Stabilization Proceedings – Second Chance For Businesses With Financial Difficulties

With the latest changes in the Commerce Act, promulgated on December 2016, a complete new set of business stabilization proceedings were created, which are regulated in the amended Fifth part of the Act. The aforementioned amendment, together with the other changes in the Act, are a result of the tendencies at transnational level within the European Union, which have been prevailing in the last years, for creating minimum standards for security and guaranteeing the citizens’ rights and the opportunities for investments. One of the main aims of the European Commission Recommendation from 12 March 2014 is to ensure the possibility for restructuring of businesses with financial difficulties, in order to prevent the risk of becoming insolvent, and to lead to maximum benefit for the businesses and their creditors and employees. The same point is set out in the European Council Recommendation from 14 July 2015, which recognizes the importance of national legislation for facilitating the process of reduction of the debt ratio of businesses. The Recommendation also provides advice for improving the businesses’ restricting mechanisms before the bankruptcy proceeding are instituted. The changes in the Commerce Act are also in complience with the recommendations of the World Bank, in accordance with the regulations of the bankruptcy proceedings and the rights of the creditors. The new amendment in the field of the stabilization proceedings will enter into force on 01 July 2017.

Generally, the main idea of the stabilization proceedings is to create a possibility for achieving a settlement between the company with financial difficulties and its creditors about the fullfillment of the company’s obligations, which can lead to opportunity for continuation of the company’s activity. Namely, one of the reversals of the new approach to business failure and insolvency, mentioned in the European Commission Recommendation from 12 March 2014, is to ensure more guarantees for the stabilization of businesses with financial difficulties, to give a second chance and to create conditions for the companies to preserve and continue their activities. As a result, the rights of the debtor are guaranteed, the satisfaction of the creditors is ensured and also the investments are stimulated, because of the wider range of security guarantees.

A petition for the institution of stabilization proceedings can be filed only by the company and it’s without significance if the business is a sole trader, a commercial corporation or cooperative. It’s necessary that the company is not in a liquidation procedure, because that would be incompatible with the main aim of the stabilization proceedings – continuing the activity of the company. The stabilization procedure is not applicable for public enterprise companies exercising a state monopoly or established by a special law, and also for the banks and insurance companies. The stabilization court shall be the district court exercising jurisdiction over the district where the company’s registered office is at the time of submission of the petition for institution of stabilization proceedings.

In order for the stabilization proceedings to be constituted, there must be a legal basis, which is provided in Article 762 of the Commerce Act – the company must be in immediate danger of insolvency. It’s explicitly stipulated that the company must not be insolvent, otherwise there is no possibility for the its stabilization, and the institution of the bankruptcy proceedings is  unavoidable. It should be noted that the above-mentioned is the only legal basis. An immediate danger of over-indebtedness is not regulated as basis for instituting proceedings. In accordance with the legal provisions, an immediate danger of insolvency is in evidence when the company, in view of the upcoming maturity of its monetary obligations in the following six months from the moment when the petition for institution of stabilization proceedings can be filed, will be unableto fulfill due monetary obligations (monetary obligation due under or related to a commercial transaction, including the validity, performance, non-performance, termination, invalidity or dissolution, as well as the consequences from thermination thereof; public legal obligation to the state or municipalities related to its commercial activity; obligation under a private state obligation) or may cease payments.

It is possible the legal basis, provided in Article 762 of Commerce Act, to be in evidence, but despite this a prohibition for instituting stabilization proceedings to be provided. This can happen in the following hypotheses:

  • before the date when the petition for institution of stabilization  proceedings has been filed, the company had not reported tothe Trade Registry its annual financial statement for the last three years; 
  • stabilization proceedings have been instituted for the company in the last three years before the date when the petition for institution of stabilization  proceedings has been filed; 
  • a petition for institution of bankruptcy proceedings has been filed for the company, before the petition for institution of stabilization  proceedings; 
  • more than one-fifth of the company’s obligations are to affiliated companies or persons, who have obtained their claim from affiliated persons during the last three years.

The stabilization proceedings shall be instituted with a court ruling. With this act the court appoints a monitoring trustee and schedules a meeting for admitting and accepting the stabilization plan.  It’s possible the court to grantprecautionary measures and also to appoint a registered auditor.

The consequences of stabilization proceedings institution are:

  • restricting the company’s activity – it’s related to the prohibition of payment of debts which havearisen before the date of the filing of the petition for institution of stabilization  proceedings, except fulfillment of public claims for VAT, excise duty, security contributions etс.; concluding contracts only after prior authorization from the monitoring trustee etc.
  • halting the enforcement proceedings against the company – instituting new enforcement proceedings is inadmissible and the pending proceedings pursuant to Civil Procedure Code or Tax and Social-Insurance Procedure Code are automatically halted. Theesealso apply to the enforcement actions pursuant to Registered Pledges Act against the company; this restriction is not applicable to the enforcement actions, which are not against a company’s property (for example, enforcement proceedings for non-monetary obligations, movable property delivery or coercive seizure of possession), and also in the cases when the company’s property secures others’ debt;
  • suspension of prescription – from the moment of the stabilization proceedings institution, a prescription for the creditors’ claims does not run;
  • termination of contracts – the contracts can be terminated after prior authorization by the court, when the contract is not fully or in part fulfilled and it is established that the execution of the contract will undermine the stabilization plan , and under condition that the non-observance of the contract will not cause to the other party unusual inconvenience.

The changes in the Commerce Act introduce some specific, in relation to the previous framework, authorities of the stabilization proceedings, like:

  • Monitoring trustee – this is an obligatory support body, which is appointed by the court,is legally qualified and meets the requirements for a trustee. Various powers of the monitoring trustee are covered, among them: hearing of objections against the presented by the company’s creditors list and preparing a draft for a final creditors list, preparing a report for the status of the property and the activities of the company, supervising the company’s activity, taking part in the meeting for discussion the plan for stabilization, etc.
  • Registered auditor – this is an optional body, which should be registered as an auditor and can be appointed by the court at the start of theof proceedings or later. But under other assumption, the participation is obligatory – in the caseswhen a transformation of the company or transformation of the claims in part of the capital is provided in the plan. Its main function is related to the preparation of a draft for the compliance with the assumptions specified in the plan for stabilization and the way of satisfaction of the creditors with the finances and property of the company.

The main element in the stabilization proceedings is the plan for stabilization. It is offered by the company and is presented as an application to the petition for institution of stabilization proceeding. The plan contains:

  • the manner, the time limits and the terms, under which the company will perform its obligations towards its creditors;
  • the degree of satisfaction, which is received by each class of creditors compared to that, which it could receive by the conversion of the property in accordance with the terms and procedures set forth by the law;
  • guarantees and security, which the company is ready to offer to each class of creditors in conjunction with the plan for stabilization;
  • the managerial, organizational, legal, financial, technical and other steps for the implementation of the plan for stabilization;
  • other circumstances relevant to the plan for stabilization within the discretion of the merchant, including the appointment of supervisory body.

Imperative requirements for the contents of the plan are also incorporated in the Commerce Act . The first requirement affects the assumption, under which the plan provides a partial remission of the debts. In this case the plan should provide the satisfaction of no less than 50% of the claims of each creditor, except for these creditors, who are affiliated to the company. The affiliated to the company will be satisfied only after the ful satisfaction of the claims of every other creditor. Also by the partial remission the satisfaction of the secured creditors should be in amount equal to the market value of the established securities and no less than 50% of their claims. Another imperative requirement is related to the possibility of deferred payment of the debts. In this case the time limit for payment could not be longer than three years from the date of termination of the stabilization proceeding.

The plan for stabilization is examined in public session on camera. The company, its creditors, included in the validated creditors list, the monitoring trustee, the auditor and the expert, if there are any selected, take part in the session. The plan is discussed and additions could be made. The vote on the offered plan is carried out by the creditors separately in the following classes:

  • creditors with secured claims and creditors holding a right of retention;
  • creditors with claims ensuing from employment relationships, which have arisen before the date of the court ruling for institution of stabilization proceedings;
  • creditors with public claims, which have arisen prior to the date of the ruling for institution of stabilization proceedings;
  • creditors with unsecured claims;
  • all creditors, who are affiliated to the company, irrespective of the classes set out above

The plan must be accepted by each class by a majority of half of the claims in the class, provided that at least three-quarters of the creditors in the class have voted for the acceptance of the plan . Furthermore, it is necessary for the acceptance of the plan that creditors, who are holders of more than three-quarters of the claims, participate in the vote, notwithstanding the votes of the creditors, who are affiliated to the company.

The plan accepted on the meeting shall be impemented by a court ruling, which could be appealed before the Supreme Court of Cassation.

The plan is mandatory and has transforming action against the claims of the company, of the creditors, whose claims have arisen before the date of the ruling on institution for endorsement of the plan, including these who haven’t  exercised their voting right or have voted against, and also for the general partners, unless it is stipulated otherwise. But the plan could not have legal action towards creditors, who were not included in the final creditors list or to whom the opportunity to vote on the meeting for its acceptance was not given.

The objectives pursued with the establishment of the completely new stabilization proceedings, on the one hand, are related to the possibility for different companies in financial difficulties to stabilize their condition and to continue their activities. On the other hand, the proceedings aim also to protect the rights of the creditors, as they guarantee the satisfaction of their claims, by setting requirements for the plan for stabilization, which should secure the payment of the creditors’ claims in a certain guaranteed amount. It is expected mainly the small and the medium-sized companies will benefit from this procedure . Last but not least, it has to be noted that the new proceedings will contribute to the financial stability on a larger scale, in view of achieving better conditions for investments, more security for taking on risks and reductions in the level of financial debt of the small and medium-sized businesses.