**The Role Of Factoring In the New EU Member States**

inventory of finished goods. Respondents were then asked how the security rights of the hypothetical client bank would be enforced in their country. Key findings from the survey include data on how much a secured creditor can expect to recover (the amount), how quickly, and how simply.

The survey provides a surprisingly positive picture of enforcement, indicating that in all but one EU 8 country (Poland) it is possible to recover at least 80 percent of the market value of the assets taken as security in six months or less. But the efficiency of the process can be influenced by a number of factors, including whether there are preferred creditors whose claims supercede a bank’s claim, whether there is variation in enforcement on immovable assets (including receivables), and whether the borrower is declared insolvent (see EBRD Transition Report 2003a, table A.2.2.2).

The World Bank offers a somewhat different assessment of how well commercial laws have been implemented in terms of creditor rights. The Bank has conducted three in-depth country-level assessments of insolvency and creditor rights, the most recent of which was an assessment of the Czech Republic published in October 2003 (World Bank 2003). This study found that the average time to enforce a contract by unsecured creditors was considerably longer in the Czech Republic than in the five economies to which it was compared (Lithuania, Russia, the Slovak Republic, Turkey, and Ukraine), and somewhat longer than in the EU 15—but shorter than in the United States (Table 4). The study also found that delays in contract enforcement in the Czech Republic left unsecured creditors with little practical means to ensure that the debtor’s assets would be protected from dissipation or value loss.

|**Table 4. Contract Enforcement in th**<br>**Indicator**|**e Czech Repu**<br>**Czech**<br>**Republic**|**blic and Vario**<br>**Five other**<br>**transition**<br>**economies**|**us Other Co**<br>**EU 15**|**untries**<br>**United**<br>**States**|
|---|---|---|---|---|
|Time to enforce a contract (days)|270|196|252|365|
|Cost to enforce a contract (percentage of per<br>capita income)|18.5|12.6|5.9|0.4|
|Source: World Bank, “Czech Republic Policy Note: I|nsolvency and Cr|editor Rights Syste|ms”, 2003||

The most notable difference between the Czech Republic and other countries is the cost of enforcement. The Czech Republic compares quite unfavorably with the other countries, which themselves compare unfavorably with the EU 15—all of which compare very unfavorably with the United States.

In addition to debt collection by unsecured creditors (outside of bankruptcy) through the court system, the Bank report on the Czech Republic addresses two other important avenues: pursuit of secured claims by secured creditors (outside of bankruptcy), and pursuit of claims through bankruptcy. On the first, the Bank indicates that the recovery of collateral should be facilitated by the Public Auction Law, because the law will likely improve discipline among lenders. The law should also improve nonjudicial auction procedures and potentially streamline the foreclosure process. But the report cautions that if recovery by unsecured creditors is improved under the new law, it may come at the expense of secured creditors. Moreover, the Bank notes that under Czech commercial law secured creditors must surrender to unsecured creditors up to 30 percent of their collateral proceeds and do not enjoy significantly stronger standing in taking security in real estate—and that the situation is even worse for movable assets (such as receivables and inventory).

These problems would be significantly mitigated if the third avenue, bankruptcy, were favorable for creditors. A recent EBRD report assessing bankruptcy laws in transition economies gave the Czech Republic and three of the other EU 8 a “medium” rating (EBRD Transition Report 2003b). No transition economy scored a “very high” rating, which would be equivalent to international best practice, and

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**THE WORLD BANK**