EU Project Pravo-Justice Held the Online Roundtable on Early Warning of Insolvency

4.09.2023 |

On August 29, the EU Project Pravo-Justice held the online round table on the topic “Early Warning: National Experience and Foreign Practices.” MPs, representatives of the Ministry of Justice of Ukraine, the Audit Chamber of Ukraine, INSOL Europe, the Polish Institute for Bankruptcy, Restructuring Law and Insolvency Research, the community of insolvency practitioners, and the banking sector, took part in the event.

The round table aimed at learning the experience of European partners regarding the implementation into the national legislation of the key principles of the EU Directive 2019/1023 of June 20, 2019 on the principles of preventive restructuring frameworks, primarily the use of early warning tools.

“As the analysis shows, the pre-trial financial rehabilitation, as it currently is in Ukraine, usually apply at a stage, when it is too late and the company already finds itself in a crisis situation. In the framework of the round table, we would like to clarify what is actually early warning of insolvency; what tools apply for early warning, and how it works in different countries. The experience of EU member states applying the Preventive Restructuring Directive shows that there is no unified mechanism or single approach; everything depends on practice and national insolvency legislation,” stated Iryna Zharonkina, Property Rights and Enforcement Component Lead, EU Project Pravo-Justice, in her welcome speech.

Oleksii Movchan, Deputy Chair of the Verkhovna Rada Committee on Economic Development, developed on the importance of preparing a draft law on preventive restructuring as a condition for the implementation of the EU – Ukraine memorandum on providing macro-financial assistance.

“I hope our today’s meeting will result in some practical outputs which will be recorded and become the basis for a respective draft law. Our joint efforts shall be crowned with the implementation of some effective legislation,” noted Oleksii Movchan.

Giorgio Corno, Deputy President of INSOL Europe, briefed the participants to the event on the implementation of Article 3 of the Directive 2019/1023 in Italy. According to him, Italy’s new law on restructuring and insolvency imposes certain obligations on internal auditors, banking and financial institutions as to notifying entrepreneurs concerned of the facts that flag that companies are close to a critical financial situation.

“The law provides for the possibility to contact the Chamber of Commerce and Industry and involve it, as a mediator, in the negotiations regarding an alternative to insolvency,” said Giorgio Corno. The speaker also indicated that another Italian legislative act has directly approved the mechanism for conducting crisis negotiations.

“The crisis negotiation procedure means that there could be new agreements, moratoria, or access to bankruptcy measures and regulation,” said Giorgio Corno, while also noting that the law could be more effective than it was if Italian entrepreneurs reacted more promptly to financial crisis. He provided some statistics: only 39 out of 767 applications for crisis negotiations resulted in the signing of an agreement with the expert and relevant creditors.

“When debtors see that they have financial problems, they should react promptly. This is the purpose of the EU Directive,” summarized Giorgio Corno.

Fabrizio Fraboni, former lead financial sector specialist with the World Bank, emphasized that the Directive was a framework document that provided general requirements and recommendations, while each country could build a system of its own and offer the early warning tools that were appropriate in its particular legal context. When it comes to EU countries, there is a whole kaleidoscope of early warning systems aimed at the detection of crises. Globally, these systems can be divided into two groups: input (the most common) and output systems.

“The input system is the one where an entrepreneur, realizing that his business is in a difficult situation, seeks help with a public or private body that can provide some support to such a business entity. For this, there is a whole network of consultants who offer their services both free of charge and for remuneration” said Fabrizio Fraboni. Such an approach is mostly practiced in the Netherlands and Germany, as well as some regions of Italy.

Mr. Fraboni emphasized that the issue of confidentiality of a business entity within the early warning procedure and the availability of reliable data on its financial situation are of paramount importance in preventive restructuring processes. Besides, as pointed out by Fabrizio Fraboni, such data can be processed using AI.

“In Ukraine, there is enough data that could be processed to identify enterprises that are potentially close to insolvency,” noted the expert.

Anna Hrycaj, Head of the Institute for Bankruptcy, Restructuring Law and Insolvency Research (Poland), shared her country’s experience in the implementation of the Directive; in particular, as to the implementation of early warning tools.

“In Poland, the implementation of the Directive took place with the involvement of two state bodies – the Ministry of Justice and the Ministry of Technology and Economy. The latter was exclusively responsible for the implementation of Article 3 of the document,” said Anna Hrycaj. Ernst&Young Company played a major role, as it was selected by the European Commission as an external advisor."

Bartosz Sierakowski, Deputy Head of the Polish Institute for Bankruptcy, Restructuring Law and Insolvency Research, spoke in more detail about the early warning program in Poland.

“The program was launched by two organizations: the Family Business Foundation (a private institution) and the Polish Agency for Enterprise Development, the main goal of the latter being to help entrepreneurs who are facing financial difficulties, as well as reducing the risk of bankruptcy. Everything is confidential. The entrepreneurs who experienced any problem, could apply anonymously and get help,” says Bartosz Sierakowski. He stated that in the years 2017-2019, the Foundation trained 120 mentors, who then worked for free and shared their experience.

“Almost 1,000 entrepreneurs applied for help, and 300 out of them received it. With the support of the mentors, they prepared restructuring plans and could avoid an official bankruptcy procedure,” said Bartosz Sierakowski. (More about early warning in Poland is available here).

Vladyslav Filatov, Director of the Bankruptcy Department of the Ministry of Justice of Ukraine, emphasized in his speech high topicality of the round table discussion. According to him, pre-trial rehabilitation is almost never used in Ukraine. One of the reasons is the lack of knowledge of the market with pre-trial rehabilitation procedures.

“Not always creditors and debtors can reach a common ground and solve the problem,” said Vladyslav Filatov. In the meantime, he was hopeful that the Ministry of Justice will be able to adopt relevant regulatory changes as soon as possible to make the pre-trial restructuring procedure clear, transparent, and effective.

Viacheslav Pieskov, justice of the Commercial Cassation Court under the Supreme Court, drew attention to the risks of abuse in the application of for early warning tools.

“We need to develop the pre-trial rehabilitation procedure building on best European practices. At the same time, we are worried that the preventive restructuring procedure may be used by unscrupulous business entities to delay the bankruptcy procedure or procedures conditioned by various types of liability,” said Viacheslav Pieskov.

Denys Hryshchenko, Head of NABU’s subcommittee on legal support of banks’ activities and protection of creditors’ rights, drew attention to the issue of reaching an agreement among creditors when applying preventive restructuring procedures.

“Effective tools are needed to bring creditors to the same table and give them the opportunity to negotiate,” noted Denys Hryshchenko. He also emphasized the necessity of settling the issues regarding reliability of financial and public reporting of business entities.

Olena Baryshnikova, member of the Audit Chamber Council of Ukraine, noted that auditors could contribute a lot to preventive restructuring procedures.

"We would be glad to participate in the development of an ecosystem that would not just detect bankruptcy at an early stage, but would prevent the creation of such a situation. It is about providing high-quality financial information, and about financial statements duly verified by an auditor, and about implementing a systematic approach to raising professional qualifications of financial managers,” said Olena Baryshnikova.

Oleksandr Bondarchuk, Head of the Ukrainian National Insolvency Trustees Association, underlined that when implementing early warning tools, one shall take into account the state of economic relations in the country.

“The greater the State’s pressure on business is, the more distorted the financial reporting of business entities will be, which will make it impossible to objectively and promptly detect insolvency,” said Oleksandr Bondarchuk.