A Good Law -- the First Barrier Against Corruption

The EUR360 million sale of the Robne Kuce Beograd department store chain, one of the largest businesses in the former Yugoslavia, to the Belgrade-based company Verano Motors at the end of October 2007 has so far been the most successful sale of a bankrupt company in Serbia. The company had not been operating ten years, the bankruptcy proceedings had taken six, and who knows when they would have ended and what property would have been left for sale had the new Bankruptcy Law not been applied.

The large number of bankruptcies in Serbia involve various abuses of office which damaged both the state and the employees of the liquidated companies. The court trial of members of the so-called "Bankruptcy Mafia" -- which has been in progress at the Belgrade Special Court since January 2007 -- has shown that the property of such businesses had been rented out or sold for amounts several times under market prices, but also that legal regulations allowed bankruptcy proceedings to last up to 15 years, with creditors being unable to participate. The trial involves 35 defendants, including several senior receivers of once large companies such as Beko, Rad, Ineks, and BIM Slavija.

The application of the new Bankruptcy Law, from February 2005, which replaced the Law on Mandated Settlements, Bankruptcy and Liquidation, has shown that good regulations can prevent abuse and corruption, i.e. that bankruptcy proceedings can be concluded in about a year, with the company's property put toward paying out creditors, instead of the receivers and their business partners.

The new law has charged the Privatization Agency with naming the receivers for all public and state-owned businesses still undergoing bankruptcy proceedings, and has stipulated that these, and all other bankrupt companies, can be administered only by licensed receivers.

The New Law: Clear and Predictable

The new law, according to the Privatization Agency's communication center, is clear and predictable. It includes provisions which precisely state the prerequisites for launching bankruptcy proceedings, who exactly is to submit a bankruptcy application, and clearly differentiate the roles of all participants in the process.

Thus, the law makes disbursing creditors easier and increases the property value of bankrupt businesses. The previous law gave no precise deadlines or consequences, allowing processes to last years, while today the average is 15 months, the Agency says.

The new law mandates that all bankruptcy proceedings involve the naming of a licensed receiver. Such an individual must have a university degree, a minimum of three years' work experience, and must have passed the receiver's exam. Licensed receivers are governed in their work by the Receivers' Code of Ethics, which requires expertise and independent judgment, a high level of personal responsibility, and personal financial accountability, with one's own property at stake if need be, for one's actions.

Receivers' compensation is based on personal achievement and the quality of their work results. This, the Agency explains, increases not only motivation, but also the sense of responsibility for the task at hand.

The previous law provided neither standards receivers had to meet, nor a Code of Ethics. Fixed wages were issued monthly, giving no incentive to close a case. The new law allows receivers to perform the operational work, which involves economic and legal issues, while judges monitor the receiver and make sure the proceedings are in keeping with the law. Previously, all these duties were performed by the bankruptcy committee.

Furthermore, the new legal act has given the creditors of bankrupt businesses wider authority. They now decide on possible solutions, have the opportunity to voice their opinions regarding key issues, and comment on decisions the licensed receiver makes during the bankruptcy proceedings. The creditors' role was not clearly defined by the old law, nor were they in the position to offer their opinion.

Clear deadlines have been stated for every step of the proceedings, as are the consequences should they not be met. Time limits for key stages have been introduced, guaranteeing the swift processing and conclusion of a process, unlike the previous law, whose lack of specifics allowed the processes to drag on for years.

The new legal act has built-in safety mechanisms, such as court monitoring, creditor participation, and the licensing and supervision of receivers by the Agency for Receiver Licensing, with strict sanctions for illegal conduct. Creditors have been provided with access to information, they provide suggestions for solving the case, and can submit complaints to the bankruptcy judge or bankruptcy committee. Previously, both the role and influence of the creditors was marginalized.

The licensed receiver is obliged to submit monthly reports to all participants in the process, including the creditors. Financial reports, with financial and success breakdowns and money flow information, must be part of these monthly summaries. The old law contained no provisions which stimulated communication among participants in the process or guaranteed that the work of the receiver and other bankruptcy bodies would be public.

The Privatization Agency has said that international organizations such as the World Bank, the International Monetary Fund, the European Bank for Reconstruction and Development, and the Organization for Security and Cooperation in Europe, have commended the new bankruptcy act, concluding that it meets international standards. According to the World Bank, Serbia has become a better place to do business since the law has taken effect.

The Privatization Agency has currently been named the receiver of 450 companies. In total, the Agency has sold the property of 150 businesses, altogether worth 35.1 billion dinars. Partial property sales in 122 companies have yielded 6.2 billion dinars in profit.

Shorter Bankruptcy Proceedings

The length of bankruptcy proceedings has, through the application of the new law, been reduced from seven years to 15 months on average. "This means that we've cut the 'bankruptcy agony' of companies to almost one-sixth of what it used to be. It's in no one's interest for a company to be processed for long, and by such a reduced timeline we've significantly increased the probability that the company will survive, and that the creditors will receive as high a compensation as possible," the Agency points out.

The percentage of funds reimbursed to creditors has significantly increased and the number of those receiving 100 percent payouts is on the rise. "Clearly, the successful sale of a bankrupt company is of primary importance to everyone, but one must also take into account that the creditors play an important role in the country's economy. The more debts they collect, the better they'll be able to do business, they'll prosper, and their employees will get regular salaries. That's why we must keep in mind that the positive effects of a successful bankruptcy process are felt throughout the Serbian economy," representatives of the Agency explained.

The most recent example of a successful bankruptcy sale is the EUR15 million sale of Jugoexport's business space in 15 Knez Mihailova St, Belgrade -- also achieved thanks to the new Bankruptcy Law. These business quarters, as well as office space belonging to other companies, were leased for sums several times below market prices. The Agency changed the leasing contracts wherever it was able to, while a few cases are still awaiting verdicts that are expected to annul the contracts.

In proceedings launched according to the previous law, the Privatization Agency became the newly-appointed receiver, taking over where the previous receiver left off. Bankruptcy, however, does not allow any revisions, so the Agency has no right or jurisdiction to question the work of previous receivers. This is up to authorities such as the prosecution.

Although the new law is not part of the criminal law, according to the Privatization Agency it does regulate how its provisions are implemented and how decisions are made during the proceedings, as well as provide penalties in cases where participants knowingly violate the law. The receiver is held responsible for all damage brought about intentionally or as a result of his gross neglect, as well as for damage caused by experts he has hired, in case he has failed to monitor their work. If the damage is a result of the criminal activity of any participant of the bankruptcy proceedings, the public prosecutor is entitled and obliged to file criminal charges.

For the most part, the Privatization Agency cooperates well with the trade courts which are currently handling some 1,000 bankruptcy cases.

Receivers Independent At Last

Belgrade's Trade Court President Stevo Duranovic tells Argus that bankruptcy proceedings have significantly been influenced not only by the new Bankruptcy Law, but also by an array of other legal acts and bylaws. Among others, Duranovic named the Agency for Receiver Licensing Law, the Receivers' Code of Ethics, and regulations regarding the receivers' professional exam, receivers' compensation, and national receivership standards.

"What's important in the new law is that receivers are instituted as an independent body with the rights and responsibilities of directors or owners of the bankrupt company, and that they are held personally accountable, with their own property at stake, for any damages caused to any participant in the proceedings, resulting from intent or gross neglect. As far as abiding by deadlines, the liquidation of property, leasing the bankrupt company's business space, and paying out creditors is concerned, the receiver is required to act as would a professional entrepreneur. Also new and relevant is the introduction of the assembly and creditors' committee to bankruptcy proceedings, as mandatory bodies which give their opinions and approval to the receiver. Thus, the receiver can undertake anything of significance to the company's property, such as raising a credit or buying or selling a large portion of it, after notifying the bankruptcy judge and acquiring approval from either the creditors' committee, or those creditors whose interests are affected by the undertaking. This not only enhances supervision of the receiver's work, but also puts the interests of the creditors in first place," Duranovic explained.

Commenting on particular aspects of the bankruptcy process, Duranovic said that the new regulations have notably shortened and clarified all stages of the proceedings, but that there are still obstacles in concluding a bankruptcy process.

"One reason is the sheer number and length of the court proceedings caused by challenged claims, unclear property ownership, disorderly financial documentation, appeals regarding legal actions, insufficient cooperation between the receiver and the committee, passivity on part of the creditors," said Duranovic.

Belgrade's Trade Court is currently handling 295 bankruptcy cases, while 255 were closed in 2007. Since the new law has been put into effect, a total of 651 bankruptcy proceedings have been dealt with.

The court has six bankruptcy chambers, and the president of each handles some 50 cases. This, according to Duranovic, is a large burden not only for them but for the trial and out-of-trial bankruptcy judges as well.

Duranovic also said that since the so-called "Bankruptcy Mafia" scandal broke out and led to the arrest and suspension from duty of Trade Court President Goran Kljajevic and Trade Court Judge Delinka Djurdjevic, all Special Court bankruptcy receivers in cases linked to the scandal have been replaced, with changes also made to the trial chambers. Orders were issued for the inspection of all cases, and decisions deemed detrimental to given bankrupt companies were revised and annulled. Regular consultations between the receivers, the Bankruptcy Center and the Agency for Licensing Receivers and Bankruptcy Judges were introduced, while gaps in the Bankruptcy Law were noted and a working group, which subsequently suggested how the law and other legal acts could be changed and broadened, was formed.

One hundred and twenty eight thousand businesses submitted financial reports for 2006 to the National Bank of Serbia, 1,470 of which were undergoing bankruptcy or liquidation. Estimates say that this number will somewhat decrease for 2007, but that 2008 will see the revival of several hundred bankrupt businesses which will not find a buyer, due to lack of interest.