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 Serbia
Pre-pack reorganisation was introduced into Serbian law through the 2009 Law on Bankruptcy and is also regulated by relevant bylaws. The primary objective of pre-pack reorganisation proceedings aligns with that of a regular reorganisation: to settle creditors' claims in an optimal way through the implementation of proposed measures outlined in the reorganisation plan.
A notable distinction between pre-pack and regular reorganisation proceedings is the timing of the reorganisation plan submission. The pre-pack reorganisation plan, known as unapred pripremljen plan reorganizacije (PPRP) is prepared and submitted simultaneously with the proposal to initiate bankruptcy proceedings. In contrast, the regular reorganisation plan is submitted after the initiation of insolvency proceedings.
Key elements of the pre-pack reorganisation procedure remain largely unchanged since its introduction in 2009. These include the following points:
- Only the insolvent debtor is authorised to submit the PPRP.
- A court hearing will convene for creditors to vote on adopting the PPRP.
- The measures to be implemented in the reorganisation process are not limited to the ones listed in the Law on Bankruptcy since those serve only as examples. Those measures adopted, however, must clearly be outlined.
Objectives and application of pre-pack reorganisation in Serbia
The overarching aim of reorganising a bankrupt debtor is twofold: to maintain uninterrupted business operations (to whatever extent possible) and facilitate the resolution of creditor claims.
From its introduction in June 2010 until February 2015, over 250 plans were submitted. However, views on pre-pack are often contradictory. Some consider the process susceptible to creditor manipulation while others appreciate the advantages it provides in terms of facilitating an agreement between the debtor and creditors, time efficiency, and cost-effectiveness.
Advantages of pre-pack reorganisation noted since the beginning of its application:
Enhanced negotiation position:
When a debtor enters negotiations with creditors before entering bankruptcy proceedings, they are in a better position for negotiations since they have not lost control over their business to a bankruptcy administrator and they have more time for detailed planning of a reorganisation strategy.
Pre-pack reorganisation tends to be more economically efficient than standard reorganisations, primarily due to the shorter duration of reorganisation proceedings. The cost difference between regular reorganisations and pre-packs becomes particularly evident when there are a large number of debtors.
The potential for reaching a consensus with creditors is heightened during the preparation phase of the pre-pack plan since creditors exhibit greater openness to negotiations. In challenging economic times, the PPRP provides creditors with a more secure way to collect claims from debtors at the brink of bankruptcy.
Opportunity for personal administration:
An advantage of the PPRP is that it enables debtors to have personal administration within the bankruptcy process since their operations have not been taken over by a bankruptcy administrator.
Drawbacks and practical challenges of the PPRP:
A crucial challenge involves guaranteeing the ongoing viability of the debtor's business after the plan's execution, thereby necessitating a meticulous evaluation of the feasibility of the proposed measures.
Risks of creditor involvement:
There are potential concerns arising from the influence of creditors in the making of the pre-pack plan and the potential for skewed creditor decisions as a result of overvoting.
Inequal data accessibility:
Inequal access to data has the potential to hinder the fairness of the process and allows room for creditor manipulation.
Harmonising existing pre-pack procedures with proposed directive solutions
The Directive Proposal places its focus on the pre-pack reorganisation process by facilitating negotiations for the sale of the debtor's business prior to the initiation of insolvency proceedings so that the sale can be executed shortly after proceedings begin.
The current Serbian legal framework allows for pre-pack proceedings initiated by the submission of a pre-pack reorganisation plan. The scope of measures included within the pre-pack plan, to be executed during the reorganisation process, is not limited to the measures listed in the Law on Bankruptcy, offering flexibility for a range of actions to settle creditors' claims.
Consequently, the pre-pack reorganisation concept envisioned by the Directive Proposal should be feasible with minimal (if any) adjustments to the existing Serbian insolvency legislation and with the addition of the provisions proposed by the Directive Proposal that the Serbian legislature lacks.
Pre-pack reorganisation in Montenegro
Pre-pack reorganisation in Montenegro closely mirrors the procedure in Serbia and the key characteristics outlined earlier apply to Montenegrin pre-pack reorganisation proceedings.
The pre-pack reorganisation procedure is largely the same in Montenegro and Serbia, yet a subtle distinction arises in the way these proceedings are regulated. Serbian legislation explicitly names the reorganisation plan submitted alongside the proposal to initiate insolvency proceedings as a pre-pack plan (Unapred pripremljen plan reorganizacije) and prescribes additional elements to be included in the pre-pack plan that would not be included in a "regular" plan.
In contrast, Montenegro's Law on Bankruptcy lacks a specific name for such a plan and does not prescribe additional elements for it. Montenegrin Law on Bankruptcy, however, does prescribe the option of filing a reorganisation plan along with the proposal to initiate insolvency proceedings in the same way that it is prescribed in the Serbian Law on Bankruptcy.
For more information on pre-pack proceeding in Serbia, Montenegro and BiH, contact your CMS client partner or these local CMS experts:
Nenad Kovačević, Dunja Grujičić (Serbia/Montenegro)