Issues of the Draft Law on Bankruptcy
Interview of the Head of Legal Department of Deloitte Albania, Sabina Lalaj published at weekly business magazine Monitor
The draft law on bankruptcy provides for novelties and important amendments to the current regulation framework of the bankruptcy procedures, based on the experience of the EU countries and those of the region as well. The work done so far by the authors of the draft law, as well as the round tables organized with the advocacy groups on further improving it, is to be highly praised.
Which are the most disputable articles of the draft law on bankruptcy?
I think that article 146 of the draft law on bankruptcy shall involve a particular dispute, if it will be enacted in the form as it is currently drawn up. More precisely, this article sets out the distribution of assets in accordance with the priority ranking, which ranking is currently regulated under article 605 of the Civil Code of the Republic of Albania. Article 146 of the draft law on bankruptcy provides for different priority ranking as the one set forth under the aforementioned article of the Civil Code. In this view, there are two different provisions in relation to the creditor’s priority ranking. I opine that the noncompliance between these norms shall be subject to discussions and interpretations among the parties involved in the bankruptcy process, respectively, debtor, creditor, court and bankruptcy administrator.
Additionally, despite the positive changes, the law in several provisions uses references in undefined time terms, such as “sufficient term”, or “reasonable term” etc. This lack of term definition would raise discussions between creditors, court and bankruptcy administrator regarding the determination of the accurate definition of the sufficient/reasonable term.
The determination of the specific terms in the draft law would be advisable, in order to enable a quick and efficient process for carrying out the reorganization or liquidation.
Which factors have caused the non-implementation of the law up to date?
One of the main reasons of the non-applicability of the law on bankruptcy up to date has been the insolvency of the subjects under bankruptcy, namely the insufficiency of the bankruptcy estate that did not enable the coverage of the bankruptcy procedure expenses.
The draft law delivers a solution in this regard, by providing for the establishment of a special public fund, which pursuant to the given definition shall be managed by the National Bankruptcy Agency. This special public fund shall be used for purpose of covering the procedural expenses, in cases when the bankruptcy estate is insufficient.
Subject to article 28 of the draft law, the special public fund shall be established by means of state budget contributions, the financial obligations of the debtors being liquidated, as well as by means of other sources that will be defined upon decision of the Council of Ministers. Upon decision of the Council of Ministers shall be determined the percentage of the bankruptcy estate as well, which shall be transferred to the special public fund. It is to be emphasized that, according to the priority ranking set forth under article 146 of the draft law, the financial obligations toward the special fund are ranked in the 7th place, versus those of other creditors. Under these circumstances, I think that, at least during the first years of applicability of this law, the state budget shall bear the major financing brunt of the special fund.
Are there any inherent risks that the draft law on bankruptcy would “collide” with the legal framework governing the bank system?
The draft law, in chapter six “Means and procedures for prevention of the liquidation, reorganization and debt restructuring” enables the prevention of the liquidation through debt restructuring.
Articles 171-176 provide for the modality of realization of the debt restructuring for purpose of avoiding the commencement of the bankruptcy procedure. The debtor is entitled to seek by the creditors an agreement on debt restructuring, which should be approved before court, following the approval granted by the majority of the creditors.
Under these articles is not foreseen any particular right for the secured creditors, banks or other non-bank financial institutions.
The agreement on debt restructuring, as approved by the court, represents a “trespassing” of the contractual will with regard to the mandatory restructuring of a contract entered into between the debtor and the creditor that has not consented this restructuring.
This novelty has been a disputable issue for the representatives of the bank system, which have suggested as protective measure the inclusion in the law of a provision setting out that the approval of the majority of the secured creditors, banks or financial institutions, is needed for purpose of acceptance by the court of any debt restructuring, as per the abovementioned articles.
What are the novelties that the draft law contains with regard to individuals and business?
The draft law extends the pool of subjects, to which it applies, with the agricultural families, public legal entities, non-for-profit organizations that pursue economic objectives and the local administrative units. The latter are subject solely to the reorganizing procedure.
As far as the individuals are concerned, the draft law provides for the modalities on extending the bankruptcy procedure over the assets of the ancestor, the co-ownership of the spouses in accordance with the regime of the legal or contractual co-ownership, etc.
With regard to the business, the draft law proposes the repeal of article 104 of the law no. 9920, dated 19.05.2008 “On tax procedures in the Republic of Albania” as amended, which sets out, inter alia, that the tax administration requests before court the commencement of the bankruptcy procedure for taxpayers, commercial companies declaring a loss result in terms of their own capitals for at least 3 consecutive years. This proposed amendment avoids the inclusion in the bankruptcy procedures of the commercial subjects that, due to the activity they carry out, cannot draw profits in the first years.