IBNA Special Report
Tirana, September 30, 2014/ Independent Balkan News Agency
By Edison Kurani
If one travels 50 km from Tirana to Durres, an area where the majority of businesses of Albania are concentrated, one will notice that the images of some of them change overnight. Thus, a chain of petrol stations, known for several years, suddenly changes its name. And if one asks what has happened, the answer is simple, the company declares bankruptcy and formally changes its name.
This happens very often and the motives relate to the possibilities to benefit fiscal facilities offered in the first years that a business is created.
But do companies that change their name truly go bust?
The law on bankruptcy has been approved on 2002. So far, there’s no case of official bankruptcy of a business in Albania. In the recent weeks, General Directorate of Taxation has published a list of 117 businesses going through bankruptcy procedures. Meanwhile, according to the Agency for the Treatment of Bankruptcy, on a national level, there are 45 businesses going bankrupt.
Do large companies benefit from the legal flaws on bankruptcy?
Tax administration has started the procedures for the bankruptcy of 117 businesses throughout the country. General Directorate of Taxation has published the list and the procedures of bankruptcy, that all businesses must follow at this phase.
According to the law, tax administration demands to the court to start a procedure of bankruptcy for taxpayers, commercial companies, 2 years after the National Registration Center gives them the passive status.
This includes those companies, the tax obligation of which has been declared noncollectable and who declare losses of their capitals for at least three years in a row.
What may be noticed in the official list is that many of the companies are among the largest ones and well known. But, another surprising fact is that these companies continue their activity and the majority of them, after changing their name.
Taxation experts say that there’s a tactic which is used by large companies. Thus, they declare losses for three years in a row and then declare bankruptcy. But, the company carries on with business, by modifying the name or adding an extra element in order not to have problems with the public image. This is repeated time after time. This way, companies benefit the concessions offered by the state for three years all over again.
Bad loans are going up drastically
In the second quarter of 2014, the percentage of bad loans in the portfolios of banks in Albania is 23,9% or 69 billion ALL (670 million USD).
With a progressive increase of 6.7% in 2008, the percentage of bad loans in Albania is among the highest ones in the region.
The increase of bad loans in percentage has had a negative impact in bank earnings, capitalizations and their ability and readiness to offer more loans in Albania.
In spite of the high level of bad loans, the Albanian Bankruptcy Law has been very little applied since 2002. In general, everyone agrees that the legal procedures of bankruptcy are complex and difficult. According to the latest report of “Doing Business”, a contract needs 525 days to be settled, 39 procedures or 2 years to declare bankruptcy.
The law is there but are there people to apply it?
If there’s one thing that Albania doesn’t lack are laws. Plenty of them are approved and the majority of them through a wide political consensus. But, one thing is sure. Very little of them are rigorously applied. Many others are poorly applied.
In other cases, the law is approved but there are no people to apply it. One typical case for it is the case on bankruptcy. Experts of the World Bank say that “there are very few qualified professionals to apply legislation of Albania”.
At the same time, there’s a lack of awareness amid the business community and amid some of the main actors, such as lawyers and judges. As a result, instead of demanding a restructuring of debt and the business, companies choose not to pay their debts and shut down their activity, without using any legal instrument. As a result, creditors fight to recuperate their funding. The only mechanism of recuperation is made through legal individual instruments, which are prevented by a judicial system that has a very weak enforcement power and obsolete civil procedure rules.
A program for the Solution of Debt
International Financial Corporation IFC, part of the World Bank Group and the Ministry of Justice in Albania in partnership with the Swiss government, has launched a program to improve the system of payment power in Albania. The program for the Solution of Debt is expected to reduce lending risks and to increase the level of lending in the country.
Mahesh Uttam Chandani, Global Manager of IFC Program for the Solution of Debt, explains what is expected of this program: “The expected result of the program is the transformation of the system of the solution of debt in Albania into an efficient system, by improving the legal framework and the practices of the payment power, which will secure even stronger basis for the prevention of bad loans and their solution. This will bring many benefits for creditors and protection for companies with economic development potential”.
The Swiss side also has expectations. “At the end of the program, we expect an improved business environment, stronger financial system, better legal and regulatory framework to address the lack of payment power and more dynamic economic sectors”, says the Swiss ambassador to Albania, Christoph Graf.
IFC program for the Solution of Debt will be implemented in the next three years. It includes the legal and regulatory reform and it secures the necessary services for the creation of human capacities in relation to the solution of debt in Albania.
Novelty of the legal amendment which interests businesses
The main scope of the implementation of the law for the bankruptcy procedures is the collective settlement of the debtor’s obligations by selling all of his assets and by distributing his revenues. Or, in the case of a reorganization plan, by coming up with an alternative settlement with the main aim of carrying on with the business activity.
In the bankruptcy law, the amendment that brings a novelty is that bankruptcy will have two phases: the first one is the liquidation of the company and the declaration of bankruptcy and secondly, the reorganization of the company.
Nasip Naco, Minister of Justice, raises a concern according to which “the position of the debtor in situation of bankruptcy is discriminating” and adds: “The current law doesn’t have any provisions in relation to the frauds with bankruptcy, while the legislation of developed countries have clear provisions on the types of frauds in the bankruptcy process”.
How is business in Albania facing economic difficulties
Albanian businesses which have a weak payment power, encounter difficulties to declare bankruptcy.
Bad loans have increased significantly and this shows that businesses cannot pay their obligations.
Nevertheless, after 12 years since it came into effect, the Albanian law has not been applied. Some entrepreneurs say that the current law on bankruptcy, approved in 2002, causes many obstacles for enterprise, while the changes are welcomed by the Albanian enterprise.
Luan Bregasi, president of Business Albania says that the changes bring novelties, because after the bankruptcy, businesses may be reorganized.
Bregasi says that authorities must feel responsible for the economic destruction suffered by businesses.
“I believe that there are positive efforts, especially in looking into the possibility of reestablishing a bankrupted business. We must not be happy that a business went bankrupt, but be able to offer companies the necessary help when they are risking bankruptcy”, says Mrs. Bregasi.
Almost all businesses that result to be in financial difficulties end up liquidated even when they can be rescued. Therefore, reorganization is seen as a way out. Bregasi says that intentional bankruptcy and conditioned bankruptcy must be separated.
“We must make a difference between the closure of an enterprise, whose owner wants to close it and a natural bankruptcy, due to the difficult financial situation. It’s very difficult to shut down a business here in Albania and there may be a need for improvement in the law. Bankruptcy has been a desired option of a given entrepreneur more than a reality which would take into consideration the natural causes of shutting down a business”. /ibna/