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The Ministry of Economy has formed a working group that should draft a proposal for a legal solution for the bankruptcy of entrepreneurs. Regulating the bankruptcy of entrepreneurs is a precondition for the adoption of the Law on Personal Bankruptcy, which will regulate the bankruptcy of over-indebted citizens. The working group is composed of representatives of the Ministry of Economy, the Agency for Licensing of Bankruptcy Trustees, the Commercial Court of Appeals, the Faculty of Law, University of Belgrade, NALED, lawyers, the Prime Minister’s Office and licensed bankruptcy trustees.
The establishment of the working group as well as the drafting of the law on bankruptcy of entrepreneurs are envisaged by the Program for resolving problem loans for the period 2018-2020 (hereinafter “Program“), which is a strategic document adopted by the Government of the Republic of Serbia.
As they explain in the Ministry of Economy, the application of the existing bankruptcy framework in Serbia is limited only to legal entities. The Law on Bankruptcy Procedure from 2004 enabled the initiation of bankruptcy proceedings of entrepreneurs, but in practice that institute was not applied, so it was abolished by the Bankruptcy Law from 2010. As a result, Serbia is today one of the few European countries that does not have a regulated issue of bankruptcy of entrepreneurs.
The need for legal regulation does exist
In the Republic of Serbia in 2021, there are about 280,000 entrepreneurs. About 20,000 active entrepreneurs were blocked at the end of the second quarter of 2018, while the survival rate of entrepreneurs in the first two years of business in 2016 was about 65%. These data unequivocally indicate the need to regulate the issue of bankruptcy of entrepreneurs.
Will the courts be ready for additional amount of cases?
Given these figures, the potential inflow of bankruptcy proceedings can be large. The Ministry relies primarily on the practices of other countries, where there has been no significant increase of bankruptcy cases, so they expect the court system to absorb new cases without major problems. Finally, in the case of bankruptcy of entrepreneurs, there is sufficient experience in the system of commercial courts in the application of bankruptcy laws that would enable the smooth reintegration of this institute into the existing bankruptcy framework. The introduction of bankruptcy of entrepreneurs would speed up the bankruptcy procedure of natural persons in the near future, while respecting all the specifics that are related to them as non-economic entities.
In addition, the Program states that the bankruptcy of entrepreneurs should be simple so as not to demotivate debtors and creditors from the timely initiation of bankruptcy proceedings. This approach would involve changes to the existing Bankruptcy Law, or a special law would be enacted. In principle, the bankruptcy of entrepreneurs should not be limited only to debts based on business, given that in practice it is often very difficult to distinguish between such debts, and an attempt to differentiate would create problems in the application of the bankruptcy framework.
Debt relief, debt restructuring, exclusion of property
The Program stipulates that the bankruptcy procedure of entrepreneurs should also include the institute of debt relief, as in the case of regular bankruptcy, which would enable a “new beginning”. However, although this trend is accepted in a large number of countries, when introducing the institute of debtor release, it must be borne in mind that this may affect the collapse and abuse of contract law.
Also, it is necessary, as in the bankruptcy procedure for companies, to provide access to reorganization as an alternative to the procedure of bankruptcy of entrepreneurs. In that case, entrepreneurs could, with certain adjustments, use the existing institutes of bankruptcy law. The role of the court in that case would be minimal, which would make the procedure efficient with minimal costs.
In addition, it is necessary to resolve the issue of application of the institute of exclusion of certain property of entrepreneurs. In that respect, its strict definition is extremely important, considering that it would be too broad to enable the debtor a new financial start on the one hand, but in that way the possibility for pre-bankruptcy machinations would be opened. Therefore, for determining exempt property, the legislator should combine different ways of exemption, such as exemption by value of certain items, exemption based on monetary amount, exemption by types of items, exemption based on use of items and exemption based on the need of debtors and household members for certain assets. the purpose of the exemption can best be achieved in this way.
A number of other issues, such as how part of future settlement revenues will be determined, are very complex and require detailed consideration of possible solutions. The law must also resolve the issue of managing the bankruptcy of entrepreneurs, and whether it would be a bankruptcy trustee or some kind of administrator. A bankruptcy condition, i.e., a threshold for initiating bankruptcy proceedings, must be defined, such as a debt of 50,000 euros as proposed.
The Program envisages that the previous issues be considered by the working group. After drafting the draft legal solution and analyzing the effects, it is necessary to conduct a public discussion in order for the interested parties to present proposals regarding the reintroduction of this institute, which would now have its application in practice.
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