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Views/ Serbia: Insolvency – Will the New Law Resolve the Problems in Insolvency Proceedings?
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Milan LazićAdvokat / Senior Partnermilan.lazic@karanovic-nikolic.com
22/08/2014
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On 5 August 2014, the National Assembly of the Republic of Serbia enacted the Law on amendments and additions to the Insolvency Law ("New Law"). The New Law came into force on 13 August 2014. It has been specified that insolvency proceedings that have not been completed on the day the New Law comes into force will be completed in accordance with the previous rules.

The New Law does not introduce fundamental changes, however it does primarily correct defects and deficiencies which were identified in the previous law. It remains to be seen what effect the new regulations will have and whether or not the changes will resolve these problems in practice.

One of the most important changes the New Law introduces is the position of entities connected to the insolvency debtor, as this is one of the most prevalent problems occurring in practice. Foremost, a fourth creditor class has been formed. The new class contains claims from entities connected to the insolvency debtor based on loans or similar transactions that arose two years prior to the commencement of insolvency proceedings. Also, it has now been stipulated that pledges provided by the insolvency debtor to a connected entity within a year prior to the commencement of insolvency proceedings has no legal effect bearing on the insolvency proceedings. Therefore, it can be concluded that the intention of the lawmaker was to prevent the commonly occurring abuse of insolvency debtors with the connected entities.

The New Law also regulates the position of the insolvency manager in more detail. The New Law regulates the disciplinary responsibility of the insolvency manager, the monitoring of activities of the insolvency manager and provides stricter rules regarding the material liability of the insolvency manager for damages incurred. It can be assumed that these changes were introduced in order to gain better control of the work of insolvency managers and improve the quality of their work, having in mind that a large number of problems in practice have occurred due to the great freedom allotted to insolvency managers.

The New Law also, for the first time, defines the position of insolvency creditors whose claim is secured by a guarantee. Insolvency debtors are now obligated to notify the court of the guarantee and to inform the guarantors that an insolvency claim has been filed. Also, if the insolvency creditor settles its claim from the guarantor, it is then obligated to inform the court of this.

One particularly interesting change is that the New Law defines the difference between pledgees and secured creditors. Pledgees are defined as persons who have a pledge over the property of the insolvency debtor, but unlike the secured creditors, do not have a claim against the insolvency debtor. The New Law prescribes that the pledgees must notify the court of the existence of a pledge and must provide evidence of this fact within the deadline for filing an insolvency claim.

The greatest drawback of the New Law is that the lawmaker missed the chance to finally regulate the issue of insolvency proceedings over connected entities, that is, the issues of court jurisdiction, relations between insolvency proceedings over connected entities and overlapping collateral in these essentially connected proceedings, etc. The New Law also did not further elaborate on the rules concerning pre-packaged insolvency ("UPPR"), even though significant problems have occurred in practice due to the ambiguity of the previous provisions.

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