Amendments to the Law on Bankruptcy Proceedings to shorten procedures – Issue of needless expenses remains unsolved
The National Assembly of Serbia adopted the Law on amendments to the Law on Bankruptcy Proceedings in mid-December, after nearly three years of working on this document.
As was said during its preparation and after its adoption, the main purpose of the amendments is to provide a more secure repayment to creditors and to enable a reduction of costs and the time needed for the bankruptcy proceedings to be carried out. This is especially important considering that it is not rare for bankruptcy proceedings in Serbia to take up to two decades in certain cases, whereas tens of thousands of former workers or those still formally employed at these companies remain uncertain as to whether the money owed to them by the companies is ever to be repaid.
Another important aim of the new measures is to improve the position of secured creditors. From now on, creditors with mortgages or other security interests on the property of the bankruptcy debtor will have the right of having a representative in the Board of Creditors, which only non-secured creditors used to have. They will thereby be provided with an insight into the bankruptcy proceedings and the ability to take part in it.
The amendments also mean that property under mortgage will be able to be leased with agreement from a secured creditor in the bankruptcy proceedings alone, or that the property can be sold without being advertised publicly. Until now, let us remind, this was a discretionary right of the bankruptcy supervisor. Furthermore, the obligations of the bankruptcy supervisor are specified and the board of creditors can now dismiss the bankruptcy supervisor at any stage of the procedure without citing a specific reason.
Another new feature is the manner of valuation of the property of the bankruptcy debtor, which is to be performed by licensed valuers, and the idea is to thereby contribute to greater legal security of creditors and accelerate the procedure of monetization of the property based on market valuation.
Furthermore, a special rule of terminating the restraint on enforcement on the property of the bankruptcy debtor under mortgage or pledge rights is implemented, along with providing a secured creditor with the right to sell it in line with the rules of a mortgage foreclosure sale.
If the secured creditor fails to sell the property within nine months, it is returned to the bankruptcy supervisor to try to sell it through bankruptcy proceedings. The deadline period has been extended from six to nine months “as the practice shows that the property sale deadline period of six months is too short”, one of the rare amendments to the law the petitioners agreed to adopt.
Effects in practice
To what extent, however, will the said amendments truly enable the meeting of the main goals of the amendments to the regulations, especially those pertaining to the duration of the procedure and the issue of expenses?
– The amendments will certainly enable a better control of the activities of bankruptcy supervisors, which could lead to a quicker monetization of the property in the case of bankruptcy. On the other hand, the preclusive deadline for filing complaints about the reorganization plan has been implemented, which means that reorganization plans cannot be changed before the voting hearing, which used to prolong procedures in the past – the National Alliance for Local Economic Development (NALED) explains for our portal.
The NALED, however, warns that the current amendments do not fully protect the interests of creditors and that it will be hard to achieve the planned reduction of costs of bankruptcy proceedings. They also warn about the way bankruptcy supervisors are appointed and the transparency of data in bankruptcy proceedings.
As the association says, although it is still possible to prepare bylaws which would simplify the procedures of bankruptcy legislature and accelerate the proceedings, they emphasize that there was enough time for a quality law to be prepared and add that, for certain provisions, the law has not been amended in the way that would fully protect the interests of creditors.
They pointed this out to the Ministry of Economy, they say, but it was not ready to accept those interventions.
The NALED warns in particular that the planned reduction of costs will not be easy to achieve.
– The primary aim of these amendments is to improve the repayment towards creditors, but the costs of procedures will not be lower. Quite the contrary – the NALED emphasizes and clarifies that an increase in the total costs of bankruptcy proceedings will certainly be caused by the fact that property valuers will have an important role in various phases of the procedure and the fact that “unnecessary costs burdening the procedure, such as various notifications in high-circulation dailies distributed across Serbia, have not been eliminated”.
Position on Doing Business list
The state was announcing the Law on amendments to the Law on Bankruptcy Proceedings for a long time as a necessary step towards a further improvement of Serbia's position on the World Bank's Doing Business list. This institution used to complain about insufficient repayment to creditors in bankruptcy proceedings and the amounts spent on court fees and other charges.
According to their estimates, creditors spend as much as 20% of total amounts owed to them by the company in bankruptcy on court fees and other charges, whereas, in developed countries, the expenses are two times smaller. At the same time, creditors in Serbia manage to collect only a third of their claims, far less than in developed countries.
Although the amendments were supposed to be adopted before May, when the World Bank prepares an overview of the reforms carried out, the NALED still believes that they were adopted not a moment too soon when it comes to Serbia's position on the list. They add that this should not have a negative impact on Serbia's position, but still warn that “Serbia might lose points in certain indicators in the field of bankruptcy proceedings”.
– The NALED's petitions for amendments to the Law concerning an improvement of Serbia's position on the World Bank's Doing Business list were not accepted – the organization says and specifies that “the advance sum for the initiation of bankruptcy proceedings and the manner in which it is determined have not been defined, and the sum is therefore determined by a rough estimate made by the bankruptcy judge, without parameters defined by law”.
They also warn that it has not been enabled for the bankruptcy supervisor to be chosen by all bankruptcy creditors, nor has the reporting by bodies involved in the bankruptcy proceedings and the bankruptcy supervisor and the transparency of data in bankruptcy proceedings been improved.
The eKapija portal did try to get a more detailed explanation of the adopted amendments from the Ministry of Economy. As of the publication of this article, we had not received answers to the questions sent 14 days before.