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G E O R G I A T E C H N I C A L N O T E 0 6 | 2 0 2 0 Reform of insolvency legislation The new insolvency law of 2020 by Dr Hans Janus Berlin/Tbilisi, November 2020 About the German Economic Team Financed by the Federal Ministry for Economics and Energy, the German Economic Team (GET) advises the governments of Moldova, Georgia, Ukraine, Belarus and Uzbekistan on economic policy matters. Furthermore, GET covers specific topics in other countries, such as Armenia. Berlin Economics has been commissioned with the implementation of the consultancy. C O N T A C T Sebastian Staske, Project Manager Georgia [email protected] German Economic Team c/o BE Berlin Economics GmbH Schillerstraße 59 10627 Berlin Tel: +49 30 / 20 61 34 64 0 [email protected] www.german-economic-team.com Our publications are available under https://www.german-economic-team.com/georgia. About the author Dr Hans Janus worked for more than 30 years for the Euler Hermes AG in the field of state Export Credit Guarantees of the Federal Republic of Germany and was member of the board from 1994 until 2014. From 2003 to 2005 he was President of the Berne Union, the leading association for the global export credit and investment insurance industry. Since 2015 he works as an independent lawyer and business consultant in Hamburg. Hans Janus is a financial expert for Eastern Europe and Central Asia. He is board member of the Ger- man-Russian Lawyers Association. From 2018 until 2020 Hans Janus has been a member of the Super- visory Board of Belarusbank, Minsk. Mr. Janus is the author of various publications in the field of bank- ing law, public business law, international finance and trade law. Also, he is one of the authors of the Banking Law Handbook and editor of the German-Russian Law Review DRRZ. He studied Law and Rus- sian Language at the universities in Bochum, Hamburg and, as a post-graduate, at the Moscow State University (Lomonossov University). © 2020 Berlin Economics All rights reserved. Content Background .............................................................................................................................................. 1 1 The February 2020 draft law .................................................................................................... 1 2 Changes to the February 2020 draft law in the legislative process ......................................... 2 3 Topics for future consideration ............................................................................................... 3 4 Coming into force and amendments of other legal acts ......................................................... 5 5 Conclusion ................................................................................................................................ 5 Background The German Economic Team (GET) has covered the modernisation of Georgia’s insolvency legislation for many years. Starting with an analysis of Georgia’s 2007 “Law on insolvency proceedings” carried out in 2016, GET came to the conclusion that in the current legislation there are so many shortcomings that a completely new approach would be needed. GET recommended to issue a new insolvency law considering international organisations’ recommendations and based on international best practice.1 With this proposition GET was in full conformity with other domestic and international institutions involved in the assessment of Georgia’s insolvency legislation. In the years 2018 and 2020 draft new insolvency laws have been made. GET has analysed and commented on both of them.2 The assessment included a Technical Note on “Legal grounds for insolvency and order of creditors” and one on “Insol- vency legislation and COVID-19 pandemic”. The 2020 draft law of Georgia “On rehabilitation and col- lective satisfaction of creditors” approved by the Cabinet of Ministers of Georgia on 6 February 20203 went through parliament in September 2020 and has been published on 27 September 2020 in the Legislative Herald of Georgia after the parliament’s final approval. The purpose of this paper is to com- pare the approved legal act with the draft law of 2020, approved by the government in February. 1 The February 2020 draft law When assessing the February 2020 draft law, GET came to the following results: The 2020 draft law “On rehabilitation and collective satisfaction of creditors”, which is based on the 2018 draft law, would be, if adopted, a quantum leap forward for Georgia’s insolvency legislation. The most substantial change is a complete redirection of philosophy and objectives of insolvency proceed- ings from liquidation of the enterprise to its rehabilitation. Some striking findings in comparison with the law currently in force are: a) With 123 articles the draft law is considerably longer than the law currently in force (51 arti- cles). This fact alone reduces the risk of misunderstandings, vagueness, circumventions etc. b) The title of the draft law for the first time ever in Georgia mentions rehabilitation as a core objective of insolvency proceedings. 1 Janus, Avoiding the insolvency of Georgia‘s insolvency law, GET Georgia, Policy Briefing No. 03/2016; Janus, Avoiding the insolvency of Georgia’s insolvency law, GET Georgia, Policy Paper No. 01/2016; Saha, Janus, Reform of the insolvency law: A priority for economic policy, GET Georgia, Newsletter No. 9, March-April 2016; Janus, Migriauli, Georgiens schwieriger Weg zu einem modernen Insolvenzrecht, WiRO 2016, p. 336-338. 2 Janus, Draft Law 2020 „On Rehabilitation and Collective Satisfaction of Creditors”: A preliminary assessment, German Economic Team, Technical Note No. 01/2020; Janus, Legal grounds for insolvency and order of creditors: The draft insolvency law of 2020, international best practice and future options for Georgia, German Economic Team, Technical Note No. 03/2020. 3 http://gov.ge/index.php?lang_id=ENG&sec_id=547&info_id=75099. 1 c) Purposes and principles have been defined completely different: From asset sale and distribu- tion of proceeds to rehabilitation of the enterprise (Art. 1, 2, 21-42, 69-96). This is an important improvement, positively addressing the main weakness of the current legislation. d) The newly introduced “regulated arrangement” strengthens the concept of survival of the debtor by offering a pre-insolvency (out-of-court) procedure under the supervision of an in- solvency practitioner (Art. 11, 21, 24). e) Physical persons are not subject of this draft law (Art. 4). This is different to the draft law of 2018. The draft law does also not apply to banks, non-bank depository corporations and insur- ance companies. f) The physical continuation of debtor’s business operations can be protected by the court by prohibiting contractors to discontinue their critical services (Art. 57). g) “Insolvency” and “expected insolvency” remain the grounds for opening insolvency proceed- ings (Art. 6). However, Art. 7 (Concept of insolvency and presumption of insolvency) extends the grounds for opening insolvency proceedings by “assumed insolvency” including, amongst others, insufficient level of assets in relation to aggregate liabilities (over-indebtedness, Ger- man: Überschuldung). h) The position of “insolvency practitioner” (Art. 11, 12) is being introduced as mandatory, thus addressing one of the most important shortcomings of the current legislation and current in- solvency procedures in Georgia. i) Creditors’ rights to apply for insolvency procedures (Art. 43) strengthened by abolishment of various previous restrictions (minimum claim amounts, presentation of positive court deci- sions against creditor, applications only jointly by two or three creditors etc.). j) Important steps of the process will be made public in the “electronic system” (Art. 19) or on the website or the print edition of the Legislative Herald of Georgia. k) Voidable acts (Art. 65, 66) regulated much more detailed and closer to international standards. l) The debtor himself can be approved by court as insolvency manager under the control of a supervisor (Art. 64) as new form of rehabilitation management (German: Eigenverwaltung, Schutzschirmverfahren). m) Cross-border insolvency much more detailed (Art. 111-117). n) High level of transparency established by manifold obligations to publish important steps of insolvency procedures. The conclusion of this assessment was: The recommendation to replace the Law on insolvency pro- ceedings by a completely new law has been followed. The new draft law from 2020 is a modern, well structured, transparent and economically sound legislative act. 2 Changes to the February 2020 draft law in the legislative process There are not only few amendments of the draft law which were included in the text during the legis- lative process. These changes, however, are of minor relevance, at least most of them, or they bring 2 the new law in line with other legal acts of Georgia. The more important amendments are the follow- ing: • Mutual deduction agreements4, based on the law of Georgia “On financial pledge, mutual de- duction and derivatives” are to a large extent excluded from the application of the 2020 insol- vency law5, as laid down in Art. 4 paragraph 3 (new) by the following definition: “Insolvency proceedings or insolvency proceedings against a person participating in a financial pledge pro- vided for by the Law of Georgia on financial pledge, mutual deduction and derivatives shall be conducted in accordance with this Law and the special provisions of the Law of Georgia on financial pledge, mutual