Category: Uncategorized

Problems Encountered by Creditors

The bankruptcy of a counterparty is an extremely serious problem for business in Belarus. 

Belarusian legislation specifies the following priority of creditors in bankruptcy proceedings: (1) Court expenses and costs of the publication of information required by legislation, as well as settlement of the debtor’s liabilities which arose after bankruptcy proceedings had been opened; (2) Claims of individuals to whom the debtor is liable for an injury to life or health; (3) Calculations on severance payments, remuneration of persons working for the debtor under labor agreements (contracts) and civil contracts, which are subject to execution of works, services, or creation of intellectual property rights, on compulsory insurance contributions, contributions for pension insurance, other payments to the Social Welfare Fund of the Ministry of Labor and Social Protection of the Republic of Belarus, and the payment of insurance premiums on compulsory insurance against accidents at work and occupational diseases; (4) Calculations on obligatory payments to the budget (as a rule, payment of taxes and customs duties); (5) Claims of creditors for obligations secured by a pledge of the debtor’s property; and (6) Settlements with other creditors.

Thus, the demands of ordinary businesses are satisfied after employees, the government, and banks.

According to data provided by the Department of Reorganization and Bankruptcy of the Ministry of Economy of the Republic of Belarus in 2014, only 5% of creditors’ demands were satisfied. The goal of increasing the share of foreclosure by bringing management and business owners to vicarious liability has not been achieved. For example, in 2014, only 2.73% of all outstanding claims of creditors were credited with vicarious liability.

To sum up, based on the ranking of creditors’ claims and statistics of real satisfaction, one can reasonably conclude that ordinary merchants collect no more than 3% of debts from a bankrupt.

Reason for Creditors’ Problems.

This low percentage of collected debts is linked to actions of the debtor’s beneficiaries taken within the period preceding the bankruptcy.

A large number of bankruptcies are prepared for long before a company is actually declared insolvent. “Stripping” of existing assets is a key element of such preparations, with stripped assets later used by other companies controlled by the same beneficiaries.

Belarusian legislation provides two options to oppose asset stripping: (1) Recognition of transactions involving asset stripping as invalid by the court, and (2) Bringing to justice. 

a) Recognition of Transactions as Invalid

There are several grounds on which transactions made in the pre-bankruptcy period may be deemed invalid: (1) A significant understatement or overstatement of the transaction price relative to the price usually charged for similar goods or works or services (for example, the sale of real estate at a price two times lower than the cost according to an independent assessment); (2) Choosing one creditor over another (i.e., bypassing the priority of creditors); (3) Deliberate harm to the creditors’ interests, if a counterparty of the transaction knows or ought to know of the harm.

Most lawsuits challenging transactions for the withdrawal of debtor’s assets are satisfied by courts.

b) Bringing to Justice

The law lists several offenses for which debtors can be held criminally liable, including false bankruptcy, concealing a bankruptcy, deliberate bankruptcy, and obstruction of debt recovery by creditors. 

Deliberate bankruptcy is the most common in practice. For the 15 years deliberate bankruptcy has been criminalized, there were only 14 convictions delivered. The difficulty is obvious, as the police need to prove a direct intent to commit a crime for criminal prosecution.

How to Solve Creditors’ Problem

The government has chosen two ways to increase recovery from a bankrupt:

a) A willingness to impose vicarious liability. Courts are increasingly willing to impose a finding of vicarious liability on management and shareholders of a bankrupt. There is an increase in the number of decisions on the recognition of transactions made by the debtor’s beneficiaries as fraudulent (transactions on donation or “sale” of assets).

b) Changes to the Criminal Code. The government plans to declare deliberate bankruptcy as a crime, regardless of the direct intent to commit a crime.

We believe that these measures together will objectively reduce the unfair nature of bankruptcies in Belarus. In the current economic situation in Belarus, only drastic actions can save business from collapse.

By Dmitry Arkhipenko, Managing Partner, and Andrey Tolochko, Advocate, Revera law firm

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.

Let us briefly inform you that the latest Amendment of Slovakian Act No. 513/1991 Coll., the Commercial Code (“Amendment”), which became effective as of January 1, 2016, introduced new provisions governing so-called “companies in crisis” as well as new equity protection rules. Due to the fact that in some industries companies traditionally have a poor equity base, we would like to draw your attention to these new rules.

Companies in Crisis 

Nowadays companies are required to constantly monitor their financial status – in particular, the status of their assets and liabilities. The consequence of being a “company in crisis” is that stricter duties and restrictions are applicable and managing directors will be liable for any non-compliance. Furthermore, certain benefits provided to the company during the “crisis” (shareholder loans, etc.) cannot be returned during that period as they are considered part of the company’s equity. 

The new equity protection rules relate to “companies in crisis”; i.e., those companies that are bankrupt (over-indebted/insolvent) or in a state of imminent bankruptcy. There is a risk of bankruptcy if the ratio of the company’s equity to its obligations is less than 4:100 in 2016 (4% equity capital ratio). The ratio shall be raised to 6:100 in 2017 and to 8:100 in 2018. A company which has a negative equity balance is in any case regarded as being in crisis. 

Pursuant to the Amendment, this status shall apply only to limited partnerships whose general partners are legal entities. It will not apply to banks, insurance (or reinsurance) companies, or electronic money institutions.

General Ban on Return of Provided Loans During the Crisis

The Amendment introduces a general ban on the return of certain benefits provided by the shareholders to qualified persons during the crisis, which applies even if the company would remain in crisis as a result of such provided benefits being returned. The purpose here is the prior satisfaction of claims of other creditors before the claims of the shareholders. Benefits made in violation of this must be returned to the company. The managing directors of the company shall be liable jointly and severally for the return of these benefits.

Equity Substituting Loans 

In connection with the company in crisis, the Amendment establishes the specific term of so-called “equity substituting loans” – those loans (or similar transactions that correspond to them economically) that are provided to the company in crisis. This does not apply to all such credits and loans provided in the crisis period. For instance, short term loans with a maximum term of 60 days are not covered — though if such loans are provided repeatedly, the new equity protection rules will apply. 

Qualified Persons

Loans shall be deemed to be equity substituting loans if they are from the following persons (collectively referred to as “Qualified Persons”): (a) a member of the statutory body, an employee reporting directly to the statutory body, an authorized signatory (procurator), the head of a branch of an enterprise, or a member of the entity’s supervisory board; (b) a person who holds a direct or indirect share representing at least 5% of the company’s registered capital or voting rights in the company, or who has the ability to exercise influence over the management of the company which is comparable to the influence corresponding to the share; (c) a silent partner; (d) a person related to persons referred to in points a), b) or c); or (e) a person acting on the account of the persons referred to in points a), b) or c).

If a Qualified Person provides collateral to secure the company’s debts during the crisis, the creditors may enforce their rights secured by the collateral directly against the Qualified Person.

Stricter Obligations of Managing Directors

The Amendment further introduces new obligations on a managing director during a crisis. A managing director who discovered or who should have discovered that the company is in crisis shall, in accordance with the requirements of necessary care, do everything that would be done by a reasonably careful person in a similar position. Pursuant to the recently introduced stricter provisions on liability for the late filing of a petition for bankruptcy in the Act on Bankruptcy and Restructuring, the kinds of decisions a managing director against whom liability is claimed made during the crisis shall also be taken into account.

Conclusion

The Amendment is a step towards mirroring legislation in Germany and Austria, where these principles have already been applied for some time, with a significant amount of case law available. In fact, some rules are even stricter than they are in those neighboring countries (for instance, the Qualified Persons definition). Therefore, due to the possible significant impact to shareholder loans or similar payments provided to companies (for instance, by venture capital firms), any financing during a period of crisis needs to be properly considered. In summary, the latest change in the Slovak legislation is another important step to conform the Slovak business environment with European business practices. 

By Michaela Stessl, Country Managing Partner Slovakia, DLA Piper

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 business environment in Kosovo is becoming highly attractive for investors, offering a favorable tax system, easy access to EU and regional markets, an abundance of natural resources, a skilled and cheap workforce, protection for foreign investments, and a generally well developed legal framework. Nevertheless, according to World Bank’s Doing Business Report, resolving insolvency remains Kosovo’s weakest indicator, as it ranks 163 out of 189 countries.

The legal framework governing Bankruptcy in Kosovo (Law No. 2003/4 on Liquidation and Reorganization of Legal Persons in Bankruptcy, hereinafter the “Bankruptcy Law”) reflects international best principles and modern developments, but it remains short in addressing important aspects of bankruptcy, and there is no developed practice by the courts. It is the lack of court practice and the business community’s distrust in bankruptcy proceedings that causes Kosovo to rank so low in the World Bank’s Doing Business Report. 

Bankruptcy remains untested in Kosovo, with neither creditors nor debtors considering it a suitable remedy in times of financial difficulties, and with courts therefore unable to develop practices to enhance legal security for parties entering into bankruptcy. This approach has also been influenced by creditors’ heavy reliance on taking security interests in movable and immovable personal property, as well as in personal, bank, and corporate guarantees, mainly due to the efficient enforcement system in Kosovo and developed practice and legislation in these areas. In addition, the lack of reliable financial reporting and underdeveloped corporate governance structures in Kosovo further enforced these patterns.

Salient Features of the Current Bankruptcy Law

Kosovar Bankruptcy Law provides for two types of proceedings: one is liquidation and sale of the debtor as a whole or sale of assets, and the other is reorganization of the debtor, aimed at preserving the debtor’s business in accordance with the reorganization plan approved by the court based on voting by the creditors. 

The threshold for initiating bankruptcy proceedings is very low in Kosovo, which fails to take into account short term liquidity problems and materialization of normal business risks which do not justify bankruptcy. A creditor or group of creditors may initiate bankruptcy proceedings by filing a petition with the competent court if: (1) the overdue debt exceeds EUR 2,000 and is at least 60 days overdue; (2) it is not disputed; and (3) the debtor generally is not paying debts as they become due. In addition, a debtor may initiate voluntary bankruptcy by filing a petition with the competent court if: (1) overdue debt exceeds EUR 5,000 and is at least 60 days overdue; and (2) the debtor generally is not paying debts as they become due. 

In terms of efficiency, transparency, and procedural timelines, the Bankruptcy Law is in line with best practices. The World Bank’s Doing Business Report calculates that completing a bankruptcy case in Kosovo should take 2 years, compared to 1.7 years in OECD high income countries. In addition, there are mechanisms which ensure transparency of the whole bankruptcy process. 

The competent court for bankruptcy cases is the Basic Court in Prishtina – the Department for Commercial Matters. While this is not a specialized court for bankruptcy, it is specialized in Commercial Law, handling disputes between business organizations. Judges have attended several specialized training programs in bankruptcy, and there have been many other investments in building the capacity of the courts. In addition, the Ministry of Justice has certified bankruptcy administrators who have undergone a rigorous training program and examination.

New Legal Framework for Bankruptcy in Sight

Bankruptcy has become a priority for Kosovo in its efforts to improve the business environment. In order to further modernize the legal framework with respect to bankruptcy, a new law on bankruptcy is foreseen in the legislative agenda of the Assembly of Kosovo, and the Ministry of Trade and Industry is already preparing a draft. The new law will purportedly bring significant changes and offer more detailed solutions. First, it will introduce a better and a more balanced solution between interests of secured creditors in relations to unsecured creditors and other stakeholders. Second, it makes Kosovo more debtor friendly, slightly favoring reorganization and empowering the debtors in cases where reorganization is an option. Third, the new law will address the bankruptcy of debtors as natural persons, which are not regulated at all by the current Law on Bankruptcy. Finally, there are requests that the new law also regulate the issue of cross-border insolvency cases, taking into account the Foreign Business Organizations and their branches in Kosovo. Therefore, the new law will greatly increase the legal security of the parties in bankruptcy. 

In conclusion, the legal framework concerning insolvency in Kosovo is in line with best international practices; however, it remains untested. With the new advanced Bankruptcy Law in Kosovo’s legislative agenda and ongoing investments in capacity building of the courts, administrators, and other relevant institutions, the prospects for the future are bright.

By Visar Ramaj, Partner, Ramaj & Palushi

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.

Croatia’s insolvency regime underwent thorough changes in 2015 and is expected to continue down this road in 2016 as well. On September 1, 2015, a new Bankruptcy Act entered into force in Croatia, radically changing the previously existing bankruptcy regime in force for over 18 years. Furthermore, on January 1, 2016, a new Consumer Bankruptcy Act was introduced as an entirely new piece of legislation in the Croatian insolvency framework.

The newly enacted changes in the general bankruptcy regime primarily aim to increase efficiency and ensure a higher degree of transparency in bankruptcy proceedings. With bankruptcy procedures lasting for decades and yet remaining unresolved, available data indicates that Croatia is 24th out of 28 EU member states when it comes to the duration of its bankruptcy proceedings. On the other hand, changes made within the consumer bankruptcy legislation were introduced with a more socially responsible role in mind, in order to provide over-indebted individuals with the opportunity to restructure their personal debts.

The most significant change introduced by the Bankruptcy Act is the combined regulation of both bankruptcy and pre-bankruptcy proceedings (pre-bankruptcy proceedings were previously regulated by a separate act). Pre-bankruptcy proceedings have now become a court procedure available to debtors not meeting the conditions for initiating bankruptcy proceedings and wishing to avoid bankruptcy altogether by settling with their creditors. Also, a clearer distinction between pre-bankruptcy and bankruptcy reasons was introduced. The previous overlap of these reasons led to uncertainty, as debtors were seldom sure whether they should initiate bankruptcy or pre-bankruptcy proceedings. As of September 2015, pre-bankruptcy and bankruptcy reasons will be substantially different: incapability of payment and over-indebtedness will only be reasons for initiating bankruptcy, while threatening incapability of payment will become a pre-bankruptcy reason. 

Further, one of the most important developments is the automatic initiation of bankruptcy proceedings by the Financial Agency if a debtor’s accounts have been blocked for a period of more than 120 days. Although this is a positive step towards resolving the status of numerous insolvent companies, it could prove a burdensome and lengthy procedure, as it requires the Financial Agency to initiate bankruptcy proceedings against a total of 19,646 companies employing over 10,000 people and owing the state over HRK 19.8 million. In light of the large number of insolvent companies, they are expected to be divided into tiers, with priority given to debtors that have been blocked for over 1,000 days, followed by debtors blocked for a period between 500 and 1,000 days, and debtors blocked between 360 and 500 days, until the status of all debtors with blocked accounts is resolved. 

The new Bankruptcy Act has also made a significant leap forward in facilitating communication by electronic means and in facilitating information access. Publications regarding bankruptcy proceedings will no longer be conducted through the Croatian Official Gazette, but instead through the e-bulletin board of competent courts, which will increase transparency and ease access to relevant information for bankruptcy debtors, creditors, and interested parties.

The provisions of the Consumer Bankruptcy Act regulate the procedure under which individuals who are not performing business activities (or are performing business activities as individual entrepreneurs, but under a certain value threshold) can initiate bankruptcy proceedings, thereby settling and/or restructuring their personal debts and controlling their future payments. According to publicly available data, in the last quarter of 2015 more than 323,887 Croatian citizens had their personal accounts blocked, and their total debt amounted to HRK 35.8 billion, most of which (HRK 19.5 billion, or more than 54%) was owed to various banks. Blocks on individual accounts are often the result of numerous enforcement proceedings and usually last for months or even years. As this situation is detrimental not only to the personal status of the indebted individuals, but also to the economy as a whole, the new Consumer Bankruptcy Act was enacted with the purpose of attempting to resolve the status of numerous indebted individuals.

Changes introduced through the newly enacted Bankruptcy Act can be deemed positive as they do provide for a certain degree of increased efficiency and transparency, at least on paper. However, certain practitioners have already raised concerns with respect to the application of its provisions and have forecasted that the Bankruptcy Act will soon need to be amended. The Consumer Bankruptcy Act, while recognized as having potential to aid in resolving the existing lending crisis, has also been dubbed the “Consumer Euthanasia Act” as experts are of the opinion that only a very limited number of consumers can in fact benefit from it, rendering the favorable effect of the act questionable. In any event, the implementation of all these changes remains subject to practical scrutiny as bankruptcy procedures initiated under the new rules are still underway and have not yet been finally resolved. Whether the new acts will stand the test of practical implementation remains to be seen.

By Emir Bahtijarevic, Managing Partner, and Ema Mendusic Skugor, Senior Attorney, Divjak Topic Bahtijarevic

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.

During the last year, various insolvency- and restructuring-related matters came into the spotlight in Latvia.

Some of the highlights were amendments to the Insolvency Law defining and increasing executive liability as well as making insolvency administrators subject to additional restrictions. Lobbying by industry players such as credit institutions and foreign investors for additional improvements continued as well.

Joint Liability for Executive Board Members

According to the latest Insolvency Law amendments, executive board members now have joint liability for company debt if: (i) accounting documents are not handed over to the insolvency admnistrator, or (ii) those accounting documents are incomprehensible or do not accurately reflect the commercial acitivities of the company. This liability amounts to the entire sum required to fully meet creditor claims. The court may, however, limit liability if it is proved that another board member was responsible for the accounting matters. Therefore, explicit division of executive board member responsibilities in a company’s internal regulations or otherwise is now more important than ever.

In addition, executive board members are now subject to personal liability for a company’s tax debt under certain conditions, including: (i) where the tax debt reaches a certain level (it is linked to minimum salary and is now approximately EUR 18,000); (ii) the executive board members failed to file for insolvency when obliged to; and (iii) the executive board members alienated the assets of the company to related parties after the tax debt arose. 

In 2014, some credit institutions started raising awareness of problems in the insolvency process following several fraudulent insolvency cases. The Foreign Investors’ Council in Latvia (FICIL) continued this initiative, calling for a fight against the abuse of law and continuing improvements of the insolvency system. Deloitte, which had been engaged by the FICIL to prepare a report on the economic impact of the insolvency process abuse during the preceding seven years, reported overall financial losses in excess of USD 7 billion to all involved stakeholders. 

Control Over Insolvency Administrators

Insufficient control over insolvency administrators was another hot topic. New Insolvency Law amendments to improve the examination of and supervision over administrators are currently pending. However, some progress has already been achieved, as insolvency administrators are now considered ‘public officials’ with all related restrictions and reporting obligations. As a related note, as attorneys-at-law who are also insolvency administrators have successfully challenged this amendment in the Constitutional Court as it contradicts their status, this legislative proposal is subject to further improvements.

Statistics and Review

As regards the statistical trends, the number of insolvency proceedings initiated in 2015 increased by 7% compared to 2014 (67% of all proceedings concerned natural persons), while the number of legal protection proceedings decreased by 36%. Companies from the retail, wholesale, and construction industries dominated the statistics of new insolvency proceedings.

No large scale insolvency proceedings were initiated in 2015 comparable to the insolvency of Krajbanka AS at the end of 2011 and the insolvency of Liepajas Metalurgs AS in 2013 (which impacted the GDP of Latvia by as much as 1.5%). As regards the latter, at the end of 2014 an investor was found and the company was sold. Unfortunately, 2015 proved that it was not really a success story and the company still has financial difficulties to overcome.

Our firm was particularly proud of the successful completion of a five-year restructuring (insolvency) of the industrial park Dommo Biznesa Parks. The insolvency proceedings of two companies owning the industrial park were terminated after reaching settlements with all creditors. This was one of the success stories of distressed asset restructuring in Latvia in the recent years, especially as operation of the business was not interrupted during the restructuring proceedings.

What should we expect from 2016? It is our impression that the new amendments of the Insolvency Law and other developments during 2015 are just the beginning. The recent trend of increasing executive liability and imposing restrictions on the insolvency administrators should continue. However, it is very likely that the focus will shift to enforcement and implementation of these measures and testing of their limits. 

By Vairis Dmitrijevs, Senior Associate, Head of Corporate and M&A, Vilgerts

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.

Bankruptcy and reorganization are the two primary procedures available for solving a collective action problem in dealing with financially troubled debtors, and both are regulated by the Montenegrin Insolvency Act. Bankruptcy envisages settlement with creditors by sale of the debtor’s assets or sale of the debtor as a legal entity, while reorganization involves settlement with creditors in accordance with an adopted reorganization plan which redefines mutual debtor-creditor relations.

Grounds for initiation of insolvency proceedings over a Montenegrin corporate debtor are: (i) the permanent insolvency of the debtor (i.e., a debtor cannot respond to its financial obligations within 45 days from the date of maturity of the obligation or has completely suspended all payments for more than 30 consecutive days); or (ii) over-indebtedness, (i.e., the value of the assets of the debtor is lower than the values of its liabilities).

Insolvency proceedings may be initiated by: (i) a creditor, (ii) the debtor, or (iii) the company’s liquidator before the commercial court in Podgorica. Parties involved in insolvency proceedings are: (i) the insolvency receiver, (ii) the insolvency judge, and (iii) the creditors’ committee. Once insolvency proceedings are initiated, all management and representation authorities are entrusted to the insolvency receiver and all authorizations of the former management are revoked. Where a reorganization plan is adopted during the insolvency proceedings, the management of the debtor is determined by the reorganization plan. 

The Montenegrin legislature, recognizing the importance of the continuation of business by financially troubled companies and the negative impact that terminating such companies may have on the market, introduced reorganization as an insolvency measure to serve a dual purpose: financial recovery of the debtor and a favorable settlement of creditors’ claims. Reorganization is to be implemented in accordance with a reorganization plan, which can be submitted to the insolvency judge either simultaneously with the petition for the initiation of insolvency proceedings or after the opening of the insolvency proceedings. If the latter, the plan of reorganization should be submitted within 90 days following the date of the insolvency proceedings’ opening. A reorganization plan may be submitted by the debtor, the receiver, creditors holding at least 30% of the aggregate amount of the secured claims, creditors holding at least 30% of the aggregate amount of the unsecured claims, or persons owning at least 30% of the share capital of the debtor.

For the sake of uniformity and creditor protection the legislature has envisaged the same creditor payment priority rankings for both reorganization and bankruptcy. Insolvency creditors are classified into the following payment priority rankings: (i) unpaid gross salaries of debtor’s employees up to the amount of the annual minimum wage in the two years prior to the insolvency proceeding opening, and employee claims for work-related injuries, (ii) all public income claims (i.e., taxes and other liabilities owed to the state) due in the last three months prior to the insolvency proceeding opening, except for contributions for pension and disability insurance, and (iii) other creditors’ claims. It should be noted that costs and expenses of the insolvency proceedings and the obligations of the insolvency estate are ranked senior to all creditors’ claims. 

The Montenegrin Insolvency Act does not envisage an equitable subordination of claims and thus further incentivizes parent companies (and other affiliates of the debtor) to finance the operation of their subsidiaries through debt rather than equity. 

The outcome of insolvency proceedings depends on whether a reorganization plan has been adopted in the course of the insolvency proceedings. Where no reorganization plan has been adopted, an insolvency proceeding will result in bankruptcy of the debtor, which involves: (i) the sale of all the debtor’s assets, (ii) settlement with the debtor’s creditors from the bankruptcy estate, and (iii) termination of the debtor. As an exception, an insolvency proceeding may end with bankruptcy entailing only the sale of the debtor as legal entity – thus without necessitating its termination. On the other hand, if a reorganization plan is adopted and verified, the competent court adopts a decision to suspend the insolvency and the debtor continues to carry on its business. The reorganization itself is finished once all reorganization measures have been fulfilled and creditors’ claims settled.

Amendments to the Insolvency Act are currently in legislative consideration. Such amendments are aimed at aligning the Montenegrin Insolvency Act with relevant EU legislation as well as making insolvency proceedings more efficient by shortening the deadlines and clarifying certain provisions that in practice created obstacles due to a wide range of possible interpretations.

By Nikola Babic, Partner, and Jovan Barovic, Attorney at law, Moravcevic Vojnovic i Partneri in cooperation with Schoenherr

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.

Following many years of fierce discussions and opposition from the banking lobby, Russian lawmakers finally decided in June 2015 to allow individuals to declare themselves bankrupt. Before the amendments, the Federal Law of 26.10.2002 N 127-FZ “On Insolvency (Bankruptcy)” (the “Insolvency Law”) allowed individual insolvency for private entrepreneurs only.

The new version of the Insolvency Law, which has been in force since October 1, 2015, may not have come at the best of times, as the economy is in a recession and banks hold around one trillion rubles (approximately USD 12.5 billion) in overdue consumer loans. Of course, not all of those are expected to go bankrupt. Still, the scale of the consequences is still uncertain.

Although the general norms of the Insolvency Law apply to individuals as well, many specific regulations should be kept in mind. Unlike with the insolvency of a legal entity, where the minimum amount of claims should be no less than RUB 300,000 (approximately USD 3,750), for instance, Art. 6 of the Insolvency Law raises the bar for individuals to RUB 500,000 (approximately USD 6,250). The debts should be overdue by three months at least and confirmed by a court resolution, or should be based on credit institutions’ demands, taxes and other state duties, notarized deeds, or alimentary obligations (Art. 213.5).

The application/bankruptcy petition shall be submitted by the debtor or his creditors to the Arbitration (Trade) Court at the debtor’s place (region) of residence. The applicant shall pay the insolvency fee of RUB 6,000 (approximately USD 75) plus RUB 10,000 (approximately USD 130) to the relevant court in order to secure the wages of financial managers. 

The court shall evaluate the debtor’s financial and other conditions and come to a conclusion regarding his/her ability or inability to pay the amounts demanded. Once all the documents have been submitted and the debts have been confirmed, the court shall start the procedure of debt restructuring. Its decree shall be issued within three months of the date when the application was admitted to examination (Art. 213.6 of the Insolvency Law).

Creditors have two months within the debt restructuring procedure to submit their demands. Unlike the procedure for legal entities, the deadline can be revised or the claims can be submitted during the procedure of debt restructuring (Art. 213.19, 213.14). Within sixty days of the expiration of the period for submitting creditors’ claims, a financial manager must hold the first creditor’s meeting (Art. 213.12). The court may, however (and most certainly will), extend the period for almost every procedure, since examination of the claims takes quite some time.

The first creditors’ meeting approves the debt restructuring plan, which is then subject to court approval. However, the plan may be amended afterwards on the debtor’s or the creditors’ initiative.

Should no restructuring plan be approved, the court will issue a resolution declaring a person bankrupt, which is followed by the disposal of the debtor’s assets in order to arrange settlements with creditors. The asset disposal should generally be finished within six months.

Some debtor property may not be put on sale, including the debtor’s only housing, individual belongings, foodstuffs, and money in an amount not to exceed the minimum cost of living. (Art. 213.25 of the Insolvency Law and Art. 446 of the Civil Procedural Code).

Assets for sale or money for settlements with creditors may be obtained through challenging the debtor’s transactions (including marriage contracts and other means of disposal of property) made within three years before he/she was declared bankrupt. This option is the most interesting for creditors, because during general enforcement proceedings, creditors do not have legal instruments to challenge the debtor’s transactions related to the disposition of his/her property, even when the only purpose of the disposition was to infringe creditor interests. 

Once the disposal procedure for assets is finalized (and creditors’ interests are settled proportionally), the debtor shall be deemed relieved of any obligations, including those not claimed within the insolvency procedures. This does not apply to debtors who were abusing their rights and avoiding their obligations, or those who provided false information regarding their property or hid assets (Art. 213.28 of the Insolvency Law).

As we can see from the above, the insolvency procedure for individuals can be quite long and complicated and has many nuances, which is generally true for the insolvency of legal entities as well. Nevertheless, both creditors and debtors seem to be interested in the new option: on the first day the new amendments to the Insolvency Law were in force, as many as 112 petitions for individual bankruptcy were received by the Arbitration Court of Moscow alone. It remains to be seen what the effect will be; however, it is already clear that the demand for insolvency professionals will grow in the near future in Russia.

By Marina Tarnovskaya, Partner and Director, Peterka & Partners Russia

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 year 2015 witnessed significant changes in the law governing the liability of executive directors (managing directors) of Austrian companies. As insolvencies are among the focal points of D&O litigation, the question arises whether these changes are likely to reduce the litigation exposure of managing directors of insolvent or distressed companies in Austria.

The amendments of the stock corporation act, the Aktiengesetz, and the limited liability companies act, the GmbH-Gesetz (the “AktG” and the “GmbHG”, respectively, and collectively the “BJR-Amendment”), which took effect on January 1, 2016, are the long-expected legislative responses to the tightening scrutiny of managerial actions by the Austrian judiciary. This trend, which is particularly visible in insolvency settings, has been unsettling to the Austrian business community for the last decade. The BJR-Amendment was only incidental to a broader legislative agenda aimed at shielding ordinary entrepreneurial risk-taking from criminal exposure. The pinnacle of this reform was, thus, a narrowing of the scope of the breach-of-trust statute of the Austrian Penal Code which had been interpreted in an ever-expansive way by the Austrian courts. 

Personal Liability of Managers for Failed Bona Fide Business Transactions? 

Preliminarily, under Austrian law, every decision by a corporate managing director is in principle subject to a 360° ex-post judicial review, with the burden of proof placed on the defendant managers. Moreover, Austrian law imposes a non-delegable personal duty on managing directors to have their companies file for bankruptcy (insolvency) without undue delay once they have become insolvent (i.e., without the requirement of obtaining shareholder approval). As not only illiquid but also over-indebted companies are deemed “insolvent,” in extreme cases managing directors face the choice of destroying a massive amount of shareholder equity by filing prematurely, or having to answer for the deepening losses of the company (and creditors) by gambling on the possibility that, within the 60-day grace period allowed by law, restructuring measures would turn around the company at least to the point of averting imminent insolvency. 

The Austrian Business Judgment Rule – A Missed Opportunity? 

Pursuant to the Austrian BJR-Amendment, a managing director is deemed to have acted with the “due care of an orderly business manager” if three requirements are met: (a) the managerial decision in question must not have been influenced by “extraneous considerations”; (b) the decision must have been taken in reliance on “adequate information”; and these prerequisites form the basis for (c) the managing director’s “permissible assumption to act in the best interests of the company.” 

However, the Austrian BJR-Amendment is beset by a variety of drafting weaknesses which, for now, limit its practical usefulness. For example, the concept of “extraneous considerations” (sachfremde Uberlegungen) is not otherwise used in the AktG or GmbHG in the context of disqualifying conflicts of interests. However, in the absence of a clear statement of legislative intent that every appearance of impropriety counts against the manger, it will be difficult to determine where to draw the line. Particularly in the insolvency context, lining up a new line of credit on affordable terms or any other reorganization measure may be seen as driven by the interest of the managing director to reduce his own exposure – which may constitute an “extraneous consideration.” 

Similarly, the requirement that a managing director must rely “on adequate information” raises the question of how much information is enough, e.g., in an insolvency setting, with respect to the financial condition of one’s own company? Even if one accepts that the differences between the legally required degree of real time awareness of financial problems for AGs and GmbHs will continue to apply, it is easy to see that the BJR-Amendment is unlikely to protect the managing director in borderline cases. 

Finally, it is not clear whether the BJR-Amendment is to be understood as an irrebuttable presumption or one that can be overcome in circumstances where managers accepted a risk that was outside of the parameters mainstream managers would consider acceptable, even though they are free from undue influence and were acting subjectively in good faith and based on adequate information. At some point, however, no amount of information will be sufficient to predict whether a start-up is going to succeed or fail, and it becomes simply a decision of how much risk a manager is permitted to accept. 

Thus, the ambiguities of the BJR–Amendment and its failure to address burden-of-proof issues will cause many commentators to place a good portion of the 2015 BJR-Amendment in the column of missed legislative opportunities – ironically, until the very Austrian judges whose wings were supposed to be clipped by it have transformed the Austrian BJR into a fully workable tool of Austrian corporate governance law.

By Christian Hammerl, Counsel, Wolf Theiss

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 government of Republika Srpska (RS), the smaller of the two entities comprising Bosnia and Herzegovina, adopted the Proposal of the Bankruptcy Law at its 53rd regular session, held on December 16, 2015. The proposal was then forwarded for parliamentary procedure.

The adoption of a new Bankruptcy Law, envisaged in the Reform Agenda for BiH 2015-2018 adopted at all government levels in Bosnia and Herzegovina, represents the most comprehensive package so far of socio-economic and judicial reforms, and it is supported by all levels of government in Bosnia and Herzegovina. According to the EU delegation in Bosnia and Herzegovina, the implementation of the reform agenda is a prerequisite for the country’s membership in the EU. While progress has been made regarding certain points of the Reform Agenda, reform of the bankruptcy proceedings still lies ahead. Also, the Economic Policy for 2015 of the Government of RS laid down measures designed to improve the exhausted economy, and the adoption of the new law on bankruptcy is envisaged as one of them. 

The issue of bankruptcy is one of the most essential aspects for the overall economic situation in Bosnia and Herzegovina. There are multiple flaws within the current legal framework, including the untimely initiation of bankruptcy proceedings, insufficiency of debtor assets, low level of settlement of creditors, high costs and excessive duration of bankruptcy proceedings, and so on. 

The adoption of the new Bankruptcy Law in RS is an effort to resolve some of these weaknesses. For instance, with regard to stimulating a timely initiation of bankruptcy proceedings, it stipulates significantly higher penalties than the current law does for debtors who fail to submit a proposal to initiate bankruptcy proceedings once the necessary conditions are met. In addition, the proposal also determines the authority competent for initiating these penalty proceedings. This authority would also be competent for ensuring the timely launch of bankruptcy proceedings by, inter alia, drawing up a list of debtors which are up to 60 days behind in fulfilling their monetary obligations, publishing the list on its website, and issuing a notice on the obligation of the debtor to initiate bankruptcy proceeding within three days of the list’s publication. 

In addition, the most critical element of the Proposal is the introduction of financial and operational restructuring proceedings for insolvent debtors. This provision of the proposal also aims to provide creditors with more favorable conditions for settling their claims than those available during bankruptcy proceedings. The basic idea is to enable the debtor to continue its business activities by avoiding bankruptcy proceedings. Still, the initiation of restructuring proceedings is not mandatory, nor is failure to initiate them subject to any sanctions. 

The Ministry of Justice of RS has declared that the Proposal of the Bankruptcy Law is partially harmonized with the acquis and legal acts of the Council of Europe, with significant fulfillment of obligations stipulated by Council Regulation (EC) No 1346/2000 of May 29, 2000, on insolvency proceedings, while full harmonization will be possible as of the moment of accession to the European Union.

The Federation of Bosnia and Herzegovina (the “Federation”) – the other entity comprising Bosnia and Herzegovina – has also adopted the Reform Agenda for BiH 2015-2018, by which it committed itself to creating a more effective framework for the implementation of bankruptcy proceedings, but concrete steps are yet to be undertaken by the Federation’s stakeholders. 

As the proposal is yet to be evaluated by the National Assembly of RS and yet to even be drafted in the Federation, these regulatory developments constitute only a step in the right direction for Bosnia and Herzegovina on its road to the EU. 

By Emina Saracevic, Partner, and Saida Porovic, Associate, SGL – Saracevic & Gazibegovic Lawyers

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 last couple of years, Slovenia, like other member states of the European Union, has experienced a deep financial crisis, which has resulted in the beginning of numerous restructuring proceedings (court and out-of-court) of strategically important Slovenian companies.

The majority of these proceedings ended successfully either by concluding master restructuring agreements (MRAs) between banks, other creditors, and different companies, or by confirming compulsory settlements. Indeed, there was a 240% increase in successfully completed restructuring proceedings (i.e., compulsory settlements and preventive restructuring proceedings) from 2013 to 2014. The number of successful signings of MRAs shows that significant improvement has been made in terms of overcoming the current financial crisis, as well as in finding a way out.

Recently, most of the financial restructuring proceedings have come to the last, or “exit” phase, with the creditors now seeking other options to close their exposures in the recently restructured companies. As a result, it seems that most strategically important companies (such as Pivovarna Lasko d.d., Perutnina Ptuj d.d., Cimos d.d., Mariborska livarna Maribor d.d., Paloma d.d., and Trimo d.d.) have successfully avoided insolvency, and they will now use the opportunity to achieve further business growth. Due to their successful restructurings, the value of these companies has risen, and some of them have already been successfully sold, helping restart Slovenia’s economic growth.

With the financial restructuring proceedings of strategically important Slovenian companies gradually coming to its final phase, the focus should now be shifted to setting up a more appropriate legal framework for restructuring non-strategic companies – those defined as “micro” and “small-sized” in the Slovene Companies Act – that account for more than 98% of all registered companies in Slovenia and contribute a lion’s share to the nation’s economy. 

The Ministry of Justice has recently published a proposed amendment to the insolvency legislation (ZFPPIPP-G) which will provide additional measures for expeditious restructuring of micro- and small-sized companies. Among the most important changes the proposed amendment will bring is the option for small-sized companies to file a proposal for the initiation of a preventive restructuring proceeding, which is currently reserved solely for medium- and large-sized companies. The proceeding enables a company which is not yet insolvent but which is likely to become so within a year to obtain certain legal protections against its financial creditors (mainly banks) in the form of a three-to-five-month stand-still period (with an option for prolongation) in which negotiations between the company and its financial creditors can take place. Provided that they result in the conclusion of a financial restructuring agreement (FRA), the agreement may be confirmed by the court by an order that certain measures of financial restructuring (e.g., reduction, postponement of the maturity, or reduction of the interest rates) contained in the FRA also apply to holders of financial claims who did not sign it.

Another proposed change that will significantly improve the position of creditors in insolvency proceedings affects the rules governing the simplified compulsory settlement proceeding. Should the proposed legislation be adopted, small-sized companies will no longer be able to initiate a simplified compulsory settlement proceeding. On the other hand, creditors of the small-sized companies will gain the right to propose the initiation of a (regular) compulsory settlement proceeding, within which secured claims may also be restructured, and the creditors’ committee may appoint a creditors’ representative to monitor the day-to-day operations of the debtor, request the court’s authorization to manage the debtor’s business, and so on. Among the financial restructuring measures in this proceeding is also the spin-off. Along with the debtor, creditors may also propose their own financial restructuring plan.

It is believed that the proposed legislative changes will further reduce the number of bankruptcy proceedings against companies registered in Slovenia (this number already fell by approximately 14% in 2015 compared to 2014).

According to the statistics provided by Ministry of Justice, the average duration of insolvency proceedings has grown slightly in recent years. On average, compulsory settlement proceedings in lasted 199 days in 2013 but 296 days in 2015, while preventive restructuring proceedings lasted 121 days in 2014 and 166 days in 2015 (although this change of duration may be related to the greater complexity of recent proceedings). Now, with the proposed legislative changes, it is expected that new legal measures will provide for prompt and more effective restructuring, which is of significant importance for the acceleration of the Slovenian economy.

However, according to the Resolving Insolvency Report as a part of its Doing Business project by the World Bank, Slovenia is already ranked 6th in the world on average duration of insolvency proceedings (0.8 years), 15th on average cost of insolvency proceedings (4% of the estate), and 12th on general resolving insolvency rank. 

The passing of the amendment will enable Slovenia to further position itself as a center of excellence in SEE when it comes to resolving insolvency and to compete successfully with other Adriatic countries when it comes to the legal tools for restructuring of over-indebted corporations, making them more attractive for investors.

By Uros Ilic, Partner, and Uros Brglez, Associate, ODI Law Firm

Editor’s Note: After the February 2016 issue of the CEE Legal Matters magazine was published, ODI informed us that its article had been co-authored by Uros Brglez. This version of the article has been revised to reflect that information.

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.