Unlike most countries in the region, Serbia is late in introducing entrepreneurial bankruptcies. Experience in the environment shows that the most important thing is to establish a simple and balanced system of bankruptcy of entrepreneurs and then consumers, in order to encourage debtors and creditors to use such opportunities.
The news that a working group has been formed in the Ministry of Economy to compile a proposal for a legal solution on the bankruptcy of entrepreneurs has again brought this topic to the fore in the media, but without a clear insight into what the bankruptcy of entrepreneurs is and why it is important.
An entrepreneur is a person (natural person) who performs business activities on the market (craftsmen, caterers, agencies, lawyers, notaries…) and who are registered in a special register. What all entrepreneurs have in common is that they are responsible for all business obligations with personal property, and this responsibility does not end with deleting entrepreneurs from the register.
On the other hand, partners and general partners in partnerships and limited partnerships are liable with personal property for the obligations of the company, but they are not entrepreneurs.
In our current laws, the bankruptcy of entrepreneurs is not possible, but only the bankruptcy of legal entities.
A newspaper or a heated story?
Bankruptcy is a court procedure for the collective settlement of claims of creditors of a legal entity that is unable to settle its debts (bankruptcy debtor), due to permanent or threatening inability to pay, or over-indebtedness. In bankruptcy, a bankruptcy trustee is appointed who manages the assets of the bankruptcy debtor, determines the debts, liquidates the assets (bankruptcy estate) and settles the debts from that. Bankruptcy usually ends by deleting the debtor from the APR register, after the division of the bankruptcy estate.
The bankruptcy debtor may also be reorganized. The reorganization plan envisages the continuation of the bankruptcy debtor’s business with the possible write-off of part of the receivables, sale of part of the property, payment of debts in installments, and other measures, for a limited period of time. In that case, the bankruptcy debtor gets the opportunity for a new beginning.
The current law of Serbia does not recognize the bankruptcy of entrepreneurs. However, in the period from 2004 to 2010, there was a possibility of bankruptcy of entrepreneurs, and that bankruptcy was partially different from the bankruptcy of legal entities. For example, after concluding the bankruptcy procedure, the entrepreneur could be released from the obligation to settle the remaining debts by division, he could not submit a reorganization plan, but there was a possibility of personal administration, so the entrepreneur cashed the property and settled claims, under the supervision of the bankruptcy trustee. The court could revoke personal administration in certain cases.
However, due to unclear and vague provisions of the law, the bankruptcy of entrepreneurs did not come to life.
Not all countries in the region know about the bankruptcy of entrepreneurs. Bosnia and Herzegovina does not have the bankruptcy of entrepreneurs, but only individuals – members of partnerships and limited partnerships. Montenegro is aware of the bankruptcy of entrepreneurs, but it does not occur in practice due to unclear and vague provisions. Northern Macedonia is aware of the possibility of bankruptcy of entrepreneurs, with relatively well-developed special provisions in the law. Finally, Slovenia and Croatia have a complete system of bankruptcy – legal entities, entrepreneurs and citizens (consumers).
The Croatian example is the most interesting, because it is relatively new and comprehensive. Croatia has regulated the issue of bankruptcy of legal entities and entrepreneurs in the Bankruptcy Law, whereby a special regime applies to entrepreneurs, and prescribes the bankruptcy of consumers in the Law on Bankruptcy of Consumers. For both entrepreneurs and consumers in Croatia, there is a possibility that the bankruptcy debtor will be released from obligations, but with clearly defined conditions (that he has not been convicted of certain crimes, the absence of fraud in terms of taxes and public duties, the absence of previous exemptions in bankruptcy proceedings) disabling the settlement of creditors, etc.).
What is missing, however, in Croatia is the regulation of the relationship between the bankruptcy of entrepreneurs and consumers, if these two procedures come into competition with each other.
What is the expected solution?
The Government of Serbia has adopted a Program for resolving problem loans for the period 2018-2020. (Program) as a framework for the introduction of a new legal solution. There are several determinants:
– There is a link between the bankruptcy of entrepreneurs and consumers, but it will be introduced in stages, where the bankruptcy of entrepreneurs will be introduced first, and after the regulation of the market of consumer NPLs, the bankruptcy of consumers;
– the bankruptcy of entrepreneurs will be introduced through an amendment to the existing Bankruptcy Law;
– the bankruptcy of the entrepreneur should be simple, so that debtors and creditors would not be demotivated;
– the bankruptcy of an entrepreneur should not be limited only to debts on the basis of business, but also debts outside business relations;
– the procedure should ultimately ensure the release of entrepreneurs from debt, the balanced exclusion of certain assets from the bankruptcy estate, and thus the possibility of a “new beginning”, while preventing abuse;
– the possibility of reorganization should become available to entrepreneurs, as well as the non-institutional possibility of reorganization (financial restructuring).
We believe that the described two-stage completion of the bankruptcy system is a forced solution. A comprehensive and balanced bankruptcy system that would include both entrepreneurs and consumers, would ensure an even distribution of the bankruptcy estate and a clearer status of the debtor himself, which would have clear rules and consequences in the competition of two bankruptcies.
However, designing an integrated bankruptcy system (for legal entities, entrepreneurs and consumers) requires time and a broader analysis. While there is a well-established system of bankruptcy over legal entities (which could be adapted to entrepreneurs), bankruptcy over consumers requires the introduction of new institutes due to the highly social nature of this type of bankruptcy, but also due to data protection problems. This will include the involvement of social services, and specially trained bankruptcy trustees, who should be trained in asset management and social work.
The bankruptcy of an entrepreneur must be related to the bankruptcy of consumers, because the insolvency of an entrepreneur is sometimes difficult to separate from the insolvency of a natural person, so it is necessary to have a single procedure if there is simultaneous insolvency of entrepreneurs and consumers united in one person. The program, therefore, has clearly stipulated that the bankruptcy of an entrepreneur should not be limited to business debts. Such a solution would introduce small-scale consumer bankruptcy. However, we believe that such a solution is not good, precisely because of the social component of consumer bankruptcy, which cannot be achieved before commercial courts.
In addition, the bankruptcy regime of entrepreneurs should be applied to members of companies that are responsible for the company’s obligations with personal property, ie partners and general partners in partnerships and limited partnerships.
The future solution must introduce a balanced approach to debt write-off, by introducing clear conditions under which this can be done, following the example of good practice in the environment.
The possibility of reorganization of entrepreneurs must be an exception, especially having in mind the numerous negative experiences in the reorganization of companies, when various abuses were committed in order to avoid settling creditors ‘claims and reduce debtors’ assets.
The non-institutional framework for the restructuring of entrepreneurs already exists in the form of an agreement on the financial restructuring of entrepreneurs, which provides for a special procedure and conditions for restructuring, but also tax relief, such as payment of tax debt in installments. However, it seems that the incentives, but also the information of the general public about this possibility, are at a low level, BiF reports.
