Management Mistakes and Liability in Serbian

Insolvency Proceedings

Branko RadulovicLaw School, University of Belgrade &

Office for Regulatory Reform and Impact Assessments

• CONTESTING DEBTOR’S LEGAL ACTIONS

• CRIMINAL LIABILITY

• OTHER SANCTIONS

• “AUTOMATIC” BANKRUPTCY

• PREPACKS AND OUT-OF-COURT

SETTLEMENT

• DISQUALIFIED DIRECTORS REGISTER

CONTESTING DEBTOR’S LEGAL ACTIONS

• When?– Obstructing equal settlement and favoring specific

creditors• Deadlines

– Contesting may be performed from the day of opening of the bankruptcy proceedings until the day when the hearing on the main distribution of the bankruptcy estate is held.

• Who?– Plaintiff - creditor or bankruptcy administrator– The bankruptcy administrator is obliged to contest legal

actions

CONTESTING DEBTOR’S LEGAL ACTIONS

• Types– Regular Settlement– 6 months

• if the bankruptcy debtor was insolvent at the time of the transaction, and the creditor knew or ought to have known of its insolvency.

– Irregular Settlement – 12 months• providing security or settlement for one

creditor which he was not entitled to request, or was entitled to request but not in the manner and at the time when it was provided

CONTESTING DEBTOR’S LEGAL ACTIONS

• Direct damage to creditors– within 6 months before filing for bankruptcy

• if the bankruptcy debtor was insolvent at the time and • the counterpart knew of its insolvency;• or the debtor’s action or failure to act would result in

the inability of creditor to exercise his rights– transaction was concluded after the filing of the

petition• the counterpart knew of its insolvency

• Intentionally damaging creditors and transactions and actions without or at a negligible compensation– within five years before the filing of the petition

CRIMINAL LIABILITY

• Causing bankruptcy– irrational spending or disposal of funds, excessive

borrowing and taking disproportionate obligations, irresponsible contracting, failure to timely exercise claims, destroying or concealing property or other actions that are inconsistent with the conscientious business bankruptcy and thereby cause other damage

– negligence• Causing “false” bankruptcy

– apparent or actual impairment of companies assets• However, there is no criminal liability for failing

to timely file for bankruptcy

OTHER SANCTIONS

– Prohibition to perform • the duty performed at the time of the

offense or• managerial positions • or all duties related to the disposition,

use, management or handling of the trusted property

PROBLEMS

• In practice, criminal sanctions and civil liability is hardly ever realized– Subjective problems - passive public prosecutors– Objective problems - lack of quantitative standards and

difficulties regarding evidence

• Petitions were filed too late– Debtors - no need to protect from enforcement (weak

enforcement system)– Creditors -not willing to finance the proceedings

• Introduction of Special procedure in case of continuing insolvency

• Blocked accounts – Serbian specificity– due to widespread use of bills of

exchange/ promissory notes

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

0

2000

4000

6000

8000

10000

12000

1516123 318

1461

8003

340 293 247 271 246 259 294 237 330

4795

471

Bankruptcy tsunami

8003Companies

Bailed out*154

Bankruptcy proceedings opened879

Erased from the business registry

First wave results

PrepacksDozen successful

cases since the new law is in force

decision to initiate preliminaryProceeding(t=3)

Debtor to remove

deficiencies within 8 days

Prolonging up to 15 days due to

complexities of the case

Judge opens bankruptcy, confirms the

adoption of the proposed

prepackaged reorganization

plan, and suspends

bankruptcy simultaneously

Pre-packaged

plan submitted

simultaneously with the petition for bankruptcy

(t=0)

Preliminary proceedings

minimum 30 days

Preliminary proceedings maximum

45 days

reorganization plan is not

adopted at the hearing

Earliest after 30 days

Expected duration

around 50 days

Maximum duration

3+45+15=63 days

the prohibition of enforcement against the

secured andunsecured assets of the bankruptcy debtor(t=5)

Criteria Out-of court restructuring Pre-packaged plan Conventional

reorganization

Involved parties

Voluntary approach

*minimum two commercial banks

All creditors All creditors

Majority voting no yes yes

Moratorium partial Full *not necessarily full

Bankruptcy administrator no Possible

appointment yes

Formalities few many many

Direct costs very low low high

Indirect costs minimal low high

• The government has announced the establishment of the Disqualified Directors Register