lessons learned

Transcription

lessons learned

LESSONS LEARNED
2010
Restructuring Loans and
Enforcement of Security
The most important lessons learned since the collapse of Lehman Brothers are that
no bank is too big to fail and that national banking systems are ill-equipped to deal
with a truly global financial market. In Central and Eastern and Southeastern Europe
(CEE/SEE), the financial markets that were dominated by Austrian banks experienced
unprecedented growth up until 2008. Since then, we have seen bank nationalisations
(Kommunalkredit, HYPO GROUP ALPE ADRIA AG), state rescue packages amounting to
hundreds of billions of euros, and cross-border loan lending (i.e., new lending without
state or EBRD/EIB support) coming to an abrupt halt.
In such times business relationships are stress-tested and lenders are reminded of
the risk return trade-off; i.e., the default risk materialised and borrowers defaulted all
over the region. At a time when entire customer groups in banks shifted into
restructuring groups, the focus of a law firm committed to the CEE/SEE region shifts
towards litigation, representation of creditors in insolvency proceedings, consensual
restructuring, and enforcement of security interests. In such an environment, Wolf
Theiss has found itself advising clients coming from all sides of the crisis: from
representing a group of Austrian lenders in one of the largest restructurings in the
CEE/SEE involving a bankrupt Slovenian state holding company, to handling
enforcement proceedings for the auctioning of real estate in Bosnia and advising on
the repossession of leasing equipment in the Ukraine.
Some of the lessons learned on a CEE/SEE level were:
•
CEE/SEE is not a homogenous region
•
Banks have been reliable partners in the region, working on solutions
with borrowers where there is a business case for recovery
It is the responsibility of advisors (tax, accounting or legal) to ensure that viable
solutions are found in a challenging legal environment such as in the CEE/SEE region.
Wolf Theiss is committed and has proven to be such a reliable partner for our clients.
2
1. INTRODUCTION
2. RESTRUCTURING
Consensual Restructuring
OVERVIEW
Non-Consensual Restructuring
3. ENFORCEMENT
4. COUNTRY PARTS
Albania
Austria
Bosnia and Herzegovina
Bulgaria
Croatia
Czech Republic
Hungary
Romania
Serbia and Montenegro
Slovak Republic
Slovenia
Ukraine
5. CONTACT DETAILS
3
1. INTRODUCTION
■
WE HAVE A PROBLEM LOAN.
■
BORROWER SHOULD ACTIVELY MANAGE
THE PROCESS.
EA
SL
N
SSO
LE
ED
RN
4
PROBLEM LOAN – DEFINITION
■
A Problem Loan requires action on the part of one or more Stakeholders in
order to avoid an Event of Default and, consequently, acceleration of the
Problem Loan
■
In special situations, a Problem Loan may receive (unexpected) third-party
support
EARLY WARNING SIGNS
■
■
Cause of distress can result from
■
a flawed business case
■
a general downturn in the economy
■
problems in the company’s business sector
■
too much leverage on the balance sheet
■
bad management
■
very often a combination of the above
Business case for recovery must address above causes and show a way out of
the crisis
PROBLEM LOAN – STAKEHOLDER ACTIONS
■
■
In general, Stakeholder actions may take any of the following forms
■
remedy Default (= potential Event of Default)
■
consensual restructuring
■
non-consensual restructuring
■
out-of-court enforcement
■
in-court enforcement
Special situations
■
hold-out Lenders
■
loan-to-own ‘Lenders’
■
third-party support
■
public interest in functioning of banking system
■
private interest in strategic asset
5
STAKEHOLDERS
Sponsor
100%
Shareholder
Shareholder Loan Agr
Equity
100%
Junior Facility Agr
Junior Loan
Junior Lender
Senior Facility Agr
Senior Lender
Trade Counter
-parties
ProblemCo
Borrower
Senior Loan
Purchase Agr
Trade Credit
other relevant parties
pension plan, Government etc.
EVENTS OF DEFAULT – BACK TO THE BASICS
■
Reps and warranties: due to reps and warranties Borrowers have a duty to
disclose information
■
Undertakings: due to positive / negative undertakings Borrowers are obliged to
act / abstain from acting in a certain way
■
positive undertakings may give rise to claims for performance and/
or damages
■
■
negative undertakings may give right to obtain an injunction
Financial covenants (to which equity cures may apply)
■
breach as first indicator of financial stress; however, covenant-lite
transactions in the market with few, if any, financial covenants
■
breach of covenant at the time of delivery of Compliance Certificate
■
from year end until delivery of Compliance Certificate –> Default
(include notification undertaking)
6
TYPICAL EVENTS OF DEFAULT
■
Payment default
■
refinancing at end of term may not be available
■
transactions without realistic exit scenario are in the market
■
Breach of financial covenant
■
Misrepresentation
■
Breach of undertaking
■
■
negative pledge (in some jurisdictions not legally valid)
■
conditions subsequent
LEGAL ISSUE
Cross-default
■
issue: do we want to trigger cross-defaults in other facilities or
hedging arrangements?
■
Occurrence of Material Adverse Effect
■
who decides: “in the opinion of the Facility Agent”
■
not often used alone because
■
reasonably likely to be unable to perform …
■
forward-looking
■
conservative interpretation by courts
■
Criteria of insolvency test met
■
Opening of insolvency proceedings
■
Attachment by other creditor(s)
■
Auditor’s qualification
■
Other Events of Default
7
EVENTS OF DEFAULT – EFFECTS AND ISSUES
■
■
Effects of the occurrence of an Event of Default
■
no further utilisations (already in case of Default)
■
Loan becomes a ‘callable’ Loan (i.e., acceleration)
■
triggers ability to freely transfer Loan Asset
■
security interests become enforceable (Enforcement Event)
Issues
■
Do I have a clear-cut Event of Default (e.g., non-payment, breach of
financial covenants) or a questionable Event of Default (e.g., Material
Adverse Effect)? –> risk of damage claims
■
■
Do I have an Event of Default that may be cured easily?
Do qualifications apply?
EVENTS OF DEFAULT – QUALIFICATIONS
■
■
Events of Defaults are mostly subject to qualifications
■
grace/remedy periods
■
monetary thresholds
■
factual reps and warranties: to the best knowledge qualification
■
legal reps and warranties: Legal Reservations qualification
■
materiality qualifications
■
Lenders and Agents required to “act reasonably”
Such qualifications may make it difficult to find a clear-cut Event of Default
which does not bear a potential liability risk for the Finance Parties in case of
acceleration / enforcement
8
ACCELERATION
■
Upon the occurrence of an Event of Default that is continuing, the Facility Agent
may, and shall if directed by the Majority Lenders
■
cancel Commitments
■
declare the Loan immediately due and payable
■
declare the Loan payable on demand
■
instruct the Security Agent to enforce the Transaction Security
■
In certain countries insolvency laws may prohibit the acceleration of a Loan
■
ProblemCo’s liquidity problems may further increase because
LEGAL ISSUE
■
suppliers may radically shorten payment terms or insist on cash on delivery
■
payment morale of customers may deteriorate
BORROWER’S ACTIONS
■
Borrower typically knows that the Loan has become a Problem Loan first and
should take immediate action
■
if possible, remedy the Default (= potential Event of Default) on its own
or, if not advisable / not feasible / does not make commercial sense
■
initiate a consensual restructuring process with its creditors –
TYPICALLY THE PREFERRED OPTION FOR ALL PARTIES
■
file with the competent court for insolvency proceedings and thereby initiate
non-consensual restructuring
■
ProblemCo must carefully monitor duties of its directors
9
BORROWER’S ACTIONS – REMEDY
■
■
Borrower generally wants to remedy an Event of Default on its own
■
to avoid the costs of going through restructuring
■
to a achieve a stronger position for any negotiations with its creditors
Borrower’s remedy may be achieved through
■
debt buy-back (at a discount)
■
equity cure (‘Mulligan’) (short-term fix)
■
Permitted Disposals (use proceeds to make prepayments) which may be
restricted by
■
■
Transaction Security (Release Letter required)
■
negative undertakings
Lenders’ concerns with debt buy-backs
may lead to unequal treatment of Lenders which contravenes the spirit of
■
syndicated lending
■
not all Lenders may be offered the chance to sell
■
not all Lenders may be offered the same selling terms
■
circumvention of prepayment/subordination restrictions
■
effects of purchase; i.e., Borrower’s affiliate may become Lender with
blocking minority stake
■
Lenders’ protection
■
transfer restrictions for Loan Assets; however, non-assignment clause may
only have relative effect
■
10
Majority Lenders definition excludes affiliates of Borrower
LEGAL ISSUE
2. RESTRUCTURING
■
■
THE CREDIT RISK MATERIALISES.
THERE IS NO TEMPLATE SOLUTION IN A
SITUATION OF UNCERTAINTY.
11
CONSENSUAL RESTRUCTURING
■
FINDING A COMPROMISE IN A SITUATION WHERE THERE IS NO
EXCESS VALUE TO BE DISTRIBUTED.
■
12
RESTRUCTURE, DO NOT JUST APPLY A BAND-AID.
INITIATION OF CONSENSUAL RESTRUCTURING
BY BORROWER
■
Notification of Problem Loan to Facility Agent may include
■
a request for a Waiver Letter (e.g., postpone testing of covenants)
■
a request for time to develop a business plan for recovery (rarely in place at
this stage)
■
■
a request for additional liquidity
■
putting something on the table
■
additional security
■
Sponsor support (debt buy-back, comfort letter etc.)
Message to Finance Parties should also include
■
convincing arguments that there is a business plan for recovery
■
an invitation to the Lenders to request all information required for them to
independently evaluate ProblemCo’s business
■
NOTE: BORROWER LOSES CONTROL OVER THE PROCESS
OBSTACLES TO CONSENSUAL RESTRUCTURING
■
Potential obstacles to consensual restructuring
■
ProblemCo has lost its credibility or its relationships with Lenders have
deteriorated
■
out-of-the-money Junior Lenders
■
hold-out Lenders
■
loan-to-own ‘Lenders’
■
ProblemCo is on the brink of insolvency and directors have a duty to file for
bankruptcy
■
nobody believes that there is a viable business plan for recovery => all
creditors want to exit as fast as possible
13
NEED FOR NEW MONEY
■
Often New Money is needed by the Borrower
■
may come from Sponsor, in case of a shareholder loan the issue of
equity-replacing shareholder loan may present itself
■
LEGAL ISSUE
may come from new Lenders; however, security interest may be subject to
challenge
■
may come from existing Lenders
■
New Money takes super-priority
■
May be restricted by negative undertakings
■
■
Permitted Indebtedness
■
Permitted Security
Most likely source for New Money is a mixture of liquidity provided by the Sponsor
and the existing Lenders
LENDERS – BE PREPARED
■
Complete set of original documentation
■
duly signed Finance Documents
■
legal opinions
■
complete set of up-to-date excerpts from registers (land register, companies
register, etc)
■
■
14
Facility Agreement
■
clear-cut Events of Default
■
notice details up to date
■
process agent appointed
■
jurisdiction / arbitration
Security Documents
■
review whether out-of-court enforcement sale possible
■
review whether security interests have been duly perfected
■
up-to-date registrations
■
third party notifications have been acknowledged
LEGAL ISSUE
SUGGESTED LENDERS’ ACTIONS
■
DO NOT IGNORE THE PROBLEM: ACT IMMEDIATELY!
■
Issue Waiver Letter or Acceleration Notice
■
comply with notice clause (fax and registered mail)
■
adhere to day counting methods
■
Contact other Stakeholders to enter into Standstill Agreement
■
You may consider selling a Problem Loan
■
comply with confidentiality agreement; in some jurisdictions, banking
secrecy rules apply
■
Evaluate your position as a Stakeholder
ACCELERATION NOTICE
■
Typically a Majority Lender’s vote is required
■
Terms
■
list Events of Default
■
cancel Facility
■
request payment of all outstanding amounts to a specific account until
a final date
■
■
declare an Enforcement Event
■
reserve any further rights
Effects
■
the Facility is no longer available
■
all outstanding amounts under the Facility Agreement become due and
payable
■
Security Interests become enforceable
15
WAIVER LETTER
■
Typically a Majority Lender’s vote is required
■
Terms
■
list the Events of Default which are being waived
■
no blank waiver, Lenders should request something in return for acceptance
of increased risk
■
■
term sheet for amendments to Finance Documents may be attached
■
Borrower’s confirmation to cover legal costs and other expenses
■
prohibition on dividends, capital expenditures etc.
Effects
■
avoids acceleration => Lenders agree not to accelerate for a specific period
of time
■
creates a period during which the situation can be assessed by the
Stakeholders
STANDSTILL AGREEMENT – DEFINITION AND
PRINCIPLES
■
Standstill Agreement is a temporary arrangement entered into between the
company and its creditors (typically does not cover trade creditors). It gives
Stakeholders time to gather information and evaluate their respective position
■
Standstill Agreement is only realistic if each creditor believes that it is better off
with a consensual restructuring
■
Typically, the following principles apply to the Standstill Agreement
■
it prevents individual creditors from taking enforcement action for a period
of time allowing for a consensual restructuring to be completed
■
no improvement of relative creditor position (‘freezing’ the exposure) after
day-one (so called day-one position)
■
16
parties to Standstill Agreement share all relevant information
STANDSTILL AGREEMENT – CONTENT
■
Regulates how creditors divide and distribute new cash that may come into the
company from
■
new equity
■
asset disposals
■
enforcement proceeds
■
Defines Standstill Period (relatively short, can be extended)
■
Decisions requiring Majority Lenders’ consent
■
■
■
■
■
declaring an Event of Default and enforcement action
■
accepting new security interest
■
amending agreements
■
exercising set-off rights
■
filing for insolvency
■
charging default interest
Borrower’s undertakings
■
prohibited actions
■
cancel undrawn facilities; close out hedging arrangements
■
information undertakings
Lenders’ undertakings
■
do not demand repayment or enforce during Standstill Period
■
do not seek to better their respective relative position
Termination events
■
filing for insolvency
■
attachment of material assets
■
breach of Borrower’s undertakings
■
(Super-)Majority Lenders’ vote
Establishing a Co-ordination Committee
■
appointment of members
■
costs to be born by creditors relative to their exposure
■
exclusion of liability for Co-ordination Committee
17
■
Required liquidity: New Money
■
new facility limited in amount and repayable on demand
■
by each Lender pro rata or by specific Lender(s) for preferred position
(superpriority)
■
Confidentiality undertaking by each party
■
(Back-ended) standstill/restructuring fee payable by Borrower
■
Surviving terms after Standstill Period ends
■
Schedules
■
agreed list of existing Facilities and Lenders’ exposure
■
agreed list of existing Security Interests
DEVELOPING A STRATEGY
■
■
■
PLAN A: CONSENSUAL RESTRUCTURING
■
often minimises loss
■
requires that Borrower is cooperative
■
viable business case for recovery necessary
■
most often requires New Money
PLAN B: NON-CONSENSUAL ACTION
■
accelerate Loan and trigger Borrower’s insolvency
■
enforce security rights
■
file for Borrower’s bankruptcy
Lenders typically seek PLAN A, but should always have PLAN B lined up in order
to protect their position should PLAN A fail
18
DETERMINANTS FOR STRATEGY
■
Stakeholder’s position
■
Senior Lender’s claim or subordinated Junior Lender’s claim
■
secured or unsecured Lender
■
secured creditor has a preferential right with regard to the Collateral
and participates in distribution of the bankrupt estate with any claim in
excess of enforcement proceeds
■
unsecured creditor participates solely in the distribution of the bankrupt
estate
■
Standstill Period may apply according to Intercreditor Agreement
■
effectiveness of contractual subordination
■
violation of financial assistance / capital maintenance rules
■
risk of repayments/additional security being challenged in potential
insolvency proceedings at a later stage
■
LEGAL ISSUE
Compare benefits of PLAN A and PLAN B
■
■
LEGAL ISSUE
going-concern valuation and business case for recovery
■
cash-flow business or capital asset business
■
macroeconomic analysis
■
liquidation analysis (or break-up value)
■
in-the-money / out-of-the-money Lender
Enforcement in Borrower’s / Security Provider’s jurisdiction
■
ease of enforcement of security interests, in particular timing
■
functioning of insolvency laws
■
costs involved
■
Legislative hurdles
■
Political restraints
LEGAL ISSUE
19
LENDER‘S TOOLKIT
■
Appointment of Coordination Committee
■
formed by one or more Lender(s) (largest Lenders)
■
leads the process and addresses intercreditor issues (Standstill Agreement or
Intercreditor Agreement)
■
■
facilitates New Money
■
sounding board of interests
■
ensures that each Lender receives same information during Standstill Period
■
interface between Borrower and Lenders
■
appoints external advisors
Coordination Committee defines agreed action plan, but does not make
commercial decisions
■
Lenders will need to decide how much authority to give the Coordination
Committee
■
External advisors
■
■
lawyers
■
structuring and implementing Restructuring Plan
■
legal due diligence
■
tax due diligence
■
assistance in contingency planning (PLAN B)
accountants
■
check financials
■
provide information to review Restructuring Plan that proves business
case for recovery
■
■
20
make valuations
Debt-equity swap
■
what type of and how much equity
■
may be restricted by negative undertakings
■
Amendments to Finance Documents may include
■
adjustment of margin (market pricing)
■
payment of restructuring fee
■
tightening of security structure
■
further restrictions on disposals, dividend payments etc.
■
resetting financial covenants and reviewing the definition of the accounting
group
■
a discount as incentive for Borrower to (p)repay
■
tightening of reps and warranties
■
implementation of agreed Restructuring Plan
■
injection of additional equity
■
increased disclosure obligations
LONG TERM ECONOMIC SOLUTION
■
To create a business case as a going concern any of the following may be
required
■
injection of additional equity
■
write-off of debt by Lenders
■
restructuring of debt; e.g., extension of repayments, capitalised interest, PIK
interest, warrants
■
debt-equity swap; e.g., mezzanine lender receives equity for its mezzanine
debt
■
Senior Lenders enforce into assets of the Borrower and newly founded SPV
owned by Senior Lenders buys all such assets => enforcement proceeds
used to pay Senior Lenders; Junior Lenders left with (total) loss
21
NON-CONSENSUAL RESTRUCTURING
■
WE ARE IN COURT.
■
BANKRUPTCY PROCEEDINGS ARE SEEN AS VALUE-DESTRUCTIVE.
■
PRE-ARRANGED SALES (SO CALLED PRE-PACKS) DO NOT EXIST
IN CEE/SEE; HOWEVER, INNOVATIVE STRUCTURES MAY LEAD TO
SIMILAR RESULTS.
22
INSOLVENCY TESTS AND DUTY
■
Typically two separate insolvency tests (each triggers insolvency) for a company
apply
■
balance-sheet test
■
a company’s due and payable obligations exceed the value of the
company’s assets (=over-indebtedness)
■
cash-flow test
■
a company is not able to fulfill one or more monetary obligation
(=illiquidity)
■
Director’s duty to file for initiation of insolvency proceedings may apply
INSOLVENCY PROCEEDINGS – TYPE
■
Typically, the following types of insolvency proceedings are available
■
Composition Proceedings (or Restructuring Proceedings)
■
court-approved scheme to achieve Cram-Down
■
debtor stays in charge of assets, subject to judicial control
■
all creditors are bound, but secured creditors are not affected unless they
consent
■
Bankruptcy Proceedings (or Liquidation Proceedings)
■
court-appointed bankruptcy receiver in charge of assets
■
aims at winding up the insolvent company
■
all creditors are bound, but secured creditors have preferential rights to
the Collateral
■
In an insolvency the director’s duties may shift to considering the interests of
creditors first
23
ON AN EU LEVEL
■
Insolvency proceedings are regulated on an EU level by
■
Insolvency Regulation (1346/2000/EC and 681/2007/EC), which
■
is binding and directly applicable to all EU member states with the
exception of Denmark
■
provides that main proceedings are to be commenced in the EU member
state in which the common debtor’s center of main interest (COMI) lies,
and ancillary proceedings may be commenced in any one or more EU
member states if the common debtor has assets in those EU member
states
■
Directive on the Reorganization and Winding-Up of Credit Institutions
(2001/24/EC)
■
Directive on the Reorganization and Winding-Up of Insurance Undertakings
(2001/17/EC)
CENTRE OF MAIN INTEREST (COMI)
■
In case of companies, the COMI is, in the absence of proof to the contrary,
presumed to be the place where the common debtor’s registered office is located
■
The law of the EU member state in which proceedings are initiated (i.e., in which
state the COMI lies) determines
■
the conditions for the opening of the proceedings
■
their conduct, their closure, and practical rules, such as the definition of
debtors and assets
■
the respective powers of the common debtor and the liquidator
■
the effects of proceedings on contracts, individual creditors, and claims
■
rules relating to the voidness, voidability, or unenforceability of legal acts
detrimental to all creditors (challenge)
24
BANKRUPTCY PROCEEDINGS
■
Bankruptcy Proceedings are “liquidation” type of proceedings since their purpose is
■
to resolve the debtor’s insolvency by realizing its assets
■
to collectively satisfy the debtor’s creditors on a pro rata basis
■
Either the debtor itself or its creditors may file a petition for bankruptcy
■
Petition for the initiation of Bankruptcy Proceedings is not filed in a timely manner
–> risk of personal (criminal and/or civil) liability of
■
managing directors
■
shadow directors, i.e., persons in accordance with whose directions the
managing directors are accustomed to act
■
Rescue loans may be qualified as equity-replacing shareholder loans
■
Receiver may challenge preferential transactions and repayments made in
hardening period prior to insolvency
■
■
LEGAL ISSUE
Effects of Bankruptcy Proceedings are often
■
stigma (no more trade credit)
■
power of attorney may terminate by operation of law
■
counterparties may terminate contracts
■
statutorily preferred claims (e.g., tax) may exist
■
statutory pledges may exist
■
enforcement proceedings may be stayed
■
management loses control of the company
Note
■
‘global effect’ of US proceedings
■
■
issue: contempt of court; settlement of USD transactions
freezing orders may be issued
25
COMPOSITION PROCEEDINGS
■
Typically only the debtor may file a petition for Composition Proceedings
■
Certain majority of the creditors agrees to a Restructuring Plan which ensures
repayment of a specific quota of outstanding debt (issue: the position of public
bodies such as tax authorities, social insurance bodies); thus, it can help to deal
with hold-out lenders or subordinated lenders who are out of the money
■
■
■
26
Purpose of Composition Proceedings is
■
to resolve the debtor’s (imminent) insolvency as a going concern
■
to (partially) satisfy the debtor’s creditors
Effects of Composition Proceedings are often
■
enforcement proceedings are stayed
■
management stays in control of the company (subject to judicial control)
Composition Proceedings are only desirable in case
■
there is a realistic business case for recovery
■
the creditors will not be worse off compared to a bankruptcy solution
3. ENFORCEMENT
■
SECURED CREDITORS MAY CHOOSE TO ENFORCE THE TRANSACTION SECURITY.
27
SECURITY INTEREST – TYPES
■
■
Personal security interests
■
guarantee and surety
■
financial soundness and character of Security Provider important
In rem security interests
■
mortgage, share pledge, receivables pledge / assignment
■
value of asset and ease/cost of realisation important
SECURITY INTEREST – ACCESSORINESS
■
Accessory security interests are typically pledges and mortgages
■
Being an accessory security interest means that
■
such security interest depends on the valid existence of the Secured Claims;
thus, it is terminated by operation of law upon payment of all Secured Claims
■
■
Secured Party must be the holder of the Secured Claims
Civil law typically does not recognise a trust arrangement whereby security can
be granted in favor of the Security Agent as trustee for the Finance Parties –>
parallel debt issue
LEGAL ISSUE
SECURITY INTEREST – PERFECTION
■
Both a title instrument and an act of perfection (modus, an act of publicity) are
required for the establishment of a security interest
■
Title instrument
LEGAL ISSUE
■
pledge / hypothecation / assignment agreement
■
the title instrument determines the content of the security => important
drafting exercise: Secured Claim and Collateral
■
28
Act of perfection or modus
LEGAL ISSUE
■
registration for mortgages
■
actual delivery of the movables (physical assets) to Secured Party
■
third-party notification to debtor
COURT ENFORCEMENT
■
LEGAL ISSUE
State Enforcement Proceedings
■
requires enforceable title instrument (i.e., final court judgement or arbitral
award)
■
sale of Collateral through court leads to public auction
■
purchaser acquires Collateral free of any encumbrances
■
enforcement proceeds are distributed to Secured Creditor to satisfy Secured
Claims
PRIVATE ENFORCEMENT
■
LEGAL ISSUE
Private sale
■
typically sale of Collateral through public auction
■
requires that the Pledgee / Assignor is in a position to effect a transfer of the
Collateral to a potential purchaser (sales power of attorney may terminate in
Bankruptcy Proceedings)
■
Certain legal limitations may apply
■
pre-agreed right of the Secured Party to swap the Secured Claim against the
Collateral (e.g., debt-equity swap in case of share collateral) upon the
occurrence of an Event of Default may not be permissible
■
private sale may not be permissible with regard to certain assets
(e.g., real estate)
29
4. COUNTRY
PARTS
■
LAWS THROUGHOUT CEE/SEE ARE NOT
HOMOGENOUS AND LOCAL KNOWLEDGE IS
AN IMPORTANT FACTOR FOR SUCCESS.
LOCA
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ALBANIA
By Sokol Nako, Endrit Shijaku and
Jonida Braja, Tirana Office
ALBANIAN CHEMIST
MERITA URUCI OF SAMI
FRASHERI STREET HAD
TWO EGGS ON BROWN
A TOAST FOR BREAKFAST
THIS MORNING
GENERAL ISSUES AFFECTING LENDERS
Validity of Negative Pledge
In general, a negative pledge undertaking is legally valid and binding.
Restrictions to Accelerating a Loan
■
In general, Albanian law does not restrict the ability of parties to a Facility Agreement to
agree on any Event of Default.
Effectiveness of a Non-Assignment Clause
■
A prohibition of assignment with regard to monetary claims only has relative effect if
concluded between two business entities, i.e., such contractual prohibition is effective only
between the parties to the Facility Agreement.
Effectiveness of Contractual Subordination
■
The effectiveness of contractual subordination of unsecured creditors
is neither explicitly
regulated nor addressed in Albanian case law.
■
Subordination of secured creditors in respect of claims secured with a securing charge is
explicitly allowed.
■
A contractual subordination agreed in a standard Intercreditor Agreement is effective
between Senior Lenders and Junior Lenders. There are also good legal arguments that
such contractual subordination is also binding upon an insolvency receiver in case the
subordination does not put other creditors at a disadvantage.
Subordination by Operation of Law
■
Shareholder loans in an amount up to EUR 2,000 by a controlling shareholder are
subordinated by operation of law if the terms and conditions of the loan are not at
arm’s length.
Validity of a Forfeiture Agreement
■
An agreement for the forfeiture of the security interest (i.e., the secured creditor may keep
the Collateral in lieu of the Secured liability) is legally valid and binding.
SECURITY INTERESTS
How to Establish a Security Interest
■
To establish a valid security interest, a title instrument and an act of perfection (i.e., an act
of publicity) are required.
■
Title instruments include:
Movable Securing Charge Agreement, Account Securing Charge Agreement
Agreement, Receivables Securing Charge Agreement, Securing Charge over Shares ■
Agreement and Mortgage Agreement
■
■
Surety Agreement
Pledges under the Civil Code are also possible, but not widely used in practice. In practice
the non-possessory form of security, the so-called “securing charge”, is preferred.
■
In case of a surety the act of perfection falls together with the signing of the Surety Agreement.
■
In case of in rem rights, a separate act of perfection is required.
Ranking of Securing Charge/Mortgage
■
The rank of a securing charge depends upon when the filing for the registration was made.
■
The rank of a real estate mortgage depends on the exact time when the application for
registration of the mortgage is duly submitted to the land register (subject to actual registration).
Common in rem Security Interests
asset
security
perfection
movables
pledge / securing charge
physical delivery of the
movables to the pledgee or
instruction to possess to third
party holding movables for
the pledge/registration with
securing charge register
account
securing charge
registration with securing
charge register
receivables
securing charge
charge register
shares
securing
charge register
real estate
mortgage
registered with the land
register (Zara r Regjsitrimit te
pasurive te paluajtshme)
Accessory and Availability of Private Sale
security interest
accessory
Private Sale
guarantee
no
n.a.
surety
yes
n.a.
movables pledge
yes
yes
account pledge
yes
yes, if contractually agreed
receivables pledge
yes
share pledge
yes
real estate mortgage
yes
no
Availability of Floating Charge
■
Albanian law does not recognise the concept of floating charges over all assets
of a company.
Parallel Debt Issue
■
There is no structure comparable with a common-law trust in Albania, and the
consensus in the legal community is that a common-law trust does not create
the ownership with regard to the Secured Claims that is required to create a
valid and enforceable accessory security interest.
■
The above issue is typically solved through a so-called “parallel debt structure”
whereby the parties to the Facility Agreement agree that the Security Agent
shall be the joint and several creditor of each and every obligation of the
Borrower towards each Finance Party (other than the Security Agent).
■
The above concept has as yet not been tested in Albanian courts.
INSOLVENCY PROCEEDINGS
Type of Insolvency Proceedings
■
Two kinds of insolvency proceedings for handling the insolvency exist:
Bankruptcy Proceedings (Procedura e falimentimit me likuidim) which generally aim to collectively reimburse the creditors by liquidating the
assets of the debtor and distributing liquidation proceeds
Judicial Reorganization Proceeding (Plani i riogranizimit), the ultimate aim of which is to preserve and continue the debtor’s business on the
basis of the reorganization plan
■
■
Applicable Insolvency Test
and Directors’ Duty to File
■
Two separate insolvency tests (each triggers insolvency) for a company are
typically applied:
balance sheet test: a company’s due and payable obligations exceed the value of the company’s assets (= over-indebtedness)
cash flow test: a company is not able to perform more than one monetary obligation (= illiquidity)
■
■
■
Each member of the company’s administrative body is obliged to notify the
competent court of the company’s insolvency within a 21-day period after
becoming insolvent and to apply for the opening of Bankruptcy Proceedings.
A member of the company’s administrative body risks criminal liability in case
of non-compliance.
■
In addition, the members or the shareholders of the debtor are obliged to notify
the competent court of their company’s insolvency within three months from
the day they obtained knowledge of such insolvency. A member or shareholder
risks personal liability and administrative fines in case of non-compliance.
Describe Bankruptcy Proceedings
■
Bankruptcy Proceedings are initiated by the competent court upon an application either by the debtor or by one or more of its creditors. In addition, the tax
authorities may file a petition for the opening of Bankruptcy Proceedings if a
corporate taxpayer’s balance sheet shows losses for a period of three
consecutive years.
■
Any application filed by a member of the debtor’s administrative body needs to
be accompanied by the list of assets and income, and a list of the creditors.
■
The court must decide within 30 days of filing.
■
The decision of the court to initiate Bankruptcy Proceedings is entered into the
Registry of Immovable Property and is delivered to the debtor and to all of its
known creditors and debtors.
■
Upon the opening of Bankruptcy Proceedings, the company’s administrative
body loses its control over the debtor’s assets.
■
The court appoints a receiver (administartori i falimentimit) who assumes
control over the debtor’s assets.
■
The decision on the limitation of the administrative body’s powers and the
appointment of the receiver is published.
■
The receiver examines the debtor’s assets. The list of the debtor’s assets and the
list of creditors list needs to be filed with the District Court. The Commercial
Section of the Court supervises the receiver.
■
The receiver requires the creditors’ approval for the implementation of actions
of particular importance for the bankruptcy proceedings.
■
The assets of the insolvent debtor are confiscated and liquidated (i.e., sold in
public auction) by a bailiff officer. The liquidation proceeds are distributed to
the company’s creditors in accordance with the priority principles laid out in
the Bankruptcy Act.
■
The Bankruptcy Act lays out the following priority of payments: ■
costs of the Bankruptcy Proceedings
■
costs for the maintenance and administration of the assets in bankruptcy and related taxes
■
secured creditors
■
unsecured creditors
■
subordinated creditors
Length of Bankruptcy Proceedings
■
The duration of Bankruptcy Proceedings will depend on several different
factors (e.g., the extent of the assets and liabilities of the debtor, the number of
creditors, whether the receiver challenges any transactions of the debtor in court,
etc.). Although there is no general rule, in our experience Bankruptcy Proceedings
may last between 12 months to up to nine years in more complex cases.
■
In practice not many Bankruptcy Proceedings have been carried out by the
Albanian courts. However, the statistics show an increase in the number of such
proceedings recently, i.e., since last year.
Challenge of Preferential Transactions
■
The receiver has the right to challenge preferential legal acts or transactions,
most importantly, if:
a debtor has intentionally put certain creditors at a disadvantage
compared to its other creditors, and such other creditors knew of this intention (hardening period of 10 years)
a creditor knew of the insolvency of the debtor (hardening period of
three years)
■
■
Secured Creditors in Bankruptcy Proceedings
■
A validly established in rem security interest gives the secured creditor a
preferential claim with regard to the respective Collateral.
■
The secured creditor will have the preferential right to be satisfied from the
proceeds of the sale of the Collateral before any other creditors in accordance
with the preference order laid down in the Bankruptcy Act.
Reorganization Plan
■
A Reorganisation Plan (Plan Riorganizimi) may be proposed by the debtor or by
the receiver at any time before the final creditors’ meeting. The creditors’ meeting
may also assign to the receiver the task of preparing a Reorganisation Plan.
■
The Reorganisation Plan consists of two parts. The first part details the measures
that have been taken since the beginning of implementation of the Bankruptcy
proceedings. The second part describes the procedures to be carried out and
the rights of the parties involved in such procedures. This part should contain
the period for the payment of the claims.
Describe Reorganization Plan
■
If not otherwise provided in the Re-organization Plan,
the debtor will be
released from its debts upon fulfillment of the Reorganization Plan. The Plan
sets forth the costs and the expected incomes during the period of repayment
of the creditors. The Plan may provide that the debtor may continue
its business activities.
■
The receiver supervises the implementation of the Plan. The Court resolves on
the termination of the period of supervision.
■
The Plan requires approval by the creditors. The District Court has the right to
approve or reject the Plan. After such decision of the Court has become final,
the court resolves on the termination of the Bankruptcy Proccedings.
■
The reorganisation plan must include a period during which the implementation
of the Reorganisation Plan is to be supervised. During this period of
supervision the debtor may obtain new loans subject to prior approval by the
receiver and certain restrictions. Any new lender will take priority over the
existing creditors if the Restructuring Plan provides for such priority.
JUDICIAL ENFORCEMENT PROCEEDINGS
Describe Judicial Enforcement Proceedings
■
A secured creditor may have to pursue judicial enforcement with regard to its
Collateral in accordance with the provisions of the Civil Procedure Code, which
requires completion of the following steps:
first, the lending bank has to issue a bank statement and file such state
ment together with the Facility Agreement with the competent court and request the rendering of an enforcement order (urdher ekzekutimi)
second, the enforcement order is then submitted to a
(court or private) baliff
third, baliff will take possession of the Collateral and submit it to the
Secured Party
finally, the Secured Party must sell the Collateral and is entitled to first
satisfy its claims out of enforcement proceeds
■
■
■
■
Length of Enforcement Proceedings
■
With regard to judicial enforcement proceedings, in our experience the
enforcement procedure takes about three to 36 months (starting with the filing of
the enforcement application and ending with the distribution of the monies
realized to the secured creditor). This duration also depends on the court’s
caseload and any defensive pleadings pursued by the secured creditor.
AUSTRIA
By Marcus Benes, Nikolaus Paul
and Eva Spiegel, Vienna Office
THE SMALL RED KIOSK
ON AM HOF, VIENNA
HAS 289 MAGAZINES IN
ITS WINDOW DISPLAY
In general, a negative pledge undertaking is legally valid and binding except
with regard to real estate.
■
It is not permissible to agree on the opening of Composition Proceedings or Reorganisation
Proceedings as an Event of Default.
■
In case of receivership over an Austrian credit institution experiencing financial difficulties,
all prior claims against such credit institution are stayed for the duration of the receivership.
■
A prohibition of assignment with regard to monetary claims has relative effect if concluded
between two business entities (Unternehmen), i.e., such contractual prohibition is effective
only between the parties to the Facility Agreement and any assignment by a Lender to
a third party is valid.
■
The effectiveness of contractual subordination is neither explicitly regulated in Austrian
law nor addressed in Austrian case law.
■
such contractual subordination is also binding upon a bankruptcy receiver if the
subordination does not put other creditors at a disadvantage.
Concept of Equity-Replacing Shareholder Loans
■
Pursuant to the Act on Equity Replacements (Eigenkapitalersatz-Gesetz), a shareholder loan
granted to a company in a financial crisis is treated similarly to equity contributions (such
shareholder loan to be referred to as an Equity -Replacing Shareholder Loan).
■
The definition of shareholder is very broad and includes (i) any direct or indirect
shareholder and (ii) any other person that effectively controls the company.
■
A financial crisis is defined as occurring if:
■
the company is illiquid or over-indebted; or
■
the quota of own funds of the company is less than 8% and the fictitious debt
redemption period is longer than 15 years.
■
Any repayment of an Equity-Replacing Shareholder Loan is prohibited.
■
Similar rules apply to security interests provided by a shareholder to its company’s
creditors while such company is in a financial crisis.
Concept of Austrian Capital Maintenance Rules
■
Shareholders of an Austrian corporation may not demand repayment of their original
capital contribution – so-called Austrian Capital Maintenance Rules.
■
Accordingly, Austrian Capital Maintenance Rules protect the corporation’s assets from
unlawful equity distributions; i.e., any benefit (e.g., a security interest) provided by a
corporation to another member of its group of companies (side-stream or up-stream) is
only permissible if and to the extent it is at arms-length.
■
Any violation of Austrian Capital Maintenance Rules renders the underlying agreement
(e.g., security agreement) null and void, and any benefit received must be retransferred
by its recipient. Also, directors may become liable.
■
the Collateral in lieu of the Secured liability) is not legally valid and therefore not binding
SECURITY INTERESTS
■
To establish a valid security interest, a title instrument and an act of perfection
(i.e., an act of publicity) is required.
■
Movable Pledge Agreement, Account Pledge Agreement, Receivables Pledge
Agreement, Share Pledge Agreement and Mortgage Agreement
Guarantee Agreement and Surety Agreement
■
■
■
In case of a guarantee or surety (both personal security interests), the act of perfection falls
together with the signing of the respective title instrument.
■
■
The rank of a pledge depends on when the respective act of perfection was made.
■
The rank of a real-estate mortgage depends on the exact time when the application
for registration of the mortgage was submitted to the land register (subject to actual
registration of the mortgage).
asset
security
perfection
movables
pledge
pledgor
account
pledge
third-party notification to account bank
receivables
pledge or assignment
third-party notification to
debtor or book annotations
(Buchvermerk)
shares
pledge
company or, if any issued,
hand-over of share
certificates
real estate
mortgage
registered with the land register (Grundbuch)
security interest
accessory
Private Sale
guarantee
no
n.a.
surety
yes
n.a.
movables pledge
yes
yes
account pledge
yes
receivables pledge
yes
receivables assignment
no
share pledge
yes
yes
no
■
Austrian law does not recognise floating charges over all assets of a company.
Parallel Debt Issue
■
There is no structure comparable with a common-law trust in Austria; the
the ownership with regard to the Secured Claims that is required to create
a valid and enforceable accessory security interest.
■
The above issue is typically solved by means of a so-called ‘parallel debt structure’
whereby the parties to the Facility Agreement agree that the Security Agent shall
be the joint and several creditor (Gesamtgläubiger) of each and every obligation
of the Borrower towards each Finance Party (other than the Security Agent).
■
The above concept has as yet not been tested in Austrian courts, but the
consensus in the legal community is that such parallel debt concept,
if properly implemented, will be upheld in Austrian courts.
■
There are two kinds of insolvency proceedings:
Bankruptcy Proceedings (Konkursverfahren) which generally
lead to the liquidation of the assets forming the bankrupt estate
Composition Proceedings (Ausgleichsverfahren) which primarily
aim at eliminating a certain percentage of the debtor’s debts while
preserving its business as a going concern
■
■
■
Upon the opening of Bankruptcy Proceedings, any obligations of the debtor
that are not then due are accelerated and assumed to be due, thus permitting
liquidation of assets. In contrast thereto, Composition Proceedings prevent such
acceleration in the interest of preserving the debtor’s business.
■
typically applied:
balance sheet test: a company’s due and payable obligations exceed
the value of the company’s assets (= over-indebtedness) plus a negative business forecast
cash flow test: a company is not able to perform more than one
monetary obligation (= illiquidity)
■
■
■
Each director of a company is obliged to notify the competent court of its
company’s insolvency within a sixty-day period after becoming insolvent and
to apply for the opening of Bankruptcy Proceedings. A director risks criminal
liability in case of non-compliance.
■
Bankruptcy Proceedings are initiated by the competent court upon an
application either by the debtor or by one or more of its creditors.
■
The opening of Bankruptcy Proceedings becomes effective the day following
the publication of the contents of the bankruptcy edict in the Austrian online
insolvency database (http://www.edikte.justiz.gv.at/).
■
Upon effectiveness of the opening of Bankruptcy Proceedings, the managing
directors have no further power and authority to represent their company.
■
The competent court appoints a bankruptcy receiver (Masseverwalter) who
assumes control of the debtor’s business and its assets (there are no
proceedings comparable with Chapter 11 under Austrian insolvency laws).
■
Typically, the debtor’s assets are liquidated; i.e., sold to the highest bidder.
Liquidation proceeds (less preferred claims) are distributed to the company’s
creditors on a pro-rata basis.
■
The Bankruptcy Code lists the following preferred claims:
■
■
costs for the maintenance and administration of the assets in bankruptcy and related taxes
claims of employees that originate after the Bankruptcy Proceedings
have been initiated
■
award payable to claimant protection agencies
■
claims arising in connection with the termination of the
employment relationship:
■
■
bankruptcy receiver and was not in accordance
with the Bankruptcy Code
■
if the employment relationship was established after Bankruptcy
Proceedings were opened
contracts which have been assumed and confirmed by the
bankruptcy receiver
■
all claims arising out of other legal acts of the bankruptcy receiver
■
claims based on unjust enrichment of the bankrupt estate;
■
fees payable to claimant protection agencies
■
■
if the termination of the employment relationship was done by the In Bankruptcy Proceedings, the debtor may apply for forced judicial composition
(Zwangsausgleich) in order to preserve its business as a going concern.
The settlement plan must contain an offer for the repayment of at least 20% of all
outstanding debts within a two-year period. A majority in number of the creditors,
representing at least 75 per cent in value, must agree to the settlement plan.
If the forced judicial composition is approved by the bankruptcy court
(Cram-Down), the Bankruptcy Proceedings will be terminated and the debtor
will be released from its debts upon fulfillment of the settlement plan.
■
The duration of Bankruptcy Proceedings will depend on several
different factors (e.g., the extent of the assets and liabilities of the obligor,
the number of creditors, whether an application for forced judicial composition
(Zwangsausgleich) is made, whether the bankruptcy receiver challenges any
transactions of the obligor in court, etc). Although there is no general rule, our
experience is that more complex Bankruptcy Proceedings may take
up to 36 months.
■
The bankruptcy receiver has the right to challenge preferential legal acts or
transactions, most importantly, if:
the debtor has intentionally put certain creditors at a disadvantage
compared to its other creditors, and such other creditors knew of this
intention (hardening period of 10 years)
a transfer of assets was effected without due consideration
(hardening period of two years)
■
■
■
the provision of a security for, or settlement of, an obligation that was not yet due (hardening period of one year)
a creditor knew or should have known of the debtor’s insolvency
(hardening period of six months).
■
■
preferential claim regarding the respective Collateral.
■
The Collateral will not form part of the bankrupt estate and the secured
creditor will have a separation right with regard to the Collateral.
■
However, secured creditors may be barred by the bankruptcy court from
enforcing their security interests for a maximum period of 90 days after the
opening of the Bankruptcy Proceedings if the exercise of such rights would
endanger the continuation of the debtor’s business and provided that such
stay does not result in severe personal or economic damages to the relevant
secured creditor.
Survival of Powers of Attorney
■
Any appointment as a legal representative (Vollmachtsnehmer) or as an agent
(Auftragnehmer) granted by a company will automatically cease to be valid
upon the opening of Bankruptcy Proceedings over its assets.
■
This may affect the secured creditor’s ability to effect a transfer of the Collateral
to a potential purchaser in a private enforcement since the bankruptcy
receiver has assumed control over the debtor’s assets.
Describe Composition Proceedings
■
Composition Proceedings are initiated by the competent court upon an
application by an insolvent debtor or a debtor who faces over-indebtedness
or illiquidity.
■
The opening of Composition Proceedings becomes effective the day following
the publication of the contents of the composition edict in the Austrian online
insolvency database (http://www.edikte.justiz.gv.at/).
■
The competent court will appoint a composition administrator
(Ausgleichsverwalter) to supervise and support the debtor, who does
not lose control over its business and assets.
■
In Composition Proceedings the debtor has the opportunity to negotiate for
the discharge of up to 60% of its outstanding debts. The settlement plan must
contain an offer for the repayment of at least 40% of all outstanding debts.
■
A majority in number of the creditors, representing at least 75 per cent in value,
must agree to the settlement plan. If the judicial composition is approved by
the competent court (Cram-Down), the Composition Proceedings will be
terminated and the debtor will be released from its debts upon fulfillment
of the settlement plan.
■
Composition Proceedings do not effect the position of secured creditors.
■
Successful judicial compositions are rare in practice, because a minimum
repayment quota of 40% of the debt within two years must be provided.
The possibility of a forced judicial composition (Zwangsausgleich) ordered
by the bankruptcy court during Bankruptcy Proceedings, which means a
chance of reducing debts by up to 80%, ensures that many debtors
immediately file for bankruptcy.
■
Collateral in accordance with the Enforcement Act, (Exekutionsordnung) which
requires completion of the following steps:
first, obtaining a title for enforcement (Exekutionstitel); e.g., ruling on
non-payment by the borrower
second, filing a motion for enforcement (Exekutionsantrag) with the
competent Austrian county court
third, obtaining a decision of the competent Austrian county court that judicial enforcement is permissible (Exekutionsbewilligung)
fourth, enforcement by public auction (Zwangsversteigerung) or
alternatively, in case of real estate, compulsory administration
(Zwangsverwaltung) of the real estate
finally, the proceeds of the public auction or compulsory administration are distributed to the secured creditor to settle secured claims
■
■
■
■
■
■
A title for enforcement may be:
■
a final, conclusive and binding judgment by an Austrian court
■
a final, conclusive and binding judgment by a court of a Member State
as defined in Council Regulation (EC) 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters
■
a settlement effected before an Austrian court
■
a final, conclusive and binding arbitral award in Austria or a member
state to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958
■
enforcement procedure takes between six months and one year (starting with
the filing of the enforcement application and ending with the distribution of
the monies realized to the secured creditor). This duration also depends on the
court’s caseload and any defensive pleadings pursued by the secured creditor.
BOSNIA AND HERZEGOVINA
By Naida Custovic, Sarajevo Office
SARAJEVO TAXI DRIVER
ˇ WEARS
MUSLIJA SALCIN
TWO PAIRS OF GLOVES
DURING THE WINTER
General Note on BiH Legal Framework:
Bosnia and Herzegovina (“BiH”) is a country consisting of two separate entities,
the Federation of Bosnia and Herzegovina (“FBiH”) and Republika Srpska (“RS”),
and one special autonomous district under direct sovereignty of the state, the Brčko District.
Different legal regimes apply in the two entities, although some legal issues are regulated
by State laws applicable in both entities, and in many cases the relevant laws in the two
entities have few substantial differences. In the following text, unless otherwise specified,
the described legal rules apply in both FBiH and RS.
■
In general, a negative pledge undertaking is legally valid and binding. Nevertheless, such
provision would have relative effect only (i.e., it would not be effective towards third parties
acting in good faith).
■
However, the new RS Law on Property Rights, applicable as of 1 January 2010, stipulates
that provisions of a pledge/mortgage agreement which prevent creation of another pledge
over the property being pledged under the agreement are deemed null and void. The law
is not clear as to whether this applies only to the property which is being encumbered with
a pledge, or also to any other property owned by the pledgor.
■
Acceleration, more precisely enforcement of a Loan and security, is restricted in the course
of preliminary bankruptcy proceedings (i.e., the period between filing of a petition for
bankruptcy and official opening of the bankruptcy proceedings).
■
If a bank is subject to receivership (privrema uprava) or liquidation proceedings (likvidacija),
pursuant to the banking laws the competent banking agency may, upon recommendation
of a preliminary receiver or a liquidator, declare certain obligations of the bank
temporarily blocked.
■
A prohibition of assignment with regard to monetary claims has absolute effect,
i.e. third parties cannot validly acquire the claim.
■
Contractual subordination is generally permitted and such subordination should be effective
between the contracting parties. The relevant laws do not explicitly address the issue of
effectiveness of contractual subordination in the course of bankruptcy proceedings, but there
are certain indications in the bankruptcy laws that a contractually agreed subordination
should also be binding upon the receiver to the extent that it does not put other creditors at a
disadvantage.
Concept of Equity-Replacing Shareholder Loan
■
Under FBiH and RS laws regulating bankruptcy proceedings, a loan granted by a shareholder to
a company in a financial crisis will be subject to the equity-replacing loans rules, provided that
the necessary conditions are met. The equity-replacing loans rules extend also to transactions that
are economically similar to loans, as well as granting security to the shareholder in connection
with such loans. The laws are silent as to whether these rules also apply to a party which, although
technically not qualifying as a shareholder of such company, is treated like a shareholder.
■
In addition, under the new RS Law on Business Companies, equity-replacing loans will in
bankruptcy be treated as unsecured loans. However, this will not apply to a shareholder who
holds less than 1/10 of the company’s share capital, provided that such a shareholder is not
a manager or a member of the management board of the company.
■
Equity-replacing loan transactions are voidable in bankruptcy if granted: (i) with with regard
to security granted to a shareholder for an equity-replacing loan, within five years before filing
of a petition for bankruptcy proceedings, or after the petition has been filed; or (ii) with regard
to repayment of a shareholder loan, within one year before filing of a petition for bankruptcy
proceedings, or after the petition has been filed.
■
In bankruptcy, the respective claims of shareholders are subordinated.
■
Under the new RS Law on Business Companies, if a company repaid an equity replacing loan
within one year prior to the filing of a petition for bankruptcy proceedings, the shareholder is
required to return the repaid amount to the company.
Concept of Capital Maintenance Rules
■
Although FBiH and RS do not have comprehensive systems of capital maintenance
rules comparable to the capital maintenance rules of some of the EU countries, certain
principles of protection of the company’s assets exist in the laws of both entities
which can be considered as a form of capital maintenance rules. However, there is
no case law in this regard.
■
These rules include provisions regulating the founders’ obligations to pay their capital
contributions, the prohibition of repayment of equity to the shareholders or payment of
interest on equity, participation in the company’s profits through payment of dividends or
acquisition of new shares, permitted distributions, prohibition of financial assistance, etc.
These rules are not identical in FBiH and RS.
■
The consequences of violating capital maintenance rules vary from personal liability of
the responsible persons within the company, to obligatory return of received benefits and
voidance of transactions.
■
It is not possible to agree on forfeiture of the security interest (i.e., the secured creditor may
keep the Collateral in lieu of the secured liability); such agreement would be null and void.
SECURITY INTERESTS
Note on Creation of Pledges in RS
■
In general, pledges in BiH are regulated by the Framework Pledge Law adopted at
the State level and applicable in both FBiH and RS.
■
However, the new Property Law, which is applicable in RS as of 1 January 2010,
provides a completely new legal regime for the creation of pledges.
■
Due to the complicated legal structure of the country, it is unclear
at this stage which of the existing legal regimes will be applicable in RS.
■
The following information on the establishment of pledges is based
on the Framework Pledge Law.
■
Establishment of a valid security interest (by way of a contractual arrangement)
requires, inter alia, a title instrument and performance of appropriate perfection
steps, which depend on the type of security interest and property.
■
Title instruments for in rem security interests include: Movable Pledge Agreement,
Account Pledge Agreement, Receivables Pledge Agreement, Share Pledge
Agreement and Mortgage Agreement.
■
Title instruments for personal security interests include a Surety Agreement
and a bank guarantee.
■
Perfection steps for personal security interests are entailed in the respective title
instruments, while in respect of in rem security interests additional perfection steps
are required.
Ranking of Pledge/Mortgage
■
The rank of a pledge depends on the exact time of registration of the pledge in
the BiH Pledge Registry.
■
The rank of mortgage over real estate depends upon the order of submission of
applications for registration of the mortgage to the land register.
asset
security
perfection
movables
pledge
Registration in the BiH Pledge
Registry
account
pledge
Registry; Notification of the
relevant bank.
receivables
pledge
Registry; Notification of the
relevant debtor.
shares
pledge
Shares in a limited liability
company – registration in the
BiH Pledge Registry
Shares in a joint stock
company – registration with
the FBiH/RS securities registry.
real estate
mortgage
registered with the competent land register
security interest
accessory
Private Sale
guarantee
no
n.a.
surety
yes
n.a.
movables pledge
yes
in general no; however,
under certain conditions,
a pledgee may sell the
security independently in a
public auction (javna prodaja) or through a direct sale
(neposredna pogodba).
account pledge
yes
yes (i.e. direct payment by
the bank)
receivables pledge
yes
yes (i.e. direct payment by
the debtor)
share pledge
yes
same as for movables pledge
yes
no
■
In general no floating charge is available; the general rule is that a security
has to be specified (or at least definable) at the moment of its creation.
■
However, the BiH Rulebook on Pledges contains an exception to this rule in the
form of a provision which has effects similar to a floating charge concept. Such
exception is, however, only relevant with respect to the property which is
considered to be “general movable property” (opšta pokretna imovina)
under this rulebook. It is unclear whether this form of floating charge concept
could perhaps also cover property that is termed “specific movable property”
(specifična pokretna imovina) in accordance with the BiH Rulebook on Pledges
(i.e., movable property that has a manufacturer’s serial or
identification number attached to it and that is included in the list of assets
considered to be specific movable property in the BiH Rulebook on Pledges).
■
There is no case law available in this respect, but the prevailing opinion is that
additional perfection steps would be required in case of acquisition of new
movable property by the debtor.
Parallel Debt Issue
■
BiH law does not provide for a structure comparable with the common-law trust.
It is generally considered that a common-law trust does not entail acquisition
of ownership over the Secured Claims by the trustee, which is a prerequisite for
the creation of a valid and enforceable security interest of accessory nature.
■
The above issue is typically solved through a so-called “parallel debt
structure”. Under this structure, the parties to the Facility Agreement agree that
the Security Agent shall be the joint and several creditor (solidarni povjerilac) of
each and every obligation of the Borrower towards each Finance Party
(other than the Security Agent).
■
However, the above concept has not yet been tested in court.
■
The FBiH and RS bankruptcy laws recognize only one type of insolvency
proceedings in the form of general enforcement proceedings over the entire
assets of a debtor. However, in the conduct of insolvency proceedings and the
final outcome of the proceedings, bankruptcy laws distinguish between:
a regular procedure which results in the liquidation of the assets of the
company and the winding-up of the company and
a reorganization of the company by implementation of a bankruptcy plan.
■
■
■
Upon the opening of Bankruptcy Proceedings, any obligations of the common
debtor that are not then due are accelerated and assumed to be due, thus permitting the liquidation of assets.
■
Bankruptcy proceedings have to be initiated in the event of insolvency
(“platežna nesposobnost”) of the debtor. The insolvency is defined as the
debtor’s inability to settle all its outstanding obligations as they fall due for
a period longer than 30 days in FBiH and 60 days in RS.
■
The debtor can also initiate bankruptcy proceedings due to threatened insolvency
(“prijeteća platežna nesposobnost”), i.e., in the event that the debtor anticipates that
it will not be able to settle its obligations as they fall due.
■
The management of the company is obliged to initiate bankruptcy proceedings
without delay, in any case no later than 30 days after the insolvency has occurred.
Otherwise, the management may be liable for the damages incurred by the estate
after the occurrence of insolvency; criminal liability of the members of the
management is also possible.
Describe Liquidation Proceedings
■
Bankruptcy proceedings are initiated upon an application by the debtor or by any of
its creditors or by the liquidator in the course of ordinary liquidation proceedings if the
company has insufficient assets to meet all its obligations.
■
Upon receipt of an application, the court appoints a preliminary receiver who
determines whether grounds for opening bankruptcy proceedings exist
(preliminary bankruptcy proceedings).
■
If the preliminary receiver determines that bankruptcy proceedings should
be opened, the court opens bankruptcy proceedings, appoints a bankruptcy receiver
(steccijni upravnik) invites all creditors to notify their respective claim within 30 days
of publication of the decision and schedules the examination hearing (ispitno ročište)
in which the lodged claims are reviewed as well as the reporting hearing (izvještajno
ročište) in which the further course of the proceedings is determined.
■
The decision opening the bankruptcy proceedings has to be published in the official
gazette and on the court’s notice board. Also, a copy of the decision is sent to all known
creditors and debtors of the company. Opening of the bankruptcy proceedings must
also be noted in all relevant public registers (commercial registry, land registry, etc).
■
As of the opening of the bankruptcy proceedings, the receiver assumes control
over the debtor and its assets.
■
All existing court and similar proceedings are suspended until the receiver
decides whether or not to assume them. The creditors can realize their
respective claims only in the course of the bankruptcy proceedings.
■
The receiver has a discretionary right to decide which contracts will be fulfilled
and which will be terminated.
■
All creditors are divided into three payment classes:
Preferential creditors – include (i) claims incurred in the course of the
preliminary bankruptcy proceedings; and (ii) employees in respect of their claims out of the employment relationship, but only up to a certain amount
General creditors – includes all creditors who have a valid claim
against the debtor
Subordinated creditors – includes (i) interest accrued after the bankruptcy
proceedings were opened; (ii) expenses incurred by a creditor due to its
participation in the proceedings; (iii) administrative and criminal fines
and related damage claims; (iv) claims related to gratuitous favors of
the debtor; (v) equity-replacing loans.
■
■
■
■
In the course of the bankruptcy proceedings, the debtor or receiver
(independently or upon instruction of the creditors) may prepare and
file a bankruptcy plan for reorganization of the debtor.
■
Reorganization of the debtor entails the preparation of a bankruptcy plan that
should enable the company to be rehabilitated and to continue its business
operation. Hence, the bankruptcy plan can provide for measures such as,
inter alia, conversion of the existing debts into capital, repayment of certain
debts only, merger of the company with or into another entity, conversion
of the company’s obligations into loans, etc.
■
The bankruptcy plan has to be adopted by the relevant majority of all creditors
and confirmed by the court.
■
If no bankruptcy plan has been filed or adopted, the debtor’s assets
will be sold and the company will be liquidated.
■
As a general rule, bankruptcy proceedings are urgent proceedings
(hitan postupak) and accordingly subject to a legal framework that should enable
speedy proceedings. However, in practice this is rather difficult to achieve.
■
The relevant factors which affect duration of the proceedings are the extent of the
assets and liabilities of the obligor, the number of creditors, whether the receiver
challenges any transactions of the obligor in court, whether a bankruptcy plan
has been filed, etc. Backlogs of existing cases in court also plays a significant role
in the duration of the proceedings.
■
In some cases, bankruptcy proceedings may take several years.
■
As a general rule, the receiver may challenge transactions implemented prior
to the commencement of the bankruptcy proceedings if such transaction has
impaired equal settlement of all creditors.
■
A transaction can be contested if:
it has been carried out within either (i) six months before filing of the petition for bankruptcy proceedings and the creditor knew or should have known of
the debtor’s insolvency, or (ii) after the petition has been filed and the
creditor knew or should have known of the debtor’s insolvency or about the
petition for bankruptcy.
it has provided a creditor an unusual settlement or security for its claim,
and (i) if it was carried out within one month prior to filing of the petition
for bankruptcy proceedings or after the petition was filed; or (ii) if it was
carried out up to three months prior to filing of the petition for bankruptcy
proceedings if at that time the debtor was already insolvent.
the transaction provided for no or insufficient compensation for the
debtor (hardening period of five years prior to filing of the petition
for bankruptcy proceedings).
■
■
■
Secured creditors in Bankruptcy Proceedings
■
Secured creditors (razlučni povjerioci) who have a validly established in rem
security interest can demand separate settlement of their respective claims out
of the proceeds realized through the sale of the Collateral.
■
If the claims of a secured creditor cannot be fully satisfied out of the Collateral,
the remaining claim will be treated as an unsecured claim in bankruptcy
proceedings.
■
Secured creditors cannot realize their right to demand sale of the Collateral
during the preliminary bankruptcy proceedings.
■
Any appointment as a procurist (prokurist), legal representative (punomoćnik)
or agent (zastupnik) granted by the debtor will automatically cease to be valid
upon the opening of bankruptcy proceedings.
■
Collateral in accordance with the FBiH and RS laws on enforcement
proceedings or the BiH Framework Pledge Law.
■
Enforcement proceedings generally include the following steps:
■
obtaining a title for enforcement (izvršni naslov);
■
filing a motion for enforcement (prijedlog za izvršenje) with the
competent court;
obtaining a decision of the competent court that judicial enforcement
is permissible (rješenje o izvršenju)
enforcement in the relevant procedure prescribed
for the respective Collateral.
■
■
■
■
A title for enforcement in respect of Collateral may be:
■
a final, conclusive and binding judgment by a BiH court or arbitral award;
■
a settlement effected before a BiH court (sudsko poravnanje);
■
a notarial deed (notarska isprava);
■
a confirmation of pledge registration (potvrda o registraciji zaloga)
from the BiH Pledge Registry.
BiH, as one of the successor countries of the former Yugoslavia, is also a party to
the New York Convention. Therefore, an arbitral award rendered in other
contracting countries that are parties to the Convention would be, in general,
enforceable in BiH. However, when signing the New York Convention, BiH made
a reservation that it will apply the New York Convention only to differences arising
out of legal relationships, whether contractual or not, that are considered
commercial under the law of BiH and only of awards made in the territory of
another contracting state on the basis of reciprocity. Despite the fact that the
reciprocity between contracting states of the New York Convention is presumed,
it cannot be ruled out that an FBiH court will ask for proof of such reciprocity.
■
In our experience the enforcement procedure takes about six months to 1 year
(excluding the time of filing of the enforcement petition). The duration also
depends on the court’s and State Execution Service’s caseload and any defensive
pleadings pursued by the defendant.
BULGARIA
By Richard Clegg, Jasmina Uzova and
Deniz Saidov, Sofia Office
THE BOOKSELLERS AT
SOFIA’S OUTDOOR MARKET
OFTEN USE FRUIT BOXES
TO CARRY THEIR BOOKS
Even though there is no special regulation regarding negative pledges, they are used in
practice. In our opinion, negative pledge undertakings are legal and binding between
parties to a loan agreement.
■
In general, Bulgarian law does not restrict the ability of the parties to a
Facility Agreement to agree on any Event of Default.
■
In case of a bank facility, the bank must grant a defaulting Borrower a reasonable
period of time before the acceleration becomes effective.
■
A prohibition of assignment is legally valid and binding between the contracting parties,
and the violation of such clause may give rise to damage claims. However, it is not effective
vis-à-vis third parties and any assignment by a Lender to a third party is valid.
■
An assignment becomes effective vis-à-vis third parties as well as the debtor only
upon notification of the debtor.
■
The effectiveness of contractual subordination is neither explicitly regulated
nor addressed in Bulgarian case law.
■
between Senior Lenders and Junior Lenders. However, such Agreement would not be
binding upon a bankruptcy receiver.
■
Shareholders’ loans are subordinated upon the opening of Insolvency Proceedings
by operation of law.
■
the Collateral in lieu of the Secured liability) is not legally valid or binding, except with
regard to financial collateral contracts.
■
Financial collateral contracts include financial contracts between banks and merchants if
the contract has been explicitly made subject to the (EU-law based) rules on financial
collateral.
SECURITY INTERESTS
■
■
Movable Pledge Agreement, Accounts Receivable Pledge Agreement,
Receivables Pledge Agreement, Shares Pledge Agreement, Securities Pledge
Agreement, Going-Concern Pledge Agreement, Floating Pool Pledge Agreement,
Financial Collateral Agreement and Mortgage Agreement
■
■
■
Depending on the security interest, the act of perfection may be one or more of:
(i) the registration of the security with the respective registry or (ii) notifying the debtor
or (iii) the transfer of the respective Collateral to the Secured Party or (iv) notarization
of the agreement.
■
In case of a guarantee or surety (both personal security interests), the act of perfection
falls together with the signing of the respective title instrument.
■
The rank of a pledge depends upon the time when the respective act of perfection
has been made.
■
registration of the mortgage is submitted to the Registry Agency (subject to actual registration).
asset
security
perfection
movables
pledge
pledgor or registration with
the Central Pledges Registry
accounts receivable
pledge
registration with the Central
Pledges Registry or compliance with the requirements
under the Financial
Collateral Contracts Act
receivables
notification to debtor and/or
Pledges Registry
shares
pledge
endorsement, hand -over
and registration with the
shareholder registry or only
the hand-over of share
certificates (depending on
the type of shares)
book-entry form securities
pledge
Depository
real estate
mortgage
notary deed registered with
the Registry Agency
going concern or
floating pool
pledge
Pledges Registry as well as
with the respective registries
in accordance with the type
of the asset class
security interest
accessory
Private Sale
guarantee
yes/no depending on
terms
n.a.
surety
yes
n.a.
movables pledge
yes
yes
account pledge
yes
yes
receivables pledge
yes
yes
share pledge
yes
yes
yes
no
■
Bulgarian law recognises a floating charge in the form of:
a registered going-concern pledge over the going concern of a
company (enterprise pledge)
a registered pledge over a floating pool of (i) receivables,
or (ii) movables, or (iii) book-entry securities, owned by a company
■
■
Parallel Debt Issue
■
Bulgarian law requires that the secured party must be the holder of secured
claims. Bulgarian law, as a general rule, does not recognize a security trustee
structure. As an exception to said rule, a structure similar to security trusteeship
is provided by Bulgarian law in the following two cases:
■
bondholders of a bond-issue shall appoint a security trustee; and
■
the Financial Collateral Contracts Act (effective as of 25 August 2006)
mentions the provision of financial security to a party acting for the
account of several secured creditors, so that with regard to financial
collateral agreements effectiveness of the security trustee structure seems probable; this has not yet been tested in court
■
be the joint and several creditor of each and every obligation of the Borrower
towards each Finance Party (other than the Security Agent).
■
The above concept has as yet not been tested in Bulgarian courts.
■
Insolvency Proceedings may be opened over the assets of an insolvent or
over-indebted company.
■
Insolvency Proceedings are initiated through an application for the opening of
Insolvency Proceedings. The single-entry procedure may have two
different exits:
Composition (Оздравяване на предприятието) - formal or informal depending
on the existence of a Restructuring Plan approved by the court or an
out-of-court settlement with all creditors
Insolvency (Обявяване в несъстоятелност) of the company which leads
to the liquidation of the company’s assets
■
■
■
Two separate insolvency tests (each triggering insolvency) for a company are
typically applied:
balance sheet test: a company’s due and payable obligations exceed
the value of the company’s assets (= over-indebtedness) plus a negative business forecast
cash flow test: a company is not able to perform more than one monetary obligation (= illiquidity)
■
■
■
Directors of a company are obliged to file with the competent court for the
opening of Insolvency Proceedings within a 30-day period after the company
becomes insolvent . A director risks criminal and civil liability in case of
non-compliance.
Describe Insolvency Proceedings
■
■
Insolvency Proceedings are initiated by the competent court upon application by:
■
the debtor
■
one or more of its creditors
■
an assigned liquidator
■
the National Revenue Agency
The opening of Insolvency Proceedings becomes effective as of the day of the
competent court’s ruling on the opening
■
In its decision the competent court: (i) appoints an insolvency administrator
(синдик); (ii) determines the date as of which the debtor has become insolvent or
over-indebted; (iii) imposes a general injunction over the assets of the debtor;
and (iv) determines the date for the first meeting of creditors.
■
The insolvency administrator supervises and approves the acts of the
management of the company, who does not lose control over the business.
■
The competent court has the power to declare that the insolvency administrator
assumes control of the insolvent company’s business in case the management
of the company endangers the interest of its creditors.
■
Typically, the debtor’s assets are liquidated, i.e., sold to the highest bidder.
Liquidation proceeds are distributed to the company’s creditors pursuant to the
statutory order of priorities.
■
The Bulgarian Commercial Act lays out the following priority of payments:
■
claims secured by a pledge or mortgage
■
claims secured by a lien
■
insolvency costs
■
claims arising out of employment contracts before the effectiveness
of the opening of Insolvency Proceedings
obligations (allowance) owed by the debtor to third parties by
operation of law
■
public claims of the state and the municipalities such as taxes,
customs duties, social security contributions, which have arisen
before the effectiveness of the opening of Insolvency Proceedings
claims which have occurred after the effectiveness of the opening
of Insolvency Proceedings
all other unsecured claims that have arisen before the effectiveness
of the opening of Insolvency Proceedings
unsecured claims for interest payment which have become due and
payable after the effectiveness of the opening of Insolvency Proceedings
claims arising out of a credit extended to the debtor by a partner
or a shareholder
■
claims arising out of gratuitous transaction
■
claims arising from the costs incurred by creditors in connection with their
participation in the insolvency proceedings, with the exception of costs for
opening of the proceedings.
■
■
■
■
■
■
If liquidation proceeds are not sufficient to satisfy all creditors within a certain
class, available proceeds are distributed on a pro rata basis.
■
The commencement of Insolvency Proceedings against a pledgor does not
affect the enforcement of a registered pledge upon the pledged assets if the
enforcement started before the opening of Insolvency Proceedings and
if the collateral is identifiable within the debtor’s estate.
■
The commencement of Insolvency Proceedings against a debtor does not affect
the enforcement proceedings of public debts if the enforcement started before
the opening of the Insolvency Proceedings.
■
The duration of Insolvency Proceedings will depend on several different
factors (e.g., the volume of the assets and liabilities of the debtor, the number of
creditors, whether a restructuring plan is approved, whether the insolvency
administrator challenges any transactions of the debtor in court, etc).
Although there is no general rule, in our experience more complex Insolvency
Proceedings may take up to 36 months.
■
The insolvency administrator or each of the creditors have the right to challenge before the court certain agreements or transactions that are
disadvantageous to the debtor or are detrimental for the creditors and which
were concluded within the applicable hardening period of up to three years
before the decision for the opening of the Insolvency Proceeding (or five years
for banks in insolvency).
■
Null and void by law are: (i) certain agreements concluded after the date of
occurrence of insolvency or over-indebtedness determined by the court
(incl. creation of pledges and mortgages); and (ii) agreements concluded in
contradiction to the statutory rules after the opening of Insolvency Proceedings.
■
Any appointed legal representative powers granted by a company will cease
to be valid upon the opening of insolvency proceedings over its assets.
■
Under the Commercial Act the approval of a Restructuring Plan is the core of
the formal Composition Proceedings. A Restructuring Plan can be proposed not
later than one month following the date of publication in the Commercial
Register of the court’s ruling approving the list of claims. A Restructuring Plan
can be proposed by:
■
the debtor
■
the administrator
■
creditors holding at least one-third of the secured claims
■
creditors holding at least one-third of the unsecured claims
■
shareholders holding at least one-third of the capital of the debtor
■
20% of the total number of the debtor’s employees
■
The Restructuring Plan may provide for deferment or rescheduling of payments,
reduction of debts, debt-to-equity swap, or reorganization of the enterprise.
■
The Restructuring Plan may envisage the sale of the enterprise or a separable
part thereof.
■
A majority of each class of creditors (secured/unsecured) representing 50% in
value must agree on the Restructuring Plan.
■
The court must approve the Restructuring Plan. If the Restructuring Plan is
approved by the court, the Insolvency Proceedings are terminated.
■
If the debtor does not perform his obligations under the Restructuring Plan
the Insolvency Proceedings may be reopened. In the re-opened Insolvency
Proceedings, no further Composition is permissible.
Describe (Judicial) Enforcement Proceedings
■
Collateral in accordance with the Civil Procedural Code (Граждански процесуален
кодекс) which requires completion of the following steps:
■
first, obtaining a title for enforcement (изпълнително основание)
■
second, filing of a motion for enforcement with the competent
Bulgarian regional court or Sofia City Court
third, obtaining a court ruling of the competent court and an execution
order (изпълнителен лист)
fourth, enforcement through public auction (публична продан) or
alternatively, in case of receivables, freezing order (запор) of the bank
accounts, bonds or shares
finally, the proceeds of the public auction or freezing order
are distributed to the creditor to settle the claims
■
■
■
■
a final, conclusive and binding decision, ruling, settlement or order
of a Bulgarian court or other intermediate judgment that
is immediately enforceable
as defined in Council Regulation (EC) 44/2001 of 22 December 2000 on
jurisdiction and the recognition and enforcement of judgments in civil
and commercial matters
a final, conclusive and binding arbitrat award in Bulgaria or a member state to the New York Convention or the Recognition and Enforcement of Foreign Arbitrat Awards of 1958
a judgment, act or memoranda on court settlement of foreign courts which have been admitted to enforcement in Bulgaria.
■
■
■
■
■
enforcement procedure takes about six months to two years (starting with the
filing of the enforcement application and ending with the distribution of the
monies realized to the secured creditor). This duration also depends on the
court’s caseload and potential objections pursued by the debtor.
CROATIA
By Dubravka Grujić, Vienna
and Ira Perić, Zagreb
A GIANT CATFISH
NAMED JURA LIVES IN
ZAGREB’S JARUN LAKE.
TO THIS DAY, HE HAS
NEVER BEEN CAUGHT
A negative pledge undertaking is null and void in relation to all types of Collateral.
■
In general, Croatian law does not restrict the ability of parties to a Facility Agreement
to agree on any Event of Default.
■
If so envisaged by the Reorganisation Plan, the Reorganisation Proceedings may
cause a stay on the right to accelerate a Loan.
■
A prohibition of assignment with regard to monetary claims has absolute effect, i.e., such
contractual prohibition is effective vis-à-vis third parties and any assignment by a Lender
to a third party in violation thereto is invalid.
■
The effectiveness of contractual subordination is neither explicitly regulated nor
addressed in Croatian (case) law.
■
between Senior Lenders and Junior Lenders. It is unclear whether (and to what extent)
the contractual subordination would survive the opening of bankruptcy proceedings and
would be respected by a bankruptcy receiver, unless it is accompanied by structural
subordination.
Concept of Equity-Replacing Shareholder Loans
■
A shareholder loan granted to a company in a financial crisis is treated similarly to equity
contributions; such shareholder loan to be referred to as an Equity-Replacing Shareholder Loan.
■
Claims for repayment of an Equity-Replacing Shareholder Loan are subordinated in
bankruptcy proceedings by operation of law if such loan was granted by a shareholder who
■
■
is also a managing director; or
■
holds a share interest representing more than 10% of the share capital.
Repayment of an Equity-Replacing Shareholder Loan is prohibited while the company is
in a financial crisis.
■
Similar rules apply to any other transaction that substantively corresponds to an
Equity-Replacing Shareholder Loan , such as a security interest or a guarantee provided by
a shareholder to its company’s creditors while the company is in a financial crisis.
■
An agreement for the forfeiture of the security interest (i.e., secured creditor may keep the
Collateral in lieu of the Secured Liability) is not legally valid and therefore not binding.
SECURITY INTERESTS
■
■
Mortgage Agreement, Movables Pledge Agreement or Movables Transfer Agreement or Movables Floating Charge Agreement, Share Pledge Agreement,
Rights/Receivables Pledge Agreement or Rights/Receivables Transfer/Assignment Agreement
■
Debenture (zadužnica)
■
■
■
For debentures, guarantees and sureties, the act of perfection falls together with
the signing of the respective title instrument.
■
■
The rank of a pledge depends upon when the respective act of perfection is made.
■
registration of the mortgage is submitted to the land register (subject to actual registration
of the mortgage).
asset
security
perfection
movables
pledge or transfer
registration with the
FINA Registry
movables
floating charge
registration with the FINA
Registry
rights/receivables
(incl. accounts)
pledge or transfer/assignment
Registry and (best practice)
third-party notification of the
FINA Registry decision
shares
pledge or transfer
Registry and (best practice)
annotation in the book of
shares
real estate
mortgage or transfer
registration with the land
register
security interest
accessory
Private Sale
guarantee
yes (unless bank
guarantee)
n.a.
surety
yes
n.a.
movables pledge/transfer
yes
pledge – no; transfer – yes
(via public notary)
movables floating charge
yes
no
rights/receivables pledge/
assignment (incl. accounts)
yes
pledge – no; assignment/
transfer – yes (via public notary)
share pledge
yes
unclear
real estate
yes
mortgage - no
transfer - yes (via public notary)
■
Croatian law recognises floating charges over all (or a certain group)
of physical movable assets (e.g., goods on stock) of a company.
Parallel Debt Issue
■
There is no structure comparable with a common-law trust in Croatia, and the
valid and enforceable security interest.
■
whereby the parties to an English law Facility Agreement agree that the Security
Agent shall be the joint and several creditor of each and every obligation of the
■
The above concept has as of yet not been tested in the Croatian courts, but
there appears to be a consensus in the legal community that such a parallel
debt concept, if properly implemented, would be upheld in Croatian courts.
■
Conceptually, the Insolvency Act provides the following kinds of insolvency
proceedings:
Bankruptcy Proceedings (stečajni postupak), which generally lead to the liquidation of the insolvent entity
Reorganisation Proceedings (preustroj) which primarily aim at eliminating a certain percentage of the debtor’s debts while preserving its business as a going concern
■
■
■
Two separate insolvency tests (each triggers insolvency) for a company
are typically applied:
balance sheet test: the book value of assets being lower than the
company’s liabilities (= over-indebtedness - prezaduženost) plus a
negative business forecast
cash flow tests: a company is unable to perform monetary obligations as they fall due (= illiquidity - nesposobnost za plaćanje) or the company deems it likely that it will be unable to perform monetary obligations
as they fall due (= threatened illiquidity - prijeteća nesposobnost
za plaćanje)
■
■
■
The management board has to file a petition for the opening of the Bankruptcy
proceedings no later than 21 days after the illiquidity or over-indebtedness has
occurred. Directors are personally liable to creditors for damages in case of
non-compliance.
■
Bankruptcy Proceedings are initiated by the competent court upon an application
by a debtor, one or more creditors, or a third party (i.e., tax authority).
■
The opening of Bankruptcy Proceedings becomes effective on the day the
respective ruling is issued by the competent court.
■
The competent court appoints a bankruptcy receiver (stečajni upravitelj),
who assumes control of the debtor’s business and its assets.
■
In the absence of a court-approved Reorganisation Plan (stečajni plan), the
debtor’s assets are liquidated and liquidation proceeds distributed to the
debtor’s creditors in accordance with the priority principles laid out in the
Insolvency Act.
■
The Insolvency Act lists the following order of payment:
claims of creditors with a right of separation (izlučni vjerovnici) from the bankruptcy estate (e.g., those holding the right of ownership or trust
ownership), satisfied outside of the Bankruptcy Proceedings
■
claims of creditors with a preferential right (razlučni vjerovnici), e.g.,
secured creditors, satisfied out of the bankruptcy estate, but before any other bankruptcy creditor
claims of creditors of the bankruptcy estate (vjerovnici stečajne mase),
i.e., costs of the Bankruptcy Proceedings; liabilities incurred by the
bankruptcy receiver; claims of attorneys for services rendered during the
period of six months prior to the opening of the Bankruptcy Proceedings; certain liabilities based on bilateral contracts; liabilities based on an
unjustified increase of the estate; liabilities based on employment
contracts for the period after the opening of Bankruptcy Proceedings
■
claims of unsecured and unsubordinated bankruptcy creditors
■
claims of subordinated bankruptcy creditors
■
■
■
The duration of the Bankruptcy Proceedings will depend on several different
factors (e.g., the extent of the assets and liabilities of the obligor, the number of
creditors, whether an application for Reorganisation Proceedings is made,
whether the bankruptcy receiver challenges any transactions in court, etc).
Although there is no general rule, in our experience more complex
Bankruptcy Proceedings may take up to 48 months.
■
Transactions undertaken prior to the Bankruptcy Proceedings that are
detrimental to the uniform satisfaction of creditors, or are more favourable
to some, may be challenged by the receiver and the bankruptcy creditors on,
among others, the following grounds:
securing or satisfying a creditor in a manner corresponding to that
creditor’s entitlement, if the debtor was illiquid at the time of the
transaction and the creditor knew (or should have known) it
(hardening period of 3 months prior to filing);
■
securing or satisfying a creditor who is not correspondingly entitled
(hardening period: (i) the last 1 month prior to filing, or (ii) if the debtor
was illiquid at the time of the transaction, or if the creditor knew at the
time of the transaction that it would be damaging to the bankruptcy
creditors - the 3rd or 2nd month prior to filing);
transactions that are directly detrimental to the bankruptcy creditors, if
the debtor was illiquid at the time of the transaction and the other party
knew of it (hardening period of 3 months prior to filing);
transactions with the intent of harming creditors, if the other party
knew of it at the time of the transaction (hardening period of
10 years prior to filing);
transaction without compensation (hardening period of 4 years
prior to filing);
Shareholder loans replacing capital contributions (hardening period
of 1 year , or, if security is provided, 5 years, prior to filing).
■
■
■
■
■
■
preferential claim regarding the respective Collateral.
■
The Collateral will form part of the bankruptcy estate, but the secured creditor will
have a preferential right to be satisfied before any other bankruptcy creditor in
accordance with the priority of payments as laid out in the Insolvency Act.
■
Ongoing enforcement of the security interest is stayed following the application
for bankruptcy, but it continues – in accordance with the Enforcement Act - after
the receiver has taken over control of the bankruptcy estate.
■
Any appointment as a legal representative or as an agent granted by a
company will automatically cease to be valid upon the opening of the
Bankruptcy Proceedings.
■
This may effect the secured creditor’s ability to effect a transfer of the Collateral
to a potential purchaser in a private enforcement.
■
In the Bankruptcy Proceedings, the debtor or the receiver may apply for the
initiation of Reorganisation Proceedings by submitting the Reorganisation Plan
to the court, in order to preserve the debtor’s business as a going concern.
■
The Reorganisation Plan requires acceptance by the majority of creditors within
each class of creditors.
■
The opening of Reorganisation Proceedings becomes effective once the court’s
decision confirming the Reorganisation Plan (rješenje o potvrdi plana) has
become final and binding.
■
Once
the Reorganisation Plan has been approved by the competent court
and the receiver has paid out the creditors of the bankruptcy estate,
the Bankruptcy Proceedings are terminated and the debtor generally
regains its control over its assets.
■
However, if so ruled by the court, the receiver, the creditors’ committee and the
bankruptcy court supervise the implementation of the Reorganisation Plan.
■
Reorganisation Proceedings may effect the position of the secured creditors, as
the Reorganisation Plan may envisage modification of their rights to separate
satisfaction.
■
The maximum duration of the Reorganisation Proceedings is not
prescribed by law.
Describe (Judicial) Enforcement Proceedings
■
It is standard practice in Croatia to have security instruments in the form of a
directly enforceable instrument (ovršna isprava); i.e., a security agreement in
the form of a Croatian notarial deed. Depending on the type of the security
interest granted, a creditor secured by such directly enforceable instrument
can enforce either out of court or with court participation.
■
Assignments/transfers (prijenos) established by a directly enforceable
instrument permit out-of-court enforcement. Prior to enforcement, the creditor
will have to obtain an enforcement confirmation (potvrda o ovršnosti) from a
Croatian notary public , i.e., a ruling on non-payment by the Borrower.
The out-of-court enforcement is effected via a Croatian notary public, by means of
a public auction (javna dražba) or direct contracting (neposredna pogodba).
■
Mortgages and pledges established by a directly enforceable instrument are
enforced via court. The creditor secured by a security agreement in the form of
a Croatian notarial deed will have to complete the following steps:
■
first, obtaining an enforcement confirmation from a Croatian notary public
■
second, filing an enforcement request (prijedlog za ovrhu) with the
competent Croatian court,
■
third, obtaining a court decision on the enforcement (rješenje o ovrsi)
■
fourth, enforcement by: (a) public auction, in case of real estate,
(b) public auction or court-orchestrated direct contracting, in case of
movables, (c) auction or court-orchestrated direct contracting, in case of
immaterial shares and business quotas, (d) stock exchange public
auction or another legally permitted manner, in case of securities
registered with the Central Depository and Clearing Company Inc.,
(e) public auction or court-orchestrated direct contracting, in case of
material rights (e.g., IP rights, usufructus)
finally, the proceeds are distributed to the secured creditor(s) to settle
secured claims.
■
■
The duration of judicial enforcement proceedings varies greatly, depending
on the court involved, its caseload, defensive tactics pursued by the debtor and
similar. In our experience, it generally takes between nine months and two
years (starting with filing the application for enforcement and ending with the
distribution of the monies realised to the secured creditor).
CZECH REPUBLIC
By Pavel Marc and Zuzana Slovakova,
Prague Office
STANISLAV BAŽANT,
AN ARCHITECTURE
STUDENT IN PRAGUE,
CURRENTLY HAS A
GOLF HANDICAP OF 4.7
In general, a negative pledge undertaking is legally valid and binding
except with regard to real estate.
■
In general, Czech law does not restrict the ability of the parties to a Facility Agreement
■
A prohibition of assignment with regard to monetary claims has absolute effect, i.e., such
contractual prohibition is effective vis-à-vis third parties and any assignment by a Lender
to a third party in violation thereto is invalid.
■
The concept of subordination of shareholder loans by operation of law
is not known under Czech law.
■
A contractual subordination agreed in a standard Intercreditor Agreement
is effective in an insolvency situation.
■
An agreement for the forfeiture of the security interests (i.e., the secured creditor
may keep the Collateral in lieu of the secured liability) is not legally valid.
SECURITY INTERESTS
■
To establish a valid in rem security interest, a title instrument and an act of perfection
■
Movables Pledge Agreement, Account Pledge Agreement, Agreement on
Pledge/Security Assignment of Receivables, Share Pledge Agreement,
Enterprise Pledge Agreement, Mortgage Agreement
■
■
In the case of Guarantee Agreements (personal security interest) no separate
act of perfection is required.
■
In case of in rem rights, a separate act of perfection is generally required.
■
■
The rank of a real estate mortgage depends on the exact time when the filing for
registration of the mortgage is submitted to the land register (subject to actual registration).
■
As regards an ownership interest in a limited liability company, only a single pledge
(i.e., no second-ranking pledge) may be created over such ownership interest.
asset
security
perfection
movables
pledge
third party or registration of
pledge in Pledge Register
(Rejstřík zástav)
account
pledge
account bank
receivables
third-party notification
to debtor
shares
pledge
company or, if any issued,
handing over of share
certificates
ownership interest
pledge
registered with the
Commercial Register
(Obchodní rejstřík)
enterprise
pledge
registered with the Pledge
Register (Rejstřík zástav)
real estate
mortgage
registered with the Land
Register (Katastr nemovitostí)
or the Pledge Register
(Rejstřík zástav)
security interest
accessory
Private Sale
bank guarantee
no
n.a.
other guarantees
yes
n.a.
movables pledge
yes
no
account pledge
yes
no
receivables pledge
yes
no
share pledge
yes
no
ownership interest pledge
yes
no
enterprise pledge
yes
no
yes
no
■
The floating charge concept as used in the common law jurisdictions is
not recognized under Czech law.
■
However, effects similar to floating charges may be achieved under Czech law
by establishing an enterprise pledge or pledge of inventory.
Parallel Debt Issue
■
There is no structure comparable with a common-law trust in the Czech
Republic, and the consensus in the legal community is that a common-law trust
does not create the ownership with regard to the Secured Claims that is
required to create a valid and enforceable accessory security interest.
■
whereby the parties to an English law Facility Agreement agree that the Security
Agent shall be the joint and several creditor of each and every obligation of the
■
The Czech insolvency law regime comprises one main type of insolvency
proceedings (Insolvenční rˇízení), within which the insolvency of the debtor can
be resolved through:
Bankruptcy (Konkurz) which generally leads to the liquidation
of the assets forming the bankrupt estate, or
Reorganization (Reorganizace) which primarily aims at eliminating
a certain percentage of the debtor’s debts while preserving its business
as a going concern.
■
■
■
The following insolvency tests for a company are generally applied:
balance sheet test: a company’s due and payable obligations exceed the value of the company’s assets (= over-indebtedness)
cash flow test: the debtor (i) has defaulted under a substantial portion of its payment obligations; (ii) has defaulted under a payment obligation for more than three months after its due date; or (iii) is not able to satisfy its due and payable debt in the course of enforcement proceedings
(= illiquidity)
■
■
■
Each director of a company is obliged to notify the competent court of its company’s
insolvency without undue delay and to apply for the opening of Insolvency
Proceedings. A director risks criminal liability in case of non-compliance.
■
Insolvency Proceedings are initiated by the competent court upon an
application either by the debtor or by one or more of its creditors.
■
The opening of Insolvency Proceedings becomes effective upon
publication in the public insolvency register.
■
The competent court has to announce its ruling on the opening of Insolvency
Proceedings by public notice no later than two hours after the submission of the
respective application, and such public notice is published on the court’s notice
board and in the Czech online public insolvency register (http://isir.justice.cz).
In its ruling, the competent court appoints an insolvency receiver (Insolvenční
správce) who oversees the business and reports to the court and creditors’
committee.
■
The insolvency receiver must be a person with appropriate qualifications
who is registered in the list of the Ministry of Justice of the Czech Republic.
■
In the absence of a successful Reorganization, the competent court will declare
Bankruptcy, and the insolvency receiver will liquidate the debtor’s assets; i.e.,
all assets are sold to the highest bidder.
■
When distributing the liquidation proceeds, secured and unsecured creditors
are treated separately.
■
Secured creditors are satisfied by liquidation of their Collateral (minus
expenses). Secured creditors may instruct the receiver regarding the method of
the liquidation of the Collateral.
■
The unsecured creditors are satisfied proportionally, after the full satisfaction of
the preferred claims, e.g.:
Costs and remuneration of the insolvency receiver, and certain
other costs of the Insolvency Proceedings,
Employees’ claims that have accrued in the last three years preceding
the opening of Insolvency Proceedings.
■
■
■
The duration of Insolvency Proceedings will depend on several different factors
(e.g., the extent of the assets and liabilities of the obligor, the number of creditors).
Although there is no general rule, in our experience more complex Insolvency
■
The insolvency receiver has the right to challenge preferential transactions
by filing a law suit (odpůrčí žaloba), e.g., if the debtor:
■
■
has prepaid any of its debt before maturity or
■
has provided a security interest for the benefit of any of its creditors
to the detriment of its other creditors
The preferential transaction can be challenged only if it was entered
into within one year prior to the opening of Insolvency Proceedings
(three years in case of affiliates);
■
The insolvency receiver can file the lawsuit within one year of the opening
of Insolvency Proceedings.
Secured Creditors in Insolvency Proceedings
■
A validly established in rem security interest gives the secured creditor
a preferential claim with regard to the respective Collateral.
■
The Collateral will form part of the bankruptcy estate, but the secured creditor
will have the preferential right to be satisfied from proceeds of sale of the
Collateral before any other creditors in accordance with the order of priority
in the Insolvency Proceedings.
■
Any appointment as a legal representative (zmocněnec) or as a proxy
(prokurista) granted by a company will automatically cease to be valid upon
the opening of Insolvency Proceedings over its assets.
■
During the course of the Insolvency Proceedings, the debtor may apply for
Reorganisation (by submitting the Reorganisation Plan to the court) in order
to preserve the debtor’s business as a going concern.
■
The competent court has to announce its ruling on the opening of
Reorganisation by public notice which is published on the court’s notice board
and in the Czech online public insolvency register (http://isir.justice.cz/isir/).
■
In the course of Reorganisation, the debtor has the opportunity to negotiate
for the discharge of up to 60% of its outstanding debts (cram-down); i.e., the
Reorganisation Plan must provide for the repayment of at least 40% of all
outstanding debts.
■
The Reorganisation Plan requires acceptance by the majority (50%) of all
unsecured creditors and by all secured creditors (100%).
■
Once the Reorganisation Plan has been approved by the competent court,
the Insolvency Proceedings will be terminated and the debtor will, generally,
regain control over its assets.
■
Under Czech law, any creditor may choose between the following types
of enforcement
court enforcement (výkon rozhodnutí), which is governed by the
Civil Procedural Act (Občanský soudní řád)
enforcement by a private bailiff (exekuce), which is mainly governed
by the Enforcement Act (Exekuční řád), and
if secured, the sale of Collateral by a licensed private auctioneer,
which is mainly governed by the Public Auction Act (Zákon o veřejných dražbách).
■
■
■
■
In practice, most creditors prefer the (generally more efficient) enforcement
by a private bailiff or private auctioneer.
■
The creditor can initiate the enforcement proceedings only if it has a title
or enforcement (Exekuční titul), which could be:
■
a final ruling on the obligation
■
a final, conclusive and binding judgment by a Czech court
■
a settlement approved by a court
■
a final, conclusive and binding judgment by a court of a Member State as defined in Council Regulation (EC) 44/2001 of 22 December
2000 on jurisdiction and the recognition and enforcement of
judgments in civil and commercial matters
■
a final, conclusive and binding arbitral award in the Czech Republic or a member state to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, or
an agreement between the debtor and the creditor on direct enforcement which must be concluded before the notary or before the private bailiff (zápis se svolením k vykonatelnosti) (Direct Enforcement Agreement)
■
■
In our experience enforcement by a private bailiff takes about six months to
one year; court enforcement generally takes longer.
Enforcement by the Secured Creditor
■
For secured creditors, there are two additional options in the event of
the debtor’s default:
They can apply for the sale of the Collateral in a public auction by
a licensed private auctioneer under the Public Auction Act (Zákon
o veřejných dražbách). The auction is initiated on the basis of an
enforcement title; if a Direct Enforcement Agreement exists,
no court proceedings of any kind are necessary.
Alternatively, the secured creditors may apply for the sale of the Collateral
in special proceedings under the Civil Procedural Act (Občanský soudní
řád); the court can skip the hearing if the creditor submits a Direct
Enforcement Agreement.
■
■
HUNGARY
By Gábor Erdős, Fruzsina Tari and
Eszter Nagy, Budapest Office
THE NORTH-FACING CLOCK
ON THE REFORMED CHURCH
IN SZIGETSZENTMIKLÓS
OUTSIDE OF BUDAPEST
IS ALWAYS BETWEEN FIVE
AND SEVEN MINUTES FAST
■
According to the Hungarian civil code, a restriction / prohibition of sale or encumbrance
can be undertaken only at the time of the sale of the respective asset.
■
Any other contractual undertaking can be declared invalid by the courts.
■
In general, Hungarian law does not restrict the ability of parties to a Facility Agreement to
■
However, it is not permissible to agree on an Event of Default and accelerate a loan in case
of the opening of Bankruptcy Proceedings on the basis of a payment default of the borrower.
■
A prohibition of assignment with regard to monetary claims has relative effect, i.e., such
contractual prohibition is effective only between the parties to the Facility Agreement and
any assignment by a Lender to a third party is valid.
■
The effectiveness of contractual subordination is neither explicitly regulated nor addressed
in Hungarian case law.
■
between Senior Lenders and Junior Lenders. However, such contractual subordination will
not be binding upon a bankruptcy/liquidation receiver.
■
Claims for repayment of a shareholder loan are subordinated in Liquidation Proceedings
by operation of law. We note that “shareholder” in this sense has a very broad meaning and
includes shareholders with majority shareholding, executive officers/managing directors,
close relatives and beneficiaries of gratuitous commitments.
■
the Collateral in lieu of the Secured liability) is not legally valid and therefore not binding.
SECURITY INTERESTS
■
■
Agreement, Quota/Share Pledge Agreement, Floating Charge, Mortgage Agreement, Assignment Agreement, and Option Agreement
■
■
■
In case of a guarantee or surety (both personal security interests), the act of perfection
is the signing of the respective agreement.
■
■
The rank of a real-estate mortgage, pledge on movables, floating charge
and the quota/share pledge depends on the time of registration.
■
The respective register considers the applications in the order of their submission
(i.e. if a Senior Lender files an application on day 1 and a Junior Lender files on day 2,
the relevant register will first consider the application of the Senior Lender.)
asset
security
perfection
movables
pledge
registration with
Notarial Registry
account
pledge
to account bank
receivables
to debtor
quota
pledge
registration with the Companies
Register (Cégbíróság)
all assets
floating charge
registration with Notarial
Registry
real estate
mortgage
registration with the Land
Register (Földhivatal)
security interest
accessory
Private Sale
guarantee
no
n.a.
surety
yes
n.a.
movables pledge
yes
account pledge
yes
(but not used in practice)
receivables pledge
yes
share pledge
yes
floating charge
yes
yes
■
The concept of a floating charge over all assets of a company exists
under Hungarian law.
■
In order to enforce, “crystallization” is required (i.e. the floating charge
needs to be converted into specific pledges/charges).
Parallel Debt Issue
■
There is no structure comparable with a common-law trust in Hungary.
■
In practice, various structures are implemented (some using only powers of
attorney to the security agent; some using a parallel-debt structure).
■
However, none of the above concepts have yet been tested
in the Hungarian courts.
■
The new Civil Code (not yet in force) acknowledges and explicitly regulates
the trust / security-agent concept.
■
There are the following two types of
insolvency proceedings:
Bankruptcy Proceedings (Csődeljárás) which aim at achieving
a composition between the debtor and its creditors by granting
a temporary relief from its financial obligations to the debtor
Liquidation Proceedings (Felszámolási eljárás) which aim at the
complete liquidation of assets, the satisfaction of the creditors’ claims
and the dissolution of the company
If the debtor and its creditors do not achieve composition by entering
into a composition agreement, and they agree on the impossibility of agreeing a composition, then Bankruptcy Proceedings are terminated and Liquidation Proceedings are initiated by operation of law.
■
■
■
■
There is no explicit legal obligation for the directors of a company to file for the
initiation of Bankruptcy Proceedings or Liquidation Proceedings.
■
However, in case a company becomes insolvent, the director’s duties shift
to considering the interests of the company’s creditors first. This ensures that
directors, if in the best interest of the company’s creditors, will file for
Bankruptcy Proceedings or Liquidation Proceedings in order to avoid
personal liability.
■
In Hungary no insolvency test exists, as none of the concerned parties is obliged
to initiate Bankruptcy Proceedings or Liquidation Proceedings. Upon filing an
application for such proceedings, the court makes a decision as to whether
these should be pursued, taking into consideration the liquidity of the company
and its willingness and ability to solve the (alleged) insolvent situation.
■
Liquidation Proceedings are initiated by the competent court upon an
application either by the debtor or by its creditors. Further, the court initiates
Liquidation Proceedings ex officio in case Bankruptcy Proceedings are
not settled in a composition.
■
The opening of Liquidation Proceedings becomes effective on the day of
publication of the opening of Liquidation Proceedings in the Company Gazette
(Cégközlöny). From that day on, Hungarian companies subject to Liquidation
Proceedings are identified by the use of the affix „felszámolás alatt” or
„f.a.” after the company name.
■
The competent court appoints a liquidator (Felszámoló biztos) who becomes
the sole representative of the debtor company.
■
As soon as Liquidation Proceedings are commenced, all claims become due
irrespective of the terms of the original agreements. Otherwise the contractual
obligations can be continued as per the terms of the original agreement.
■
Liquidation proceeds are distributed to the debtor’s creditors in accordance
with the priority principles laid out in the Act on Bankruptcy Proceedings and
Liquidation Proceedings No. XLIX of 1991 („Bankruptcy Act”).
■
The Bankruptcy Act lays out the following priority of payments:
■
liquidation expenses (e.g., salaries of employees, costs of sales etc.)
■
claims secured by floating charges established before commencement
of Liquidation Proceedings
■
alimony claims, life-annuity payment claims and compensation benefits
■
claims of individuals not originating from economic activities,
claims of small and micro companies, small-scale agricultural producers
social insurance payment claims, overdue private pension fund
membership dues, repayable government subsidies and water and
sewage utility charges
■
other claims (e.g. any unsecured claims)
■
default interest and late charges, surcharges, penalties and similar debts
■
claims of executive officers, employees, controlled companies,
shareholders with controlling interests and gratuitous contracts
■
Length of Liquidation Proceedings
■
The duration of Liquidation Proceedings will depend on several different
factors, including the number of creditors, the timing of the application for
registering their claims etc. As a rule, Liquidation Proceedings should be
terminated within two years and 90 days. If, however, a litigation is not concluded
within this time period, the Liquidation Proceedings will be extended until a final
and binding decision is reached by the competent court in respect of the
ongoing litigation.
■
The liquidator is entitled to challenge preferential transactions where:
the preferential transaction was performed within the 90-day period preceding the filing of the application for commencement
of Liquidation Proceedings;
the liquidator challenges such transaction within 90 days after
obtaining knowledge of it; and
the liquidator challenges such transaction within one year
from the filing date of the Liquidation Proceedings.
■
■
■
■
■
All assets subject to a pledge or mortgages, but not assets subject to a floating
charge, are excluded from the pool of assets available for distribution in
Liquidation Proceedings. With regard to such assets Secured Creditors may
enforce outside of Liquidation Proceedings and request settlement of their
claims from the enforcement proceeds in accordance with their respective
rank of priority.
■
With regard to assets subject to a floating charge, the Secured Creditors whose
floating charges have been registered will have recourse to up to 50% of the
proceeds from the sale of the charged assets in accordance with the priority of
payment as laid out in the Bankruptcy Act.
■
A security deposit (óvadék) is enforceable within 3 months from commencement
of Liquidation Proceedings while a call option (vételi jog) is enforceable without
limitation in time, but cannot be set-off by the creditor against any claims
against the debtor.
■
Any appointment as a legal representative or as an agent granted by a company
will automatically cease to be valid upon the opening of Liquidation Proceedings.
■
■
Bankruptcy Proceedings are initiated upon application by the management
or one or more creditors of a company that is insolvent or that faces
over-indebtedness or illiquidity.
■
If any of the creditors of the company apply for initiation of Bankruptcy Proceedings
and the management later files an application for Bankruptcy Proceedings,
the latter application will supersede the former.
■
The opening of Bankruptcy Proceedings becomes effective on the day of
publication in the Company Gazette (Cégközlöny). A temporary moratorium comes into
effect at the time the application for Bankruptcy Proceedings is filed and remains intact
until publication in the Company Gazette. From that day on, Hungarian companies
subject to Bankruptcy Proceedings must be identified by the use of the affix „cs.a.” after
the company name.
■
The competent court is entitled to appoint a receiver (Vagyonfelügyelő) from the list of
liquidators, who assumes control of the business activities and management of the company.
■
In each group of creditors (secured and unsecured), a majority in number of votes of the
creditors must approve the restructuring plan. The Composition Agreement together with
the minutes, declarations and approval of actions to be taken have to be approved by
the competent court. With the announcement of the Composition Agreement in the
Gazette, the Bankruptcy Proceedings will be terminated. The moratorium terminates
immediately and the debtor has to fulfil its payment obligations according to the
Composition Agreement. If the debtor fails to so fulfil its payment obligations, anybody
can apply for Liquidation Proceedings to be initiated against the debtor.
■
The receiver may also challenge payments that have been effected unlawfully after the
commencement of the Bankruptcy Proceedings.
■
factors such as the quality of the proposed composition agreement,
the creditors willing to sign such agreement, etc. Nevertheless, the whole
proceedings may not exceed 365 days starting with the commencement
of the Bankruptcy Proceedings.
■
Collateral in accordance with the Enforcement Act which requires completion
of the following steps:
first, obtaining a title for enforcement; e.g., ruling on non-payment
by the borrower
second, filing of a motion for enforcement with the competent
Hungarian court
third, obtaining a writ of the competent Hungarian court that orders
the judicial enforcement
■
fourth, enforcement – public auction
■
finally, the proceeds of the public auction are distributed to the secured creditor to settle secured claims
■
■
■
■
A title for enforcement may be, inter alia:
■
a final, conclusive and binding judgment by a Hungarian court
■
jurisdiction and the recognition and enforcement of judgments in
civil and commercial matters
■
a settlement approved by a Hungarian court
■
a final, conclusive and binding arbitral award in Hungary or a member
■
enforcement procedure takes between some months and one year (starting
with the filing of the enforcement application and ending with the distribution of
the monies realized to the secured creditor). This duration also depends on the
court’s caseload and any defensive pleadings raised by the secured creditor.
ROMANIA
By Andreea Poenaru and Claudia
Arnautu, Bucharest Office
THE CHESTNUT TREES
IN BUCHAREST BLOSSOMED
IN AUGUST 2008 FOR THE
SECOND TIME THAT YEAR
■
In general, a negative pledge undertaking is legally valid for real estate.
■
For movable assets (receivables, shares accounts), a negative pledge undertaking
is in most cases null and void under Romanian law.
■
In general, Romanian law does not restrict the ability of parties
to a Facility Agreement to agree on any Event of Default.
■
However, an agreement on an Event of Default in case of the opening of
Insolvency Proceeding is not valid or binding (with certain exceptions).
■
A prohibition of assignment with regard to monetary claims has relative effect
if concluded between two business entities, i.e., such contractual prohibition is effective
only between the parties to the Facility Agreement and any assignment by a Lender
to a third party is valid.
■
The effectiveness of contractual subordination is neither explicitly regulated nor addressed
in Romanian case law.
■
A contractual subordination might not be recognised in case of insolvency since the
receiver will be bound by the statutory provisions on the distribution of proceeds in
bankruptcy proceedings.
Subordination of Shareholder Loans by
Operation of Law
■
Shareholder loans granted by shareholders holding at least 10% of a company’s share
capital are treated as subordinated debt within the context of the respective company’s
insolvency.
■
In general, an agreement for the forfeiture of the security interest (i.e., the secured
creditor may keep the Collateral in lieu of the secured liability) is not legally valid
and therefore not binding.
■
There are certain exceptions; these, however, have a rather narrow scope (Financial
Collateral Law implementing Dir. no. 2002/47/EC on Financial Collateral Arrangements).
SECURITY INTERESTS
■
(i.e., an act of publicity) are required.
■
Agree ment, Share Pledge Agreement and Mortgage Agreement
Surety (fidejusiune) Agreement and Corporate Guarantee Agreement
■
■
■
Registration formalities need to be observed for the perfection of pledges and mortgages.
■
No formalities are necessary for sureties and corporate guarantees where perfection occurs
upon signing of the respective security agreement.
■
The rank of a pledge depends upon the date when the pledge is recorded
in the public register.
■
asset
security
perfection
movables
pledge
Electronic Archive
bank account
pledge
Electronic Archive and
notification of account bank
receivables
third party notification
of the debtor
shares
pledge
registration with the shareholders’ register and
notification of company
real estate
mortgage
Register (Cartea Funciara)
and (with regard to
improvements, extensions
and assets that have not
become immovable assets
within the meaning of the
Civil Code) registration with
the Electronic Archive
security interest
accessory
Private Sale
corporate guarantee
yes
n.a.
surety
yes
n.a.
movables pledge
yes
account pledge
yes
receivables pledge
yes
share pledge
yes
yes
no
■
Under Romanian law, all movable assets of a company can be pledged
under the so-called “pledge on the goodwill” (Garanţie reală mobiliară asupra
fondului de comerţ), pursuant to which all present and future (tangible or
intangible) movable assets (inventory, equipment, accounts, stock etc.) are
provided as Collateral.
Parallel Debt Issue
■
There is no structure comparable with a common-law trust in Romania, and the
the ownership with regard to the Secured Claims that is required to create
a valid and enforceable accessory security interest.
■
The above issue is typically solved by a so-called “parallel debt structure”
whereby the parties to the (English-law governed) Facility Agreement agree
that the Security Agent shall be the joint and several creditor of each and
every obligation of the Borrower towards each Finance Party
(other than the Security Agent).
■
Two kinds of insolvency proceedings may be initiated:
Bankruptcy Proceedings (Faliment) which generally lead to the
liquidation of the assets forming the bankruptcy estate
Judicial Reorganization (Reorganizare judiciară) which primarily
aim at avoiding bankruptcy and rescuing the debtor by
restructuring the company
■
■
■
Upon the opening of Bankruptcy Proceedings, any obligation of the debtor
that is not then due is automatically accelerated and assumed to be due.
In contrast thereto, Judicial Reorganization prevents such acceleration
in the interest of preserving the debtor’s business.
■
The opening of the insolvency proceedings suspends: (i) all judiciary and
extra-judiciary claims and procedures for the recovery of debts;
and (ii) the statute of limitation applicable to these actions.
■
Insolvency Proceedings are initiated by the competent court upon
an application filed either by the debtor or by one or more of its creditors.
■
Insolvency Proceedings are handled by a special insolvency department
of the tribunal located at the principal seat of the debtor (as registered with
the trade registry) and are carried out by a specialised insolvency judge,
called the “Syndic Judge”.
■
The opening of Insolvency Proceedings becomes effective on the day of the
notification of the Syndic Judge’s decision to the debtor and the creditors and
its publication in the online Insolvency Gazette.
■
Immediate effects of the opening of insolvency proceedings are mainly: ■
the debtor enters into the “observation period”
■
the debtor may lose control over its assets
■
no interest, penalty or increase of any kind which occurred before the
opening of the Insolvency Proceedings may be added to the debts
(except with regard to the claims of the secured creditors)
all the documents issued by the debtor, by the receiver or by the
Liquidator (as the case may be) must bear the information that the
company is “under insolvency”.
■
■
One single insolvency test (triggering insolvency) for a company applies:
Cash flow test: a company does not have sufficient financial resources to pay its due and payable debts (= illiquidity)
■
■
Insolvency may be either: (i) actual, in which case the debtor is obliged to
apply for the opening of Insolvency Proceedings; or (ii) imminent, in which
case the application by the debtor is optional.
■
The director of a company is obliged to convene a general shareholders’
meeting and notify the competent court within 30 days of the date of obvious
insolvency. In case of non-compliance, a director risks criminal liability.
■
If Bankruptcy Proceedings have been opened, the Syndic Judge appoints
a Liquidator (Lichidator).
■
The Liquidator must notify the company’s creditors, the company and the Trade
Registry of the commencement of Bankruptcy Proceedings. Within 10 days upon
receipt of the notification, the creditors must lodge an application for payment
of their receivables together with the supporting documentation.
■
Instead of liquidation, Judicial Reorganization may be initiated if the creditors
of the bankrupt debtor decide to adopt a Reorganization Plan.
■
The liquidation consists of the sale of the debtor’s assets by
auction or by direct sale.
■
Every three months, beginning with commencement of the liquidation, the
Liquidator must submit a report on the proceeds obtained from the liquidation
and from the recovery of receivables, as well as a plan for their distribution
amongst the creditors to the creditors.
■
Liquidation proceeds will be distributed in accordance with the following
order of priority
taxes, stamp duties and any other costs related to
the bankruptcy proceedings
■
receivables arising out of employment relationships
■
receivables arising out of secured loan agreements granted by
credit institutions after the opening of the Insolvency Proceedings as well as any other receivables arising out of the activity carried out by the debtor after the opening of Insolvency Proceedings
■
claims of public authorities;
■
receivables arising out of secured loan agreements granted by credit institutions before the opening of Bankruptcy Proceedings as well
as any receivables arising out of services agreements, supply agreements,
or any other agreements and leases before the opening of Bankruptcy Proceedings;
■
unsecured claims;
■
subordinated debt as follows
■
■
■
loans granted by shareholders holding at least 10%
of a company’s share capital
■
claims arising out of deeds without consideration (gratuitous acts)
After approving the report confirming the distribution of all proceeds and
the deposit of any unclaimed proceeds in a bank account, the Syndic Judge
will order the termination of the Bankruptcy Proceedings and the deletion
of the company from the Trade Registry.
■
If, at any stage of the Bankruptcy Proceeding, it is discovered that the assets are
insufficient to cover all administrative expenses, the Syndic Judge will issue
a decision of termination of the Bankruptcy Proceedings and order
the deletion of the debtor from the Trade Registry.
■
The length of time of the Bankruptcy Proceedings will depend on several
different factors (e.g., the extent of the assets and liabilities of the obligor,
the number of creditors, whether the receiver/Liquidator challenges any
transactions of the obligor in court, etc).
■
The receiver/Liquidator may challenge certain types of acts or transactions,
as follows:
gratuitous transfers (save for sponsorships with humanitarian purposes) and any commercial transaction not completed at arm’s length
(hardening period of three years)
deeds concluded with the intent of concealing assets from the creditors
or otherwise diminishing their rights and involving collusion with the
counterparty (hardening period of three years)
transfers of asset ownership to a creditor for the payment of a debt or for the benefit of such creditors, if the amount which the creditor would have been able to obtain by a sale during the Insolvency Proceeding is lower than the amount actually received (hardening period of 120 days)
establishment of security for an unsecured debt
(hardening period of 120 days)
■
certain prepayments of debts (hardening period of 120 days
■
transfers of assets or assumptions of debt for the purpose of concealing or delaying the state of insolvency or prejudicing the interests of creditors or performance of derivative transactions (hardening period of two years)
transactions concluded with certain persons who had a legal
relationship with the debtor may be cancelled and assets/proceeds
recovered if such transactions resulted in defrauding other creditors (hardening period of three years).
■
■
■
■
■
■
Secured creditors, i.e., those with an established mortgage, lien, pledge or any
other security over certain assets of the debtor, have priority in the settlement
of claims with respect to their respective Collateral, after deducting the costs
incurred by the sale of the those assets.
■
A power of attorney is automatically cancelled upon commencement of the
Bankruptcy Proceedings against the debtor/the principal.
■
Describe Judicial Reorganization
■
Judicial Reorganization may be initiated by the competent court upon an (i)
application by a debtor facing illiquidity (voluntary reorganization) (ii) by one
or more of its creditors (involuntary reorganization). Additionally, the creditors
of an insolvent debtor may decide to adopt a Reorganization Plan in the course
of Bankruptcy Proceedings.
■
Within 20 days of the opening of the Judicial Reorganization proceedings, the
general meeting of shareholders is convened by the court-appointed receiver
in order to appoint the special administrator to represent the debtor and to
participate in the Judicial Reorganization on behalf of the debtor.
■
Once the debtor is divested of its powers, the receiver takes over the executive
management, partially or totally running the business, whereas the special
administrator’s role is limited to representing the interests of the shareholders.
■
The Reorganization Plan requires approval by a simple majority in value in
each class of creditor (secured and unsecured). If the restructuring plan is
accepted by the creditors it is submitted to the insolvency court for approval.
■
The approved Reorganization Plan creates binding obligations for the debtor.
■
Within 60 days of his appointment, the receiver must draft a report indicating,
inter alia, if there is any chance for the debtor to be successfully reorganised by
implementation of a Reorganisation Plan. If reorganisation is not possible,
the receiver will suggest the opening of Bankruptcy Proceedings.
■
Creditors holding at least 20% of the claims against the borrower may suggest a
reorganization plan to the court within 30 days of the date the definitive list of
claims being published (involuntary reorganization, also against the debtor’s will).
■
Additionally, such creditors have a veto right regarding the proposal of the
receiver for the opening of Bankruptcy Proceedings.
■
The court may approve a Reorganization Plan which has not been approved by
all creditor classes, provided that at least one affected class votes in favor of the
plan and that the plan is fair. The plan is deemed fair if it (i) leaves the security
interests of secured creditors substantially unaltered and any reduction of the net
present value of their claims is not below the value of their collateral; and (ii) the
“absolute priority rule” with respect to other classes of creditors is complied with.
Enforcement Proceedings
Describe Enforcement Proceedings
(choice of proceedings)
■
Collateral in accordance with the Civil Procedure Code (Codul de Procedură
Civilă) or with the Security Interest Law (Titlul VI privind Regimul Juridic al
Garantţiilor Reale Mobiliare din Legea nr. 99/ 1999, privind unele măsuri pentru
accelerarea reformei economice).
■
Mortgages may only be enforced in accordance with the Civil Procedure Code.
Describe Enforcement Proceedings –
Security Interest Law
■
Under the Security Interest Law, if a security agreement includes the following
clause (written with capital letters and having 0.5 cm) “IN CASE OF DEFAULT THE
CREDITOR IS ENTITLED TO USE ITS OWN MEANS IN ORDER TO TAKE POSSESSION
OVER THE OBJECT OF THE SECURITY” the creditor is entitled to take possession
of the Collateral as well as the title documents attesting the debtor’s ownership
rights over the Collateral.
■
If the debtor resists, the creditor can apply for assistance from an
enforcement officer.
■
Should a secured creditor choose to enforce a security pursuant to the Security
Interest Law, the following steps have to be taken:
first, serve a default notice to the borrower under the facility agreement, declaring the loan due and payable and the security documents enforce
able (in whole or in part)
second, obtaining a title for enforcement (Titlu executoriu); e.g.,
ruling on non-payment by the borrower
■
■
■
third, in case the secured creditor addresses a request to the bailiff (as per the
above), an application for assistance must be filed whereas such application
must be accompanied by:
a copy of the excerpt from the Electronic Archive for Secured Transactions (Arhiva Electronică de Garanţii Reale Mobiliare), certified by an
Electronic Archive officer
■
a certified copy of the security interest agreement
■
a description of the Collateral
■
■
fourth, the creditor may either proceed with the public sale, direct private
sale or retention of the Collateral (in this latter case, only if the parties have
specifically agreed in the security agreement upon such an enforcement
alternative)
■
fifth, return to the debtor any amount in excess of the claims satisfied as a result
of the sale of the Collateral.
■
The creditor is bound to enforce the Collateral within a reasonable timeframe
and according to the commercial market practice applicable, taking into
account the nature of the Collateral.
Describe Enforcement Proceedings
(choice of proceedings)
■
Should a secured creditor choose to enforce a security pursuant to the Civil
Procedure Code or in case of an enforcement of a mortgage, the following
steps have to be taken:
first, serve a default notice to the borrower under the Facility Agreement and accelerate the Loan
second, obtain a title for enforcement (Titlu executoriu); e.g.,
third, make an application to an enforcement officer and provide
evidence of the claim and the security together with the evidence of the registration of the security with the relevant register.
■
■
■
Describe Judicial Enforcement
Civil Procedure Code (movable assets)
■
The debtor’s movable assets will be seized if, within one day from receiving
the notification, the debtor fails to pay the debt.
■
The bailiff will identify and evaluate the assets at their market value. Should
any of the parties to the enforcement procedure contest the bailiff’s valuation,
a valuation by an expert is ordered.
■
The bailiff will notify the other creditors of the seizure and of the auction details.
The auction takes place within two weeks to two months as of the date of the
seizure minutes. Assets are sold to the highest bidder. Creditors have to pay
a minimum of 75% of its value as established by the bailiff / expert.
■
The proceeds obtained in the public auction are distributed to the secured
creditor to settle secured claims.
Civil Procedure Code (immovable assets)
■
In a special summons, the bailiff warns the debtor that, unless it fulfils its
obligations, the property will be subjected to the enforcement procedure. This
summons may, at the bailiff’s request, be noted in the relevant land register.
■
The bailiff may appoint an administrator to ensure better administration of the
property and to collect revenues, pay any expenses and represent the owner in
any court proceedings.
■
If the debtor does not pay within 15 days of the summons, the bailiff will
determine the property’s market value in preparation for the auction.
■
The auction takes place between 30 and 60 days after the sales announcement
is published. The bailiff will allow bidders to participate in the auction subject
to their having paid an advance cash deposit of 10% of the upset price blocked
at the disposal of the bailiff. The debtor is not entitled to bid, neither directly nor
indirectly.
■
The property is sold to the bidder offering the highest price. In the event the
property cannot be sold, the asking price in subsequent auctions is set at 75%
of the property’s value. Should no bidder offer such price, the property is sold at
the highest price offered.
■
Creditors may not adjudicate the immovable at a price below 75%
of the immovable’s value
■
The purchaser has to pay within 30 days.
■
■
a final, conclusive and binding judgment by a Romanian court
■
a notarial deed, a pledge agreement or a facility agreement governed by
Romanian law, all of which are “writs of execution”, or any other titles qualified as such by Romanian law
jurisdiction and the recognition and enforcement of judgments in civil
and commercial matters
A final, conclusive and binding arbitral award from a member state of the New York Convention of Recognition and Enforcement of
Foreign Arbitral Awards of 1958.
■
■
■
The duration of the enforcement proceedings under the Security Interest Law
may vary between three months and one year.
■
The enforcement proceedings under the Civil Procedure Code may last
between six months to two years.
■
In cases where no Romanian enforcement title is available, the length of
recognition/admission procedures needs to be taken into account additionally.
SERBIA
By Katarina Minić and Miloš Andjelković,
Belgrade Office
THE SERBIAN MINISTER
FOR THE ENVIRONMENT
HAS 1,024 SONGS ON HIS
MP3 PLAYER
■
In general, a negative pledge undertaking is legally valid and binding except
with regard to real estate.
■
There are no explicit restrictions on a lender’s ability to accelerate a loan
upon the occurrence of an Event of Default.
■
A prohibition of assignment with regard to cross-border monetary claims has
absolute effect; i.e., it is effective vis-à-vis third parties and any assignment by
a lender in violation thereto is invalid.
■
By operation of Serbian law, in order for an assignment of cross border monetary claims
to be valid: (i) the assignment agreement must be made in the form of a three-party
agreement, signed by the assignor, assignee and the borrower or (ii) the signed
assignment agreement must receive
subsequent written consent by the borrower. Please note that a consent to assignment
may not be given in advance.
■
The concept of contractual subordination is not recognized under Serbian law.
■
Pursuant to the Commercial Entities Law, a company may not make payments to its
shareholders if after such payments the company would be unable to pay
its obligations as they fall due.
■
the Collateral in lieu of the secured liability) is not legally valid and binding in case of real
estate collateral (i.e. mortgage).
■
As for the movables pledge, Article 28 of the Serbian Movables Pledge Law provides that
a Forfeiture Agreement would be deemed prohibited only in situations where the pledgor
is a natural person who has entered into the pledge agreement outside of the scope of
his/her commercial activity. In light of this, it could be argued that in all other cases
Forfeiture Agreements are permissible.
SECURITY INTERESTS
■
In order for a valid security interest to be deemed established, a title instrument and
an act of perfection (i.e., an act of publicity) would be required.
■
Agreement, Share Pledge Agreement, Mortgage Agreement, Insurance Pledge
Agreement,
■
■
■
■
■
Actual ranking depends on the exact time when the filing for registration of pledge/
mortgage is submitted to the relevant registry (subject to actual registration).
asset
security
perfection
movables
pledge
registration with the National
Pledge Register or physical
delivery of the movable
to the pledgee
account
pledge
Pledge Register and
notification of account bank
(still untested in Serbia)
share
pledge
Pledge Register
real estate
mortgage
respective cadastre or
land register.
security interest
accessory
Private Sale
guarantee
no
n.a.
surety
yes
n.a.
movables pledge
yes
account pledge
yes
receivables pledge
yes
share pledge
yes
yes
■
Serbian law does not recognise floating charges over all assets of a company.
Parallel Debt Issue
■
In Serbia there is no structure comparable with a common-law trust.
■
The above issue is typically solved through a so-called ‘joint and several
creditorship’ concept, which has, however, not yet been legally tested in Serbia
■
In addition, the Movables Pledge Law (which is applicable to a security
registered with the Pledge Registry, i.e. movables, ownership interests and
receivables) allows a pledgor to appoint a third party to take legal action to
protect and enforce the Secured Claims. Such third party has the rights of the
pledgor in relation to the pledgee. The name of such third party is entered in
the Pledge Registry instead of the pledgee’s name.
■
There are the following two types of insolvency proceedings :
Bankruptcy Proceedings (Stecaj) which generally lead to the liquidation
of the assets forming the bankrupt estate
Restructuring Proceedings (Reorganizacija) which primarily aim at
eliminating a certain percentage of the bankrupt debtor’s debts while preserving its business as a going concern
■
■
■
Upon the opening of Bankruptcy Proceedings, any obligations of the bankrupt
debtor that are not yet due are accelerated and assumed to be due,
thus permitting the liquidation of assets.
■
Serbian Bankruptcy Law provides the following grounds for bankruptcy
(occurrence of any one of these causes being the condition for initiating
insolvency proceedings):
continuing inability of the debtor to settle debts, i.e., the debtor has been in payment default for at least 45 days or has ceased to make payments for a period of at least 30 days (illiquidity)
the creditor faces an inability to enforce its claims against the debtor,
i.e., unsuccessful enforcement despite proven claim of creditor
a company’s due and payable obligations exceed the value of the
company’s assets (over-indebtedness)
failure to fulfil an adopted Restructuring Plan
■
■
■
■
■
Upon receipt of an application to initiate insolvency proceedings, the court
initiates the so-called preliminary insolvency proceedings (prethodni stečajni
postupak), which are aimed at determining the grounds for opening the
insolvency proceedings.
■
Subsequently the competent court appoints a bankruptcy receiver and
schedules a creditors’ hearing. The court’s ruling on the initiation of the
insolvency proceedings must be delivered to all relevant parties, including the
creditors that are known to the court. Also, a special notification must be
published in the Official Gazette of the Republic of Serbia.
■
As a general rule, in case Restructuring Proceedings have not been initiated
and no Restructuring Plan has been adopted, the bankrupt debtor’s assets are
liquidated; i.e., sold to the highest bidder. Liquidation proceeds are distributed
to the company’s creditors, in accordance with the rules set out in the
Bankruptcy Law.
■
The Bankruptcy Law lists the following order of settlement of the bankruptcy
creditors:
■
costs of Bankruptcy Proceedings
■
the unpaid net wages of employees equal to the minimum guaranteed
wages in the year preceding the initiation of Bankruptcy Proceedings as well as the unpaid social and pension contributions
claims based on any public revenues that fell due in the three months
preceding the institution of Bankruptcy Proceedings
claims of other unsecured creditors
■
■
■
A person who has the right to request segregation of a certain asset from the
bankrupt estate is not treated as a bankruptcy creditor; such asset is not included
in the bankruptcy estate.
■
Inter alia, creditors with at least 1/3 of the unsecured claims are entitled to propose
a Restructuring Plan.
■
Restructuring may be proposed simultaneously with filing the application to
initiate Bankruptcy Proceedings, but in general cannot be proposed later than
90 days following the initiation of those proceedings. The bankrupt debtor remains
under the receiver’s supervision. Bankruptcy Proceedings may be re-initiated if
the bankrupt debtor is in breach of the obligations set forth in the Restructuring
Plan and/or the Bankruptcy Law.
Length of Liquidation Proceedings
■
It is very difficult to estimate the duration of the Bankruptcy Proceedings, since the
duration of the sale of the assets of the bankrupt debtor may vary from case to
case. Moreover, the time-lines prescribed by the Bankruptcy Law do not include
potential court proceedings that may arise from appeals to any court decisions
adopted in the course of Bankruptcy Proceedings.
■
According to an informal analysis, Bankruptcy Proceedings in Serbia in
practice last an average of 2.7 years
■
A new Bankruptcy Law adopted in 2009 aims to speed up and decrease
costs of Bankruptcy Proceedings and to increase the debt recovery rate.
■
The bankruptcy receiver has the right to challenge preferential legal acts or
transactions in the event
the bankrupt debtor granted certain creditors of due claims a preferential
security interest or preferentially settled a due claim, and such creditors
knew or should have known of this intention (hardening period
of six months)
of the provision of a security for, or settlement of, an obligation to which
the respective creditor was not entitled, or was entitled but not in the way
and at the time such security was provided or claim settled
(hardening period of one year)
of an act that causes direct damage to the bankrupt debtor’s creditors
(hardening period of six months)
an insolvent debtor has intentionally put certain creditors at a
disadvantage compared to its other creditors, and such other creditors
knew of this intention (hardening period of five years).
■
■
■
■
■
preferential claim regarding the respective Collateral. The Collateral is
separated from the Bankruptcy Proceedings.
■
If these creditors’ claims are not settled in full by the sale of assets
under lien, they may claim the unsettled portion as unsecured bankruptcy
creditors.
■
Any liens on the assets of the bankrupt debtor obtained (by means of enforcement
or security) 60 days prior to the opening of Bankruptcy Proceedings will not give
the creditors a position as secured creditors. On the basis of the decision of the
bankruptcy judge, the competent body will delete such rights from the respective
public records.
■
Powers of attorney (relating to the company’s assets that form the bankruptcy
estate) granted by a company’s representative becomes ineffective as of the
date of the opening of the Bankruptcy Proceedings.
Describe Restructuring Proceedings
■
Restructuring Proceedings are opened if the creditors adopt a Restructuring
Plan submitted by the bankrupt debtor.
■
The Restructuring Plan is passed with a simple majority (in value) of the votes
of each class of creditors (e.g., secured or unsecured) and requires subsequent
court approval.
■
The approved Restructuring Plan creates binding obligations for the
bankrupt debtor.
■
Possible measures for implementation of a Restructuring Plan include,
inter alia, debt-equity swaps as well as cancellations of the existing shares or
issuance of new shares.
■
When approved by the creditors, the Restructuring Plan becomes a new
agreement for the settlement of claims specified therein. However, the bankrupt
debtor remains under the supervision of the receiver and Bankruptcy
Proceedings may be re-initiated if the bankrupt debtor is in breach of the
obligations set forth in the Restructuring Plan and/or the Bankruptcy Law.
■
Out-of-court enforcement is standard market practice as regards pledges of
ownership interests in limited liability companies, movables, mortgages
and IP rights.
■
However, for various reasons, a secured creditor may have to pursue judicial
enforcement with regard to its Collateral in accordance with the Law on
Enforcement Proceedings (Zakon o izvrsnom postupku) which requires
completion of the following steps:
■
■
first, obtaining a directly enforceable title for enforcement
■
second, filing a motion for enforcement (predlog za izvršenje)
with the competent court
■
third, enforcement by public auction or direct bargaining
■
finally, the proceeds are distributed to the secured creditor to
settle secured claims.
A title for enforcement (izvršna isprava) may be:
a final, conclusive and binding (i) court decision; (ii) court settlement;
or (iii) arbitral award
a final, conclusive and binding decision adopted in administrative
or misdemeanor proceedings
a directly enforceable mortgage agreement concluded in accordance
with the law on mortgage
■
■
■
■
It is very difficult to evaluate the length of judicial enforcement proceedings.
The duration of judicial enforcement proceedings depends on a number of issues
such as (i) the object of enforcement, (ii) the court’s caseload, and (iii) any
objections raised by the bankrupt debtor.
■
In practice, the Enforcement Proceedings in Serbia may take anywhere between
three months and several years.
SLOVAKIA
By Marcela Slobodova and Andrej Schwarz,
Bratislava Office
THE ROLAND FOUNTAIN
IN CENTRAL BRATISLAVA
CONTAINS COINS DATING
BACK TO 1909
In general, a negative pledge undertaking is legally valid and binding only inter partes.
■
In general, Slovak law does not restrict the ability of the parties to a Facility Agreement
■
Enforcement of claims may, however, be stayed during Restructuring Proceedings.
■
A prohibition of assignment with regard to monetary claims has absolute effect, i.e.,
it is effective vis-à-vis third parties and any assignment by a lender in violation
thereto is invalid.
■
Contractual subordination of claims is effective and explicitly regulated in Slovak law.
■
the Collateral in lieu of the Secured liability) is not legally valid and thus not binding.
SECURITY INTERESTS
■
■
Agreement, Share Pledge Agreement and Mortgage Agreement
■
■
■
In addition, the obligation may be secured by guarantees or sureties, in which case no
separate act of perfection is required.
■
The rank of a pledge depends upon the timing of the respective act of perfection.
■
The rank of a real estate mortgage depends on the exact time when the mortgage
is registered in the land register (subject to actual registration).
asset
security
perfection
movables
pledge
registration in a Central
Notary Register or physical
delivery of the movables to
the pledgee/instruction to
possess to third party holding
movables for pledgor
account
registered with a Central
Notary Register or third-party
notification to account bank
receivables
registered with a Central
Notary Register or thirdparty notification to debtor
shares
pledge
registered with a
Commercial Register
(limited liability company)/
Central Securities Depository
(joint-stock corporation)
real estate
mortgage
registered with the Land
Register
security interest
accessory
Private Sale
movables pledge
yes
account pledge
yes
receivables pledge
yes
share pledge
yes
yes
■
Slovakian law does not recognise floating charges over all the assets of a company. Similar
effects may be achieved by a pledge of enterprise (or parts thereof) or of the inventory.
Parallel Debt Issue
■
There is no structure comparable with a common-law trust in Slovakia, and the
consensus in the legal community is that a common law trust does not create the
ownership with regard to the Secured Claims that is required to create a valid and
enforceable accessory security interest.
■
The above issue is typically solved by agreeing that the Security Agent shall be the joint and
several creditor of each and every obligation of the Borrower towards each Finance Party
(other than the Security Agent). This has not as yet been tested in the courts.
■
Bankruptcy Proceedings (konkurzné konanie), which generally lead
to the liquidation of the company’s assets
Restructuring Proceedings (reštrukturalizačné konanie), the primary aim
of which is to reorganize an insolvent company, to draw up a plan to
repay the debtor’s debts and to ensure the debtor’s existence as a
going concern.
■
■
■
Upon the opening of Bankruptcy Proceedings, any obligations of the debtor
that are not yet due are accelerated and assumed to be due, thus permitting
the liquidation of assets.
■
typically applied:
balance sheet test: a company that is obliged to maintain books
for accounting purposes has more than one creditor and its due and
payable obligations exceed the value of its assets (= over-indebtedness)
cash flow test: a company has defaulted with regard to more than one
payment obligation for more than 30 days (= illiquidity)
■
■
■
Each director of a company is obliged to notify the competent court of its
company’s insolvency within a 30-day period after becoming insolvent and to
apply for the opening of Bankruptcy Proceedings. A director risks criminal
liability in case of non-compliance.
■
Bankruptcy Proceedings are initiated by the competent court upon an
application either by (i) the debtor, (iI) one or more of its creditors or (iiI) an
appointed liquidator.
■
Bankruptcy Proceedings have the following phases:
first phase: pre-commencement phase until the opening of Bankruptcy Proceedings by the court decision declaring the debtor’s bankruptcy
second phase: actual Bankruptcy Proceedings
■
■
■
If the bankruptcy application was filed by the debtor, the court will either
declare the debtor’s bankruptcy and open Bankruptcy Proceedings or,
if it is unclear whether the available assets will suffice to cover costs of the
Bankruptcy Proceedings, appoint a preliminary bankruptcy receiver.
■
If the bankruptcy application was filed by a creditor, the court will forward the
application to the debtor with a request to prove its solvency. If the debtor fails
to do so, the court will either declare the debtor’s bankruptcy or, if it is unclear
whether the available assets will suffice to cover costs of the Bankruptcy
Proceedings, appoint a preliminary bankruptcy receiver.
■
If available assets do not suffice to cover the costs of the Bankruptcy
Proceedings, the bankruptcy application will be rejected and the company
will be liquidated by law.
■
If the bankrupt debtor is already being liquidated, the liquidation proceedings
will be stayed. The liquidator will be entitled to act only to the extent to which his
powers did not pass to the bankruptcy receiver. Since the liquidator is acting on
behalf of the debtor, his application is subject to the same rules as an application
made by the debtor itself.
■
The debtor is officially declared bankrupt on the day on which the court’s
resolution regarding the opening of Bankruptcy Proceedings is published
in the Commercial Journal.
■
The competent court appoints a bankruptcy receiver (správca konkurznej
podstaty) who assumes control of the debtor’s business and its assets.
■
Liquidation proceeds are distributed to the common debtor’s creditors in
accordance with the priority principles laid out in the Bankruptcy Code.
■
The Bankruptcy Code lists no special provisions on preferred claims and in
principle specifies the following claims in the following order of priority:
claims against the bankruptcy estate (i.e. fixed fee of the bankruptcy receiver and reimbursement of his expenses, taxes, customs duties,
health and social insurance contributions);
secured claims (secured by collateral rights that rank prior to the
claims of unsecured creditors);
■
unsecured claims (not protected by any collateral rights); and
■
subordinated claims.
■
■
■
factors (e.g., the extent of the assets and liabilities of the obligor, the number
of creditors, whether an application for Restructuring Proceedings is made,
whether the receiver challenges any transactions of the obligor in court, etc.).
Although there is no general rule, in our experience more complex Bankruptcy
■
The receiver has the right to challenge preferential legal acts or transactions,
most importantly, if:
the debtor has intentionally put certain creditors at a disadvantage
compared to its other creditors (hardening period of one year or,
with regard to counterparties that are related to the debtor, three years)
the transfer of assets was effected without due consideration
(hardening period of one year or, with regard to counterparties related
to the debtor, three years)
the debtor intentionally entered into a transaction
detrimental to its creditors and the other party knew or should have known of the debtor’s intention (hardening period of five years)
■
■
■
■
■
Any appointment as a legal representative granted by a company will
automatically cease to be valid upon the opening of Bankruptcy Proceedings
over the company’s assets.
■
to a potential purchaser in a private enforcement since the bankruptcy
receiver will have assumed control over the debtor’s assets.
■
Powers of Attorney are not affected by the opening of Restructuring Proceedings.
Describe Restructuring Proceedings
■
Restructuring Proceedings are initiated by the court upon an application by
■
a debtor who is insolvent or at risk of becoming insolvent or
■
a creditor,
in both cases provided that the restructuring receiver mandated by the debtor/
creditor recommends the restructuring proceedings in an appraisal no older
than 30 days and, with regard to applications by a creditor, provided that the
debtor agrees to the Restructuring Proceedings.
■
■
Restructuring Proceedings have the following phases:
■
first phase: pre-commencement phase
■
second phase: actual Restructuring Proceedings
The opening of Restructuring Proceedings will become effective on the day on
which the respective court’s resolution is published in the Commercial Journal.
■
The court will appoint a restructuring receiver (správca) to supervise the
business activities of the debtor and to monitor the financial and commercial
situation of the debtor. Unless listed in the court’s resolution on the commencement
of Restructuring Proceedings, all actions of the debtor are subject to the
restructuring receiver’s prior approval. The restructuring receiver may be
nominated by (i) the debtor or (ii) the creditor(s) (if agreed by the debtor).
■
The preconditions for Restructuring Proceedings are the following:
1. the debtor conducts a business activity;
2. the debtor is insolvent or at risk of becoming insolvent
3. it is possible to preserve a substantial part of the enterprise and
4. it is possible to satisfy the claims of the creditors to an extent greater
■
than under Bankruptcy Proceedings.
Restructuring Proceedings are officially opened on the day on which the court’s
resolution regarding their opening is published in the Commercial Journal.
■
The aim of the Restructuring Proceedings is to reorganize an over-indebted entity
and to ensure its subsequent existence as a financially sound entity, principally by
means of agreeing on and obtaining approval for a restructuring plan.
■
After appointing the restructuring receiver, the court invites all creditors
to lodge their claims.
■
A restructuring plan (Reštrukturalizačný plán) is drawn up by (i) the debtor, if the
Restructuring Proceedings were initiated by the debtor, or by (ii) the restructuring
receiver, if the Restructuring Proceedings were initiated by the creditor(s).
■
The restructuring plan requires court approval.
■
The restructuring plan further requires the creditors’ approval: The voting on the
restructuring plan proceeds separately in every class of claims. Acceptance in
each class of creditors requires a simple majority in number and value (in any
event more than 1% of all claims in the class). Acceptance in the shareholder
classes requires a simple majority in number.
■
If it the restructuring plan is approved by the court, the Restructuring Proceedings
will be terminated and the debtor will be released from its debts upon fulfilment
of the restructuring plan (Cram-Down).
■
A creditor holding a Collateral (pledge) may decide to enforce the pledge
either (i) pursuant to the provisions of the Enforcement Act, (ii) by auction, or
(iii) in any other way agreed in the pledge agreement (e.g. private tendering
procedure or direct sale).
■
If the creditor has to enforce its Collateral in accordance with the Enforcement
Act, the following is required:
first, obtaining a title for enforcement; e.g., ruling on non-payment by
the borrower
■
second, filing of a motion for enforcement with the judicial enforcer
■
third, obtaining a decision of the competent Slovak county court
approving the judicial enforcement
■
fourth, enforcement through public auction
■
fourth, enforcement through payroll deduction; assignment of debtor’s
receivables towards third parties; sale of movable or immovable assets, security bills or enterprise
■
■
A title for enforcement may be in particular:
■
a final, conclusive and binding judgment of a Slovak court
■
jurisdiction and the recognition and enforcement of judgments in civil and commercial matters
■
a settlement effected before a Slovak court
■
a notary deed on acknowledgement of a debt and consent to direct
enforceability
a final, conclusive and binding arbitral award in Slovakia or a member
■
■
enforcement procedure takes about six months to one year (starting with the
filing of the enforcement application and ending with the distribution of the
monies realized to the creditor(s)).
SLOVENIA
By Sabina Novak, Markus Bruckmüller,
Ljubljana Office
THE PHONELINE FOR
THE RAILWAY MUSEUM
IN LJUBLJANA PLAYS
‘EINE KLEINE NACHTMUSIK’
WHILST YOU ARE ON HOLD
IIn general, a negative pledge undertaking is legally valid and binding between the
contracting parties. Effect vis-à-vis third parties is obtained if the negative pledge is registered
with the Central Securities Clearing Corporation for shares and with the Land Register
for real estate.
■
In general, Slovenian law does not restrict the ability of parties to a Facility Agreement to
■
A prohibition of assignment with regard to monetary claims has relative effect if concluded
between two business entities, i.e., such contractual prohibition is effective only between the
parties to the Facility Agreement and any assignment by a Lender to a third party is valid.
■
The effectiveness of contractual subordination is neither explicitly regulated in Slovenian
law nor addressed in Slovenian case law.
■
such contractual subordination is also binding in the event of insolvency.
Concept of Equity-Replacing Shareholder Loan
■
Pursuant to the Companies Act, a shareholder loan granted to a company in a financial
crisis is treated similarly to equity contributions in case of Bankruptcy Proceedings or
compulsory settlement (Equity-Replacing Shareholder Loan).
■
The provisions on Equity-Replacing Shareholder Loan refer to direct shareholders in
limited liability companies and direct shareholders in joint stock companies whose
voting rights exceed 25%.
■
Any repayment of an Equity-Replacing Shareholder Loan is prohibited in insolvency.
■
Similar rules apply to security interests provided by a shareholder to its company’s
creditors while such company is in a financial crisis.
■
If an Equity-Replacing Shareholder Loan was repaid within one year before the filing of an
application for insolvency, the respective shareholder has to repay the amount to the company
■
the Collateral in lieu of the Secured liability) is legally valid and binding only if agreed in
accordance with the Act on Financial Collateral.
SECURITY INTERESTS
■
■
Movable Pledge Agreement, Account Pledge Agreement, Receivables Pledge/
Assignment Agreement, Share Pledge Agreement and Mortgage Agreement,
Warehouse Pledge Agreement
■
■
■
■
■
■
asset
security
perfection
movables
pledge
notarial deed and, if
registration is permissible,
also registration with
a public register
account
pledge
debtor
receivables
debtor
shares
pledge
to company for shares in
limited liability company
or registration with Central
Securities Clearing
Corporation for shares in
joint-stock corporation
real estate
mortgage
Land Register
real estate
land debt
Register and issuance of
land debt certificate(s) to be
endorsed to the creditor
(similar to German “Grundschuld”)
security interest
accessory
Private Sale
guarantee
no
n.a.
surety
yes
n.a.
movables pledge
yes
yes
account pledge
yes
receivables pledge
yes
share pledge
yes
yes
no
land debt
no
no
■
Slovenian law does not recognise the concept of a floating charge over all
assets of a company.
■
However, with regard to “warehouse pledges”, the pledged inventories may be
exchanged during the validity of the pledge.
Parallel Debt Issue
■
There is no structure comparable with a common-law trust in Slovenia, and the
■
be the joint and several creditor (solidarni upnik) of each and every obligation of
the Borrower towards each Finance Party (other than the Security Agent).
■
The above concept has as yet not been tested in Slovenian courts, but there are
good legal arguments that such parallel debt concept, if properly implemented,
will be upheld in Slovenia courts.
■
Bankruptcy Proceedings (stečaj) which generally lead to the liquidation
of the assets forming the bankrupt estate
Composition Proceedings (prisilna poravnava) which primarily aim
at eliminating a certain percentage of the debtor’s debts while preserving its business as a going concern
■
■
■
In Bankruptcy Proceedings, any obligations of the debtor that are not due by the
time of distribution of the proceeds are accelerated and assumed to be due, thus
permitting liquidation of the assets. In contrast thereto, Composition Proceedings
prevent such acceleration in the interest of preserving the debtor’s business.
■
typically applied:
balance sheet test: (i) a company’s due and payable obligations exceed the value of the company’s assets (= over-indebtedness) or (ii) the loss of the current financial year together with the loss(es) carried forward
exceeds 50% of the registered share capital and such loss cannot be
covered with carried-forward profits and reserves.
cash flow test: due and payable claims in excess of 20% of the accounts
payable as stated in the last audited financial statements against a
company have been overdue for at least two months (= long-term illiquidity)
■
■
■
Within one month after a company has become insolvent, the directors of the
company must prepare a report on the matter, such report to be presented to
the shareholders in a shareholders’ meeting (either directly or after review by the
supervisory board).
■
The management of a company is obliged to initiate Bankruptcy Proceedings
three days after (i) the management has established in its report that the
possibility of successful reorganization is lower than at least 50 %; (ii) the
general meeting has not passed a resolution on an increase of subscribed
capital as proposed in the management’s report; or (iii) the resolution for the
capital increase was passed, but the shares were not duly subscribed.
■
The management must initiate compulsory settlement proceedings no later than
three months after insolvency became apparent if no out-of court
settlement was possible and the management established in its report that the
possibility of successful compulsory settlement is higher than 50%.
■
A director risks claims for damages as well as criminal liability in case of non-compliance
with the duty to report and to file for the opening of insolvency proceedings.
■
■
An application for opening Bankruptcy Proceedings may be filed by:
■
the debtor
■
the creditors (who, with reasonable certainty, prove their claim against the debtor and that the debtor is at least two months late with its payment of that claim)
■
a general partner of a partnership
■
the Public Guarantee and Maintenance Fund of the Republic of Slovenia (Javni jamstveni in preživninski sklad Republike Slovenije).
The competent court appoints a bankruptcy receiver (stečajni upravitelj) who
assumes control of the debtor’s business and its assets.
■
Liquidation proceeds (less preferred claims) are distributed to the debtor’s
creditors in accordance with the priority principles laid out in the Bankruptcy Act.
■
■
In accordance with the Bankruptcy Act the following order of payment applies:
■
secured claims to be satisfied out of enforcement proceeds
■
claims of unsecured creditors and of secured creditors to the extent
not covered by enforcement proceeds
The Insolvency Act lists the following preferred claims:
■
■
costs for the maintenance and administration of the assets
■
employees’ salaries for the three months immediately prior to the
Bankruptcy Proceedings
claims for damages incurred by employees in connection with their work, severance pay for the termination of employment contracts prior to
or due to the commencement of Bankruptcy Proceedings
taxes and security contributions that must be paid together with the
above mentioned salaries/severance payments
claims of the tax authority originating in the year immediately prior
to the commencement of Bankruptcy Proceedings
all claims arising out of legal acts of the bankruptcy receiver
■
■
■
■
■
factors (e.g., the extent of the assets and liabilities of the obligor, the number of
creditors, whether the bankruptcy receiver challenges any transactions of the
obligor in court, etc). Although there is no general rule, in our experience more
complex Bankruptcy Proceedings may take up to several years.
■
The bankruptcy receiver and each creditor has the right to challenge legal acts
or transactions having occurred within a period of one year prior to filing a petition
for the opening of Bankruptcy Proceedings, if such legal acts or transactions
have decreased the value of the debtor‘s assets, which, as a consequence, put creditors at a disadvantage, or
have resulted in the preference of an individual creditor,
■
■
provided that the debtor was insolvent at the time of entering into such legal acts
or transactions and the counterparty knew, or should have known, that such debtor
is insolvent. Such actual or assumed knowledge is not required if the transaction
was not entered into at arm’s length. Moreover, knowledge is assumed (but may be
rebutted) in case the act or transaction (i) was unusual or (ii) was entered into three
months prior to filing for bankruptcy.
■
Any appointment as a legal representative or as an agent granted by
a company will automatically cease to be valid upon the opening of
Bankruptcy Proceedings over its assets.
■
■
a preferential claim regarding the respective Collateral.
■
Generally, Collateral will be realized in the course of the Bankruptcy
Proceedings. Enforcement proceeds are distributed in the order of priority as
laid out in the Bankruptcy Act.
■
If the Collateral agreement grants the creditor the right to enforce out of court,
the creditor can continue with such sale outside of the Bankruptcy Proceedings.
Describe Composition Proceedings
■
Composition Proceedings are initiated by the competent court upon a filing by
a debtor who faces over-indebtedness or illiquidity or by its personally liable
shareholder(s).
■
The opening of Composition Proceedings becomes effective the day following
the publication of the content of the composition edict in the Slovenian online
insolvency database (http://www.ajpes.si/).
■
The competent court will appoint a composition administrator who
supervises and supports the debtor; the debtor does not lose control over its
business and assets.
■
In Composition Proceedings, the debtor has the opportunity to negotiate
for the discharge of its outstanding debts. The Insolvency Act does not limit
the percentage of discharge.
■
A majority in number of the creditors, representing at least 60% in value,
must agree to the settlement plan. If the judicial composition (and thereby the
re-organization plan) is approved by the competent court, Composition
Proceedings will be terminated and the debtor will be partially released from
its debts upon fulfillment of the settlement plan.
■
Composition Proceedings do not affect the position of secured creditors.
■
Collateral in accordance with the Enforcement Act (Zakon o izvršbi in
zavarovanju) which requires completion of the following steps:
first, obtaining a title for enforcement (izvršilni naslov); e.g.,
second, filing of a motion for enforcement (predlog za izvršbo)
with the competent Slovenian county court
third, obtaining a decision of the competent Slovenian county court that judicial enforcement is permissible (sklep o izvršbi)
■
fourth, enforcement through public auction
■
finally, the proceeds of the public auction are distributed to the secured creditor to settle secured claims
■
■
■
■
A title for enforcement may be, in particular,
■
a final, conclusive and binding judgment by a Slovenian court
■
a final, conclusive and binding judgment by a court of a Member State as defined in Council Regulation (EC) 44/2001 of 22 December 2000 on
jurisdiction and the recognition and enforcement of judgments in civil and commercial matters
■
a settlement effected before a Slovenian court
■
a directly enforceable notarial deed
■
a final, conclusive and binding arbitral award in Slovenia or a member state to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958
■
enforcement procedure takes about one to two years (starting with the filing of
the enforcement application and ending with the distribution of the monies
realized to the secured creditor). This duration also depends on the court’s
caseload and any defensive pleadings pursued by the secured creditor.
UKRAINE
By Ievgen Gusiev, Kiev Office
AN OLD RAVEN NAMED KARL
LIVES IN THE COURTYARD AT
9 REYTARSKA STREET IN KIEV.
HE LIKES TO POSE WHENEVER
PEOPLE TAKE HIS PICTURE
■
In general, a negative pledge undertaking is legally valid and binding except with regard
to real estate.
■
In general, Ukraine law does not restrict the ability of the parties to a Facility Agreement
■
In case of receivership over a Ukrainian credit institution which is experiencing financial
difficulties, all prior claims against such credit institution are stayed for the duration of the
receivership.
■
A prohibition of assignment with regard to monetary claims has absolute effect
(i.e., it is effective vis-à-vis third parties and any assignment by a lender in violation
thereto is invalid) except for a sale of receivables by a bank to a licensed factor under
a factoring agreement.
■
The effectiveness of contractual subordination is neither explicitly regulated
nor addressed in Ukrainian statutory or case law.
■
such contractual subordination is also binding upon a court-appointed agent in the
course of Bankruptcy Proceedings.
■
the Collateral in lieu of the Secured liability) is legally valid and binding only with respect
to pledges of movable assets.
■
In principle, the Mortgage Act allows a mortgagee to take title to and keep the mortgaged
property in lieu of the secured liability, if such option is expressly provided for in the
underlying mortgage agreement. However, in practice this cannot be enforced because
the implementing regulations on the transfer of the title registration have not been brought
into line with the provisions of the Mortgage Act.
SECURITY INTERESTS
■
To establish a valid security interest, a title instrument is required.
■
Title instruments may include:
Agreement, Share Pledge Agreement, and Mortgage Agreement
■
■
■
Depending on the security interest, the act of perfection may be (i) the signing of the
respective title instrument or its notarization or (ii) the transfer of the respective Collateral
to the Secured Party.
■
Pledges and mortgages must be registered in the state register of encumbrances on
movable property or the mortgage register.
■
The rank of a pledge/mortgage can generally be established contractually. If not stipulated
by the underlying agreement, the rank of the pledge/mortgage depends on when the
respective act of perfection is made.
■
By operation of law, the rank of real estate mortgages depends on the exact time the
application for registration of the mortgage is submitted to the state mortgage register
(subject to actual registration).
asset
security
perfection
movables
pledge
registration with the state
register of encumbrances on
movable property
account
pledge
account bank and
register of encumbrances on
movable property
receivables
pledge
debtor and registration
with the state register of
encumbrances on movable
property
shares of stock corporation
pledge
physical delivery of any
physical share certificates to
the pledgee or, if no share
certificates exist, notification
of share custodian, and (best
practice) registration with the
state register of encumbrances
on movable property
real estate
mortgage
mortgage register
security interest
accessory
Private Sale
guarantee
no
n.a.
surety
yes
n.a.
movables pledge
yes
account pledge
yes
receivables pledge
yes
share pledge
yes
yes
■
Ukraine law does not recognise floating charges over all the assets of a company.
Parallel Debt Issue
■
There is structure comparable with a common-law trust in the Ukraine, and the
■
The above issue is typically solved through a so-called ‘parallel debt structure’
whereby the parties to the English-law governed Facility Agreement agree that the
Security Agent shall be the joint and several creditor of each and every obligation
of the Borrower towards each Finance Party (other than the Security Agent).
■
The above concept has as yet not been tested in Ukraine courts, but Ukraine
law stipulates that business practice of international banks is to be followed in
international lending transactions; thus, there are good arguments that such
parallel debt structure will be recognised.
■
Conceptually, Bankruptcy Proceedings (bankrutstvo) start with Asset
Management Proceedings (rozporyadzhennya maynom borzhnyka) which
can either lead to:
Reorganisation Proceedings (sanatsiya) which primarily aim at drawing
up a plan to repay the debtor’s liabilities and ensuring the debtor’s
existence as a going concern, or
Liquidation Proceedings (likvidatsiyna protsedura) which generally lead
to the liquidation of the insolvent entity.
■
■
■
Further, during Bankruptcy Proceedings, the debtor and its creditors may at
any time agree on an Amicable Settlement Agreement (myrova ugoda) which
requires approval by a majority of creditors representing at least 50 per cent
of the value of the claims and by all secured creditors, provided, however, that
claims for outstanding salaries and insurance premiums are not subject to such
settlement and must be paid in full.
■
If the Amicable Settlement Agreement is approved by the competent court
(Cram-Down), Bankruptcy Proceedings are terminated.
■
The following insolvency test for a company is generally applied:
outstanding due amounts (defaulted debt) exceed at least three hundred
minimum wages (equals to approximately EUR 23,000 as of today) AND
a company is unable to perform more than one monetary obligation for
more then three months (= illiquidity)
■
■
■
Given certain circumstances (e.g., illiquidity) for a period of at least 30 days,
directors of a company are obliged to file for the opening of Bankruptcy
Proceedings with the competent court. A director risks criminal liability in
case of non-compliance.
■
Bankruptcy Proceedings are initiated by the competent court upon an application
either by the debtor or by one or more of its creditors.
■
The opening of Bankruptcy Proceedings becomes effective on the day the
respective ruling of the competent court is issued and Asset Management
Proceedings are initiated. In its ruling, the competent court appoints an asset
manager (rozporyadnyk mayna) who protects the interests of creditors and
whose consent is required for the disposal of certain assets of the company
(such assets or monetary thresholds described in the respective court decision).
■
In the absence of a court-approved Amicable Settlement Agreement or
Reorganisation Plan (i.e., if efforts towards settlement or reorganisation fail), the
competent court will declare that the debtor is insolvent and initiate Liquidation
Proceedings. In its ruling, the competent court appoints a liquidation manager
(likvidator) who evaluates and liquidates the debtor’s assets.
■
Liquidation proceeds are distributed to the debtor’s creditors in accordance
with the priority principles laid out in the Insolvency Act.
■
The Insolvency Code lists the following priority of payments:
secured claims to the extent enforcement proceeds are available for
distribution after realisation of the Collateral, and claims for outstanding
salaries and insurance premiums
■
other claims of employees
■
statutory payments (taxes, public duties etc.)
■
unsecured claims
■
liquidation proceeds payable to employees who are shareholders
■
the rest of the claims
■
provided that if liquidation proceeds are not sufficient to satisfy all creditors
within a certain class, available proceeds are distributed on a pro rata basis.
■
The duration of Bankruptcy Proceedings will depend on several different factors
(e.g., the extent of the assets and liabilities of the insolvent entity, the number of
creditors, whether an application for Amicable Settlement Agreement is made,
etc.). Although there is no general rule, in our experience more complex
Bankruptcy Proceedings may take up to several years.
■
Under certain circumstances (agreements that are disadvantageous to the debtor
or hinder successful completion of Reorganisation Proceedings), the liquidation
manager has the right to challenge certain agreements or transactions which
have occurred during a period of six months (hardening period) before the
opening of Bankruptcy Proceedings.
■
A validly established in rem security interest (e.g., mortgage or pledge) gives
the secured creditor a preferential claim with regard to the respective
Collateral; i.e., liquidation proceeds are used first to satisfy all claims of the
respective secured creditor as laid out in the order of priority.
■
Regarding any claim in excess of such liquidation proceeds, secured creditors
participate in the order of priority alongside unsecured creditors.
■
The opening of the Bankruptcy Proceedings does not affect the validity of
appointments of legal representatives or agents.
■
In Bankruptcy Proceedings, the creditors (if applicable, represented by
the creditors’ committee) may apply for the initiation of Reorganisation
Proceedings in order to preserve the debtor’s business as a going concern.
■
The opening of Reorganisation Proceedings becomes effective on the day
the court renders its approving decision.
■
The competent court will appoint a reorganisation agent (keruyuchiy
sanatsiyeyu) who replaces the asset manager. The reorganisation agent will
assume control over the debtor’s assets and draw up a Reorganisation Plan
(plan sanatsiyi borzhnyka). It is not uncommon that the Reorganisation Plan
includes a debt-equity swap effecting the take-over of the insolvent company
by its creditor(s).
■
Upon approval of the Reorganisation Plan by the Ministry of Economy and by
the competent court, the Bankruptcy Proceedings are finally terminated and
the debtor will be released from its debts to the extent provided for in the
Reorganisation Plan.
■
Reorganisation Proceedings cannot take longer then 12 months plus a court
approved extension of another 6 months. If not finalised successfully,
the proceedings continue as Bankruptcy Proceedings.
■
Collateral in accordance with the Enforcement Act, which requires completion
of the following steps:
first, obtaining a title for enforcement; e.g., a ruling issued by the
competent court
■
second, obtaining a writ of execution from the competent court
■
third, submitting the writ of execution to the State Executive Service
■
fourth, enforcement by the State Executive Service (e.g., sale of asset) , and
■
finally, the enforcement proceeds are distributed to the creditor.
■
Generally a title for enforcement may be:
a final, conclusive and binding judgment (order) by a Ukrainian court
followed by a relevant writ
■
notarial executive endorsement
■
a final, conclusive and binding arbitral award in a member state
to the New York Convention on the Recognition and Enforcement of
Foreign Arbitral Awards of 1958 provided that execution of such
award is approved by a writ of a Ukrainian court.
■
■
If there is an agreement between the parties on extra-judicial enforcement
via notarial endorsement, it is possible to apply to the State Execution Service
for enforcement once the mentioned endorsement is in place.
■
With regard to enforcement proceedings, in our experience the enforcement
procedure takes about six months to 1 year (excluding time of filing of the
enforcement petition). This duration also depends on the court’s and State
Execution Service’s caseload and any defensive pleadings pursued by the
defendant.
5. CONTACT
DETAILS
TALK TO US
We consider ourselves fortunate to work in a part of the world
that presents many fascinating legal challenges. The rapid
pace of economic and political change, combined with the
evolving relationship between EU and national law, means
that we are often involved in breaking new ground and setting
fresh precedents. As a result, our focus is always on the next
case, helping our clients to succeed with their projects across
CEE/SEE.
We would be happy to talk with you to discuss your requirements and
explore ways of working together. Feel free to contact us at any of our
offices, either through your existing contact at Wolf Theiss or by
contacting any of the individuals detailed opposite:
www.wolftheiss.com
Albania
Sokol Nako
Tel: +355 4 227 4521
[email protected]
Austria
Andreas Schmid
Tel: +43 1 515 10 5030
[email protected]
Markus Heidinger
Tel: +43 1 515 10 5060
[email protected]
Richard Wolf
Tel: +43 1 515 10 5080
[email protected]
Christian Hoenig
Tel: +43 1 515 10 5040
[email protected]
Peter Oberlechner
Tel: +43 1 515 10 5170
[email protected]
Claus Schneider
Tel: +43 1 515 10 5390
[email protected]
Nikolaus Paul
Tel: +43 1 515 10 5430
[email protected]
Marcus Benes
Tel: +43 1 515 10 5340
[email protected]
Eva Spiegel
Tel: +43 1 515 10 5120
[email protected]
Naida Custovic
Tel. +43 1 51510 2060
[email protected]
Bosnia and
Herzegovina
+ 38 7 33 296 426
Bulgaria
Richard Clegg
Tel: +359 2 8613 700
[email protected]
Croatia
Luka Tadic-Colic
Tel: +385 1 4925 488
[email protected]
Czech
Pavel Marc
Tel: +420 234 765 111
[email protected]
Zoltán Faludi
Tel: +36 1 484 8803
[email protected]
Gábor Erdos
Tel: +36 1 484 8822
[email protected]
Bryan W. Jardine
Tel: +40 21 3088 100
[email protected]
Andreea Poenaru
Tel: +40 21 3088 195
[email protected]
Serbia
Bojana Bregovic
Tel: +381 11 330 2900
[email protected]
Slovak
Erik Steger
Tel: +43 1 515 10 5130
[email protected]
Republic
Lubos Frolkovic
Tel: +42 1 59 10 1240
[email protected]
Slovenia
Markus Bruckmüller Tel: +386 1 438 00 00
[email protected]
Ukraine
Ievgen Gusiev
[email protected]
Republic
Hungary
Romania
Tel: +38 044 3 777510
OUR OFFICES
Albania
Hungary
Eurocol Business Center, 4th floor
Murat Toptani Street
AL – Tirana
Tel.: +355 4 2274 521
Kálvin tér 12-13
Kálvin Center, 4th floor
H – 1085 Budapest
Tel.: +36 1 4848 800
Austria
Romania
Schubertring 6
A – 1010 Wien
Tel.: +43 1 515 10
Bucharest Corporate Center (BCC)
Str. Gheorghe Polizu Nr. 58-60
Floor 12-13, Sector 1
RO – 011062 Bucharest
Tel.: +40 21 308 81 00
Bosnia and Herzegovina
Fra Anđela Zvizdovića 1
Tower A/12 Unitic Tower
BiH – 71 000 Sarajevo
Tel.: +387 33 296 444
Serbia
PC Ušće - Bulevar Mihajla Pupina 6
SRB – 11070 Novi Beograd
Tel.: +381 11 3302 900
Bulgaria
Rainbow Center
29, Atanas Dukov Street
BG – 1407 Sofia
Tel.: +359 2 8613 700
Slovak Republic
Croatia
Slovenia
Eurotower, 19th Floor
Ivana Lučića 2a
HR – 10 000 Zagreb
Tel.: +385 1 49 25 400
Tivolska cesta 30
SI – 1000 Ljubljana
Tel.: +386 1 438 00 00
Laurinská 3
SK – 811 01 Bratislava
Tel.: +421 2 591 012 40
Ukraine
Czech Republic
Pobřežní 12
CZ – 186 00 Prague 8
Tel.: +420 234 765 111
11 Mykhailivska Str.
UA – 01001 Kiev
Tel.: +38 044 3 777 500

lessons learned

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