Restructuring and insolvency law in Serbia

Restructuring

The Law on Insolvency (Official Gazette of the Republic of Serbia nos. 104/2009, 99/2011, 71/2012, 83/2014, 113/2017, 44/2018 and 95/2018) (“Law on Insolvency”) regulates the regular and the pre-prepared reorganisation.

Financial restructuring proceedings are primarily regulated by the Law on Consensual Financial Restructuring (“Official Gazette of RS” no. 89/2015) (“Law on Consensual Financial Restructuring”), the Rulebook on Conditions and Methods of Institutional Mediation in Consensual Financial Restructuring of Companies (“Official Gazette of RS” no. 65/2011 and 67/2011) (“Rulebook on Conditions and Methods of Institutional Mediation in Consensual Financial Restructuring of Companies”) and the Rulebook on the Content of Debt Moratorium Contracts (“Official Gazette of RS” no.21/2012) (“Rulebook on the Content of Debt Moratorium Contracts”).

Regular reorganisation plans must be filed within 90 days from the opening of insolvency proceedings.

Plans can be filed by the debtor, the bankruptcy administrator, secured creditors holding at least 30% of secured claims relative to total claims, unsecured creditors with at least 30% of unsecured claims relative to total claims, and persons owning at least 30% of the debtor’s capital.

In case the reorganisation plan is prepared in advance, before the initiation of insolvency proceedings and submitted by the debtor along with the insolvency petition, it becomes a so called “pre-prepared reorganisation plan”. Pre-prepared reorganisation plans may only be submitted by the debtor along with the insolvency petition and are regulated by specific rules of the Law on Insolvency.

Consensual financial restructuring proceedings require the debtor, or one or more creditors, to submit a request to the Serbian Chamber of Commerce. This request should identify at least two creditor banks.

Financial Restructuring

Consensual financial restructuring, a form of institutional restructuring involving the Serbian Chamber of Commerce, without any involvement of courts.

Reorganisation as a method of restructuring

Restructuring through regular or pre-prepared reorganisation regulated by the Law on Insolvency.

In restructuring through reorganisation under the Law on Insolvency, it is up to the debtor and the creditors who they involve and what classes they set up.

In consensual financial restructuring, the difference between creditor banks and other creditors is relevant. At least two domestic or foreign banks must participate. If the debtor is an entrepreneur, one bank’s participation is sufficient. Domestic development institutions can also participate, and in some cases, a domestic bank in bankruptcy or liquidation can be involved.

If, during winding-up proceedings, the appointed administrator finds that the company lacks sufficient assets to settle its debts, they must initiate insolvency proceedings before the competent court. The consequences for failing to fulfil this obligation are not explicitly stipulated in the law.

The representative bodies of the company have a general duty to act diligently, showing the care of a prudent businessperson, and with a reasonable belief that they are acting in the company’s best interest. This provision can be applied to restructuring and insolvency proceedings in the sense that the company’s representative bodies should refrain from any action which could decrease the value of the insolvent company, i.e. its assets, or in any other way prevent successful completion of the insolvency proceedings.

Other than the general duty to act diligently and in the best interest of the company, the shareholders have no specific duties in connection with restructuring and insolvency proceedings. However, shareholders owning at least 30% of shares are entitled to submit a reorganisation plan.

Insolvency

The primary piece of legislation is the Law on Insolvency.

Insolvency proceedings are set in motion through the submission of a petition for initiation of insolvency. Persons authorised to petition for insolvency are the debtor or any creditor (depending on the grounds for insolvency invoked).

The debtor or any creditor (depending on the grounds for insolvency invoked) can file a petition with the competent court. Insolvency proceeding must be opened in case of at least one of the following conditions:

• permanent insolvency – the company is unable to pay its debts within 45 days of the date they become due, or it has completely ceased all payments for a consecutive period of 30 days. Permanent insolvency is presumed where the petition was filed by a creditor who was unable to obtain satisfaction of his monetary claim by any of the means of enforcement in a judicial or tax enforcement proceeding
• imminent insolvency – it is apparent that the company will not be able to pay its debts as they become due
• over-indebtedness – the liabilities of the company exceed its assets
• failure to comply with the adopted reorganisation plan, or if the reorganisation plan was put into effect in a fraudulent or unlawful manner.

Serbian insolvency law distinguishes between two primary forms:

• Bankruptcy Proceedings: aimed at satisfying creditors’ claims by liquidating the debtor’s assets
• Reorganisation (or Pre-prepared Reorganisation): involves settling creditors’ claims according to a reorganisation plan, which may redefine debtor-creditor relations, alter the status of debtors, or employ other strategies specified in the plan.

The following types are recognised:

• secured creditors (razlučni poverilac): creditors that have a security, statutory retention right or a right of settlement on assets, and rights that are recorded in public records or registers; they have the right of primary settlement from the proceeds of the sale of such assets, or from collection of claims on which they have gained that right
• lien creditors (založni poverilac): creditors that have security on the property or rights of the company (i.e. insolvency debtor) registered in public records or registers but who, unlike secured creditors, have no monetary claim against the company (i.e. insolvency debtor) secured by such security interest
• creditors with a right of separation (izlučni poverilac): creditors entitled to request that a certain asset be excluded from the insolvency estate (e.g. since they have ownership rights over such asset etc.)
• (non-secured) insolvency creditors (stečajni poverilac): the claims of (non-secured) insolvency creditors are divided into four ranks, based on priority of their claims in terms of settlement out of the insolvency estate.

Yes, however, it is a highly improbable alternative to standard insolvency proceeding

Financial restructuring from creditor's perspective 

There is no black letter law that entitles a lender to monitor a distressed debtor that is not yet subject to insolvency proceedings more closely, but contractual terms allowing for such a close monitoring may be agreed upon. What is more, lenders may appoint a director or a member of the board of directors of the company, if the company’s shareholders agree and adopt a resolution providing for such an appointment. The lender’s appointee is then subject to the same duties and obligations as any other director or member of the board of directors.

During insolvency proceedings, lenders may monitor the company more closely. Lenders (together with other creditors) have the right to vote at the creditors’ meeting, and the number of their votes is directly proportionate to the value of their claims in comparison to the total amount of debt of the bankruptcy debtor.

The creditors’ meeting must appoint the creditors’ committee consisting of no more than seven members. The total number of members of the creditors’ committee must be odd, and one of the members is always elected among secured creditors. The creditors’ committee can exercise certain powers over the bankruptcy administrator and the bankruptcy debtor, including giving an opinion to the bankruptcy administrator about the manner of sale of the bankruptcy debtor’s assets, approving entering into a loan agreement by the bankruptcy debtor, approving the final account of the bankruptcy debtor, reviewing court records and all other documentation contained in the bankruptcy case file, filing appeals against the bankruptcy judge’s decisions etc.

There are no express restrictions on creditors extending credit facilities to a company in financial difficulties. However, certain transactions entered into by the company in a prescribed period before the insolvency proceedings begin can subsequently be challenged. Furthermore, the criminal liability of a company’s responsible person causing financial loss to that entity may apply indirectly to a creditor and its responsible person where that creditor grants a loan to an already insolvent debtor, and in that manner, causes financial loss to other creditors. If insolvency proceedings have already commenced, the bankruptcy administrator may, with the approval of the creditors’ committee, enter into loan facility agreements and related security agreements on behalf of the bankruptcy debtor in order to keep the company operating. Such loans are treated as expenses of the insolvency proceedings and enjoy priority in the distribution of insolvency proceeds, ranking ahead of any other creditors, including employees and tax offices.

All securities acquired through enforcement proceedings, or a newly created security within 60 days before the start of bankruptcy proceedings, are void. Consequently, all authorities that are in charge of keeping public records must delete such securities. In addition, other transactions that completed before bankruptcy proceedings, but which interfere with the pari passu principle, or are damaging to creditors, or place one or more creditors in a better position than other creditors, may be avoided if challenged either by the bankruptcy administrator on behalf of the debtor or by creditors:

• congruent settlement: legal transactions and actions entered into within 6 months before filing for bankruptcy proceedings, which provide security or settlement to a creditor in the manner and at the time that is in accordance with the substance of its right, may be contested if the debtor was insolvent at the time and the creditor knew or ought to have known of the debtor’s insolvency
• incongruent settlement: legal transactions and actions that provide security or settlement for one creditor which it was not entitled to request, or which it was entitled to request but not in the manner and at the time it was provided, may be contested if the transaction was entered into within 12 months before filing for bankruptcy proceedings
• directly detrimental legal transactions: a legal transaction or action of the bankruptcy debtor directly damaging the creditors may be contested if: 
  • it was entered into within 6 months before filing for bankruptcy, if the bankruptcy debtor was insolvent at the time and the counterpart knew of its insolvency 
  • the transaction was concluded after the filing of the petition for initiating bankruptcy proceeding, if the bankruptcy debtor’s counterparty knew or ought to have known that the bankruptcy debtor was insolvent or that the petition for initiating the bankruptcy proceedings had been filed 
  • the debtor’s action shall cause it to lose some of its rights or if failure of the debtor to act would result in the inability to exercise that right, while the action must have been taken, or failed to have been taken, within the last 6 months before the filing of the petition for initiating the bankruptcy proceedings 
• intentionally detrimental legal transactions: legal transactions or actions entered into or taken with the intention of causing damage to one or more creditors may be contested, if the counterparty knew of the debtor’s intention. Knowledge of intent is presumed if the debtor’s counterparty knew that there was a threat of insolvency against the debtor and that the action would damage the bankruptcy creditors. Such actions may be subject to contestation in case they have been taken within 5 years before filing of the petition for initiating bankruptcy proceedings
• transactions and actions with no, or negligible, compensation: legal transactions and actions of the bankruptcy debtor that are entered into within 5 years before filing for bankruptcy proceedings, either for no compensation or for a negligible compensation, may be contested.

Finally, certain actions of a distressed debtor may be refuted regardless of whether the bankruptcy proceedings have been initiated. For example, every creditor whose claim is due for payment is entitled to refute a legal act of its debtor taken to the detriment of creditors. A legal act shall be considered to have been taken to the detriment of creditors if, due to it, the debtor is left without sufficient means to satisfy the creditor’s claim. The term “legal act” also includes an omission due to which the debtor has forfeited a substantive right, or incurred a property obligation for itself. An action/omission of the debtor may be refuted if, at the time of the action/omission, the debtor was aware or could have been aware that such action would do harm to its creditors, and if a third person benefitting from the legal act was aware of the fact, or could have been aware of it. Refuting may be done either by filing a lawsuit or raising an objection in ongoing proceedings.

Non performing loans

Serbian law prescribes a procedure for the transfer of any claim unless the claim is non-transferable. Claims are non-transferable if:

• there is a non-assignment clause in the underlying agreement
• the law so provides, or
• the claim is personal in nature and cannot be transferred to another person.

For the valid transfer of a transferable debt, the debtor must be notified but need not consent, except where the transferee is a non-Serbian lender. If a notification is not made, the debtor may repay the transferor and obtain a valid discharge; the transferee would have no rights against the debtor in that scenario.

Only entities with a banking licence are entitled to buy loans. However, this prohibition only applies to Serbian transferees with some exceptions (see the answer to Q3 below). Since non-performing loan (NPL) claims are, by definition, always due (maturity of the claim is one of the exceptions mentioned below), they can be transferred to a non-licensed legal entity. The transfer of a lender’s receivables under a cross-border loan agreement concluded between a non-resident lender and a Serbian borrower can be transferred to another lender (as transferee) and requires notification to the Serbian borrower; such a change of lenders is subject to registration with the National Bank of Serbia.

Sub-participation agreements are allowed under Serbian law, and other risk-sharing procedures may be available depending on the circumstances. Sub-participation is effected by an agreement between the existing lender and the sub-participant whereby the sub-participant assumes the benefits and risks associated with a loan granted by the existing lender. This means that the sub-participation does not affect the relationship between the original lender and debtor, and that the existing original lender remains liable to the debtor for obligations from the underlying credit agreement. The ancillary rights and securities are not assigned to the sub-participant, due to the fact that the sub-participation arrangement only creates a contractual obligation between the existing lender and sub-participant.

Generally speaking, in order to purchase, sell or collect debts in Serbia, a banking licence is required. However, pursuant to the National Bank of Serbia’s Decision on Risk Management of Banks, a bank may transfer receivables arising from loan agreements concluded with legal entities, registered entrepreneurs and farmers only to another (licensed) bank, except if:

• the relevant claim is due, or
• a claim has not yet become due, but it is considered and classified as problematic in terms of the decision on classification of balance sheet assets and off-balance sheet items. In this case the bank may transfer these receivables to a non-licensed legal entity.

In any event, a bank may not sell receivables under loan agreements concluded with natural persons to a non-licensed entity.