Bankruptcy draft nears cabinet debate

A draft of Slovakia's new bankruptcy law, regarded as the key to the government's plans to restructure the country's corporate and banking sectors in 2000, is nearing submission for cabinet approval. The authors of the draft say it will strengthen the rights of creditors in the bankruptcy process, and will cause the extinction of many of the country's stagnating industrial dinosaurs.
Under Slovakia's existing bankruptcy law, the owners of troubled companies had been able to block the attempts of creditors to push their firms into closure and recover at least a portion of their assets. The country's state-owned banks were thus unable to write off their bad loans, something which will be essential to plans to restructure and sell them to foreign investors next year.


Advisor Jraj Renčko
photo: Courtesy Finance Ministry

A draft of Slovakia's new bankruptcy law, regarded as the key to the government's plans to restructure the country's corporate and banking sectors in 2000, is nearing submission for cabinet approval. The authors of the draft say it will strengthen the rights of creditors in the bankruptcy process, and will cause the extinction of many of the country's stagnating industrial dinosaurs.

Under Slovakia's existing bankruptcy law, the owners of troubled companies had been able to block the attempts of creditors to push their firms into closure and recover at least a portion of their assets. The country's state-owned banks were thus unable to write off their bad loans, something which will be essential to plans to restructure and sell them to foreign investors next year.

Juraj Renčko, an advisor to Finance Minister Brigita Schmögnerová and one of the authors of the bankruptcy draft, told The Slovak Spectator on November 17 that the new law would now give banks, rather than debtors, the upper hand in bankruptcy proceedings.

"Until now, banks have been powerless in facing their debtors, but once the revision is approved by parliament, banks will be in quite a strong position and will be able to use efficient tools before their assets depreciate," Renčko said. "The creditor will be given more rights in deciding the fate of the debtor company, and will have a chance to participate in the bankruptcy process as well."

Matthew Vogel, a senior analyst with Merrill Lynch in London, said the new law would have a significant impact on investor perceptions of Slovakia. "This is the sort of thing that investors notice," he said. "If Slovakia gets a World Bank adjustment loan [to defray the costs of bank restructuring], it may leapfrog the Czech Republic in the restructuring process."

The law was originally to have been prepared by the Justice Ministry, but justice officials demurred, saying they were not competent to draft the bill, and passed it on to the Finance Ministry. Now that the team of experts assembled by the Finance Ministry has finished the draft, it must be approved by the Justice Ministry, the government's legislative committee as well as various other ministries.

Renčko said he hoped the bill would be approved by the government and parliament in time to take effect on January 1, 2000.

Imposing discipline

One of the worst effects of the country's current bankruptcy law has been that debtors have had an indefinite time in which to 'tunnel', or strip the assets of their companies, in the assurance that the courts would take years to adjudicate their cases.

Katarína Mathernová, an advisor to Deputy Prime Minister for Economy Ivan Mikloš, said the new law would at last "impose discipline on debtors in the bankruptcy process." She said that asset stripping at doomed firms would cease as the efficiency of the courts inicreased. "The law will solve the problem of tunnelling, because its main aim will be to make the bankruptcy process a real threat for debtors," Mathernová said.

The draft law will be accompanied by a revision of the Commercial Code and the country's tax laws, and will draw a thick line between debts piled up before the announcement of the bankruptcy process, and liabilities incurred afterwards. "This [confusion over when debts were incurred] sometimes makes the bankruptcy process longer and more complicated, so it[the revision of the bankruptcy law] will help to make the process as quick as possible," said Renčko.

Saving firms

Inevitably, the bankruptcy law will aggravate social tensions around the country as struggling companies are forced to close and their employees are added to unemployment lists. Deputy PM Mikloš said on November 12 he expected unemployment to rise above 20% next year from the current 18.2%.

However, the boosters of the law say that creditors will have many incentives to keep marginally profitable firms alive.

According to the draft, a company which declares bankruptcy will not be forced to close its doors, but will be allowed to detach profitable divisions and continue operations, leaving the doomed parts to be sold off. "We believe that the law will put pressure on debtors to find reasonable solutions for their companies in order to prevent them from falling into bankruptcy," Renčko said.

Renčko added that since creditors would have a more flexible role in proposing restructuring plans for debtor companies, it would be in their interest to finance viable operations - further increasing the likelihood that many troubled firms would find a way to survive.

This optimistic view was shared by Martin Barto, chief of strategy at the state-owned bank SLSP. "If creditors have more exclusive rights to decide the company's fate, it will increase the debtor firm's chances to survive in case of bankruptcy," Barto said.

As a case in point, Barto cited the example of eastern Slovak steel-maker VSŽ, which has been in the grip of creditors since defaulting on a $35 million loan a year ago. "With creditors having a key role in the company's restructuring, VSŽ was able to renew its financial flows and has been trying to find its way out of troubles."

According to Renčko, the Finance Ministry intends to prepare a further revision to the bankruptcy law in 2001, which will take into consideration the experiences of developed economies with bankruptcy legislation.

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