The Slovenia Times

World Bank: Sound Insolvency Regimes may Encourage Entrepreneurship


The beginning of the new millenium was a period of significant reform in Slovenia as the country prepared to join the European Union in 2004. A new insolvency law was adopted in 2007 but it was inadequate, it did not cope with the challenging economic and financial conditions brought on by the global financial crisis of 2008; many companies became insolvent. Firms suffered from over-indebtedness and had difficulties repaying their loans, leading to an increase in corporate non-performing loans of around 20% of total loans. Firms in Slovenia needed effective corporate restructuring procedures to guide the restructuring of their debt.

To address these needs and to ensure the legal framework more closely reflects international best practice, the government modified the corporate restructuring framework in 2013. The changes included the creation of a new, pre-insolvency restructuring procedure for distressed medium and large companies to restructure their financial claims, as well as a new, simplified compulsory settlement procedure to offer a reorganisation option for micro and small companies. A change was also made to the existing compulsory settlement procedure to enable creditors to initiate the reorganisation of companies for the first time.

The procedures quickly became a popular option for debtors and creditors. In the first two years following the reform, the proportion of companies using one of the three procedures more than doubled, rising from 6% of total insolvency proceedings in 2013 to 14% in 2015. Microenterprises, however, underwent corporate liquidation proceedings in the vast majority of cases (96%) in 2016, as they have less capacity for reorganisation and for securing resources to enable them to operate in a situation of financial distress. Despite these challenges, microenterprises have also benefited from the restructuring options, the number of simplified compulsory settlement proceedings for the benefit of microenterprises increased from 59 cases in 2014 to 85 in 2016.

Creditors have progressively taken advantage of the access to the compulsory settlement proceedings granted to them in 2013; by 2016 they had initiated almost one-third of all cases. During the same period, the number of successfully terminated reorganisation proceedings increased significantly. In 2016, most ended with an approved settlement.

One of the companies that benefited from the restructuring procedures was Pivovarna Laško, Slovenia's largest brewer. By the end of 2014, the company's total financial liabilities stood at EUR 226.8m (about US $268m). The company negotiated a restructuring plan with its creditors, which included a two-year debt rescheduling, the sale of shares in other companies and an intensive search for additional capital. Following the agreement, the company was bought by Heineken International BV, which committed to provide financial stability to the company. Following the sale of its assets in various corporations and entering into long-term loan agreements with Heineken, the company was able to repay its creditors in full in October 2015. Its value increased, the brewery was able to continue operating, saving hundreds of jobs.

Apart from increasing the likelihood of business survival-as shown by the rising number of successfully terminated compulsory settlement and simplified settlement procedures-the insolvency reform may have contributed to broader positive economic effects. First, the level of entrepreneurship and company formation in Slovenia increased. One year after the reform was introduced, 6,243 new businesses were registered in Slovenia, the highest number in a decade and near that of pre-crisis levels. Second, progress has been made in addressing Slovenia's high level of non-performing loans, which decreased from 15% of total loans in 2012 to 7.9% in 2016. While these results do not establish a causal relationship with the insolvency reform, they suggest that sound insolvency regimes may encourage entrepreneurship and accelerate the speed of adjustment of non-performing loans.

Source: The World Bank


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