An increasing number of questions have been raised since Serbia’s new Law on Bankruptcy and Liquidation of Banks and Insurance Companies (“Law”), together with amendments to the existing Banking Law, became effective on April 1, 2015.
With no case law at present to provide structure, there is a need to inspect these new rules closely, as they may considerably affect the management, existing shareholders, and creditors of Serbian banks undergoing liquidation or bankruptcy.
Terminating the Operations of a Solvent Bank
Bank shareholders may decide to voluntarily terminate the operations of a solvent bank. This decision, however, is subject to approval by the National Bank of Serbia (“NBS”) and is quite costly – it must be supplemented by a bank guarantee (unconditional, irrevocable, payable upon first demand, and issued by a first class bank) in an amount that secures all of the bank’s obligations. Once the NBS approves the termination of operations, it appoints the Serbian Deposit Protection Agency (“Agency”) as the liquidation administrator. However, if the bank fails to provide the NBS with all required documents, the NBS shall revoke the bank’s operating license. Neither the Law nor the Banking Law provides for a voluntary liquidation resulting from the previous voluntary delicensing of a bank, as seen in many EU jurisdictions.
An interesting question is raised at the very outset of executing liquidation of a bank when determining which regulations apply, as such proceedings are regulated by numerous pieces of legislation which call for the application of the Law’s provisions on liquidation as well as bankruptcy, and the supplementary application of the Insolvency Law, with exclusion of certain provisions “as fitting.” The Banking Law is also part of this regulatory framework, which in certain instances calls for supplementary application of the Company Law, which the Law does not refer to! This intersection of provisions thus requires considerable legal untangling.
With respect to bankruptcy, by issuing a decision on revocation of a bank’s operating license, the NBS simultaneously issues a decision on fulfilment of conditions for initiating bankruptcy proceedings. The Agency here performs duties of the bankruptcy administrator. Unlike the Insolvency Law, which is applicable to non-banking entities, the Law does not foresee a possibility for a bank to file for bankruptcy, but rather leaves this within the exclusive competency of the NBS.
Creditors of a bank in bankruptcy have a number of matters to consider. Any set-off of claims towards the bank is permissible only until certain deadlines, for example. Also, the Agency and the bank’s creditors are entitled to file avoidance claims against the bank’s actions, but not against those executed by the NBS or the Agency in relation to any previous restructuring process. The Agency pays out insured deposits of the bank, as well as any insured amounts of claims of the bank’s clients if the bank is a member of the Investor Protection Fund. Notably, unlike bankrupt companies falling under the general regime of Insolvency Law, an insolvent bank cannot be bought as a legal entity in bankruptcy proceedings.
The bank’s creditors are given between 30 and 90 days from the moment of publication of announcement on initiation of bankruptcy to report their claims towards the bank. The Agency determines if the claims are justified, and in what amount, whereas the final list of creditors’ claims is determined at the examination hearing.
The risks which bankruptcy may generate for shareholders and management should not be overlooked. For instance, the fact that an individual was a member of a bank’s management board at the time the bank went bankrupt could impair that individual’s chances of future appointment to bodies corporate of a bank in Serbia, as the NBS may reject such appointments on reputational grounds. Reputational risks also befall present (direct or indirect) shareholders, should they attempt to found a new bank or acquire ownership in an existing one in Serbia, as the NBS also weighs the business reputation of future shareholders in banks when deciding whether to grant consent for acquisition or foundation.
Until these concerns are fully addressed, and until the new regulations and practice are able to provide stronger footholds, Serbian banking waters should be treaded lightly and with great diligence.
By Natasa Lalovic Maric, Partner, and Andjelka Todorovic, Associate, Wolf Theiss
This Article was originally published in Issue 2.4. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.