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Bankruptcy flaws plague creditors

Implementing new registries delays overdue reform

By Viktor Velek
For The Prague Post
April 18th, 2007 issue

As the government races ahead on its campaign to reform public finances, another long-awaited remedy to a financial problem plaguing the Czech Republic — the deeply flawed bankruptcy system — is set to be delayed again.
On April 12, the Senate confirmed an earlier vote by the Chamber of Deputies postponing the start date of the new bankruptcy law by six months, from July 1 to Jan. 1, 2008. The law, signed by President Václav Klaus in early 2006 after years of political struggle, is meant to speed up bankruptcy proceedings, strengthen the position of creditors, help aid the recovery of failing companies and improve the Czech business climate.
Current law is a nightmare for Czech creditors, who have the worst prospects for recovering money from bankruptcy claims in the European Union, according to recent World Bank statistics. Last year, only two countries in the world had bankruptcy proceedings that lasted longer: India and Chad.
While the postponement is unfortunate, it is purely technical in nature, experts say.
“The delay is caused mainly by the demands of preparing the insolvency register,” said Zuzana Kuncová, spokeswoman for the Justice Ministry.
The register, an integral part of the measure, is a system of online databases that will contain information on all the country’s bankruptcy proceedings, enabling electronic communication with the courts.
The political vacuum after last year’s election is partly to blame for the delay. But the period set for passing the law and when it was scheduled to come into effect was too short, Kuncová said.
“In Germany, where a similar insolvency register has been designed, the government had three years to prepare and launch it,” said Justice Minister Jiří Pospíšil in the Chamber of Deputies before their March 14 vote to delay the law.
“From the very day the new government was installed in September 2006, the Justice Ministry started preparations for the new insolvency law. But it was more than obvious that we would not be able to make the law fully functional by the middle of 2007,” he said.
The Czech business community seems content with the government’s justification of the postponement.
“The insolvency register is a must, and we prefer a law that’s fully functional from the start to a law coming into effect sooner that’s only half-prepared and hence half-operational,” said Viktorie Plívová, spokeswoman for the Czech Economic Chamber.
The business community is optimistic that the present delay is the last obstacle in the bankruptcy law’s protracted birth. For them, after dealing with a broken system for so long, a bit more patience is not too great a pain.
It would be hard for the current situation to be worse. According to World Bank statistics, Czechs recover a paucity of money from bankruptcy claims compared to neighboring countries. Whereas Czech creditors get back on average less than 19 Kč (91 U.S. cents) from a claim worth 100 Kč, their counterparts in Austria recover 73 Kč from the same claim. Similar disparities exist throughout the region.
The current law has long been criticized by economic experts and business organizations for the amount of power it puts in the hands of judges. This often leads to costly and lengthy proceedings. The new law streamlines this system.
Moreover, the law will enable individuals to pay off their debts in five years’ time through scheduled repayments and asset sales, allowing them to clear debts without the intervention of collectors. The measure will also grant additional protection of debtors’ assets, Kuncová said.
Economic analysts view the new bankruptcy bill as one of the most modern and progressive measures of its kind in Europe. Kuncová stressed that the reform was praised, for example, by the World Bank.
The origins of the reforms date back more than six years. The bill signed by Klaus in April 2006 was the subject of numerous political struggles and negotiations since the beginning of the decade. After several proposals failed in Parliament, the government, led by Jiří Paroubek of the Social Democrats, and the then-opposition Civic Democrats brokered a compromise measure merging proposals from both sides.
Now the new Cabinet must write the last chapter of the story.
The Justice Ministry has already selected the contractor for the insolvency register and the result of the tender will be announced soon, Kuncová said.
The immediate tasks lying ahead in the project are to create and test for the register, as well as familiarizing law officials with the system.
There remains, however, one more pitfall on the path toward the effective resolution of company failures. As Weston Stacy, executive director of the American Chamber of Commerce, wrote last year, the bill will bear fruit only when it is well-integrated into the everyday practices of judges and administrators.
To what extent the law changes the realities of bankruptcy for the better remains to be seen. But it will be no sooner, however, than next year.

Viktor Velek can be reached at business@praguepost.com


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