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Karanovic & Nikolic

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Serbian Bankruptcy Law Amended

January 2018

arbitrationAfter two long years of analysing and debating, the Serbian Parliament adopted changes to the Bankruptcy Law and they have entered into force on the 25th of December, 2017.

The idea was to improve the position of secured creditors and to provide clarity to certain provisions that caused conflicting interpretations in practice. Changes will apply only to bankruptcies initiated after the changes entered into force. Although most of the novelties allow secured creditors increased control over the bankruptcy proceedings, it remains to be seen whether these changes will achieve the desired goals in practice.

The position of secured creditors improved

Historically, secured creditors have not had any impact to how the secured asset is being treated. There have been numerous examples of prolonging the settlement of secured creditors' claims with little to no influence on this situation by the secured creditors themselves. The newly adopted amendments are supposed to improve this by introducing several new roles of secured creditors. The most crucial improvements are the following:

  • The creditors board must have one secured creditor as a member;
  • A secured asset cannot be put under lease without the approval of a secured creditor whose claim is secured by that particular asset. If the secured asset is put under lease, the secured creditor is allowed to collect a portion of the rent, in the amount determined by the acting judge. Interestingly enough, this share in collecting the rent is not treated as a settlement of the claim;
  • A secured creditor who is interested in buying a secured asset within bankruptcy is now allowed to set-off its claim with the price reached at the public sale;
  • The bankruptcy judge approves upon request by the secured creditor its right to sell the secured asset in any manner it finds appropriate (there is no constraint to sell under rules applying to a sale in bankruptcy proceedings) within 9 months; and,
  • Secured creditors are given pre-emptive rights in a direct sale of the secured asset.

Engagement of licensed evaluators

A very welcome novelty is a mandatory engagement of licensed real estate evaluators. This amendment serves to harmonise the Bankruptcy law with the recently enacted Law on evaluators (Official gazette 108/16), that prescribes that only evaluators, licensed in accordance with this Law, are allowed to evaluate assets in bankruptcy. It remains to be seen how this provision will apply to court experts, traditionally engaged for this type of work. In any event, these amendments will certainly improve the quality of evaluations, given that before the amendments, the bankruptcy manager was allowed to evaluate the property subject to sale at its own discretion, which often led to conflicts with secured creditors.

Possibility to change acting bankruptcy manager at any point in the proceedings

The creditors' board now has the power to remove the current bankruptcy manager and appoint a new bankruptcy manager without any reasoning, at any stage of the proceedings. The only requirement is that they make this decision by a ¬ĺ majority.

Reduced threshold for liquidation vote, no option to prolong reorganisation deadlines

The previous 70% of claims entitled to vote out liquidation at the first creditors hearing has now been reduced to 50%. Also, the option of prolonging deadlines to submit a reorganisation plan has now been revoked and only one amendment of the reorganisation plan is now allowed.

The effect of bankruptcy to arbitral clauses

There has been a long debate as to how bankruptcy affects the arbitration clause. The Bankruptcy law provides for the exclusive jurisdiction of the court handling the bankruptcy to any dispute involving the bankruptcy debtor, which contradicts the effect of arbitral clauses within dispute resolution mechanisms. These new amendments bring clarity to this, with an unusual approach. Arbitral proceedings, if initiated before bankruptcy, can be continued, should the claim subject to arbitration be disputed in bankruptcy.

However, the amendments exclude the possibility of starting the arbitration after the bankruptcy was initiated and after a claim, not previously subject to arbitration, is disputed in bankruptcy. This provision requires increased diligence on the side of creditors who, for the sake of upholding the arbitral clause, would need to closely monitor financial and legal status of the debtor and initiate arbitration prior to bankruptcy being opened over their debtor.

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