Ongoing Reforms

Expedited Liquidation Procedure in the Republic of Srpska

This Article was originally published in Issue 7.2 of the CEE Legal Matters Magazine.

The Republic of Srpska’s much-anticipated Law on Liquidation Procedure (the “Law”) entered into force in October 2019. The Law was adopted three years after the reform of the Republic of Srpska’s bankruptcy procedure and is part of ongoing reforms targeted at cutting costs and improving the overall efficiency of business management by providing new and simpler ways of conducting business.

The Law resolves some of the many issues that have arisen in practice over the last 17 years. Before the new Law, the liquidation procedure was laid out in a scarce 18 articles of the old 2002 Law on Liquidation Procedure.  Among other things, the Law provides for a shortened voluntary liquidation procedure (the “Expedited Procedure”) which represents a quick and cost-effective way of closing down a solvent company.The Expedited Procedure is initiated by a voluntary decision of the company’s shareholders, who must provide a statement verified by a Notary Public. The statement serves as confirmation that the company has no outstanding debts towards any private or public entity and that the shareholders agree to compensate any creditor in joint liability for three years after the company has been removed from the relevant Business Companies Registry.Apart from these statements, the shareholder/s must provide attestations from tax and local government authorities as well as confirmations that there are no blocked accounts in commercial banks. The court to which the application for Expedited Procedure is filed does not appoint a liquidation administrator or make any further analysis of the state of indebtedness of the target company or the truthfulness of the statement of the shareholders. After confirming that the prescribed documents have been provided, the court publishes an announcement that the Expedited Procedure has been initiated and immediately closed over the company in the Official Gazette of the Republic of Srpska.The Law allows a creditor of the company to file an appeal against the court’s resolution announcing the Expedited Procedure within 15 days to stop the procedure. This appeal will be adopted in cases where the shareholders or company have not immediately and completely satisfied their debt to the creditors after receiving the appeals. Creditors who fail to report a claim in the 15 days after an Expedited Procedure has been announced in the Official Gazette have an additional three years to seek fulfilment of their claims – but only from the shareholders, and not the erased company.

Although the Expedited Procedure is indeed a quick and a cheap process for the shareholders and the company, the downside for creditors, at first glance, is the lack of certainty that due diligence was adequately performed to ensure that the company is solvent and that no creditor remains un-paid, as the court relies solely on the statement of the shareholders (except for taxes and local governance authorities from which formal attestations are required). Consequently, creditors need to be diligent in reviewing each and every Official Gazette to stay informed of any Expedited Procedure that are announced involving their debtors. Foreign creditors who generally do not have access to Official Gazettes of the Republic of Srpska are left entirely out of the loop.

In cases where creditors are not informed about an Expedited Procedure, there are additional questions about the solvency, availability, and value of the property of the shareholder/s, as their statement could remain a formal yet ungrounded guarantee. This question is even more potent in cases where the shareholders are foreign entities, where –  in addition to the lack of information and guarantee that the warrantor has enough means to compensate creditors – there are also questions about the enforceability of the notarized statement and accruement of costs for pursuing collection abroad. Finally, there is no guarantee that the shareholders will not undergo liquidation or bankruptcy or similar wind-down procedures as soon as the Expedited Procedure is finalized.

It appears from the get-go that there is room for wrongdoing and damages and it only remains to be seen in practice what other new issues will arise and how the situation will further develop.

The information in this document does not constitute legal advice on any particular matter and is provided for general informational purposes only.