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Vital bankruptcy law passes final hurdle

Six months after its original deadline, parliament June 20 approved revisions to the Bankruptcy Law in one of the most important legal changes for the last few years, one which promised to breathe new life into the countryşs corporate and banking sectors.
Approval of the legislation, which comes into effect as of August 1 this year, demanded wholesale revisions in 14 laws, including the Commercial Code, Civic Code, Tax and Custom Laws.
The revisions were praised by government officials and analysts who heralded them as one of the major achievements of the present government, mainly because they gave extra incentive to foreign direct investment and helped economic transformation. "This legislation opens the door for real corporate sector restructuring," said Juraj Renčko, one of the authors of the revision and an advisor to Finance Minister Brigita Schmögnerová.

Six months after its original deadline, parliament June 20 approved revisions to the Bankruptcy Law in one of the most important legal changes for the last few years, one which promised to breathe new life into the countryşs corporate and banking sectors.

Approval of the legislation, which comes into effect as of August 1 this year, demanded wholesale revisions in 14 laws, including the Commercial Code, Civic Code, Tax and Custom Laws.

The revisions were praised by government officials and analysts who heralded them as one of the major achievements of the present government, mainly because they gave extra incentive to foreign direct investment and helped economic transformation. "This legislation opens the door for real corporate sector restructuring," said Juraj Renčko, one of the authors of the revision and an advisor to Finance Minister Brigita Schmögnerová.

However, opposition deputies critised the law saying that the government expected too much from it and that the current 18.7% unemployment rate would be put under even more pressure. "I think that it will be difficult to apply this legislation to the Slovak corporate environment," said Miroslav Maxon, economic expert at the HZDS senior opposition party and a former finance minister.

The main aim of the new law and supporting legislation is to give more rights to creditors and allow them to play a major role in determining the future path of a bankrupt company. The new regulations strengthen the position of creditors in bankruptcy cases by establishing a creditorsş council to oversee the bankruptcy process - something that is sure to clear the 'dead wood' out of the corporate sector, but may also lead to mass layoffs as inefficient firms are closed down.

Mixed reviews

Foreign analysts said the law was a positive step and good news for the banking sector, but warned that its implementation might be difficult. "The government and its agencies will have to do a lot of work on this," said Matthew Vogel, a senior economist on emerging markets with Merrill Lynch in London.

But Vogel stressed how important it was that the creditor's position was now secured in the new law. He explained that, comparatively, Slovakia's laws will now be tighter than those of the Czech Republic. "The bankruptcy law is not as effective as it should be [in the Czech Republic] because creditors don't have a strong position in the bankruptcy process," Vogel said.

One of the biggest criticisms levelled against the present legislation is that owners of financially troubled companies can block creditors' attempts to push their firms to closure and recover at least some viable parts of the company. The new law, however, in allowing creditors to force moribund firms out of business, allows the biggest state-owned banks to write off many of their bad loans, a process essential for the financial institutionsş restructuring and future sale over the next two years.

"This is very good for banks, an investment into the future of the corporate environment and makes business better. This is likely to reflect in the price of banks in their privatisation," said Martin Barto, head of strategy at Slovenská sporiteľna, one of four state-controlled banks slated for privatisation in the next 18 months.

Anton Marcinčin, a consultant with the World Bank, which helped to draft the new laws, agreed that the current law has been ineffective because there was no way banks could get their money back from stagnant debtor firms. "There was only liquidation and the company couldn't be sold as a going concern," Marcinčin said. He added that the new laws would allow company restructuring and would also let banks start lending again.

The new law speeds up the bankruptcy process by stipulating that a debtor is bankrupt when he owes money to creditors and is unable to settle obligations 30 days after the term of payment. Eighty days after this date company creditors are obliged to meet and decide whether they will declare the company bankrupt or try to revive it.

However, this will only be effective as of February 1, 2001 because as Renčko explained "many companies aren't yet ready for it".

Pre-WWII definitions of bankruptcy, according to Renčko, had held up the law's passage through government and parliament. "One of the most important tasks for the authors of the new laws was to explain to some officials engaged in the process of approval the new definition of bankruptcy," Renčko said.

"According to this [pre-1939] definition, bankruptcy means a company's liquidation, but in modern economies bankruptcy is the process in which a company's assets are transfered from one owner to another as soon as possible, so the company doesn't die.

"This new law breaks the dominant position of the judge and bankruptcy arbitrator in the bankruptcy process in favour of the creditor, and this was also something that took a longer time to persuade some people about," he added.

Renčko said that he knew of some dead businesses which could have survived if the law had been approved as originally scheduled in December last year. "But on the other hand I have to admit that all amendments proposed by deputies were constructive and strengthened creditors' rights," Renčko said.

"It would be better if these laws had been here three months or three years ago, but we are happy that they are in place now," Marcinčin said.

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