In May 2011 the Law on Consensual Financial Restructuring of the Companies (the Law) was enacted, bringing what appeared to be a new way out for the companies facing financial difficulties.
When the most recent financial crisis hit the globe, businesses started to deteriorate everywhere. In Serbia, there was an addition issue: the economy’s internal problems. The result: many companies moving ever deeper into financial troubles without a way out in sight. This may have been the crucial push behind the enactment of the Law – helping companies recover before insolvency hits.
The main idea behind financial restructuring of a company is rearranging relations between a company facing financial difficulties (ie, an overly indebted company or one unable to make payments) and its creditors. This is achieved by introducing a standstill on a strictly voluntary basis and with an active role of an institutional intermediary (eg, the Serbian Chamber of Commerce, independent experts) between the company and its creditors.
The financial restructuring occurs if there are at least two banks (whether resident or non-resident in Serbia) and if the restructuring is to be conducted with respect to the claims/debts that the creditors and the debtor may freely dispose of. (It is interesting that a definition of “free disposal of claims” is nowhere to be found, or is a definition of “overly indebted”, “threat of being overly indebted”, etc.). Creditors that agree to participate in the restructuring must act in mutual cooperation and good faith, especially when it comes to creating all of the conditions for a successful restructuring.
The restructuring itself is marked by two phases and two separate agreements. First, a standstill is introduced through a written agreement between the creditors and debtor, temporarily preventing all creditors participating in the restructuring from enforcing or demanding settlement of their claims (unless they must initiate court proceedings for statute of limitations reasons). No enforcement procedures may be initiated, while those procedures already underway are suspended.
Secondly, financial restructuring is completed once the financial restructuring agreement has been executed, providing for some or all of the following recovery measures: payments in instalments, amendments to the maturity dates, amendments to the interest rates, debt discharge, debt equity swap, issuance of securities, and more.
Reorganisation in insolvency
At first sight, it seems that financial restructuring is similar to reorganisation in insolvency, a preventive composition. The preventive composition is also a measure for recovery of a debtor and is subject to an agreement between the creditors and the debtor.
The two crucial differences between the two, however, are the moment of application of the reorganisation and the position of the creditors. In financial restructuring there is a presumption of equal position of all participating creditors, at least in proportion to the amounts of their claims against the debtor (unless otherwise agreed between the creditors). Preventive composition, conversely, brings a division of creditors into ranks which are set out in a distinct hierarchy, like in bankruptcy proceedings. Furthermore, with financial restructuring, only those creditors who executed the appropriate agreements are included in its effects and measures. Under a preventive composition procedure, on the other hand, a reorganisation plan is adopted if approved by a simple majority of creditors within each of their ranks. An adopted reorganisation plan further regulates all of the relations between the debtor and its creditors, most importantly, including those creditors who voted against the plan but were outnumbered.
Even though financial restructuring is different than reorganisation in insolvency and has recently been introduced into Serbian law, it is not completely unknown. In fact, the legislative act enacting the Law simply shaped something that already existed in practice into a legal norm. However, as the by-laws have yet to be enacted, implementation of this Law is currently cumbersome and its full effects are yet to be seen.
In financial restructuring there is a presumption of equal position of all participating creditors, at least in proportion to the amounts of their claims against the debtor (unless otherwise agreed between the creditors). Preventive composition, conversely, brings a division of creditors into ranks which are set out in a distinct hierarchy, like in bankruptcy proceedings.