As a result of the challenges that the local market has been facing over the past years brought on by the recent pandemic, wars, and other changes in the market, the majority of businesses are faced with losses and accumulating high levels of debt. Consequently, enormous pressure is imposed on businesses, including on their viability, which, in turn, pushes the need to explore methods for overcoming these obstacles.
Different trends aimed at avoiding liquidation are present globally, such as: so-called “out-of-court restructuring agreements with creditors” – a US concept that reduces leverage by exchanging existing debt for new securities; or the Australian concept of a Small Business Restructuring Process entailing benefits that include directors maintaining day-to-day control over the business, lower professional costs, higher success rates, and simpler reorganization plans during the restructuring process.
Reorganization, unlike company liquidation, facilitates the revitalization of financially ailing companies. It allows debtors to retain operational control while renegotiating financial obligations. This strategic maneuver enables debt restructuring, fostering collaboration between debtors and creditors to salvage economic value, enhance stakeholder interests, preserve the company, and mitigate potential job losses. While a positive contributor to the economy, reorganization demands a concerted commitment from stakeholders, translating into protracted, resource-intensive legal proceedings.
Although Macedonian legislation tries to keep up with emerging trends, it has yet to be aligned with the EU acquis. Our Law on Bankruptcy introduces the concept of a Reorganization Plan. Namely, upon passing the report on the economic and financial standing of the debtor (i.e., the company in distress) on the first reporting creditors’ assembly, creditors are able to decide whether to proceed with closing the business or its temporary continuation. If decided that the business is to continue, a Reorganization Plan is prepared by the bankruptcy administrator. As an exception favorable for the creditors, the initiative for passing a Reorganization Plan or a proposal for such a plan may be submitted to the court by each bankruptcy creditor and creditor with segregation rights prior to the creditors’ assembly. The reorganization procedure prior to the initiating of the bankruptcy procedure may be conducted solely if the debtor, alongside the proposal for initiating a bankruptcy procedure, also submits a Reorganization Plan.
The law stipulates a strict form and content of the Reorganization Plan as well as precise procedures preceding the approval of such a plan (i.e., assessment of the plan). This also includes procedures that involve separate discussions, the opening of the restructuring procedure, a preliminary procedure for the termination of the conditions for the initiation of bankruptcy in accordance with the Reorganization Plan, etc., ending with the adoption of the Reorganization Plan. Once approved by the court, the Reorganization Plan is considered to be an enforceable deed. All parties involved are then obliged to strictly follow all stipulated obligations, steps, and provided methodology. The bankruptcy administrator is responsible for strict supervision and controls the implementation of the Reorganization Plan to ensure it is executed as adopted.
When defining the rights of the creditors, the Reorganization Plan must make a distinction between creditors with the rights and creditors of a higher payment rank. Creditors with segregation rights are to be settled separately and are not part of the Reorganization Plan. Another mechanism favored by creditors is the possibility to sell the debtor or parts of the business of the debtor, subject to strict limitations (i.e., prior approval by the creditors’ assembly, limitations with regard to the buyer, etc.).
In contrast to reorganization, liquidation is a pragmatic solution viewed favorably when financial situations are irreparable. Assets are systematically sold and proceeds are used to discharge outstanding debts through court-initiated proceedings, concluding with equitable distribution among creditors. However, this leads to the cessation of business activities and entity dissolution, potential asset value depreciation during the process, compromising overall stakeholder recovery, etc. Though swifter, liquidation demands acceptance of business closure and compromises on asset realization. In practical terms, creditors usually get less in bankruptcy cases compared to reorganizations due to a longer and more expensive process than a reorganization.
Aligning with European Union trends, a shift toward favoring company revival through restructuring is evident. Anticipating future legislation in North Macedonia, it is expected that updates will provide better legal options for restructuring, improve the business environment, and preserve employment and property values. Simultaneously, it should address legal solutions for the swift removal from the market of companies posing insolvency risks to others.
By Marija Filipovska Jelcic, Partner, and Martin Ivanov, Attorney-at-Law, CMS
This article was originally published in Issue 10.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
