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

# **Commercial law**

In recent years there has been considerable analysis of commercial law on security interests in Eastern Europe, particularly in the EU 8. For example, in 2003 the European Bank for Reconstruction and Development (EBRD) launched the New Legal Indicator Survey, which focuses on secured transactions. The survey, prepared by EBRD legal experts, assesses the extent to which country laws comply with international standards. These assessments are supported by case studies that evaluate the extent to which legal systems provide efficient outcomes.

The survey found that transition economies have made considerable progress in bringing their commercial laws on secured transactions up to international standards. But progress has been slow in some areas, such as in the scope of assets that can be secured, in public notification, and in enforcement and priority. Although in principle most countries allow security to be granted over most types of movable property (such as accounts receivable and inventory), restrictions often exist in the general law—particularly in the need for specific descriptions of each asset included as collateral. Such restrictions preclude the use of many modern financing techniques that involve granting security over groups or pools of assets. Among the EU 8, only Hungary and the Slovak Republic do not have problems in this area (EBRD Transition Report 2003a).

A registration, or notification, system is critical. Creditors must be alerted immediately when another creditor files a lien against assets. In addition, the system must unambiguously sequence these claims so that a secured lender can have confidence that its lien will be registered as having priority. Clear rules must be established about where claims must be filed. (This can be problematic for borrowers with multiple locations.) Though much progress has been made, EBRD Transition Report 2003a) finds that registration systems have weaknesses in most countries in the region. (See the annex for detailed descriptions of EU 8 systems for registration and secured transactions.) Among the EU 8, Hungary, Lithuania, and the Slovak Republic have undertaken the most extensive reforms in adopting legal and institutional frameworks for secured transactions, although in Lithuania financing instruments still suffer from deficiencies in formal requirements for defining collateral. The Czech Republic, Latvia, and Poland have made substantial progress in this area, having conducted major overhauls of their commercial laws on secured transactions. But in many cases there are still significant shortcomings. In Poland, for example, the time required for registration is problematic, and it takes an average of 1,000 days to enforce a contract (see http://rru.worldbank.org/doingbusiness).

Finally, Estonia and Slovenia have made only minor reforms with respect to secured transactions. Slovenia appears to be the least reformed of the EU 8, though it is introducing new provisions for collateral. But the taking of security is limited, and there is no public register to allow tracking of priorities and to alert third parties of existing charges. Box 3 provides more detailed analysis of commercial laws and their effects on factoring in the EU 8.

# **Contract enforcement**

No matter how strong a country’s commercial law, lien registration, and bankruptcy law, they will have a limited impact on credit availability if they are not enforced in a timely, predictable and uniform fashion. Progress on this front is mixed in the EU 8. Compounding this problem is the fact that assessments of this progress vary, with the EBRD reporting more favorable developments than the World Bank. Still, both institutions agree that the EU 8 have made more progress on passing laws consistent with international standards than on consistently applying them.

In 2003 the EBRD surveyed lawyers in transition economies to determine how well the law works in practice. Lawyers were presented with a hypothetical scenario regarding the enforcement of a security interest over movable tangible assets. The specific assets used as collateral were equipment and an

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**THE WORLD BANK**