Unlike liquidation proceedings, which apply to companies that generate more revenue than they owe and are essentially operating well, bankruptcy proceedings involve companies that are over-indebted.
Bankruptcy is a highly complex legal process, and its outcome largely depends on how well it is managed.
Namely, a bankruptcy proceedings may end in:
1) Bankruptcy, where the legal entity ceases to exist after the procedure is completed, or
2) Reorganization, which allows the debtor to recover and continue operating.
The Bankruptcy Law states that the goal of bankruptcy is “the most favorable collective settlement of bankruptcy creditors
by achieving the highest possible value from the bankruptcy debtor and their assets.”
It is crucial to protect the interests of all parties involved when a company is facing such a challenging financial situation.
In a bankruptcy outcome, the creditors are paid from the value of the debtor’s total assets. The company (legal entity) is
thus terminated.
Reorganization, on the other hand, entails “the settlement of creditors according to an adopted reorganization plan by
redefining debtor-creditor relations, changing the debtor’s legal structure, or through other methods outlined in the plan.”
In essence, if creditors agree to the reorganization, the company will attempt to recover through the implementation
of a turnaround plan.
The success of a reorganization depends on the realism of the plan and the quality of the underlying business analysis.
According to unofficial data, the success rate of reorganizations among bankrupt companies in Serbia is about 30–40%.
When is Bankruptcy Proceedings Initiated?
Bankruptcy proceedings may be initiated if at least one of the following grounds is met:
· Long-term inability to pay;
· Imminent inability to pay;
· Over-indebtedness;
· Failure to comply with an approved reorganization plan or if the plan was obtained through fraud or illegality.
What does this mean in practice?
Long-term inability to pay exists if a company (the debtor) fails to fulfill its monetary obligations within 45 days of maturity (with interruptions), or suspends all payments for 30 consecutive days.
This situation is often indicated by creditors who cannot collect their claims through court or tax enforcement because the
debtor has no recoverable assets.
Imminent inability to pay arises when the company itself indicates that it will likely not be able to settle its obligations when due.
Over-indebtedness exists when the company’s liabilities exceed its assets. However, if the company is a partnership or limited partnership with at least one general partner being a natural person, it will not be considered over-indebted—because those individuals are personally liable with their entire assets.
In short, all bankruptcy grounds boil down to one thing: when a company can no longer service its obligations, bankruptcy
proceedings may be initiated.
It is important to emphasize that bankruptcy proceedings is a very complex process. Proper interpretation of legal provisions
and procedures can significantly impact the outcome for all stakeholders.
Key Participants in Bankruptcy Proceedings
The main bodies in a bankruptcy proceedings are the bankruptcy judge, bankruptcy administrator, creditors’ assembly, and
creditors’ committee. All have specific roles aimed at a single goal—maximizing creditor recovery.
The Creditor in Bankruptcy
All creditors of the debtor form the creditors’ assembly. Voting rights are proportional to the amount of each creditor’s claim. Most decisions are made by majority vote, except for decisions on bankruptcy or dismissal of the administrator, which require unanimity.
At the first hearing, the assembly elects the creditors’ committee. If there are five or fewer creditors, all serve as
committee members.
Creditors whose claims are disputed and who do not initiate litigation lose their creditor status and are excluded from the
assembly.
Creditors often fail to use all the protective mechanisms available under the Bankruptcy Law.
Our experience shows that timely legal support can significantly increase the collection rate. Key elements include:
· Proper and complete filing of claims—with all supporting documentation;
· Active participation in the creditors’ committee—creditors often lack time or experience;
· Challenging the debtor’s pre-bankruptcy actions that harmed creditors—even when rights are clearly violated, creditors may not know how to protect themselves;
· Crafting optimal recovery strategies at different stages—with practical advice from an experienced attorney.
The Debtor in Bankruptcy
When a company is facing financial difficulties, recognizing early signs and acting proactively may be crucial for its survival.
If bankruptcy can be avoided, reorganization is the better alternative—even for creditors. It is generally less disruptive to the economy, as the company may continue operating in some capacity.
However, reorganization is even more complex than bankruptcy proceedings. It requires all participants to work toward one
goal: long-term financial recovery.
Reorganization Process
Reorganization is conducted according to a written plan. It may be submitted either with the bankruptcy petition or after the proceeding is opened. If submitted at the same time as the petition, it is referred to as a pre-packaged reorganization plan (commonly known as “UPPR”).
For creditors to agree to wait longer for settlement in exchange for potentially higher recoveries, the plan must be
convincing and comprehensive.
Whether submitted before or after proceedings are opened, the reorganization plan must be detailed and precise. It should
explain the cause of insolvency, outline a recovery plan, list measures and deadlines, and include reports, expert assessments, and more.
Professional Legal Support in Bankruptcy
Given the complexity of bankruptcy, whether you’re a creditor or debtor, hiring professionals with prior experience in such
proceedings is highly recommended.
The importance of a well-prepared pre-packaged plan (UPPR) cannot be overstated.
Moreover, creditors—often businesses that have already waited a long time to be paid—are not easily convinced of future
repayment. On the debtor’s side, skilled negotiators can make a difference even before proceedings begin.
If creditors accept the reorganization, how it is structured determines whether the promises made during negotiations will be
fulfilled.
Throughout the process, someone must protect the interests of the debtor—a company in financial trouble that still has the
potential to recover.
When to Seek Legal Advice from a Bankruptcy Specialist
The optimal time to hire a specialized bankruptcy attorney is:
· If you are a creditor—immediately upon learning that proceedings have been opened;
· If you are a debtor—at the first signs of financial trouble, ideally before any formal grounds arise.
Bankruptcy is a complex legal mechanism that requires specialized knowledge and experience.
A law firm specialized for bankruptcy proceedings can represent both creditors and debtors, aiming to achieve the most favorable outcome in each unique situation.
Law Firm Petrović Mojsić & Partners
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