Legal Reform in Georgia

Georgia has continued to implement reforms to its legal system in recent years.

However, further reform efforts are needed in various sectors, with this is mind the Banks Legal Transition team’s approach to legal reform work in Georgia is broadly designed to continue and deepen EBRD’s support to private companies to enable them to strengthen their business and governance model, expand their markets and enhance their competitiveness. With this in mind the bank has published or will shortly be publishing results of assessments undertaken relating to secured transactions, corporate governance, public procurement and Insolvency Office Holders.

 

Access to Finance

Applicable legislation in the sector includes the Civil Code of Georgia, dated 26 June 1997; the Law on Public Registry, dated 19 December 2008; and the Law on Payment Systems and Payment Services, dated 1 July 2012:
 
A modern secured transactions framework for taking pledges over movables was first introduced in 2005 by amending the Civil Code. The new provisions provided for flexible, efficient and modern legal means for the creation, perfection and enforcement of a pledge. Since then the Civil Code saw several amendments of the provisions for regulating the taking of both mortgages over immovable and pledges over movable property and rights (e.g. 2006, 2007 and 2008) with the last ones taking place in 2011 (9 March 2011 and 1 July 2011).
 
The law now allows for a general definition of collateral and of the secured debt (a credit line of a revolving loan can now be secured). Notarisation of the charge agreement is not required, but parties may find that they have an interest in executing the agreement as a notarial deed in order to benefit from expedient enforcement procedures. The amendments in 2011 allow parties to limit the right to pledge only to parts of movable things or rights (non-material property wealth). When the object of pledge is described generally as “all the movable assets of the pledge”, it is not necessary to describe these assets in the pledge agreement. The 2011 amendments also provide that the right to pledge automatically extends to the fulfilment of a pledged claim or insurance payment, even if such provision is not provided for by the parties in the agreement. The law also now regulates in detail the effects the processing and mixing of the pledged assets have on the pledgee’s rights.
 
In 2014 the EBRD conducted an assessment on secured transactions which examined the availability of collateralising different types of assets regardless of the underlying legal instruments used to achieve the establishment of secured creditor’s rights. In addition to the classic security interests (pledges and mortgages the assessment also covered usual types of quasi security, such as sale and lease back transactions. The assessment also covered related issues such as enforcement and syndicated lending. The links below take you to the assessment results for Georgia.
 
 
 

Capital Markets

The Georgian Financial Supervision Agency, established on 24 April 2008 under the Organic Law on National Bank, is the sole entity responsible for supervising the financial sector. It replaced both the National Security Commission and the State Supervisory Service of Insurance. The Agency is in charge of supervising the banking sector, securities markets and insurance sector, as well as issuing licences to and regulating financial institutions, including commercial banks.
 
The Georgian Stock Exchange (‘GSE’), designed and established with the help of USAID in 1999, is the only organised securities exchange in Georgia. The legal framework seems to be appropriate in relation to the size and level of activities of the Georgian capital market; however, there is a need for improvement in the legal framework in relation to money markets, including repo transactions and derivatives.
 
As regards the Georgian money market, the National Bank of Georgia (‘NBG’) plays an active role in the Georgian domestic money market, in particular interbank lending, and develops currency policies through its monetary policy committee. In relation to applicable legal framework it is worth noting that in 2011 the Regulation on repo operations was repealed and at present no regulation exists that specifically addresses repo and reverse repo operations. Moreover, Georgian law does not have a clearly defined concept of netting and netting arrangements. The recently adopted law on Payment Systems and Services refers to the concept of netting, under this legislation close-out netting is viewed in the context of enforcement of financial collateral. The applicability of the law on Payment Systems and Services to over-the-counter derivative transactions documented by a master agreement seems to be questionable and certainly untested.
 
 

Contract Enforcement and Judicial Capacity

Georgia's judiciary comprises a three-tier system of courts of general jurisdiction, which hear all criminal and civil matters, including commercial cases. There are no specialist chambers for commercial or other matters at first instance. Appeal courts and the Supreme Court have general civil chambers. Responsibility for management of the judicial system is vested in the High Council of Justice, which is an independent authority. This body is also responsible for professional development and qualification of judges.
 
The EBRD Judicial Decisions Assessment 2011 found the quality of court judgments in commercial law matters in Georgia to be among the best in the Commonwealth of Independent States. Factors adversely affecting the quality of court decisions included certain gaps in commercial areas such as competition law, as well as the judges’ high caseload. In addition, it was considered that judges would benefit from further judicial training in commercial law and market practice. Implementation of commercial law decisions was considered to be very effective. Even so, there remains a backlog of unenforced decisions and certain inefficiencies in the functioning of enforcement agencies. The recent introduction of a dual system of private and government bailiffs is aimed at raising enforcement standards.
 
 
 

Corporate Governance

The Corporate Governance Code for Commercial Banks was developed by the Association of Banks and adopted in 2009. It includes a set of recommendations on shareholders rights, supervisory and management boards, corporate secretary, internal control and risk management, information disclosure and transparency, conflict of interests and corporate governance of holdings. Its recommendations are meant to be applied under the so called “comply or explain” mechanism, according to which banks are required to comply with the proposed recommendations or to explain the reasons for such non-compliance. A number of banks have signed up to the code but none has so far published any “comply or explain” statement, or otherwise published any reports in relation to the code. The 2007 EBRD assessment on corporate governance showed Georgia being in “very low compliance” with the OECD Principles of Corporate Governance, showing a number of shortcomings in all areas under consideration.
 
 
 

Debt restructuring and bankruptcy

The principal legislation governing the law on insolvency in Georgia is the Law on Insolvency Proceedings (the "Law on Insolvency") dated 29 June 2012, which applies to corporate entities and sole traders. It can be initiated by debtors that are cashflow insolvent or that have encountered the threat of imminent insolvency. Certain new provisions in the Law on Insolvency, which relate to the application of new electronic insolvency case management systems, will only come into force from 1 January 2013.
 
The main law regulating insolvency proceedings for businesses (including individual entrepreneurs) is the Law of Georgia on Insolvency Proceedings (LIP). Additional provisions with respect to entrepreneurs are found in the Law of Georgia on Entrepreneurs. Based on the results of the assessment, a partly developed legal framework appears to exist for the IOH profession in Georgia, which prima facie displays a number of strengths. Nevertheless, such framework would benefit from further improvements to address certain important areas of weaknesses and thus improve IOH capacity and performance.
 
 
 

Electronic Communications

The key primary legislation is the Law on Electronic Communications of 2005 (amended up to 2011). To get a clear idea of regulation of the sector, however, this law must be must read in conjunction with the Law on Broadcasting and other multi-sector legislation that impacts the sector. Sector legislation is largely aligned with the main requirements of the European Union (EU) 2003 framework, including the important areas of regulatory independence, general authorisation, market analysis, designation of significant market power, imposition of remedies, enforcement, interconnection, consumer protection and management of scarce resources. Some aspects of the framework, however, are still not yet fully aligned, including universal service and rights of way.
 
The EBRD does not currently have direct investments in the sector in Georgia; however the presence of a strongly EU-reflective legal and regulatory framework makes the overall environment for the sector attractive for investment, promotes broader competitiveness across the economy and aids social development.
 
 
 

Energy and resource efficiency

The Law of Georgia on Electricity and Natural Gas of 1997 (with 2005 and 2007 amendments) is the centrepiece of the country’s legal framework in the energy efficiency and renewable energy sectors.
 
There is no dedicated law on energy efficiency in Georgia. The country has received technical assistance with the drafting of a general energy efficiency law in 2007 but the draft has not been publicly released or submitted for consultation.
 
At present, Georgia does not have any primary legislation dedicated to renewable energy either, though aspects relevant to renewables exist in the energy legislation, as hydro power has long been the most important electricity source in the country.
 
 

Energy legal and regulatory reform

The Ministry of Energy has primary responsibility over policy in the energy sector.
Specifically, the Ministry of Energy is in charge of drafting the national energy
policy and submitting it to the Parliament for approval, and for developing and
implementing short-, medium- and long-term strategies and priorities for the power
sector of the country.
In September 2007, the gas sector was partly reformed through revision to the
Law on Electricity and Natural Gas. The law authorises the Ministry of Energy
to take a decision on deregulation or partial deregulation of the gas market, which
it did by Order No. 69 (25/29/2007). By 2008, Georgia’s natural gas sector, with the exception of the main pipeline system, was largely privatised.
 
The EBRDs 2010 assessment was its first conducted in the energy sector, the results for Georgia are detailed below.
 
 
 

PPP/Concessions

The Georgian Law (Law of Georgia "On the Procedure for Granting Concessions to Foreign Countries and Companies") was adopted in 1994.
 
In addition, numerous government statements contain an implicit general policy framework for improving the legal environment and promoting PPP in Georgia.
 
The 2012 EBRD Concession/PPP Laws Assessment (The “2012 Assessment”) found Georgian legislation to be in low compliance with international standards. The Assessment revealed that the Law has much room for improvement as far as its scope of application is concerned (see Chart 1). In particular, concessions are defined as "long-term leasing agreements" and seem to be limited to natural resources and activities related thereto. In fact, strictly speaking the Law has rather limited applicability to PPP in its common sense. Furthermore, the Law does not clearly define a Contracting Authority and as one can see from its title domestic investors are discriminated against. The Law provides for the adoption of a list of objects that can or cannot be subject to concessions but no such list could be identified.
 
 
 

Public Procurement

The current Public Procurement Law (PPL) was adopted in 2009 and introduced eProcurement tools and procedures in Georgia. The State Procurement Agency (SPA) was established in 2012 as a national public procurement regulatory authority in Georgia.
 
The 2013 EBRD assessment revealed that the Georgian institutional framework needs further development, as currently all procurement related functions, including operational central purchasing are handled by the SPA which may bring accusations of a conflict of interest between different institutional functions; the DRB should be reorganised into an independent review and remedies body, in particular. Tendering based on reverse auction is not suitable for all types of procurement, specifically complex projects. In order to minimise the number of direct contracts awarded in Georgia on the grounds that e-auction is not suitable for it a two stage system of tendering and request for proposals could be introduced into the Georgian eProcurement system.