Since 14 August 2017 the Serbian Government’s proposal of new Amendments to the Insolvency Act („Amendments“) has been on the agenda of the National Parliament of Serbia. There is no information when the National Assembly will open the discussion and voting procedure on the Amendments. However, recent legislative practice in Serbia shows that Government’s bills rarely suffer material amendments during discussion and voting procedure in the Parliament. Below is a closer insight into the future legislative amendments to the Insolvency Act.
The Amendments addressed several material issues encountered in practice. The position of secured creditors will be improved, as they will have to approve the sale of secured assets to the insolvency administrator. Secured creditors will have their representative in the board of creditors, which is chosen by a vote at the meeting of only secured creditors. Election of the chairman of the creditors’ committee and members of the board of creditors is simplified.
Amendments also clarified that in case the decision on initiation of insolvency is repealed and the case remanded for retrial upon an appeal, in which the first instance court renders a new decision on initiation of insolvency proceedings, such decision would have a retroactive effect, i.e. it would be valid from the date of the repealed decision on initiation of insolvency proceedings.
Amendments introduced new possibilities for the court to protect secured creditors, so that beside lifting the moratorium on forced collection, an insolvency judge can order (i) application of adequate protection of the debtor’s assets, (ii) replacement of a pledge on an asset which has a constant value, (iii) payment of income from the secured asset to the secured creditor, (iv) repair or adequate maintenance of the asset, or (v) other measures that the judge finds adequate for protection of secured creditors. Amendments also addressed the procedure and legal remedies regarding court’s decisions on lifting the moratorium or imposing adequate measures, and those measures are limited to 9 months, until they cease.
Amendments aim to resolve a dilemma on the character of claims resulting from the transactions that are declared null and void. This common controversy was mostly interpreted as that such claim would be an obligation of the insolvency estate given that the law provides that the consequence of a transaction being null and void is that each party keeps the proceeds received without adequate legal basis (unjustified enrichment), and thus each party has to return received proceeds to the other. On the other hand, there were different interpretations, such as that the creditor from a transaction declared null and void is precluded from reporting its claim based on unjust enrichment, as such claims have to be reported within 120 days from the day of publishing the decision on initiation of insolvency proceedings in the Official Gazette. Now, the Amendments confirmed that claims resulting from transactions declared null and void are obligations of the insolvency estate, which have priority over registered unsecured claims.
The courts retained exclusive jurisdiction over disputes related to challenging the creditors’ claims vis-à-vis the insolvency debtor, with an exception: in case the relevant creditors were in dispute with the insolvency debtor before an arbitration tribunal, and in case the insolvency administrator persists on challenging such a claim, a creditor could continue with arbitral proceedings in order to determine the validity of its claim before the arbitration tribunal.
Amendments also aim to rectify certain ambiguities in the sale procedure. It is now clarified that a buyer of assets in the sale procedure acquires the purchased assets on the basis of the proof of paid purchase price and court’s decision on sale (earlier, only the payment of purchase price was the basis for acquiring the ownership). Moreover, the Amendments establish a different sale regime for pledged assets – the insolvency administrator now has a duty to offer such assets for sale within 6 months from the court’s decision on bankruptcy.
Secured creditors will also have certain additional rights in the process of sale of pledged assets. Namely, the sale of pledged assets in insolvency proceedings will be subject to approval of a secured creditor having a pledge on such assets, in case the achieved purchase price is below 50% of the estimated market value. In case of sale of pledged assets through direct bargain, a secured creditor will have a right of first refusal. Finally, in case a secured creditor is the purchaser of the pledged asset, it will have the right to set off its claim with the purchase price.
There is one interesting novelty related to the situation when, after the liquidation of the debtor’s assets and satisfaction of the creditors’ claims, certain proceeds or property still remains undistributed. Amendments provide that such proceeds or property would be divided between shareholders, but unlike the current solution (which is silent in that regard), it is specified that such proceeds or assets are acquired without any encumbrances.
Amendments also addressed certain issues related to reorganization and pre-packaged reorganization plans. Apart from clarifications and non-material amendments, an important change is that in case a creditor files for insolvency, and the insolvency debtor files for a pre-packaged reorganization plan before the court renders a decision on initiating insolvency proceedings, the motion for a pre-packaged reorganization plan will have priority. However, in case the pre-packaged reorganization plan motion is denied, and the debtor submits a new motion for a pre-packaged reorganization plan, the motion for initiation of insolvency proceedings will have priority. Amendments abolish provisions on the possibility for extension of the deadline to submit a reorganization plan in insolvency proceedings.
We note that Amendments failed to address the issue with application of the principle of publicity, as all insolvency documents in the case were supposed to be publicly available online as of 1 January 2015. However, as it is well known, secrecy still prevails over the principle of publicity in insolvency proceedings, as there is no comprehensively publicly available data to this date.