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Preferential legal treatment for creditors

As the global economic crisis affects Albania and more borrowers default on loans, lenders are becoming increasingly concerned with the provisions of Albanian law on the preferential rights of creditors in enforcement procedures.

There are two slightly different priority lists set out in Albanian legislation. The Civil Code provides one preferential priority list for compulsory enforcement procedures against individuals (non-bankruptcy related proceedings); and the Bankruptcy Law provides a preference list that must be applied in respect of bankruptcy procedures against companies. In this article we give a brief overview of preferences applied in a compulsory enforcement procedure.

According to Article 605 of the Albanian Civil Code, in the order of precedence for payments to creditors, claims arising out of financial transactions completed with securing charges for the price of purchase of a specific object take priority.

Interestingly the Civil Code provides that claims deriving from salaries or through service relations, and any interest on late payments accrued thereon for a maximum of 12 months, rank second in priority.

However the Republic of Albania has ratified the Protection of Workers' Claims (Employer's Insolvency) Convention, 1992 according to which claims of employees arising out of employment agreements should rank higher than any other claims. As the ILO Convention postdates the Civil Code the discrepancy that it has with the Civil Code is understandable and does not present much of an issue. In any event, under the Constitution of Albania ratified international conventions take priority over laws of Parliament: therefore it would follow that the ILO convention ranks higher.

The following claims are then ranked below that according to this hierarchy:

  1. Remuneration arising out of death and/or ill-health;
  2. Consideration for disposal of intellectual property that was due to be paid in the last two years from the date on which the enforcement takes place;
  3. Taxes, and compulsory insurance policies to be taken out by the State Insurance Institute;
  4. Claims secured with a securing charge;
  5. Salaries for periods earlier than 12 months
  6. Consideration to be received by an agent pursuant to an agency agreement.
  7. Claims secured by a possessory pledge or mortgage to the extent of the value of the pledged or mortgaged property;
  8. Expenses incurred in respect of court cases and issuance of executive court orders for the purposes of guarding a property during the enforcement procedure to the extent of the value of such property;
  9. Unsecured loans extended by a bank;
  10. Claims arising out of certain agricultural agreements;
  11. Unsecured creditors.

Creditors secured with a securing charge or with mortgages may indeed agree to subordinate their claims towards each other with the law expressly supporting such practice. A question that crops up often, however, is whether unsecured creditors would be able to subordinate their claims towards each other by an agreement and whether bailiffs would recognise and enforce such an agreement.

Ilir Mustafaj, First Instance Court Judge, and Endrit Shijaku of Wolf Theiss

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