Bankruptcy represents a legal concept whose purpose is the collective settlement of creditors in the most favourable way, through achieving the greatest possible value of the bankruptcy debtor’s property. It is enforced before the court having the jurisdiction over the company seat of the bankruptcy debtor and is initiated once the company can no-longer settle its obligations towards creditors. The reasons for bankruptcy can be: over-indebtedness, permanent insolvency, threatening insolvency, failure to act in accordance with the plan of reorganization and if the reorganization plan had been effected in a fraudulent or illegal way. The guiding principles in bankruptcy are: the protection of all creditors, providing equal treatment and equality among creditors of the same payment rank, enforcement with utmost priority and with as little expenses as possible in line with the principle of urgency and efficient procedure conduct in line with the principle of cost-effectiveness.
In this article we will firstly consider the key rights and obligations of the creditor, and we will then explore what are the strategies during bankruptcy proceedings that would help the creditors collect their claims and manage risks as efficiently as possible in the composite bankruptcy environment.
Bankruptcy creditors are all persons that on the day of initiation of bankruptcy proceedings have an unsecured claim towards the bankruptcy debtor. They are divided depending on the type of claim they have through classification into payment ranks, so that the bankruptcy creditors of the lower payment rank are settled only after the creditors of the higher payment rank have been paid.
The first payment rank consists of unpaid net employee earnings and contributions; the second payment rank covers the claims based on public revenues; the third payment rank is related to the claims of other bankruptcy creditors while the fourth payment rank includes unsecured loans and similar obligations towards related parties.
In the bankruptcy proceedings there are also creditors with a separate satisfaction right, secured creditors, and creditors with an exclusion right which are the recipients of financial security. Creditors belonging to either of these groups do not represent bankruptcy creditors.
Creditors with a separate satisfaction right or separate creditors are creditors with a lien, a legal right of retention or a right of settlement over objects and rights that are the subject of public books or registries and have the right of primary settlement from the assets generated through the sale of property, i.e. collection of claims over which they had acquired that right. They are entitled to a proportionate settlement from the bankruptcy estate just like bankruptcy creditors, but only if they waive their status of separate creditor or if through no fault of their own they are unable to settle their separate claims, and also in the event of implementing a partial division before the realization of property over which they have a separate right. Secured creditors are creditors that have collateral over objects or rights of the bankruptcy debtor who is the subject of public books or records, and have no monetary claims in regard to the bankruptcy debtor secured by that collateral. A creditor with an exclusion right or excluded creditor is a person which based on their actual or personal right is entitled to request that a certain item be excluded from the bankruptcy estate.
The roles of the different types of creditors in bankruptcy as well as claims in different payment ranks are governed in more detail by the Law on Bankruptcy (“Official gazette of RS”, no. 104/2009, 99/2011 – other law, 71/2012 – decision of the Constitutional Court, 83/2014, 113/2017, 44/2018 and 95/2018).
What do creditors need to know about their rights and obligations in bankruptcy proceedings? In order for the creditor’s claim to be considered during the bankruptcy proceedings it must firstly be reported to the competent court. The reporting of claims is submitted in writing and upon the expiration of the deadline established with the decision of the bankruptcy judge, and no later than 120 days from the date of announcement in the “Official Gazette of Republic of Serbia”. In addition to the application being timely it must contain the main information on the creditor, all relevant information on the debt, including the amount, as well as the basis for the claim. In reporting the claim in a manner prescribed by the law the creditor acquires the right of a party in the bankruptcy proceedings.
Additionally, in line with the principle of publicity and information the creditors are entitled to be informed on all the phases of the procedure, to inspect the information related to the procedure and to participate in hearings, give their comments on the reorganization plan (should there be one), propose a person that will act as the bankruptcy trustee, all for the purpose of informing others on the status of their claims and to better perceive the situation of the bankruptcy debtor and the procedure itself.
Auditing cannot be invoked, a return to the previous state requested nor a proposal for the repeat of procedure submitted in bankruptcy proceedings. If legal actions damaging the creditors, or placing certain creditors in a more favourable position against other creditors of the same type, was taken before the opening of bankruptcy proceedings, the bankruptcy trustee and creditors can refute these types of legal affairs, legal and process actions from the day of the opening of bankruptcy proceedings up until the hearing is held for the main division. Legal affairs or legal actions of the bankruptcy debtor are refuted through filing a lawsuit, for the purpose of prevention of uneven settlement.
In addition to the bankruptcy judge and the bankruptcy trustee, the creditors’ assembly that elects members of the creditors’ committee also represents a bankruptcy proceedings authority.
The role of the creditors committee as a bankruptcy proceedings authority is substantial and includes activities such as giving opinions to the bankruptcy trustee on the means of liquidation of assets or the continuance of commenced affairs of the bankruptcy debtor. The creditors committee controls the work of the bankruptcy trustee in the following ways: consideration of the report on the state of the bankruptcy estate and the status of the proceedings; submitting the written remarks to the bankruptcy judge on the work of the bankruptcy trustee and proposing the dismissal of the current bankruptcy trustee and proposing the appointment of a new one.
The creditors committee can file a complaint against the decisions of the bankruptcy judge, if that is permitted under the Law on Bankruptcy. The complaint is filed before a higher instance court through the court of first instance within eight days from the day of announcement of the decision on the court bulletin board, i.e., from the day of the delivery of decision to the participants of the proceedings, unless otherwise prescribed by this law.
Some useful strategies that creditors can implement to protect their claims in bankruptcy:
Timely action: Creditors need to adhere to the deadlines for registering claims, as well as other deadlines for taking actions established by the law. A delay in submitting applications, taking legal or taking process actions can lead to loss of the right to collect.
Active monitoring of the procedure: Creditors should monitor all activities in the bankruptcy proceedings and attend the meetings of creditors. In accordance with the law, announcements, decisions and other acts of the court, are published on the bulletin board and the electronic board of the court on the date of adoption. All the submissions from the bankruptcy trustee and participants in the process and all relevant appendices are published, upon receipt, on the public portal of the competent commercial court. In accordance with the above, stakeholders, such as bankruptcy trustees have the option of being acquainted with the process of the bankruptcy proceedings. With active engagement in the creditors’ assembly and committee, they can be confident that they will be informed in a timely manner on all important activities and that they will have the opportunity to affect important decisions.
Cooperation with other participants in the proceedings: In some cases, cooperation with other creditors can bring better results. Together creditors can agree on the strategies, like joint requests or negotiations. Through sound cooperation with the proceeding authorities like the bankruptcy trustee the creditors can ensure a more efficient enforcement of their rights.
Sale of property: During the sale of assets which is managed by the bankruptcy trustee, it is preferable that the creditors follow through the process to ensure that the property is sold at market price.
Reorganization: The bankruptcy proceeding doesn’t necessarily end with the debtor’s liquidation, i.e. bankruptcy, and can sometimes be reversed paving was for the reorganization of the bankruptcy debtor. Reorganization in this context implies the settlement of all creditors according to the adopted plan of reorganization and through redefining the debtor-creditor relationship, the status change of the debtor or in another manner which is provided by the plan of reorganization. The deadline for the submission of reorganization plan is no later than 90 days from the date of opening of the bankruptcy proceedings.
Bankruptcy, even though commonly perceived from the negative aspect as an end to business operation, in fact carries a potential for revitalization and renewed activation of trapped capital of the bankruptcy debtor which can prompt economic development. The protection of claims during the bankruptcy proceedings represents a challenge for the creditors, but knowing your rights and obligations, as well as strategic planning, can significantly increases the chances for success in debt collection.
