Bankruptcy Dominoes

​The following text is not an anecdote; rather it is a description of the debates taking place among people throughout the country over a glass of beer or wine. »Don’t bother coming tomorrow, that’s what they told us today in the factory, « says the first. »Ours is still negotiating with the creditor banks, « says the second. »We still produce, but who knows for how long, « the third adds.
 
​The following text is not an anecdote; rather it is a description of the debates taking place among people throughout the country over a glass of beer or wine. »Don’t bother coming tomorrow, that’s what they told us today in the factory, « says the first. »Ours is still negotiating with the creditor banks, « says the second. »We still produce, but who knows for how long, « the third adds.
The Czech Republic is by no means the oasis in the desert of the financial crisis, as we were hearing from politicians and analysts last autumn. On the contrary, the country is now going through a series of bankruptcies, which have not yet had their full impact. The worst is yet to come. And what could be the outcome of all this? The Ekonom weekly publication found out that last year, more new bankruptcy proposals were filed than over the past ten years, according to the Euler Hermes Čescob Credit Insurance Company (part of the multinational Euler Hermes Group, one of the world’s leading groups in the field of credit insurance).
Insolvency proposals came down to 5141 cases, which includes sole traders. According to Euler Hermes, there were 1720 bankruptcies actually declared.
After a long time, 2008 was the first year to see an increase in the number of bankruptcies. In fact, the number had been gradually decreasing since 2001. And in 2007, bankruptcy was only declared in 1115 cases.
This number jumped by approximately 50% last year.
»Last year was not so disastrous. The real figures will be seen this year. The first half of the year will be the worst. The real impact of the crisis, which was at its worst in the last months of the previous year, are still to come, « the economist Miroslav Zámečník believes, the member of the new National Economic Government Council (NERV), established early this year by the prime minister Mirek Topolánek.
Moreover, the Euler Hermes Insurance Company estimates illustrate the true situation. According to its analysis, bankruptcy proceedings should affect 5200 companies this year, and the courts are likely to propose bankruptcy in 1770 cases.
»The third quarter will be decisive. Then it will be clear whether or not the situation is critical,« Julius Kudla points out, the head of an insurance company. Not a good forecast for the year. The situation is just as bad according to statistics, which do not include small traders, but only study trading companies i.e. companies the suffix a.s., s.r.o. or v.o.s. These companies are monitored by the Czech Credit Bureau (CCB), which established the banking and non-banking credit registers in the Czech Republic, and supplies solutions for credit risk management, and information on traders. Its analysis for Ekonom comes from the Cribis.cz system, and according to this analysis, 858 companies were struck by insolvency last year. That should not present a threat in comparison with the previous year. In 2007, there were only seven companies less.
However, progress within the individual quarters of the past year has shown that there is a reason to fear the bankruptcy wave.
Within the first three quarters of 2008, the number of companies declaring bankruptcy was less than in 2007. The resulting higher total number of insolvencies was seen in the last three months of the year. According to an inter-annual comparison, twenty more companies declared bankruptcy within these three months.
The bankruptcy patterns in 2009 will be influenced by a number of aspects, which are contradictory in a way. »The global financial crisis and the subsequent economic decline will substantially decrease the foreign demand for Czech products and services. Also, internal demand will be limited by decreasing household expenditure, as a result of the expected growth in unemployment, « Věra Kameníčková from CCB states.
»Banks are being more careful in lending money to companies, as they are weakened due to the financial crisis, and this will restrict companies’ access to financial resources. However, the currently weakening exchange rate of the Czech Koruna may help exporters. Furthermore, oil prices will help companies, as it is lower in comparison with the first half of 2008, « she adds. However, she does not quote any specific figures.
Glassmakers and builders 
Among those who  faced bankruptcy last year,  were the following companies: Karlovarský porcelán, Sklárny Bohemia, Slezan Frýdek-Místek, Olšanské papírny, Czech Aircraft Works and Masný průmysl Česká Lípa.
And this year, more companies are joining them right from the beginning of the year. For example, the Prague building company Artexa became insolvent, as it has not paid either its business partners or its employees for five months. The house builders strongly felt the effects of decreasing demand for turnkey housing.
The company owners tried to find a strategic partner, but did not succeed. »The negotiations were not successful, « they stated in the insolvency proposal.
There are probably many similarly unsuccessful negotiations ahead of Czech traders this year.
The most famous case of bankruptcy in recent weeks is that of a glassworks. The court has recently declared bankruptcy in the Crystalex glassworks in Nový Bor, which belongs to the Bohemia Crystalex Trading Group. »The bankruptcy adjudication will be vital for the company’s future, as it will allow the sale of the glassworks to new owners. The decision should be made at the creditors meeting on the 12th March, « says Karel Samec, the group’s spokesman.
Paper mills are not doing well either. Creditor banks drew all the cash from the glassworks, so there is no money, even for wages. The employees still hoped their company would be saved. In the end, however, in the Karolinka porcelain factory in Karolinka near Vsetín, they had to tell people: »Do not come again«, instead of the good news.
Notwithstanding the originally negative position of the minister of finance, Miroslav Kalousek, he agreed to help the glassworks from the Bohemia Crystalex Trading Group, if they came up with a good restructuring plan.
»We are willing to help with operating financing, providing that the owners, the creditor banks, and the insolvency administrator are willing to approach restructuring and asset sales without delay. Without meeting this condition, mere help in providing operating financing is out of the question, as it would only prolong the restructuring agony, « Mr. Kalousek stated in the press declaration. The glassmakers can thus hope again, as well as the employees of the cardboard plant in Karolinka, which is closely tied to the glassworks. Nevertheless, the labour offices already expect a record-breaking surge of unemployment.
Apart from glassmakers and builders, the automotive industry, the transport and chemical and steel industries are among the most affected sectors.
»All companies dealing with the production and sale of paper are also having serious problems, « adds Mr. Kudla from Euler Hermes.
Mr. Zámečník also adds that tourism is going through hard times. »Tourism is a luxury product, and especially when people from western countries reduce their consumption, they travel less. Hotel owners felt a much decreased demand for their services over Christmas, « he says.
Finding the culprit 
Where should we search for the main causes of bankruptcies in Czech companies? »The strengthening koruna in the first half of the past year played its role, aggravating the situation for exporters. Especially in the fields with strong Asian competition. Among other factors, there were high oil prices in the first half of 2008, a decrease in foreign demand as a result of the recession at the end of 2008, and the unbalanced structure of the Czech economy, which is sensitive to failures in demand in several sectors, « Ondřej Pirohanič states, one of the authors of the CCB analysis.
»The decrease in demand took place abroad, as well as in the domestic market. It should start improving sometime in this year’s third quarter, but this will not affect exporters to European countries, who will be influenced by the crisis for longer, « Karel Havlíček adds, the vice-chairman of the Association of Small and Medium Enterprises, and the head of the Sindat Group Company, dealing with business, advisory and project services.
»At present, rapidly reduced oil prices have on the contrary added a hidden fiscal impetus to companies. On the other hand, it is very difficult for them with the koruna. It is too volatile, which is hard to prepare for, « the economist Zámečník believes.
The law as a force 
There is an additional unpleasant side to the bankruptcies, according to experts – a domino effect. »Secondary insolvency is definitely one of the main causes of the tense financial situation in a lot of companies. The numbers speak clearly. Last year, the amount of receivables in arrears increased by sixteen percent, yet their value increased by as much as 120 percent, « Mr. Kudla claims. The companies stopped paying invoices with higher amounts, despite the risk of greater penalties. Moreover, larger companies granting greater and therefore more expensive orders also defaulted.
The so far celebrated European projects for Brussels’ money may also represent a burden for cash flow of companies. »You must cover 45 percent with your money, and only approximately 55 percent comes from European funds. Companies may need money from elsewhere, « Karel Havlíček warns, from the Association of Small and Medium Enterprises.
Insolvency law is another threat to companies. »So far, in many cases, insolvency law has been used as a coercive measure in business disputes, which may have fatal consequences for some companies, « Mr. Kudla states.
The prime minister’s economic council wants to overhaul the insolvency law. »It is one of the aspects we will examine closely, and there are some modifications we want to propose. We need it in these times, « Tomáš Sedláček, a ČSOB economist, stated the viewpoint of NERV.
The ministry of justice has already started preparing modifications to the insolvency law. »We propose twelve changes altogether, linked to the financial crisis. The aim is to modify the law in such a way, as to give businesses a greater chance of survival, « Bohumil Havel explains, a lawyer, member of an expert group at the justice department, and one of the co-authors of the insolvency law.
Some of the changes would only be adopted on a temporary, emergency basis. There are three parts to the proposals: to give the businesses facing problems, but still with viable operations, better weapons for negotiating with creditors. Also the state should become involved in helping, by making some payments to the businesses undergoing reorganization, for example social security payments. And last but not least, there should be regulations ensuring that employees are not left without wages, as is happening now during the insolvency proceedings in the glassworks of the Bohemia Crystalex Trading Group.
Don't panic 
Mr. Havlíček from the Association of Small and Medium Enterprises rejects scenarios that are overly pessimistic. »There will of course be more bankruptcies, but I would not panic too much. The creditors have already tested the procedure, and they know very well that the yield from insolvency proceedings is not so high. It is usually below ten percent. Therefore, they will prefer negotiating a spread in payments rather than sending somebody into bankruptcy, « he believes.
To add to the problems of Czech companies, the banks are reluctant to grant loans. According to an exclusive survey by the Economic Chamber for Ekonom weekly, two-thirds of companies are experiencing reduced access to the credit (see Ekonom No. 2/2009).
»Nevertheless, a turnover of external money is necessary for business, which also leads to a domino effect.  The bank will not grant a loan, you can't pay the supplier, and it escalates into a downward spiral. At present, the banks are at best willing to extend existing credit, but getting new credit is difficult, « Mr. Havlíček explains.
»The banks failed to control liquidity, and now they are unwilling to lend money. The paranoia caused by the bad state of companies will get even worse in the second quarter, when the economic results are announced. The results will be noticeably worse even for very strong companies, « the vice-chairman of the Association of Small and Medium Enterprises, Mr. Havlíček, continues.
»Would you lend money to anyone?« the economist Zámečník asks. »The banks do not know what the revenue of companies will look like. Moreover, an exporter will admit sales problems, yet he will probably not boast about some of his customers going bankrupt. It is a problem, of course, but you cannot blame the banks. They must consider the risks carefully. The fact that it is now a kind of a collective act on the side of the banking segment is understandable « Mr. Zámečník explains.
We’ve been through worse times and even though the situation in Czech companies is not so good, we’ve been through worse times. The end of the 1990s and the beginning of the new century were characterized by a large number of bankruptcies. At those times the number of the bankrupt companies significantly exceeded 2000 per year.
Can the Czech Republic expect a similar situation now, when the world crisis is forcing companies to go bankrupt, which is confirmed by the 50% increase in the number of bankruptcies from 2007 to 2008?
»Companies are no doubt in a better financial state than at the end of the 1990s. The outcome, however, is unsure, as this year brings about decreasing revenue, which is different to the situation back then, « Mr. Zámečník stated.
Mr. Havlíček, from the Association of Small and Medium Enterprises, is even more optimistic. »Back then, companies were being established in thousands, as if on an assembly line. The market was not ready for that. Moreover, competition was growing and banks were failing. Today, the state is much steadier, « he claimed.
We are not alone 
The Czech Republic is definitely not the only country to face a series of bankruptcies. There are bankruptcies abroad as well, and on a large scale, too.
In the U.S.A., for example, where the crisis began and from where it spread across the world, an electronic court database reports five thousand bankruptcies a day, including household insolvencies. That represents an increase of 54 percent between 2007 and 2008. Should the bankruptcies continue at this pace, there will be 1.2 to 1.4 million bankrupt subjects by the end of this year.
The headquarters of the Euler Hermes Credit Insurance Company published a worldwide view of bankruptcies prior to the end of the year. And it is not optimistic at all.
Europe will come off worst. The number of bankruptcies will only rise by 16.7 percent, but in terms of absolute numbers, this will mean an increase of nearly 200 thousand.
According to Romeo Grill, the chief economist at Euler Hermes, the worst situation will be in the automotive industry, retail, the textile industry and logistics.
Besides this, the European Association of Suppliers in the Automotive Industry has already warned that if governments do not help them via credit guarantees, every tenth automotive supplier will go bankrupt within several months.
France is probably the country to earn the unenviable first place in Europe, with 63 thousand companies expected to go bankrupt.
That will surpass even the U.S.A., although there should be a rapid growth in insolvencies by more than fifty percent. Approximately sixty two thousand companies could file for bankruptcy in the U.S.A.
Japan, on the other hand, should be slightly better off. The increase in bankruptcies there should not exceed 12 percent. Yet even the Land of the Rising Sun had to reach a low. In November, the number of listed bankrupt companies reached record levels since World War II. There were 1277 bankrupt companies, amongst which were thirty large joint-stock companies.
Investments into export
And what could help the companies in this situation? »I would tackle the crisis by increasing the financing of institutions which support exports,« Ivan Kočárník, the former minister of finance, said in an interview for the Ekonom weekly (see Ekonom No. 3/2009).
Mr. Havlíček from the Association of Small and Medium Enterprises agrees with that. »Now it is useless to pour more money into organizations like CzechInvest or CzechTrade, as they have already done their jobs very well. More money should be sent to EGAP, for example, « he said.
He thinks the current situation on the market represents an opportunity for bold and well-funded companies. In other words a company which is going bankrupt can be acquired »for next to nothing«.

»Last year was not so disastrous. The real figures will be seen this year. The first half of the year will be the worst. « Miroslav Zámečník, economist and member of NERV 
»Secondary insolvency is definitely one of the main causes of the tense financial situation in a lot of companies. « Julius Kudla, Euler Hermes Čescob 
»At present, the banks are at best willing to extend existing credit, but getting new credit is difficult. « Karel Havlíček, Association of Small and Medium Enterprises
According to Euler Hermes Insurance Company estimates, there will be 1770 companies and entrepreneurs declared insolvent this year.
INSOLVENCY INDEX 
What can you find in the index? All the adjudications of the insolvency court filed in the insolvency proceedings; all the submissions inserted in the judicial record administered by the insolvency court regarding the debtor; legally defined information on insolvency administrators; legally defined information on debtors; information on the main proceedings in EU member states; deliveries of a majority of adjudications (do thus not rely on the envelope with a stripe upon the delivery). What is not in the index? Submissions or other papers subject to confidentiality in accordance with a special legal regulation; proceedings initiated prior to the end of 2007, i.e. the proceedings abiding by the legal regulation contained in the law on bankruptcy and compensation. Apart from glassmakers and builders, the automotive industry, the transport and the chemical and steel industries are among the most afflicted sectors.
BANKRUPTCY – only the last step in the insolvency chain
Insolvency law distinguishes between two types of bankruptcy: insolvency (financial insolvency) and excessive indebtedness. The debtor becomes insolvent in the case where there are multiple (at least two) creditors, his/her financial obligations are at least 30 days after the due date, and he/she is not able to fulfil the obligations. Excessive indebtedness is a situation where there are multiple creditors and the total of the debtor’s obligations exceeds the value of his/her assets. Furthermore, insolvency law defines the so-called threat of insolvency, which is a situation where it can be assumed that the debtor will not be able to completely fulfil a substantial part of his/her financial obligations on time. In the first stage of the insolvency proceedings, the court accepts the insolvency proposal (the company itself can file it, or the creditor), and publishes it in the insolvency index within two hours. 
After the proposal is published in the insolvency index, the creditors have two months at the most to enter their claims. The moratorium will give the debtor a chance to settle with the creditors before the entire insolvency proceedings pass, namely because during this time, it is not possible to issue the insolvency adjudication. The debtor can apply for the moratorium within seven days after filing the insolvency proposal. The creditor can apply for the moratorium within fifteen days after filing the insolvency proposal. In the second stage, the court then decides on the method of settling the insolvency. The court has three months to decide, following the insolvency adjudication.
Bankruptcy is only one of the possible solutions. It mostly means the end of production and sale of the debtor’s assets. Reorganization is more often the solution used in the case of insolvency of debtors-businessmen running a large business, where it would be preferable to maintain production from the point of view of satisfying the creditors. These are usually companies with a turnover of at least 100 million koruna or employing at least 100 employees. Nevertheless, this is definitely the longest and the most difficult path for the creditors to take. Because the aim is to revitalize the debtor’s company, and this takes five to six years, according to foreign experience. So far, our courts have approved the reorganization of four companies. Discharge from debts, or personal bankruptcy, gives a chance to people who are not businessmen to settle with their creditors. Within five years, they will settle one third of the claim to the creditor, via monthly instalments. 
When a company is in excessive indebtedness 
A company without sufficient assets to cover all the due and undue obligations must pronounce insolvency itself. The first, essential prerequisite for excessive indebtedness is the existence of at least two creditors. The second, and more significant prerequisite for pronouncing excessive indebtedness is a negative difference between the debtor’s assets on one side, and the value of all his/her obligations on the other. The company executive or the board of directors must file the proposal for initiation of the insolvency proceedings without undue delay after learning about the insolvency, or after having learned about it, provided that there was due care. In the case where the people responsible do not satisfy their obligation to file the proposal, they are liable to pay any subsequent damages or other detriments incurred to the creditors.