article by Carmen Peli, PeliPartners partner and head of the Banking & Finance
Legislation to support corporate financing needs to be adapted to the current realities of the lending market to mitigate risk and support the full potential of financing, says an analysis by law firm PeliPartners.
"Some legislative frameworks have failed to keep pace with the development of the lending market and often end up holding back the potential of a financing. This is the case of the Company Law no 31/1990, which, more than 30 years after it entered into force and despite countless amendments, is not adapted to the current business realities," explained Carmen Peli, PeliPartners partner and head of the Banking & Finance.
PeliPartners' analysis shows that although the economic context is not favourable, banks are recording positive trends in the area of corporate financing. Energy, agriculture and construction are among the areas benefiting from significant financing, while other areas are in the focus of banks because of their high growth potential.
The need for working capital financing is growing amid rising inflation and production costs. In this respect, banks are also recommending less popular lending methods, such as factoring, which reduce a company's risks and costs.
Legislation that has not been adapted to the current needs of the credit market translates into risks that companies have to take or avoid through complicated legal structures.
Companies are regulated exclusively as individual entities, without a clear legislative framework allowing them the possibility of offering or benefiting from the support of the group of which they are part , which impacts on the activities of the groups of companies from a broader investment and operational perspective.
Thus, in many transactions banks provide financing to groups of companies, taking into account consolidated financial statements and aggregated business prospects or plans. The parent company may seek to obtain financing on more financially advantageous terms for several of the companies it controls which are either pure project companies or operate in synergy with other companies in the same group.
"It is natural in these circumstances that the collateral package agreed with the bank includes assets held by several companies, for the creation of which decisions of several companies in the group are therefore necessary. However, the Company Law regulates conflicts of interest both for directors and for associates or shareholders who vote in company bodies - these rules on conflicts of interest should be revised to allow group financing to be carried out swiftly and without artificial risk", explained Carmen Peli.
Another example concerns the financing of company acquisition transactions. The Company Law contains a prohibition on lending to, or providing guarantees for, the acquired company. For this reason, in practice, company acquisition financing transactions can have a complicated structure, with both banks and the buyer (debtor) taking risks, which increases the cost of this type of financing. By clarifying and limiting the prohibition to certain types of transactions or companies, or by setting up a list of well thought-out exceptions, acquisition financing can benefit from easier to implement, lower-cost structures. Moreover, in many EU Member States the applicability of this restriction is expressly limited by law.
PeliPartners' analysis shows that, in this context, legislation should provide for the concept of a group by regulating the relationship between affiliates, remove restrictions on the collateral that can be used in acquisition financing, limit the liability of members and directors for intra-group transactions, and clarify the scope of their liability.
Amending the Company Law is a constant concern for both legal practitioners and the business community, and work is ongoing on a set of legislative proposals to truly modernise the legislative framework.