In response to the proposal by the EU Commission on 7 December 2022 that an EU Directive be issued to harmonise certain aspects of insolvency law, this article provides a look into one of the main topics of the draft directive – pre-pack reorganisation proceedings as regulated in Serbia, Montenegro, and Bosnia and Herzegovina, which are candidate countries for accession to the EU.
Pre-pack reorganisation is a method within bankruptcy proceedings designed to maintain a struggling company's administrative structure, streamline the process of settlement of creditors' claims, and minimise disruptions to the company’s operations.
Pre-pack reorganisation in Bosnia and Herzegovina
Bosnia and Herzegovina (BiH) consist of two distinct administrative entities: the Federation of BiH (FBiH) and Republika Srpska (RS), and the special administrative unit Brcko District of BiH (BD). In accordance with the constitutional division of competences, insolvency falls under the authority of individual parts with certain legislation adopted at the state (BiH) level.
Pre-pack proceedings as proposed in the EU Directive are not explicitly recognised and regulated in the FBiH, RS or BD.
However, both the Law on Insolvency of RS and the Law on Insolvency of FBiH allow for the option of sale of debtor’s business as a going concern withing the meaning of insolvency and allow the option of submitting an insolvency plan alongside a proposal to initiate (i.e. open) insolvency proceedings although not entirely in the manner as envisaged under the proposed EU Directive.
Current insolvency framework in BiH
Pursuant to the existing insolvency framework in BiH, the sale of all or part of a debtor's business may be formally conducted only after official opening of the insolvency proceedings. An agreement or settlement between the debtor and creditors, however, is always possible as a viable option outside of insolvency proceedings. In addition, the applicable insolvency legislation also recognises separate pre-insolvency proceedings in FBiH and a restructuring process in RS, as briefly outlined below.
When the insolvency proceeding has officially opened and is underway, both RS and FBiH insolvency laws allow for the assembly of creditors to opt to sell the insolvent debtor as a legal entity in whole. In this case, the insolvency trustee is obliged to inform secured creditors regarding this sale. Also, before putting the insolvent debtor up for sale, the insolvency trustee must assess its value and the value of the property representing collateral.
Additionally, sale of all or part of the assets of the insolvency debtor can also be envisaged as part of the insolvency plan, which may be submitted together with a proposal to open insolvency proceedings. This insolvency plan allows for deviation from the provisions of the law governing the cashing in and distribution of the insolvency estate and may also provide for other options such as transfer of part or all of the assets of the insolvent debtor to one or more existing entities or entities yet to be established. The plan also allows for the insolvent debtor to be acquired by another entity or merged with one or more entities, etc. The insolvent debtor may also submit an insolvency plan during insolvency proceedings if the plan could not be submitted in the initiation phase due to objective reasons and if the creditors’ assembly consents.
Restructuring and pre-insolvency in BiH
In RS, apart from the insolvency proceeding, a restructuring procedure also exists that is carried out to regulate the legal position of the debtor and its relationship with creditors, all for the purpose of facilitating the continuation of the performance of its activities.
Restructuring was introduced for the first time in RS in 2016 as a measure of recovery of debtors by concluding an agreement with creditors, which essentially represents an alternative to insolvency proceedings and the termination of a business entity. An almost identical legal concept and solution is present in the FBiH which was introduced in 2021, but under a different name (i.e. pre-insolvency procedure).
A restructuring/pre-insolvency procedure may be opened in case of threatened insolvency and is initiated at the proposal of the debtor or at the proposal of the creditor. (The latter is valid only if the debtor agrees with this proposal). However, the form of restructuring/pre-insolvency as currently envisaged still entails the active participation of the court. In other words, the court examines the admissibility of the proposal for opening the restructuring/pre-insolvency procedure and if the court determines that the prerequisites for opening the procedure have been met, it issues a decision on the opening of the procedure and appoints a trustee. Therefore, restructuring as a form of out-of-court settlement between debtors and creditors has not yet been recognised in insolvency legislation in BiH as such. (This does not preclude the debtor and creditor from reaching a separate agreement as mentioned above).
Final considerations and conclusion
Insolvency is a complex proceeding in BiH that can be costly and time consuming. (Steps have been taken in order to expedite matters, but these legal solutions are only currently available for liquidation proceedings, such as the recently introduced shortened liquidation in RS). At the same time, insolvency legislation in FBiH and RS is falling behind the EU acquis and the current laws are only partially harmonised with EU regulations (with existing legislation in FBiH effectively reflecting the EU regulation 2015/848 only in terms of the basic principles, and in RS reflecting the regulation EC 1346/2000).
Thus, in light of all of the above, the current legal solutions are not efficient and do not resolve the key issues of length, cost and complexity of the insolvency proceedings, and even though the BiH's long-term goal is to join the EU and align its legislation with EU standards, it is likely to take time for the concept of pre-pack proceedings to be introduced and applied in practice in BiH as envisaged under the proposed EU Directive.
For more information on pre-pack proceeding in BiH, contact your CMS client partner or these local CMS experts:
Andrea Zubović-Devedžić, Stefan Ćosović