“Is your company protected against client insolvency?” was the title of an event organised by the German Chamber of Industry and Commerce last week. Three speakers presented different defence methods: bad debt insurance, factoring, or turning to a good lawyer.
The first two options are of a preventative nature, while a lawyer usually comes into the picture when damage has already been done. The evening’s question is a very topical one. The number of insolvency proceedings is growing steadily. In the first half of 2009 alone, 14,122 insolvency proceedings were launched in Hungary, amounting to 70% of the number of proceedings in the whole of last year. The number of liquidation proceedings opened in the first half rose 36% yr-on-yr.
Bad debt insurance
The instrument of bad debt insurance offers general protection on all claims and is far less widespread in Hungary than, for instance, Germany. According to Euler Hermes Magyar Hitelbiztosító Zrt. board member Olivér Zárda, the crisis is likely to lead to a closing of that gap, firstly as a result of companies becoming more aware of the issue, and secondly because banks are increasingly tying the granting of financing to the existence of bad debt insurance.
Taking out bad debt insurance in itself is not enough. It is essential, for example, that companies keep better record of their contracts and other relevant documents. That may sound like a banal requirement, but Zárda considered it worth mentioning, based on experience. The need to keep a closer eye on the client relationships of our customers is likewise self evident, but frequently ignored. Zárda said salespeople need to be more aware of risks: “the prospect of additional deals should no longer cloud their view of associated risks.” It can also be helpful in the case of future bad debts if firms ask their clients whether they have a deal for securities. “Until now that has been a taboo topic, but if the possibility exists, I would definitely advise it. Companies that are willing to pay and capable of paying should not have a problem with that request.”
Factoring
The factoring branch is clearly one of the winners of the crisis, since its service promises something currently in short supply: liquidity. “This year will be the best in our history,” said Tamás Molnár, director of special company financing at MKB Bank Zrt. With a share of 26%, MKB is the largest player on the Hungarian factoring market. Factoring focuses more on improving liquidity through incoming payments being advanced, than on protecting against bad debts. “Through the sale of claims, companies’ balance-sheet structures are also improved,” Molnár said. “A reduced balance sheet, for example, leads to a better debt index, which in turn results in a better credit rating for the company in question,” he added.
In addition, transferring claims also has a positive impact on firms’ payment discipline, he said. “Debtors sit up and take notice when they learn that the name of the creditor is MKB,” Molnár said. Another advantage that should not be underestimated is the fact that as a bank is generally only interested in the settlement of the debts, it cannot be held off with the prospect of follow-up orders. MKB cooperates closely with Euler Hermes in debt collection, he said. Molnár explained that a further benefit of factoring is that the creditor can be free of foreign exchange risks, having transferred its claims to a bank.
Turning to a lawyer
Nóra Tapolczai, solicitor at the international law firm Nörr Stiefenhofer Lutz, which is also represented in Budapest, addressed the legal aspects of claims management. She spoke in detail on the current amendments to the bankruptcy law and the associated new possibilities for both creditor and company. There have been changes to creditor protection in particular, aimed at enabling reorganisations of firms in difficulty to help them stay afloat.
