily influenced by legal developments of Western nations, with German and French (particularly in Romania) legal traditions still prevalent. In addition, the influence of Soviet-type legislation still can be found in the legislation of some CEE countries (although this influence is fading). 

Looking further South, it is interesting to note that Turkey’s legislation following the collapse of the Ottoman Empire was also almost entirely based on European models. Turkey’s Civil Code adopted in 1926 was a barely modified translation of the Swiss Civil Code of the time. Sharia law was abolished and the Turkish Penal code was based on Italian models. If one considers that the old Hungarian Civil Code (from 1959) was also heavily influenced by what was at the time the most modern Civil Code – that of the Swiss – it becomes understandable that it is not very difficult to discuss legal matters among CEE and Turkish lawyers.

Unfortunately, Turkey’s almost-halted accession talks with the EU recently have triggered a different development, as in some recent cases Turkish legislation consciously opted for non-European solutions.

Recent political and legal developments also strengthen the recognition that CEE should be approached as an autonomous region, even if it is far from being homogenous. Many CEE countries which are not yet members of the EU have started accession talks, and one can only hope that this process will not be slowed down by recent developments in Greece. 

In addition, there are an increasing number of regional companies focusing their operations exclusively on this region and several multinationals also adopted special approaches to accommodate regional peculiarities. Some law firms have detected this trend and streamlined their operations accordingly. While it is clearly a positive development for a company like Turk Telekom International, I must say that I still have not found one law firm with local offices in all countries where we operate. Hence, even if we would like to use only one firm, we are forced to use different firms. Also a problem that law firms should address is that even within the same firm different offices deliver quite different quality of services which can be annoying and hinders the development of a long term relationship. 

In my view the region’s catch up with the West is strongly dependent on the EU accession of possible candidates. EU accession would require the adoption of EU legal standards and the establishment of an efficient judicial system, which is inevitable for an investment-friendly business environment. Earlier in Hungary we also experienced the extremely positive effects of quick alignment to EU standards and of the introduction of the Rule of Law principle.  

So, has history ended in the CEE? I would say it has not and it is definitely not about to end in the near future, with cultural differences, including legal ones, likely to be with us for a long time. However, we lawyers should also try contributing to avoid “clashes,” as our profession in many ways requires us to compassionately understand the different cultural backgrounds of the parties at the table.

By Attila Bocsak, Head of Legal, Turk Telekom International

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

In December 2013, in the wake of financial and economic crisis, the Bank of Slovenia adopted several decisions addressed to major Slovenian banks (among them Nova Ljubljanska banka d.d., Nova KBM d.d.), which introduced emergency measures in order to remedy the instability of financial system in the Republic of Slovenia and to comply the planned state aid with requirements of the EU Commission.

These measures included (i) decrease of share capital of banks and writing-off their hybrid and subordinated debt and (ii) increase of the share capital of banks with the state’s own financial resources (the total amount of bailout in three largest banks amounted to 3 billion EUR).

These measures resulted in several proceedings before Slovenian courts and Slovenian Constitutional Court, where aggrieved domestic and foreign creditors and shareholders allege violations of their constitutional rights to fair trial and property, on the basis that they could not participate in the proceedings before the Bank of Slovenia, have no right of appeal against its decisions and were not granted any compensation for the taking of their property. 

The legal basis for disputed decisions were, inter alia, the Slovenian Banking Act, Communication from the EU Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (the “Banking Communication”) and Directive 2001/24/EC on the reorganization and winding up of credit institutions.

The Banking Communication in paragraph 44 provides that in cases where the bank no longer meets the minimum regulatory capital requirements (as was – according to the Bank of Slovenia – the case with relevant Slovenian banks), subordinated debt must be converted or written down, before State aid is granted. Pursuant to the same paragraph the State aid must not be granted before equity, hybrid capital and subordinated debt have fully contributed to offset any losses. However, the Banking Communication in paragraph 19 further stipulates that before granting any kind of restructuring aid to a bank all capital generating measures including the conversion of junior debt should be exhausted, provided that fundamental rights are respected and financial stability is not put at risk. 

Expropriated shareholders and debt holders claim that emergency measures of the Bank of Slovenia interfered with their property rights with retroactive effect, since at the time they entered into legal relationship with the bank, the applicable legal regime (i.e. before the Banking Communication) did not condition state aid with prior cancelation of shares and write-off of debt instruments. Hence, disputed decisions violate the principle of legitimate expectations, as developed in the jurisprudence of the Court of Justice of the European Union (the “CJEU”). They further refer to Directive 2001/24/EC on the reorganisation and winding up of credit institutions, which in Article 2 defines reorganisation measures as measures “intended to preserve or restore the financial situation of a credit institution and which could affect third parties’ preexisting rights«, however, without expressly mentioning expropriation of shareholders or debt write off (as administered in case of Slovenian banks). 

Only in May 2014, i.e. few months after the Bank of Slovenia adopted disputed measures, the European Parliament and the Council adopted Bank Recovery and Resolution Directive 2014/59/EU, which now provides in Articles 43 to 62 for possibility to cancel existing shares and recapitalize the bank or to convert or write-off debt instruments. Directive came into force on 1 January 2015. With respect to temporal application, Article 55 provides for burden sharing of creditors only with respect to liabilities, which are entered into after the date of transposition of directive into national legal systems. In the words of the EU Commissioner for Financial Stability, Financial Services and Capital Markets Union: »From now on, it will be the bank’s shareholders and their creditors who will bear the related costs and losses of a failure rather than the taxpayer. « (Press release of the EU Commission, published on 31 December 2014: A single rulebook for the resolution of failing banks will apply in the EU as of 1 January 2015).

Another issue is the compatibility of the Banking Communication with the Second Company Law Directive 2012/30/EU. According to this directive any increase or decrease of the share capital must be decided by the general meeting of the company (and not by an administrative measure of the state organ). Interestingly, although the wording of the Banking Communication is very scarce when it comes to issue of fundamental rights of shareholders, which are to contribute to losses of the bank, the EU Commission appears to have foreseen this problem in the past and has recognized that the mandatory nature of the rights accorded under the Second Company Law Directive 2012/30/EU may undermine attempts by authorities to quickly handle a bank crisis (see Communication from the EU Commission, COM(2009) 561/4, An EU Framework for Cross-Border Crisis Management in the Banking Sector, p.12). The CJEU already held in Panagis Pafitis and others v Trapeza Kentrikis Ellados A.E. and others (C-441/93 of 12 March 1996) that the provisions of the directive preclude national rules under which the capital of a bank, which is in distress due to its debt burden, may be increased by an administrative measure, without a resolution of the general meeting. 

Faced with all these interesting questions, the Slovenian Constitutional Court in November 2014 decided to submit to the CJEU request for preliminary ruling asking whether, inter alia, the Banking Communication is legally binding for EU Member States, whether it is in accordance with the EU Charter of fundamental rights, the principle of legitimate expectations, Second Company Law Directive 2012/30/EU and Directive 2001/24/EC on the reorganisation and winding up of credit institutions. To date, parties have provided their written observations, and the CJEU has not yet scheduled the hearing. Whatever the decision of the CJEU will be, it will certainly provide some reflection on the current response to the financial crisis and to what extent the burden sharing of shareholders and creditors in the financial crisis is required in order to safeguard the financial stability.

By Anze Arko, Senior Associate, ODI Law Firm

The number of consumers in the internal European market making online purchases is exponentially increasing, therefore the number of disputes arising from e-commerce is also on the rise.

When it comes to the average consumer disputes, there is no doubt that the consumers are the weaker party as they, as one shot litigants, generally do not have as much experience with court proceedings as the company, a repeat player in disputes. The consumer’s financial status can also disable them from hiring a lawyer to represent their rights in front of a court of law. Low value of dispute, high court expenses, slow proceedings and the lack of law knowledge are generally the reasons why a consumer decides to not even try to resolve his dispute in front of a court. 

As European consumers are essential for the European economy, it is important for the European Union to apply a system which will protect consumer rights in EU cross-border transactions. And especially when it comes to a consumer dispute, the Alternative Dispute Resolution (ADR) is touted as an efficient and effective alternative of providing justice to a court proceeding. 

As a part of the internet technology development, ADR methods have also started to apply in an online world where they are known as the Online Dispute Resolution (ODR). ODR is used internationally for different forms of online dispute settlements by means of ADR methods. By improving the functioning of the retail market and enhancing redress for consumers, the ODR is tackling some of the problems connected to the use of offline mechanisms and increasing consumer confidence in the internal market. The most common ADR methods applying in the ODR system are (appropriately adjusted) e-negotiation, e-mediation and e-arbitration. 

In May 2013, the EU has adopted the Regulation (EU) no. 524/2013 on online dispute resolution for consumer disputes and the Directive 2013/11/EU on alternative dispute resolution for consumer disputes . According to the ODR Regulation, an EU-wide online platform will be set up for disputes that arise from online transactions. An online platform will be set up for all EU citizens who will want to solve disputes online with ADR methods. All EU traders/companies, who are using online cross-border transactions will have to inform their customers about the possibilty of using the EU-wide online platform for solving disputes. The regulation requires this information to be simply, directly and permanetly visible on the website, so most likely companies will attach this information in their General terms & conditions.

The online platform will provide an online complaint form, which will be filled by consumer in his own language. Furthermore, the online platform will identify the ADR method which will be suitable for certain customer dispute and will also identify communication with an ADR competent authority and both parties, to provide and to translate all information regarding such procedures. Disputes with the use of ODR could be potentially settled within 30 days and the online platform needs to be accessible in all official languages of the EU. The platform will be electronically linked with the national ADR entities that have been established and which has been notified to the Commission in accordance with the new regulations. ADR national authorities will be responsible for dealing with individual contractual disputes received via the platform. Each member state has to provide one ADR national authority which will represent a contact on online platform and will provide information for consumers regarding solving dispute online. It should also be stressed out that in order to establish trust in the system, it is also important to establish a system that will protect all personal data and respect strict confidentiality rules set by EU legislation.

In Slovenia, The Law on Out-of-Court Consumer Dispute Resolution is currently in interdepartmental harmonization process. The proposal of this Act determines the competence of Ministry of Economic Development and Technology to exercise control over the operation performing ADR. The consumer is free to decide whether to initiate the options under this proposed Act or to choose the court proceeding. Initiate proceedings under this Act may only be filed by the consumer. The procedure is free for the consumer, with the exception of fees, which can be specified by the authority solving the dispute and must not exceed 20 euros. This Act shall apply, if the value of the dispute is not more than 5.000 euros and not less than 40 euros. The company should in simple, clear and understandable way inform the consumer which authority is recognized as competent to solve the dispute and companies dealing with online purchases have to provide a hyperlink to online platform. A violation of the above is punishable by a fine of 500 euros. 

The way of settling consumer disputes is different from country to country and there is no an EU wide uniform procedure with regard to consumer appeals. That is why there is still a large number of consumers who avoid making a cross-border transaction. It is generally believed that it is easier to resolve a potential dispute with a company that is in their country. But by not making a a cross-border transaction they are also being deprived of making the best deal, while by not being able to attract foreign customers, the companies are being deprived as well. 

With the combination of an EU-wide online platform and an ADR system the internal market will gain a new dimension, its competitiveness will rise and, most importantly, better protection of consumers rights will be achieved. Despite some optimistic predictions regarding the ODR’s potential, it is too early to say what the future of the ODR might be. ODR is at least another option to settle the consumer disputes and in some cases could actually be the best option, but it has one huge disadvantage that stands out–the absence of personal contact. All comunication will be in writing and it is well known that this does not include all thoughts and impressions which a given person wants to deliver to the other party. Despite all of that, there may yet be a bright future to finally bringing cross-border consumer rights protection to a satisfactory level. 

By Masa Snoj, Junior Associate, ODI Law Firm