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(Re)constructing Restructuring and Insolvency in CEE

(Re)constructing Restructuring and Insolvency in CEE

Issue 9.10
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There is a growing concern, across CEE, about a potential wave of insolvency and restructuring proceedings. Given the economic aftermath of COVID-19, coupled with the ramifications of rising inflation and interest rates, energy crisis concerns, and the war in Ukraine – the road ahead seems bumpy at best.

A Rising Tide

“We expect an increase in demand for consulting in the area of insolvency/restructuring,” Graf Patsch Taucher Partner Clemens Freisinger begins. “We see this expected development in the fact that COVID-19-related government support and subsidies have expired, deferrals of levies and taxes by the public health insurance funds and financial authorities were terminated, and the suspension of the obligation to file for insolvency in the event of over indebtedness has ended,” he says of Austria.

Resonating Freisinger’s words are also DLA Piper Slovakia Country Managing Partner Michaela Stessl, Lextal Partner Magnus Braun, JPM Jankovic Popovic Mitic Senior Partner Nenad Popovic, Penteris Partner Daniel Klementewicz, PRK Partners Managing Partner Vaclav Bily, Tuca Zbarcea & Asociatii Partner Catalina Mihailescu, and Nazali Tax & Legal Managing Partner Ersin Nazali. “An increase in insolvency/restructuring work in 2023 is likely, given the expected increase in the number of bankruptcies/restructurings,” Stessl says about Slovakia. “For example, while the number of declared bankruptcies was 160 in 2020, it increased to 287 in 2021. In 2022, so far, 235 bankruptcies have been declared.”

COVID-19 and the war in Ukraine are the main drivers for such expectations in Turkey, according to Nazali. “The tension between Russia and Ukraine caused supply chain disruptions, transportation bottlenecks, shortages, and high input costs, especially in energy and commodities, which negatively affects all of Europe and even the world,” Nazali says. Citing the decrease of the value of the Turkish lira “by almost half in 2022,” he says that inflation rates in Turkey have gotten significantly higher than in other parts of the world. “Due to uncontrollable inflation rates, Turkey has adopted a new economic model in 2022 and aims to direct people to the stock market and other investment instruments by keeping interest rates low, and also aims to achieve growth in exports,” Nazali explains. Still, even with this in place, the number of insolvent businesses in Turkey, which was 14,000 in 2019, is expected to reach almost 20,000 by the end of 2022. And he shares that, according to the Allianz Trade 2022 Bankruptcy Expectation Report, “approximately 18,500 businesses are predicted to go insolvent in Turkey in 2023.”

Chiming in, Mihailescu adds that Romania has seen the number of insolvencies soar by “12% in the first half of 2022, compared to the same period last year, as more and more companies are struggling to survive in the current post-pandemic context.” Given everything, she anticipates “even higher levels of corporate insolvencies in Romania, especially once the various economic stimulus measures expire and as a result of the negative impact of the war in Ukraine.”

The same rings true in Serbia, where Popovic reports a “continued trend of increasing interest rates by central banks in an obviously overheated economy,” which, coupled with high energy costs and inflation, means it will “become increasingly difficult to service loans.”

But Not Everywhere

On the other hand, things do not appear to be as grim (yet) in other jurisdictions. “So far, the Bulgarian economy has encountered various COVID-19-related effects and, as of February 2022, also the effects of the war in Ukraine, but a surge in insolvencies is not yet one of them,” Schoenherr Attorney at Law Tsvetan Krumov reports. “Although the Bulgarian state was slow in implementing measures to help companies affected by the pandemic and, more recently, by the increase of energy prices –measures which turned out to be insufficient – there has been no visible increase in bankruptcy proceedings since 2020.” 

The words of Cipcic-Bragadin Mesic & Associates Partner Marina Mesic, Cobalt Partner Gatis Flinters, RPHS Managing Partner Fisnik Salihu, and Kavcic Bracun & Partners Managing Partner Simon Bracun echo that sentiment. “Contrary to the financial crisis of 2007, during the last decade lending practices in Latvia have been very conservative,” Flinters says. “As a result, banks and commercial lenders generally feel rather confident about the quality of their loan portfolios and expect only a moderate increase in insolvency/restructuring work in 2023.” Flinters believes that the wave of insolvency and restructuring, if it were to hit, “will likely affect only some specific industries, but not the Latvian economy as a whole.”

Salihu, looking ahead, adds that “considering that insolvency/restructuring did not increase during the pandemic and after, we do not expect any increase in insolvency/restructuring work in 2023.” However, he points to another direction as one of the key reasons – the fact that the legal framework is a bit hazy: “companies, in general, were unable to understand the procedures at hand, and insolvency is still seen as a procedure with a negative reputational impact.”

Finally, Bracun says that Slovenia has experienced a decrease in the number of insolvency proceedings, yet this might change “soon, due to the ongoing challenges on the energy market and inflation in Europe. The Slovenian government has been working on different legislative measures to try to mitigate these risks, but it remains to be seen how successful it will be, especially in the business sector.”

Legislative Landscapes – The Change So Far

Following the overall status and prospects of insolvency and restructuring work across CEE, it stands to reason that the legal landscape, as such, will change, if it hasn’t already.

“The implementation of Directive (EU) 2019/1023 through the Restructuring and Insolvency Directive Implementation Act will surely change the legal landscape of Austrian insolvency and restructuring law,” Freisinger says. “The core of the RIRUG is formed by the Restructuring Code – this is a new and complex set of rules that must be understood and subsequently applied in practice.” Still, Freisinger says it’s too early to assess the impact of those changes on market realities.

According to Mesic, the same directive has been influencing the legal landscape of Croatia. “The aim of Directive (EU) 2019/1023 is to remove obstacles that prevent viable companies and entrepreneurs in financial difficulties from accessing effective national frameworks for preventive restructuring and continuing operations, and also to enable honest insolvent or over-indebted entrepreneurs to use full debt relief, after a reasonable period, thus giving them a second chance,” she explains. The directive also incentivizes debtors to react quickly and expands trustees’ powers and responsibilities, Mesic adds.

In Slovenia, Bracun reports that the directive is yet to be implemented. Since it went before parliament for discussions, a “new government has been in place, which recognized the importance of its implementation, but has made little to no effort to propose a new draft of the Insolvency Act,” he explains. Furthermore, he reports that the government is battling the incoming energy crisis and a rising tide of inflation, which also directly relate to potential insolvency and restructuring proceedings.

In addition to Austria, Croatia, and Slovenia, other EU member states have been working on implementing the directive into their national legal landscapes, including Bulgaria, the Czech Republic, Poland, and Romania. Krumov reports that Bulgaria has had “a voluntary bank loan moratorium, prepared by the Association of Bulgarian Banks,” for 2020 and 2021, which ultimately resulted in a slowdown in bankruptcy cases. The moratorium was not extended into 2022. 

“In 2021, Poland introduced the National Register of Debtors, which is a new practical online tool providing up-to-date nationwide information on debtors and ongoing restructuring, bankruptcy, or secondary bankruptcy proceedings where the debtor has been banned from conducting a business activity, or proceedings for the recognition of a decision opening foreign insolvency proceedings concerning the debtor,” reports Klementewicz. According to him, the register allows for greater transparency of restructuring and bankruptcy matters.

In Turkey, new legislation has been introduced during the initial onslaught of the COVID-19 virus to help prevent a surge in insolvency proceedings. According to Nazali, “new regulations were needed to extend the legal periods in various branches of law, including bankruptcy/restructuring, to prevent loss of rights due to missing legal deadlines.” These regulations were temporary and are no longer in effect. However, the legal landscape regulating enforcement and bankruptcy was again altered in 2021, “to prevent an unconscious increase in the debts of the debtors and also ensure the continuation of the debtor’s economic activities, by subjecting the debtor’s transactions to the court’s permission,” he explains. 

… And the Change to Come

Looking ahead, Flinters says “the most important near-term target for Latvia is to properly implement the Restructuring Directive. This is long overdue, and its introduction has been delayed by many disagreements on the proper balance of stakeholder interests. From the point of view of financial creditors,” he explains, “it is vital to prevent the abuse of the restructuring procedure and artificial delays of insolvency proceedings if the debtor is beyond recovery.” Much like Flinters, Krumov believes implementing the directive to be of the utmost importance for Bulgaria.

In Slovakia, Stessl stresses that the legislative framework is “very formalistic and time-consuming.” Looking ahead, she expresses a desire for a framework regulating restructuring in such a way as to “provide more flexibility for the debtors to avoid bankruptcy.”

In Mesic’s view, the Croatian landscape would benefit from “the possibility of forcing the debtor to take restructuring measures in time, so that they are not left without the possibility to pay off their obligations. What most often happens is that the debtor becomes over-indebted and has no assets to pay off their obligations.” The situation in Serbia is similar, according to Popovic.

“Due to many inconsistent and unclear rules, the Insolvency Act was regarded as one of the most complex legislative acts in Slovenia,” Bracun reports. “This is especially noticeable for the provisions governing compulsory settlements. Several amendments have already improved the act significantly, however, there are still some procedures that require further tweaks to reflect recent market developments into the legal framework, and to make insolvency procedures more effective and transparent,” he explains. “The new government has acknowledged the need for updated insolvency laws, but it is still unclear when any new changes will be implemented,” making the environment somewhat unpredictable. 

In Romania, Mihailescu stresses the need for speed. “Contrary to the demands of the principle of celerity, insolvency proceedings in Romania are rather lengthy,” she says. “This is highly detrimental to the interests of all participants.” She believes that any legislative updates must focus on increasing efficiency and limiting the duration of insolvency proceedings.

No Further Changes

On the other hand, some think that no legislative updates are needed. Braun, for one, says that, “taking into account the complete overhaul of both the Bankruptcy Act and Reorganization Act in Estonia, no one would benefit from any further changes. Rather, all efforts are best spent on upholding the main purposes of these laws: just and swift proceedings with the maximum benefit of the creditors and a rightful outcome for the debtor.” Pressed to highlight an area in Estonia’s legal framework that could still use an update, Braun says that amending the laws “to enable seizing the assets of a third-party in respect of bankruptcy proceedings,” would be beneficial.

Finally, Nazali says that, in the case of Turkey, it is “crucial to make regulations that will maintain the balance of equity in the relations between the creditor and debtor.” He believes that tilting the scales towards either end could create serious issues. Looking at the bills submitted to parliament, he says no further changes are “currently planned regarding bankruptcy and restructuring” and, speaking of future legislation, he ventures that “instead of offering short-term solutions specific to current economic conditions … many factors, such as economic and social ties with other countries, from past to present, should be considered.” 

This article was originally published in Issue 9.10 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here