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Reorganization Proceedings in Serbia and Room for Improvement

Reorganization Proceedings in Serbia and Room for Improvement

Serbia
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Reorganization was introduced in Serbian bankruptcy legislation in 2010 and is very often used to restructure claims, as it provides an opportunity for a debtor to continue operating if the settlement proposed through a reorganization plan is more favorable to creditors than liquidation.

A reorganization plan may be filed either in bankruptcy proceedings or as a prepackaged reorganization plan (UPPR). However, judicial unfamiliarity with complicated commercial and financial issues and an unclear legal framework often hamper an effective administration of the process.

Reorganization in Serbia is a court-administered process, but creditors have the final say, as the plan will be adopted only if the majority of creditors in each class (formed for the purpose of voting) support it.  Serbian Bankruptcy law provides bankruptcy judges with significant authority to ensure the legality of reorganization proceedings. Still, even though it is a court-administered process, the outcome of it – i.e., an adopted reorganization plan – is essentially a financial document that affects how the future business of the reorganized company will run and how debts with existing creditors will be settled. So the main challenge for judges is understanding the financial aspects of the reorganization plan. Unfortunately, because judges are often unprepared and ill equipped to understand complicated financial and commercial matters, they rarely perceive which tools from the existing legal framework would be the most adequate. This is why they are often reluctant to use certain tools to effectively examine the reorganization plan and all of its implications. For instance, no judge has ever yet held a special hearing allowing the creditors to discuss the plan and elaborate their objections to its provisions. In practice, this has led to a mere outvoting contest between the supporters and opponents of the plan.

Other difficulties experienced by judges stem from the existing legal framework on reorganization in Serbia, which is still undeveloped and imprecise and sometimes untested in practice. For example, the most controversial issue in every reorganization process is the treatment of disputed claims when it comes to voting. The rule is that creditors with disputed claims may not vote for the reorganization plan. However, they are entitled to request from the judge an assessment of the value of their claim for the purposes of voting. It is not clear whether the judge is supposed to assess their claim by himself or is to engage an expert on this. In practice this has often led to disputed claims not being assessed for the purposes of voting at all.

Another controversial issue is “cramdown.” The term cramdown derives from the US bankruptcy system, and it is usually defined as involuntary imposition of a reorganization plan over the objection of some classes of creditors by – for instance – reducing their claim to such an extent that they cannot outvote other creditors from the same class and prevent reorganization. In Serbia, this is used by authors of the plan when they do not tailor the classes of creditors according to the basic principle of reorganization (more favorable settlement of creditors compared to liquidation) but in order to achieve the plan’s adoption at all costs. The main challenge for the judges is to recognize when there is a cramdown in place. Improving the financial skills of judges would increase their understanding of this issue and ultimately allow them to prevent its misuse.

To conclude, the lack of special skills needed for comprehensive review of proposed terms and measures for reorganization often limits judges only to reviewing reorganization plans from a legal perspective, making them hesitant about observing them from a commercial and financial point of view. This leads to the adoption of infeasible reorganization plans that only postpone the inevitable outcome – liquidation in bankruptcy.

As the purpose of reorganization is settlement of creditors through a continuation of the debtor’s business, judges need not only to have legal knowledge but also to be equipped with appropriate financial, commercial, and economic skills to understand when reorganization is feasible and able to ensure a better settlement for all creditors in comparison to bankruptcy proceedings. Equally relevant is for judges to recognize the opposite situation: when reorganization is aimed only at the debtor’s survival, without any economic justification.

By Milan Lazic, Partner, Vedran Ceric and Milica Savic, Attorneys at Law in cooperation with Karanovic & Nikolic

This Article was originally published in Issue 4.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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