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Bosnia and Herzegovina: Parallel Debt Concept Under the Local Legal Framework

Bosnia and Herzegovina: Parallel Debt Concept Under the Local Legal Framework

Bosnia and Herzegovina
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Under Bosnia and Herzegovina law, a pledge can be granted solely to a creditor of a claim. This hampers the creation of effective security for securing syndicated facilities (e.g.,  loans provided to debtor by more than one lender). In practice, this is solved by creating a “parallel debt structure” and appointing a security agent who holds pledges in favor of all lenders. Despite its broad use, this structure has not been tested before local courts. Thus, questions about its validity remain unsettled.

Parallel debt obligations (“Parallel Debt”) are claims which are created in favor of the agent, mirroring the claims of all lenders arising from syndicated facilities (“Principal Obligations”). The agent, the lenders of the Principal Obligations, and the debtor(s) of the Principal Obligations agree on: (i) the creation of debt which the debtor owns to the agent along with where such debt corresponds with the Principal Obligations and where it exists in parallel with them; (ii) the agent is a joint and several creditor (together with each lender) of each and any obligation of the debtor toward a particular lender, creating joint and several creditorship between the agent and the lenders; (iii) any payment of the Principal Obligations to a particular lender discharges the corresponding Parallel Debt and any payment in respect of the Parallel Debt to the agent discharges the corresponding Principal Obligations, which eliminates the risk that one obligation could be fulfilled twice (i.e.,  to a particular lender and to the agent).

The aim of parallel debt construction is to facilitate the establishment of efficient security for securing syndicated facilities due to the lack of an adequate legal institution in Bosnia & Herzegovina (BH) law such as the ability in common law jurisdictions for agents to hold security property in trust for all lenders.

The skeptics of the parallel debt concept find its flaws in absence of causa . To them, the agent is an “artificially created” lender, and not the “real lender” who provides financing to debtor(s). To some extent this could be true, as in practice the agent does not necessarily provide any financing. However, this does not affect the validity of parallel debt concept. Namely, causa  is a reason for the creation of an obligation. Under BH laws an agreement is null and void if the obligation does not have a causa  or if the causa  is contrary to the mandatory provisions of local law, public policy, or good practices, but the Parallel Debt has its own causa, consisting in achieving the payment of already existing obligations, i.e.,  the Principal Obligations. In legal doctrine such causa  is recognized as causa solvendi

Furthermore, the fact that parallel debt as a legal concept is not explicitly recognized under BH law does not automatically mean that it is not permitted. BH law proclaims the freedom of parties to arrange their relations as they please. Such freedom is limited solely by the mandatory rules of BH law, public policy, and good practices. To the best of our knowledge, there is no limitation in any of these sources that would prohibit the creation of parallel debt.

Nevertheless, the parallel debt concept is not ideal. First, the pledge is established in favor of the agent and secures only the Parallel Debt. Thus, the lenders do not have a direct security interest and are not entitled to take enforcement actions in respect of established pledges except through the agent. Therefore, the lenders also bear the risk of the agent’s bankruptcy or insolvency.

To conclude: the parallel debt structure is currently the best legal concept for establishing effective security for securing syndicated facilities. Nevertheless, the lack of relevant court practice raises concerns that the parallel debt structure might be challenged before local courts. With this in mind, and recognizing the significance of financing through syndicated facilities, adequate interventions by BH legislators in solving this matter would be extremely welcome.

By Nina Vjestica, Partner, and Djordje Dimitrijevic, Senior Associate, Dimitrijevic & Partners

This Article was originally published in Issue 7.11 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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