Restructuring and insolvency law in Bosnia and Herzegovina

Bosnia and Herzegovina is divided into two entities, the Federation of Bosnia and Herzegovina (FBiH) and Republika Srpska (RS), and one self-governing district (BD), each with its own legal regime. Answers in this guide on insolvency and restructuring proceedings are based on two main pieces of legislation: the FBiH Law on Insolvency Proceedings and the RS Law on Insolvency. Further provisions regarding restructuring are found in the relevant company laws of FBiH and RS, and the Law on Financial Business Operations applicable in the territory of FBiH. 1 There is no equivalent law in RS, rather a law defining deadlines for payment of financial obligations in business operations. However, as this law does not refer to restructuring/insolvency, it will not be further discussed in this questionnaire.  

An insolvency proceeding is initiated by a written petition of either the debtor or any creditor who has a legally recognised interest to conduct such proceedings. The creditor is obliged to show, by attaching the appropriate documentation, that its claim, and the inability of the debtor to make payments, is probable.

After the opening of an insolvency proceeding, a reorganisation plan may be drafted that deviates from the provisions of law governing the liquidation and distribution of the insolvency estate. The insolvency debtor may file a reorganisation plan together with a proposal to open insolvency proceedings. 

In FBiH, after the opening of insolvency proceedings, the right to file a reorganisation plan with the respective court is granted to the insolvency administrator and to the insolvency debtor until the final hearing at the latest. 
In RS, the insolvency debtor may also submit an insolvency plan during the insolvency proceedings if it could not do so when submitting the proposal for opening the insolvency proceedings and if it obtains the consent of the assembly of creditors. It is also explicitly regulated that restructuring proceedings can be initiated at the proposal of the debtor or at the proposal of the creditor if the debtor agrees with such proposal. (If the creditor initiates restructuring, the consent of the debtor must be submitted along with the proposal.) 

The debtor’s inability to make payments, i.e. if the debtor is unable to meet its accrued and outstanding monetary liabilities for a period of 30 days (FBiH) or 60 days (RS). In RS, it is also deemed that a debtor is unable to make payments if its account has been blocked for 60 days continuously. 

In addition, an insolvency proceeding may also be commenced due to a debtor’s threatened inability to make payments. However, in this case only the debtor may file a petition to initiate insolvency proceedings.

Insolvency proceedings are conducted in two phases: preliminary procedure and insolvency proceeding. 

Preliminary procedure

The main purpose of the preliminary procedure is to determine whether the conditions for the opening of insolvency proceedings are satisfied, i.e. the insolvency of the debtor; whether there is sufficient basis for the petition; whether there are sufficient funds to cover the costs of insolvency proceedings; and whether the current operation can be maintained.

Insolvency proceeding

The insolvency proceeding is conducted for the purpose of satisfying the debtor’s creditors collectively through the liquidation of its property and distribution of the generated proceeds to the creditors.
In the course of an insolvency proceeding, the reorganisation of the debtor may also be conducted for the purpose of defining the legal status of the debtor and its relationship with creditors, and especially for the purpose of maintaining its business operations. 

Restructuring procedure

In RS, apart from the insolvency proceeding, a restructuring procedure also exists. This is carried out in order to regulate the legal position of the debtor and its relationship with creditors, in order to continue performing its activities; such restructuring procedure will be completed within 5 months from the date of its opening.

There are four categories of persons acting as creditors involved in insolvency proceedings:

• Insolvency creditors (stečajni povjerioci): creditors who at the time of the opening of insolvency proceedings have established a claim towards the insolvency debtor
• Creditors of the insolvency estate (povjerioci stečajne mase): creditors who during insolvency proceedings acquire a claim towards the insolvency estate 
• Extraction creditors (izlučni povjerioci): persons who have the right to extract an asset from the insolvency estate as the latter does not belong to the insolvency debtor, and who are not considered as insolvency creditors
• Secured creditors (razlučni povjerioci): creditors with a claim secured by an asset included in the insolvency estate that are authorised to request separate settlement of their claim from the subject of the security.    

According to their type of claim, creditors are classified in payment priorities:

• creditors of higher payment priority
• creditors of general payment priority, and 
• creditors of lower payment priority. 

Once the inability to make payments occurs, a debtor’s authorised representatives are required to file, forthwith, a proposal to open an insolvency proceeding. The proposal must be filed within 30 days (FBiH) or 60 days (RS) of the day the inability to make payments occurs. The authorised representatives are required to compensate the legal entity for the loss of property caused by their legally binding actions taken after the inability to make payments occurs, unless they can prove that these actions were taken with due care and diligence. 

The responsible person of the insolvency debtor shall be fined with a monetary penalty in the amount of BAM 500-1,700 (approx. EUR 250-870) in FBiH and BAM 10,000- 20,000 (approx. EUR 5,113-10,226) in RS, if he/she does not submit the proposal for the opening of insolvency proceedings. 

In addition to the considerations under item 6 above, a director is always required to act in accordance with the company’s best interests. Should a director violate this obligation, the company is entitled to claim damages from the director. In FBiH, fines ranging from BAM 1,500-3,000 (approx. EUR 767-1534) may be imposed if the director of an illiquid company makes any payments other than those necessary for the ordinary course of business.

Furthermore, the director is obliged to take all necessary measures to ensure the company’s liquidity and to manage the assets and liabilities of the company so that it is capable of performing all its due obligations. Please note that the measures and actions mentioned are explicitly regulated only in FBiH, i.e. not in RS. 
Further obligations of the representative bodies are regulated in the Law on Financial Business Operations of FBiH which is explained in detail in point 12. 

In both FBiH and RS, an insolvency administrator is generally appointed in the court order for the opening of an insolvency proceeding. From that moment on, the debtor’s right to administer and dispose of assets belonging to the insolvency estate, as well as the rights of the representative bodies’ proxies, are transferred to the insolvency administrator. If the debtor disposes of assets after the opening of an insolvency proceeding, such actions have no legal effect, except for those for which the general rules on the protection of trust in land registers and other public registers apply. However, during an insolvency proceeding the representative bodies have duties of disclosure and cooperation in order to assist the insolvency administrator with the fulfilment of its duties. If the representative bodies refuse to disclose and cooperate with the insolvency administrator during the proceedings, the court may order coercive measures against the representative bodies. 

In a case of insolvency, administration of the legal entity is transferred primarily to the insolvency administrator, supported by the insolvency judge, assembly of creditors and board of creditors, each within their competence defined by the applicable legislation. Therefore, once insolvency proceedings are opened, shareholders are effectively stripped of the decision-making powers they typically exercise within the shareholders’ assembly.

In terms of legal transactions between shareholders and the legal entity, note that the legal transaction by which security is provided for the claim of a shareholder of the company for repayment of a loan replacing capital can be annulled if the action was taken in the 5 years immediately before submission of the proposal for the opening of insolvency proceedings or after that deadline. Legal transactions by which the claim of a shareholder of the company for repayment of a loan replacing capital is secured may also be annulled if the action was taken in the 1 year (FBiH) or 3 years (RS) before submission of the proposal for the opening of insolvency proceedings or after that deadline.

Personal liability

Regarding the potential personal liability of shareholders: 

• in RS, shareholders may be personally liable to third parties for the company’s obligations if they use the company for illegal or fraudulent purposes or if they dispose of the company’s property as their own property 
• in FBiH, in addition to the above, a shareholder will be personally liable if it uses the company to achieve a personal goal that is not in line with the goals of other shareholders or the company, or if it uses the company to damage its own creditors, affect the company’s assets in its favour or for the benefit of third parties, or influence the company to assume obligations even though the shareholder knew, or should have known, that the company is not or will not be able to perform its obligations.   

Please see our response under item 9. 

If insolvency proceedings are opened against a company whose shareholders are personally liable for the company’s obligations, claims against shareholders of the company based on their personal responsibility, arising from the provisions of the Insolvency act or from any other law during the insolvency proceedings, may be made only by the insolvency administrator.

In addition, shareholder loans are considered as capital replacements if such loans are granted at a time of crisis instead of procuring fresh capital. Such loans have the lowest priority in settlement since they are treated as capital contributions.  

Generally, shareholders can initiate liquidation proceedings if the legal entity is capable of meeting its existing obligations. However, if the debtor is unable to meet its accrued and outstanding monetary liabilities (see point 3 above), shareholders cannot decide to voluntarily liquidate the company and solvent liquidation is not an alternative to regular insolvency proceedings. In other words, if shareholders initiate a liquidation procedure in an entity where conditions for conducting the liquidation procedure have not been met, the liquidator shall within 15 days submit a proposal to suspend the liquidation procedure and open insolvency proceedings. 

The relevant laws do not provide for specific preventive restructuring. However, the Law on Financial Business Operations of FBiH provides for certain obligations of the relevant bodies in order to maintain liquidity and capital adequacy in a legal entity. 
A company is deemed to be illiquid if it does not meet its short-term financial obligations within a period of 60 days after such obligations become due, provided that the amount due exceeds the amount equal to 20% of its total short-term financial obligations determined in its financial report for the previous year. In addition, the law stipulates that illiquidity also exists if the company fails to pay salaries and the corresponding taxes and social contributions within a period of 30 days after such obligations become due.

In the above-mentioned cases, the company is only allowed to make the payments necessary for ordinary business such as: 

• procurement of goods and services for ordinary business activities
• operational costs (electricity, water and similar)
• salaries
• taxes, and 
• administrative fees and costs related to preparation of the documents necessary for financial consolidation and restructuring. 

In other words, the company is not allowed to transfer receivables to third parties, to provide loans, distribute profits, to procure automobiles or to incur costs associated with hospitality and accommodation. 
In the case of illiquidity, the company is obliged to carry out financial restructuring measures within a period of 60 days with the aim of becoming liquid.

The success rate depends on several conditions such as the value of the insolvency estate, the number of claims by the debtor’s employees, the number of payment priority creditors etc. 

In other words, the payment of insolvency creditors whose claims are accepted by the insolvency administrator is conducted according to a priority hierarchy; and unless the higher priority insolvency creditors are paid in full, lower priority insolvency creditors will not receive even partial payment. In most cases, financial institutions are secured creditors with claims over real estate or other property of a greater value, and they are the ones who have the best success rates. Satisfaction of other creditors depends on a case-by-case basis, and there are no official statistics regarding their success. In our experience to date, we have learned that such rates tend to be very low and that the proceedings tend to last a long time.