The state National Property Fund (FNM) privatisation agency said July 4 that it will start taking a tougher approach in seizing assets from its debtors.
The Fund, which must pay 24 billion Slovak crowns ($480 million) by the end of this year to cover maturing bonds, was owed 26.7 billion crowns at the end of 2000, largely from debtors who bought state property during the 1990s and then failed to meet payment and investment obligations.
After recent negotiations with the Slovak Chamber of Executors (SKE), an independent body which advises on asset seizures, the two institutions announced that by the end of August they would sign a deal aimed at speeding up and improving the process of seizing assets from debtors.
Economic analysts said that the move could persuade other companies that using distraint (the seizure of property in order to obtain payment of debt) is a much more efficient and secure way of reclaiming debt than sending threatening letters through the post, the method Slovak firms currently prefer.
Four hundred billion crowns ($8.3 billion - almost half of Slovakia's annual GDP) - of debt is outstanding in Slovakia's corporate sector.
Among the biggest debtors to the FNM are JAS Bardejov, a shoemaker, which owes 433 million crowns, and Magnatech Slovakia, a magnesium producer, which owes 278 million crowns.
Cutting down time
On the basis of the contract, the SKE will give consulting and legal advice to the FNM before and during distraint procedures. Until now, the FNM has been dealing with seizure of property by first going to a court and then requesting a distraint order. The court then investigates the request to check that the debt is real, and after confirming this appoints an executor to deal with the process of seizing the assets. At this point debtors can raise objections to the process.
By first co-operating with the SKE, however, the FNM can make sure that it has followed the exact and correct procedure for pursuing debts through asset seizures before it approaches the courts, thus cutting down the number of objections that debtors can present later.
"At the moment, seizing assets takes too long because debtors can raise whatever objections towards the process that they want," said SKE President Ján Jonata.
"We used to use asset seizures to reclaim our debts only occasionally. But the advantage of this contract [with the SKE] is that as soon as we decide to use distraint to reclaim a debt, the process will not take several months, as it usually does now, but only a few weeks," FNM president Jozef Kojda told The Slovak Spectator July 10.
Distraint underused
Sector analysts and the SKE say that many firms currently try to reclaim debts by persuasion, sending angry letters and reminders of unpaid dues, rather than contacting groups like the SKE to claim back debt in the form of assets.
They argue that this often considerably prolongs the process of reclaiming debt, sometimes causing creditor companies serious financial problems as they wait for bills to be paid.
"Some politicians are fond of announcing they are going to claim payments for debts without using executors, while businesses also write letters and ruminate on how to persuade debtors to pay up. This contract [between the FNM and SKE] will show them that there are people here to do this job [seize assets]," said Jonata.
By not considering distraint sooner, analysts also say, creditor firms run a risk of never seeing their debts repaid as firms go into bankruptcy. Slovakia has registered an increase in bankruptcies from 224 in 1997 to 2,400 by the end of 2000.
Admitting that it has been motivated by the need to swell its coffers to allow it to redeem its bonds, the FNM also says the rising number of bankruptcies in Slovakia has led it to turn to the SKE.
"The number of bankruptcies is growing, and once a firm declares bankruptcy its assets cannot be seized [as debt repayments]," said Kojda.
The government last year introduced a new Bankruptcy Law designed to speed up bankruptcy proceedings in courts and give creditors more opportunity to retrieve assets. However, institutions such as the World Bank have said that Slovakia's bankruptcy procedures are still far too long, with many cases stretching for months on end, leaving assets in failed companies in limbo, and creditors unable to claim them for long periods of time.
More than 6,000 bankruptcy cases remained pending in courts in March this year.
General reluctance
Despite the FNM's apparent enthusiasm in taking a more aggressive approach to its debtors, analysts say that many Slovak companies are still reluctant to pursue debtors. When contacted by The Slovak Spectator, many firms, including Slovakia's largest bank, Slovenská sporiteľňa, refused to comment on their methods of reclaiming debts, claiming the issue was too sensitive to discuss.
However, Jana Červenáková, an analyst at economic think-tank MESA 10, said that Slovak firms, especially those dealing with larger debtors, rarely resort to distraint. When dealing with smaller firms who owe negligible sums of money, she said, firms prefer not to go through the time-consuming process, while with larger companies with bigger debts, creditors steer clear for other reasons.
"These companies are afraid of many larger debtors, especially if these debtors are part of a certain powerful group in the country," said Červenáková.
Entrepreneur Jozef Majský, one of Slovakia's richest men and owner of some of the largest companies in Slovakia, such as auto firm Sipox Holding, has warned in the past that if he is forced to pay debts to institutions such as Sociálna poisťovňa (SP), the state insurance company, he will lay off thousands of workers. Slovakia's unemployment rate is 18.5%.
It is threats like these, Červenáková said, that make creditors reluctant to approach distraint. The SKE says that with the FNM's lead, and over 100 billion crowns in bad debt racked up by state banks in the 1990s waiting to be recovered, distraint may soon be more common.
