New Bankruptcy Law in Bosnia & Herzegovina

By Željko Vlačić, SAJIC

Bosnia & Herzegovina is a state composed of two entities, the Republic of Srpska and the Federation of Bosnia & Herzegovina, each of which has its executive, judicial and legislative power, i.e. separate legislation and laws that are not timely synchronised in both entities, although in 95% of cases those laws provide the same legal solutions.

The Federation of Bosnia & Herzegovina is currently in the process of passing a new Bankruptcy Law, which would lead to identical legal solutions and the same procedures in both entities of Bosnia & Herzegovina. However, in the Republic of Srpska in 2016, the new Bankruptcy Law was passed, and the same contains changes and novelties aligned with the countries in the region, i.e. the countries of the European Union. Consequently, an urgent issuance of the new Law on Liquidation Procedure was envisaged, but this has not happened yet.

The main objection related to the previous system was the untimely initiation of bankruptcy proceedings, their duration, the excessive costs of proceedings, the substantially low percentage of creditors' settlements, and the most important objection relating to the inability of reorganisation of the bankruptcy debtor prior to the initiation of bankruptcy proceedings.

For the last two years, the said Law has accomplished its goal, i.e. the previous shortcomings have been partially eliminated and the new Law has fulfilled its purpose.

In order to avoid the consequences of the opening of bankruptcy proceedings and to give the company another chance (probably the last one), a new concept named the restructuring process was introduced. By its legal definition, this is a procedure that is being carried out in order to regulate the legitimate position of the debtor as well as the debtor's relationship with the creditors, in order to maintain the business. The purpose of this procedure is a financial restructuring of the debtor who has become illiquid/insolvent in a way that enables the same to become liquid/solvent, as well as enabling creditors to benefit from more favourable conditions of settlement than the creditor could have achieved in the course of the bankruptcy proceedings.

This procedure can be conducted if there is an existing threat of payment disability, i.e. the debtor cannot settle all financial obligations upon its maturity. The Law stipulates a condition which must be fulfilled for initiating procedure which is that that the debtor does not settle financial obligations within 60 days due to existing financial diffculties. In order to initiate the procedure, and ultimately to succeed with the same, the basic condition is that the debtor agrees to the same, i.e. that there is a will and complete cooperation with the trustee appointed by the court to manage and coordinate this procedure. The court accepts the restructuring plan if 25% of the creditors vote for it and if the sum of the claims of those who voted for the financial and operational restructuring plan exceeds the amount of those creditors who voted against it.

For now, the concept of restructuring has fulfilled its expectations, since 11 restructuring procedures have been initiated with almost 600 jobs retained, and four restructuring processes have been successfully implemented in companies that have been given the opportunity to revitalise and maintain operations.

In the next period, the adoption of by-laws is expected and this will further elaborate the concept of sale of a debtor-legal entity, which is also a novelty in the effective regulations of Bosnia & Herzegovina. In practice, selling a bankruptcy debtor as a legal entity would mean selling a company (e.g. an industrial enterprise) as a technical- technological unit. In accordance with the decision of the general meeting of creditors, the bankruptcy debtor shall change its owner but shall continue to operate as a legal entity in the same or modified organisational form and with the same workforce. If such a sale is realised, the bankruptcy proceedings will cease in respect of the bankruptcy debtor but will continue in respect of the bankruptcy estate. No such procedures have yet been carried out, because it is essential to put this into a precise legal framework due to its possible abuses.

Although high-risk fines are imposed for responsible persons in a company if they fail to initiate a bankruptcy proceeding timely, i.e. if they procrastinate the same, this particular deficiency of procrastination from the previous practice is still not completely eliminated. Bearing in mind that in accordance with the law the bankruptcy proceeding is of an urgent nature there is, nevertheless, a tendency for their minimum duration. Expanding the number of bankruptcy judges who will run these procedures quickly and efficiently would certainly contribute to a shortening of the procedure.

In order to ensure effcient bankruptcy proceedings as well as effcient legis- lative system in Bosnia & Herzegovina it is essential to harmonise the effective regulations with the regulations of the countries of the European Union. In this way, the social side of the Bankruptcy Law would not be the priority but rather the purpose of the law would be the security and trust of potential investors in an effective legislative system which protects their business in Bosnia & Herzegovina.

Željko Vlačić

Željko Vlačić

SAJIC, Banja Luka, Bosnia & Herzegovina
T: +387 51 227 620
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Published: May 2018 l Photo: knovakov -

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