New Liquidation Procedure Act of Republika Srpska

The new Liquidation Procedure Act of Republika Srpska has entered into force on 12 October 2019 ("the Act"). This law introduces the shortened voluntary liquidation procedure for the first time in Bosnia and Herzegovina ("B&H"). Generally, the nature of the liquidation procedure remains unchanged - it is a procedure implemented over business entities and serves the purpose of full and complete settlement of all company creditors by cashing in company assets. Once creditors are settled, the remainder funds are distributed amongst the company shareholders in proportion to their capital contributions.

The business community of this B&H entity¹ , Republika Srpska ("RS") has rightly, via the RS Chamber of Commerce and Industry, initiated introduction of this Act since in practice this procedure has been extremely long-lasting, complicated, expensive and burdensome (and remains a problem in the remainder of B&H).

Therefore, this brief review focuses on the new legal concept of voluntary shortened liquidation which is the most important novelty of the Act.

How it works and what are the positives 

Per Articles 51 to 56 of this Act, the process starts by the competent company corporate body introducing a liquidation decision based on which the proposal for initiation of the shortened voluntary liquidation is submitted. Such proposal is supported by a set of prescribed documents. 

In contrast to the previously applicable law (and the currently envisaged standard voluntary liquidation procedure), the liquidation judge in this procedure introduces a resolution on simultaneously opening and closing the voluntary shortened liquidation (after determining the required conditions are met and documents submitted). Subsequently this resolution is registered in the Registry of business entities and once it is fully legally binding, the company is deleted from the Registry.

As it can be seen, the requirement to appoint a liquidation administrator has not been regulated for this specific type of liquidation procedure. Therefore, it is reasonable to expect that this change will result in the decrease in total costs of implementing this procedure. In addition, generally speaking, it can be argued that the procedure will be shortened considering that the liquidation judge brings a resolution on opening and simultaneous closing of the procedure (assuming the appeal procedure and settlement of any outstanding debts will also be done in a quick and efficient manner).

Possible downsides

As stated above, the proposal to initiate the shortened liquidation procedure must be supported by a number of prescribed documents which, inter alia, include (i) the notarised statement of the shareholder(s) confirming all employee and creditor obligations have been settled and (ii) tax and indirect tax authorities' certificates confirming there are no outstanding direct and indirect tax obligations. 

These two pieces of documentation are particularly interesting for reasons as follows.

Under Article 55 of the Act, persons/entities issuing the statement regarding creditor and employee obligations shall be jointly (without limitations) liable for a period of three years after the company is deleted from the Registry. This liability is registered in a special registry with the particularities regarding the shareholder company/person. 

It can be argued that the unlimited joint liability imposed by this provision of the Act is burdensome, particularly for shareholders/investors that decided to do business via a limited liability company, whereby after the company ceases to exist, such shareholders are registered (and "tied" without limitations) in a separate registry as liable for obligations of a company that has already been deleted. 

Thus, this provision is arguably overly burdensome and in practice distracts from the aim of the new Act – it is unlikely to positively influence and stimulate the business climate in RS, nor will any concrete changes be made to the easier investing and opening and closing of new companies. On the other hand, it can be argued that entrepreneurs should carry the risk of their investments and be liable for the created company obligations – company liquidation can and should only be initiated once all creditor and employee obligations have been fully settled.  

Furthermore, as specified above, it is necessary to also submit the direct and indirect tax authority certificates confirming there are no outstanding obligations in this regard. Obtaining these certificates (particularly from the direct tax authorities) has in practice so far proved to be a long, inconsistent and exhausting procedure which generally delayed the liquidation procedure itself. Therefore, it is reasonable to expect that the competent tax authorities will act in the spirit of the legislator's aim behind this Act (to ensure a quick and efficient company liquidation procedure) - otherwise, the procedure loses its purpose.  

In conclusion, the new RS Liquidation Procedure Act (and particularly, the shortened voluntary liquidation procedure explained herein), should be considered as a step forward to achieve a more efficient and economically effective liquidation procedure (acting under the assumption that the participating administrative bodies and courts will act accordingly). Although it can be stated that certain provisions of this Law are (unnecessarily) burdensome, the newly introduced Act has the potential to positively impact the business climate in RS as well as to stimulate the perception of easier business dealings in this entity. 

_{¹ Bosnia and Herzegovina consists of two entities, Federation of Bosnia and Herzegovina and Republika Srpska, as well as an independent administrative unit, Brčko District of Bosnia and Herzegovina. Legislation regulating this procedure is introduced at entity level.}