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Paksoy has announced that it advised the EBRD on a USD 100 million facility agreement with with Turk Telekomikasyon A.S. (“Turk Telekom”), Turkey’s leading telecom company, as Turk Telekom prepares to roll out high-speed advanced 4.5G mobile services. Reed Smith acted as counsel to the EBRD on English law aspects of the deal.  

Turk Telekom has recently been awarded a 4.5G spectrum license and the EBRD’s loan will finance capital expenditures for mobile broadband network expansion.  

The Paksoy team was led by Partner Sera Somay and Senior Associate Ozlem Barut, with assistance from Associate Soner Dagli.   

Paksoy did not reply to inquiries about counsel for Turk Telecom on the deal.

Sorainen Belarus has advised Fiverun, Inc., a California-based innovator in the mobile point of sale (mPOS) arena, on Belarusian aspects of its sale to Vista Equity Partners — a leading private equity firm focused on investing in software, data, and technology-enabled companies.

Following Vista’s December 2015 acquisition and merger of software developers MarketLive and Shopatron, the addition of Fiverun will create a unified omnichannel commerce solutions company called Kibo.”

The client was advised by a Sorainen team consisting of Partner Kiryl Apanasevich and Associate Alesia Tsiabus. 

The Republic of Moldova has continued the recent trend of insolvency legislation renovation, following such states as Romania, Russia, Ukraine, Germany, and Great Britain, among others. Moldova’s new Insolvency Law of 2012 is already the fourth law covering the subject matter in the less than 25 years of the country’s independence.

As a result of this continued legislative effort, Moldova can boast of having put into place a modern insolvency procedure and an efficient system of debtor asset administration.

According to the World Bank Doing Business 2016 report, Moldova has improved its insolvency system by introducing a licensing system for insolvency administrators, increasing the qualification requirements to include a professional exam and training, and establishing supervisory bodies to regulate the profession of insolvency administrators.

In order to provide insight into the Moldovan insolvency procedure, we will deal briefly below with the major aspects and novelties of the new Insolvency Law (the “Law”).

Applicability of the Law. The new Law regulates all aspects of insolvency of any type of business entity, including state-owned enterprises, insurance companies, investment funds, and non-profit organizations. The Law also applies to individual entrepreneurs, i.e., sole traders (individual enterprises) and patent holders. The Law does not apply to banks or to insolvencies of state and local administrative entities.

Insolvency Procedure. The Law provides the following procedures for satisfying the claims of creditors on account of the debtor’s assets: (1) a restructuring procedure, involving a repayment of debt in accordance with a plan and the debtor’s financial and economic revival; or (2) a bankruptcy procedure, involving the sale of all debtor assets in order to repay its debts and the liquidation of the debtor. 

The Law also introduces two new procedures which are vital for realizing the expediency principle. The first one is the expedited restructuring procedure: an insolvency procedure that is meant to restore the debtor’s business and which may start immediately after application or after observation and should be completed within a short timeframe. The second one is the simplified liquidation procedure, which is an insolvency procedure to liquidate the debtor within a short timeframe. 

Grounds for Initiating the Insolvency Process. The general ground for initiating the insolvency procedure is a debtor’s inability to pay, while the special ground for insolvency is over-indebtedness of the debtor.

A creditor can file an application for debtor’s insolvency if the creditor is able to show that it has a legitimate claim against the debtor, the debtor has failed to pay the debt by the due date, and the creditor has notified the debtor that the debt is overdue. 

The debtor may initiate the insolvency procedure when there is a risk of inability to pay. The debtor is obliged to file an introductive application immediately, but not later than upon expiration of 30 days from the moment of occurring any of the grounds for initiating the insolvency procedure. The court shall pass a decision on initiation of the insolvency process within 10 days.

Realization of Debtor Assets. The term of realization or liquidation of the debtor’s insolvency assets shall not exceed two years from the moment of initiation of the insolvency procedure. Upon expiration of two years, any unused debtor’s assets shall be sold without delay in a Dutch auction without the consent of the creditors’ meeting, until the price falls to zero, at which point direct negotiations should be started.

Terms. The Law provides the specific terms for procedural actions, including, where permitted, the grounds for extending the relevant term. Thus, the parties are able to estimate the time required for completing each procedural step. For example, the Law stipulates that the term for examining an initiation of the insolvency process shall not exceed 60 working days, starting from the date of accepting the introductive application for examination.

Authorized Administrators. The lawmaker created a mechanism of authorization of and supervision over the insolvency administrators through the Law on Authorized Administrators of 2014.

Jurisprudence. At the moment there is no streamlined and well elaborated judicial practice on applying the new Insolvency Law. However, the Supreme Court of Justice – within one year of the new Law’s entry into force – has made a dedicated effort to explain how the legislative provisions should be applied by adopting a Decision of the Plenary Hearing of the Court on the Judicial Practice of Application of the Insolvency Law. Additionally, the Supreme Court of Justice publishes explications and recommendations of application of certain legislative rules, which have turned out to be a rather useful instrument for judges, insolvency attorneys, and businesses.

By Cristina Martin, Partner, ACI Partners

This Article was originally published in Issue 3.1 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

According to the most recent Doing Business rating, in 2015 Ukraine lagged behind in the “resolving insolvency” category, qualifying as 141st out of out of 189 economies considered. This rating reflects the sad reality Ukrainian businesses have been facing for years.

In practice, bankruptcy procedures have often been used for the undue enrichment of a company’s shareholders and management, who would transfer the assets of the company on the verge of insolvency to other companies controlled by them in order to prevent recovery by the company’s real creditors.

Although Ukraine’s Law on Bankruptcy was repeatedly amended and restated from 1993 to 2015, it still has inefficient mechanisms. 

Although envisaged by law, pre-judicial rehabilitation is rarely used because it is burdened procedurally by legislative requirements to collect a large volume of information. Thus, directors of insolvent companies (even those acting in good faith with respect to the creditors and the company) are often unable to apply to the court for pre-judicial rehabilitation. The only way out of the situation is the deregulation of pre-trial rehabilitation of the company and the incentivization of trustees in bankruptcy (insolvency officers) to use rehabilitation. 

A commercial court may initiate bankruptcy proceedings should the undisputed claims to the debtor collectively amount to 300 times the minimum wage and not have been satisfied by the debtor within 3 months after the deadline for their repayment. Creditors’ claims are recognized as undisputed if they are supported by a court decision which has come into force and which has been followed by a resolution on the be¬ginning of enforcement proceedings. One of the problems that occurs in practice is the suspension of enfor¬cement proceedings. Also, Ukrainian judges often arbitrarily require other proof for recognizing a creditor’s demands as indisputable, such as banking documents that have not been executed due to a lack of funds in the debtor’s account, and so on. These additional documents are not required by any legislative acts and can be, in practice, difficult to collect, leading to courts refusing to initiate bankruptcy proceedings. 

In order to identify all creditors and others who wish to participate in the debtor’s reorganization, an official publication of the commencement of bankruptcy proceedings is made by the commercial court on the website of the Supreme Commercial Court of Ukraine. Internet publication is a step forward in comparison to the hard-copy newspaper publication that was required in the past. Online searches have simplified the monitoring of bad-faith counterparties, in comparison to the flipping through newspaper announcements by an in-house lawyer in order to check the names of announced insolvent companies and comparing them to the list of the company’s counterparties that used to be required.

Creditors with claims arising before the date of initiation of bankruptcy proceedings must submit a written statement of the requirements to the debtor to the relevant commercial court, as well as confirmation documents 30 days from the date of the announcement’s publication. This time limit is not subject to renewal. In our view, 30 days is an extremely short period and it is discriminatory, especially with respect to foreign creditors of a Ukrainian company.

In our view, certain legislative provisions still encumber the procedure and should be amended. For instance, insolvency officers should be provided with full access to relevant information by state authorities in order to discover the assets of an insolvent entity, and the authorities should be obliged to provide the information at no cost, and promptly. Also, the obligation imposed on a company that is declared bankrupt to continue financial reporting to state authorities (although legally the entity is prohibited from continuing commercial activity any longer) is in our view inefficient and should be abolished.

Not only the legal framework but also court proceedings impede the normal functioning of bankruptcy proceedings. The major problem of the implementation of the law in this sphere is that bankruptcy cases are litigated in Ukrainian courts for years, and the deadlines prescribed by the law are constantly being extended, which is often a result of the abuse of rights by parties to the bankruptcy proceedings and often makes it impossible for unsecured creditors to recover any assets from a debtor involved in bankruptcy proceedings.

By Tatiana Timchenko, Partner and Director, Peterka & Partners Ukraine

This Article was originally published in Issue 3.1 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Introduction

Efficiency, independence, flexibility, professionalism, and protection of sensitive information are among the main reasons why parties to disputes prefer to opt for arbitration instead of ordinary courts. These benefits, however, do not come without a cost.

Arbitration can also be viewed as an expensive game where most of the fees are paid in advance by the requesting party. A financially distressed claimant may not be in a position to advance the costs and fees necessary to initiate an arbitration proceeding. A recent Hungarian court precedent highlights that, for this reason, in an ongoing liquidation, an arbitration agreement may not be enforceable.

An Arbitration Agreement May be Rendered Incapable of Being Performed 

In recent years the number of initiated liquidation proceedings has skyrocketed in Hungary. Many insolvent debtors entered insolvency after being unable to repay the credit facilities they received prior to the financial crisis.

Although most of these credit facility agreements contain arbitration clauses, an increasing number of insolvent debtors’ challenges to the banks’ decisions on drawstop, termination, or acceleration are being submitted to ordinary courts. The insolvent debtors usually argue that everyone should have the fundamental right and opportunity to assert or defend his or her rights before dispute resolution bodies, irrespective of financial condition, and thus they claim that the arbitration agreement was rendered incapable of being performed because the insolvent debtor is unable to advance the costs of the arbitration proceeding.

Hungarian Precedent Declaring That an Arbitration Agreement With a Company Under Liquidation is Unenforceable

At first the courts were divided on how to tackle these types of cases and whether to rely on the exemption granted by the Hungarian Arbitration Act, which allows ordinary courts to hear a case on its merits when an arbitration agreement is incapable of being performed. In 2014 the Supreme Court of Hungary issued its guidelines confirming that an arbitration agreement is not enforceable with respect to a company under liquidation, since such agreement is by definition incapable of being performed as a result of the claimant’s insolvency.

The Supreme Court of Hungary provided the following reasoning for this view: (i) the costs of the arbitration proceedings exceed the costs of an ordinary court case; (ii) in arbitrations the claimant must advance the arbitration costs in any case, and may not request any suspension or exemption from it; (iii) in arbitration proceedings the insolvent company’s creditors are not able to join; (iv) arbitration proceedings are not open to the public; (v) the arbitration proceeding is a one-instance proceeding without a right to appeal and with only a limited ability to have the award set aside; and (vi) arbitration proceedings are less effective than ordinary court proceedings.

Question Marks Behind the Supreme Court’s Reasoning

The need for support for financially distressed companies to enable them to obtain a fair trial is understandable, but the arguments of the Supreme Court of Hungary are not entirely convincing in establishing legitimate reasons for rendering an arbitration agreement “incapable of being performed” and thus to declare that, despite the agreement of the parties, ordinary courts will decide on the matter.

In our view the argument that because arbitration proceedings are closed to the public and creditors cannot intervene the rights of the debtor company are prejudiced to such an extent that its consent to arbitrate can be disregarded is unconvincing, to say the least. Similarly, it is questionable whether non-availability of an appeal, even in theory, should render an arbitration agreement “incapable of being performed” just because the claimant is under liquidation. Why would non-availability of appeal matter for insolvent companies but not for others? Similarly, we see no foundation for the court’s opinion that arbitration proceedings are less effective than court proceedings. How was “efficiency” measured by the ordinary courts? Is this statement scientifically, economically, or legally grounded, or just proof of the ordinary courts’ traditional bias against arbitration in general? 

The Supreme Court is also silent about a potential scenario in which the formerly insolvent company’s solvency is restored. Would a restored solvency re-establish the arbitration agreement’s formerly defective status? 

Unique Nature of the Hungarian Interpretation

It has to be noted that the issue discussed above and the interpretation of law in this context is not unique to Hungary. The exemption from being bound by an arbitration agreement on the basis that it is “incapable of being performed” has its origin in the UNCITRAL Model Law on International Commercial Arbitration. 

The Hungarian innovation is that, according to the Supreme Court’s interpretation, every arbitration agreement concluded by a company which then falls under liquidation is by definition incapable of being performed. To our knowledge there is no other jurisdiction that has interpreted the scope of Article 8 (1) of the UNCITRAL Model Law this widely, giving claimants in financial difficulty the ability to easily bypass their contractual undertakings with regards to arbitration. In our view such interpretation opened a Pandora’s box entitling companies who may have no more to lose to initiate lawsuits in bad faith to hinder enforcement and delay the closure of the liquidation proceeding. 

By Szabolcs Mestyan, Partner, and Balazs Fazakas, Associate, Lakatos, Koves and Partners

This Article was originally published in Issue 3.1 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

In the era of increased globalization, international trends have a strong impact on local ones, with national economies increasingly affected by movements and tendencies on the international scene. In such a setting, financial and insolvency issues troubling one corporation can easily become issues for related entities and partners abroad. A recent example is the EUR 2.56 billion cross-border insolvency case of Alpine Bau GmbH, one of the biggest cross-border insolvency and restructuring cases to date, which is having effects and implications in Serbia, too.

Insolvencies inevitably bring chaos and problems even at the national level – and the magnitude of these difficulties is only increased when they play out on an international stage. Serbia is no exception to this rule. As a result, UNCITRAL has created a Model Law on Cross-Border Insolvency in an attempt to provide effective mechanisms for dealing with the problems that tend to arise. Cross-border insolvency provisions based on this UNCITRAL Model Law were first introduced into the Serbian system in 2005 and have been subject to changes and improvements since, with the latest changes made in 2014 as part of the overall amendments to the Law on Insolvency. However, Serbian cross-border regulation still lacks some clarity, and additional improvements to Serbian legislation must be made to make it better suited to the needs of international trade and investments.

What follows is a brief overview of the basics of Serbian cross-border insolvency regulation.

The Serbian Law on Insolvency sets out three instances that call for application of its cross-border insolvency provisions: (i) when a foreign court or competent foreign body/representative requires assistance in connection with foreign proceedings; (ii) when the local insolvency judge/administrator requires assistance in a foreign country in connection with insolvency proceedings conducted in Serbia, in accordance with the Law on Insolvency; or (iii) when foreign proceedings are conducted simultaneously with insolvency proceedings in Serbia, in accordance with the Law on Insolvency.

Under the Law on Insolvency, Serbian courts generally have exclusive jurisdiction for instigating, opening, and conducting insolvency proceedings against debtors whose center of primary interests is situated in Serbia (“main insolvency proceedings”), as well as for cases arising thereunder. Serbian courts may also establish jurisdiction against debtors who merely have a permanent business establishment in Serbia (“secondary proceedings”). Both the center of primary interests and permanent business establishment are defined in line with UNCITRAL Model law. 

For cross-border insolvencies, insolvency proceedings are generally governed by the law of the state of their original instigation, with the exception of segregation/secured claims with respect to the assets located within the territory of Serbia, which are governed by Serbian law, and the effects of the insolvency proceedings on employment contracts, which are construed in accordance with the law governing those contracts. 

In order to have direct access to Serbian courts and a debtor’s assets in Serbia, a foreign representative must file a request for recognition of the foreign proceedings as the primary or secondary foreign proceedings (depending on whether they take place in the state where the debtor has the center of its primary interests or its permanent establishment) with the competent court in Serbia. The court will decide upon such requests without delay and recognize foreign proceedings if the applicant has filed proper documentation, including but not limited to the proof that foreign proceedings were initiated and that the foreign representative was appointed. However, the court may refuse to take any action that is contrary to Serbian public policy. Upon and after instigation of the insolvency proceedings against a debtor whose center of primary interests is in Serbia, foreign proceedings may only be recognized as secondary foreign proceedings.

For the purpose of protecting a debtor’s assets or creditors’ interests, Serbian courts may, upon request of foreign representatives, issue interim relief measures. Once foreign proceedings are recognized as primary, automatic relief measures occur, aimed at preventing the initiation of new proceedings concerning the debtor’s property, suspending enforcement measures directed at the debtor’s assets, and prohibiting the transfer, encumbrance, or other disposal of the debtor’s assets. If appropriate, these measures may also be issued after recognition of foreign proceedings as secondary. 

Unlike in other jurisdictions, the ruling on recognition of foreign proceedings does not need to be published. Nevertheless, it is advisable to have it published, at least in the form of an annotation on the commercial register’s webpage. 

After recognition of the primary foreign insolvency proceedings has been obtained, secondary insolvency proceedings in Serbia may be commenced only if the debtor has assets in Serbia.

By Natasa Lalovic Maric, Partner, Wolf Theiss Serbia

This Article was originally published in Issue 3.1 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Romania’s recently enacted Insolvency Law (Law no. 85/2014) provides clarity by requiring that an updated consolidated table of creditors be included as a necessary and natural step in insolvency proceedings.

While this much needed legal provision will help streamline future insolvency proceedings, the previous Insolvency Law (Law no. 85/2006) still continues to govern those proceedings which commenced before the new law was enacted. The lack of a clear and express legal basis for updating the consolidated table of creditors in the previous Insolvency Law continues to create confusion and gives rise to contradictory case law in the majority of ongoing insolvency proceedings.

The important legal clarification comes into play in cases where certain claims are partially or entirely paid off after the consolidated table of creditors has been published and the judicial receiver does not publish an updated table, citing the lack of a legal basis for doing so. This creates a risk that after the creditors’ meeting vote, a creditor could contest the decision and minutes of the meeting on the basis that they are not legal because the creditors voted on claims which were not real. 

Such situations are actually quite common in practice. In many legal insolvency proceedings under the previous Insolvency Law, certain claims were in fact partially or totally paid off. Without a specific legal provision allowing the consolidated table of creditors to be updated to accurately reflect the actual debts, the minimum quorum and approval thresholds at the creditors’ meetings were set in accordance with the full list of claims – including those already paid off.

In recent insolvency literature and case law, many have argued that the update of the consolidated table of creditors is in fact legal within insolvency proceedings performed under the previous law. A good example of this is the recent Civil Decision no. 3930 dated 11.05.2015 of the Cluj Court of Appeals.

There are several arguments in support of this point of view. First of all, it is obviously contrary to the fundamental principles of legality that former creditors, whose claims have already been paid off, would continue to take part and vote in creditors’ meetings when they no longer hold an interest in the insolvency proceedings. Moreover, since voting power in creditors’ meetings is related to the size of one’s claim, in the case of partial payment of a creditor’s claims, it is only fair that the creditor’s voting rights should be altered accordingly. Since these situations clearly illustrate that the consolidated table of creditors can undergo changes after publication, it seems only logical that the table should be updated. Taking the overly rigid approach that it cannot be updated due to the lack of explicit legal provisions can lead to unnecessary complications in the proceedings.

However, some advocate a much stricter interpretation of the law and maintain that updating the consolidated table of creditors is not legal under the previous Insolvency Law. Most of these arguments point to the absence of explicit legal grounds on which such an action is to be taken. Such arguments have been reflected in recent case law, as in Civil Decision no. 3824 dated 02.04.2014 of the Suceava Court of Appeals. 

This is one of the many issues the new Insolvency Law has solved through clearer and more explicit legal provisions, diminishing the risk of obstacles arising from rigid and formal readings of insolvency norms. The update of the consolidated table of creditors is properly set out in article 49 para. (4): “in such cases where debtors’ debts have been entirely or partially paid off, the table of creditors will be modified correspondingly.” With respect to the procedure for convening and holding creditors’ meetings, article 108 para. (2) states that alongside the publication of the convener, “the table of creditors updated with the amounts paid off or modified during the proceedings will also be published.”

Even though future insolvency cases in Romania will be subject to the new and much clearer norms, this more practical interpretation should also be uniformly applied in ongoing cases under the previous Insolvency Law no. 85/2006. Not only is this in line with the general principles of law, but it also upholds the spirit of the Insolvency Law, which ultimately aims to provide a clear and fair process to protect creditors and address their claims.

By Tiberiu Csaki, Partner, Dentons Bucharest

This Article was originally published in Issue 3.1 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The vast number of non-performing loans (NPLs) in Greece – i.e., loans not paid for over 90 days – has created an enormous burden on the Greek economy over the past six years, hampering its already shaky recovery.

Each of the “memoranda” implemented during the last few years has explicitly provided for Greek bank recapitalizations in order to tackle capital deficits. The IMF and other European institutions have repeatedly pointed out the need for a new, flexible regime to regulate the transfer of NPLs, which would not only increase the net worth of Greek banks but would also release them from time- and money-consuming collection procedures.

Law No. 4354/2015 (the “Law”) introduced a new regime on NPLs, providing for the transfer of NPLs from banks to a special purchase vehicle (SPV) called a “Corporation for the Transfer of Claims from Non-Performing Loans” (a “Corporation”). A Corporation must be established in Greece either via a main corporate seat or a branch if it is seated in another EU member state. Credit institutions or securitization companies can also be involved in the market for NPLs where the relevant activity falls within the scope of their activity as per their Articles of Association. 

In order to participate in the relevant NPL market, a Corporation must have been granted a license from the Bank of Greece (the “BoG”), which is the regulatory authority for the national financial system. A license will be granted upon the successful completion of all good-standing and law-compliance checks carried out by the BoG. A prospective Corporation must have drawn up a business plan for NPL collection, which shall explicitly set out the Corporation’s main principles and methodology. Where all requirements are fulfilled, the license shall be granted within 20 days from the application.

Once the relevant license has been obtained, the (newly regulated) process for the transfer of NPLs is rather simple. A transfer agreement must be concluded between the initial creditor – usually a bank or a securitization company – and the Corporation, having as subject one or more non–performing loan contracts with the same debtor. Any liens (i.e., mortgages and encumbrances), are transferred automatically to the Corporation. A copy of the transfer agreement must be registered with the special directory on notional pledges. Following that, the Corporation shall be the legitimate claimant against the debtor and shall be entitled to file a lawsuit, settle, or otherwise manage the claim. 

The new framework establishes a rather flexible and low-cost regime, allowing banks to dispose of any unwanted NPLs against an instant repayment of part of their nominal value. This regime also generates a new market branch – the so-called “Secondary Market of NPLs” – which actually enhances the prospects for recovery of the Greek economy at a low cost/risk rate. On the investing Corporations’ side, the new Law comes with a simplified, straightforward proposal to invest in a highly regulated environment of enhanced safety and investment protection. 

Overall, the new NPL legislation must be seen as a boost to the national banking system and a strong movement towards FDI attraction; fast cash flow in bank funds is expected to lose its strict lending policy and, combined with the careful screening of loan applicants, will contribute to the re-initialization of the national economy and catch the eye of foreign investors.

By Panagiotis Drakopoulos, Partner, and Evangelos Margaritis and Mariliza Kyparissi, Senior Associates, Drakopoulos

This Article was originally published in Issue 3.1 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

A January 1, 2016 amendment to the Polish Act on Bankruptcy and Restructuring should be of equal interest not only to debtors but also to creditors and potential investors as among the new instruments the amendment introduces to the Polish legal system is a “pre-packaged sale,” which will create new ways to invest in distressed assets.

The Polish pre-packaged sale is modeled on the “pre-pack” solution that exists in a number of jurisdictions with well-developed restructuring laws, such as the USA, the Netherlands, and the UK. It enables an investor to buy a company’s business in the course of bankruptcy proceedings, but on terms agreed between the investor and the debtor before formal bankruptcy proceedings commence.

Polish style pre-packs allow a debtor to submit to court, at the same time as a bankruptcy petition, a motion for the acceptance of the terms and conditions of sale of all or a substantial part of its enterprise or assets as agreed with a potential buyer. The motion must specify the prospective buyer and the purchase price, and must include a description and estimate of the value of the purchase subject, prepared by a court expert.

When issuing a decision on a declaration of bankruptcy the court may accept the proposed terms and conditions of sale. It will compare the proposed purchase price with the price likely to be achieved in the course of bankruptcy proceedings (decreased by the costs of such proceedings). If the former price is higher, the court must accept the motion. If the price offered is close to the amount obtainable during bankruptcy proceedings, the court may accept the motion only if it is supported by an important social reason, such as the retention of employment or the possibility to preserve the debtor’s undertaking. 

Under the pre-pack framework, information on the sale of the enterprise does not become public any sooner than upon a declaration of bankruptcy. 

A disadvantage of the pre-pack solution is that it is not a transparent procedure for selecting a buyer for the bankrupt company. This may not be satisfactory for all creditors. (The only situation where a pre-pack will not be able to be conducted without a creditor’s prior consent concerns assets encumbered with a registered pledge, if a pledge agreement provides for the satisfaction of a pledgee by way of seizure or public auction of the pledged asset.) 

Its undeniable advantage, however, is that the sale of the enterprise is not preceded by protracted bankruptcy proceedings, which can take several months or even years. During such period the debtor’s assets usually significantly decrease in value, and instead of bringing profit they generate costs related to keeping them secured. Pre-pack makes it possible to get a considerably higher purchase price by minimizing the risk of deterioration of the company’s customer and supplier bases. It also reduces the opportunities for third parties (e.g., suppliers or subcontractors), to disrupt the continuation of the business during bankruptcy proceedings. The fact that it mitigates the risk of a substantial decrease in the value of the debtor’s company makes pre-packaged sale highly attractive for creditors whose claims will be satisfied from the proceeds of such sale. 

From the investors’ point of view, it is particularly important that a pre-packaged sale of a debtor’s enterprise operates as an enforced sale (i.e., excludes encumbrances). Thus, the investor will not be bound by the liabilities of the previous owner (including tax duties) and will purchase the assets clear of any encumbrances, save for some minor exceptions (including, for example, non expiry of a public road ease). 

Pre-packaged sale is therefore conducted at a much higher level of legal safety for investors than that generally available in a standard enterprise acquisition. Moreover, the due diligence process may be significantly limited, thus allowing a considerable reduction in the costs of the whole transaction. 

For these reasons pre-packaged sale avoids many of the legal threats inherent in standard enterprise acquisition transactions and considerably reduces the costs and time involved in acquiring distressed assets.

In practice the only difficulty may be in obtaining a valuation that unambiguously confirms that the price offered by the investor is higher than the amount that may be obtained during liquidation bankruptcy proceedings under general rules.

By Malgorzata Chrusciak, Partner, and Agnieszka Ziolek, Senior Associate, CMS

This Article was originally published in Issue 3.1 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

One of the initiatives of the European Commission is to shift the focus of national insolvency rules away from liquidation and toward encouraging viable business entities to restructure at an early stage to prevent insolvency. In March 2014 the Commission issued a Recommendation on a new approach to business failure and insolvency, inviting member states to implement certain principles in their national insolvency procedures to stabilize businesses in financial difficulties.

To this end, in December 2015 the Bulgarian Ministry of Justice published a draft of a proposed supplement to the Bulgarian Commerce Act introducing a new procedure for the stabilization of business entities in distress.

This procedure may be initiated by a business (sole proprietor or corporation) upon its impending illiquidity, unless it is caused by the business’s own dishonest or unreasonable behavior. To establish impending illiquidity, the draft law provides a cash flow test, i.e., if the business entity would become illiquid in the upcoming six months based on its pending obligations. Creditors are not authorized to initiate the stabilization procedure. It is also unavailable if more than 20% of the obligations are towards related parties, if a stabilization procedure has already been started in the previous three years, or if there is a petition to initiate insolvency proceedings.

Currently, the draft law requires the business entity to file a rather complex petition with multiple attachments with the competent court. Other than the usual lists of creditors, secured claims, and payment schedules, the petition must also include a detailed summary of the entity’s commercial and business activities, material transactions, and transactions with related parties. The petition should also provide an in-depth explanation of the circumstances that have led to the impending illiquidity, as well as propose a management, financial, and business plan to rescue the business. This pre-packaging of the stabilization plan (no creditor can propose a stabilization plan, even if the initial plan has failed), combined with the short time period to remedy any irregularities after filing, could be a serious hurdle for business entities to restructure through the proposed procedure.

Under the draft law, one of the consequences of an initiated stabilization procedure is that the court will impose a stay on all enforcement procedures and set-offs that were previously possible. Additionally, contracts could be terminated at the request of any of the parties if they could threaten the stabilization procedure.

The court may also appoint an administrator to supervise the day-to-day activities of the business entity under stabilization. The administrator has flexible powers, and these can be tailored by the court depending on the situation of the distressed business entity and the need for supervision. In particular, the court may revoke the powers of the business to dispose of its assets or make payments and may assign these powers to the administrator. Another important function of the administrator is to compile a list of creditors and their ranking based on the amount of their claims. The court may also appoint auditors and experts to evaluate the financial condition and the proposed plan of the business entity.

Creditors whose claims have been recognized are divided into tiers according to the type of claim – secured claims, claims of public authorities, claims under employment relations, unsecured claims, and claims from related parties. The proposed plan is accepted when each creditor tier has approved it with a quorum of three-fourths of the number of creditors in the respective tier and a simple majority based on the value of the claims. To be valid, creditors holding at least three-fourths of the value of all claims (excluding the claims of related parties) should participate in the vote.

Under the proposed new law, the plan has to be approved no later than four months after the procedure has started. If approved, the plan is binding on all the parties, i.e., the debtor and the creditors with accepted claims. The accepted plan can propose different restructuring methods, such as the extension of maturities (but not for more than three years); a haircut of the claims (by not more than 50%); debt-to-equity swaps; selling of the going concern; or a division of the company. The plan must have strict deadlines for its implementation. Non-performance of the plan may lead to its revocation and the reinstatement of all claims and enforcement procedures.

Although the draft law is in an advanced stage of discussion, it still needs improvement to make it a more business-friendly legal tool that can ease the tensions between debtors and creditors during distressed periods. Nevertheless, the draft act represents an important step forward in the development of a modern insolvency and restructuring framework in Bulgaria.

By Svilen Issaev, Managing Associate, Konstantin Stoyanov, Associate, Kinstellar Bulgaria

This Article was originally published in Issue 3.1 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.