Restructuring and insolvency law in Bosnia and Herzegovina

1. What is the primary legislation governing restructuring proceedings in your jurisdiction?

Bosnia and Herzegovina (BiH) consists of two entities, the Federation of Bosnia and Herzegovina (FBiH) and the Republika Srpska (RS), and one self-governing unit, the Brčko District (BD), each with its own legal regime. Answers in this guide on insolvency and restructuring proceedings are based on three main pieces of legislation:

• FBiH Law on Insolvency
• RS Law on Insolvency
• BD Law on Insolvency.

Further provisions regarding restructuring are found in the relevant company laws of FBiH, RS and BD and the relevant laws on financial business operations applicable in the territories of FBiH and BD.

2. How are restructuring proceedings initiated?

According to the laws in force in all three administrative units of BiH, restructuring proceedings are initiated at the written proposal of the debtor, or the creditor with the consent of the debtor, before the court competent for conducting the proceedings. A creditor that initiates proceedings must submit the debtor’s consent along with its proposal.

After the proposal is submitted with all required attachments, the competent court examines and decides on its admissibility within 8 days from the date of submission.

3. Which different types of restructuring proceedings exist and what are their characteristics?

Pre-insolvency financial restructuring/Restructuring

FBiH and BD

Pre-insolvency financial restructuring represents a procedure conducted by the competent court. Its purpose is to allow a debtor threatened by insolvency and its creditors to conclude an agreement, under the court’s supervision, which will improve the liquidity and insolvency of the debtor through financial and operational restructuring, allowing the debtor to continue performing its activity.

RS

Restructuring is carried out in RS to regulate the legal position of a debtor and its relationship with creditors for the purpose of facilitating the continuation of the performance of its activities. The mechanism was introduced in 2016 as a measure of recovery of debtors by concluding an agreement with creditors. It essentially represents an alternative to insolvency proceedings and the termination of a business entity, and is almost identical to the legal concept and solution introduced in the FBiH in 2021 under a different name (i.e. pre-insolvency financial restructuring).

Reorganisation within general insolvency proceedings

FBiH and BD

Reorganisation proceedings may only be conducted after initiating insolvency proceedings before the competent court. The purpose of these proceedings is to define the legal status of the debtor and relations with its creditors, with an emphasis on maintaining the debtor’s business operations and employees. 

RS

Reorganisation represents an alternative option to insolvent liquidation conducted under the rules of the general insolvency proceedings. Its purpose corresponds to the purpose of reorganisation proceedings in the FBiH and BD.

4. Are there different types of creditors and what is the significance of the differences between them?

Pre-insolvency financial restructuring (FBiH and BD) and Restructuring (RS)

Even though the laws do not recognise any difference in voting rights, creditors may be distinguished as those whose claims are:

• reduced in accordance with their statement of reduction of claims
• reduced in accordance with the law
• disputed
• not affected by the pre-insolvency proceedings.

Reorganisation within general insolvency proceedings (FBiH, BD and RS)

Generally, there are two groups of creditors:

• secured creditors (povjerioci s pravom odvojenog namirenja)
• creditors classified by payment priority (povjerioci razvrstani po isplatnim redovima), further divided into three sub-groups:
  • higher priority
  • general priority
  • lower priority.

According to applicable laws, the following groups of creditors are recognised in reorganisation proceedings:

• secured creditors if the reorganisation plan affects their rights
• creditors not of lower priority (e.g. unsecured creditors)
• each class of creditor of lower priority if their claims are not discharged in accordance with the law
• employees if, in their capacity as creditors in the insolvency proceedings, they claim sums that are not negligible.

5. Is there any obligation to initiate restructuring/insolvency proceedings? For whom does this obligation exist and under what conditions? What are the consequences if this obligation is violated?

Once the inability to make payments occurs, a debtor’s authorised representatives are obliged, without delay, to file a proposal to open an insolvency proceeding. The proposal must generally be filed within 60 days from the date of occurrence of inability to make payments. The authorised representatives are required to compensate the legal entity for the loss of property caused by their legally binding actions taken after the inability to make payments occurs, unless they can prove that these actions were taken with due care and diligence.

The responsible person of the insolvency debtor shall be fined with a monetary fine in the amount of BAM 10,000-20,000 (corresponding to approximately EUR 5,113-10,226) if they do not submit the proposal for the opening of insolvency proceedings.

6. What are the main duties of the representative bodies in connection with restructuring proceedings?

In addition to the considerations under Q5 above, a director is always required to act in accordance with the company’s best interests. Should a director violate this obligation, the company is entitled to claim damages from the director. In FBiH, fines ranging from BAM 1,500-3,000 (approximately EUR 767-1534) may be imposed if the director of an illiquid company makes any payments other than those necessary for the ordinary course of business.

Furthermore, a director is obliged to take all necessary measures to ensure the company’s liquidity and to manage the assets and liabilities of the company so that it is capable of performing all its due obligations.

Note that the measures and actions mentioned are explicitly regulated only in FBiH, i.e. not in RS. Further obligations of the representative bodies are regulated in the Law on Financial Business Operations of FBiH.

7. What are the main duties of shareholders in connection with restructuring proceedings?

In case of insolvency, administration of the legal entity is transferred primarily to the insolvency administrator, supported by the insolvency judge, assembly of creditors and board of creditors, each within their competence defined by the applicable legislation. Therefore, once insolvency proceedings are opened, shareholders are effectively stripped of the decision-making powers they typically exercise within a shareholders’ assembly.

In terms of legal transactions between shareholders and the legal entity, note that legal transactions by which:

• security is provided for the claim of a shareholder of the company for repayment of a loan replacing capital may be annulled if the action was taken in the 5 years before submission of the proposal for the opening of insolvency proceedings or after that deadline
• the claim of a shareholder of the company for repayment of a loan replacing capital is secured may be annulled if the action was taken in the 3 years before submission of the proposal for the opening of insolvency proceedings or after that deadline. 

1. What is the primary legislation governing insolvency proceedings in your jurisdiction?

See Q1 under Restructuring.

2. How are insolvency proceedings initiated?

Insolvency proceedings are initiated by a written petition of either the debtor or any creditor who has a legally recognised interest to conduct such proceedings. The creditor is obliged to show, by attaching the appropriate documentation, that its claim, and the inability of the debtor to make payments, is probable.

After the opening of an insolvency proceeding, a reorganisation plan may be drafted that deviates from the provisions of law governing the liquidation and distribution of the insolvency estate. The insolvency debtor may file a reorganisation plan together with a proposal to open insolvency proceedings.

FBiH

After the opening of insolvency proceedings, the right to file a reorganisation plan with the respective court is granted to the insolvency administrator and to the insolvency debtor until the final hearing at the latest.

RS

The insolvency debtor may also submit an insolvency plan during insolvency proceedings if it could not do so when submitting the proposal for opening insolvency proceedings and if it obtains the consent of the assembly of creditors.

It is also explicitly regulated that restructuring proceedings can be initiated at the proposal of a debtor, or at the proposal of a creditor if the debtor agrees with such proposal and the consent of the debtor is submitted along with the proposal.

3. What are the legal reasons for insolvency in your country?

The reasons for opening insolvency proceedings are:

• insolvency of the debtor
• threatened insolvency
• failure to act in accordance with the adopted reorganisation plan
• if the reorganisation plan was effected by fraud or in an illegal manner.

4. Which different types of insolvency proceedings exist and what are their characteristics?

Besides proceedings of restructuring (see Restructuring above), the only type of insolvency proceedings are bankruptcy proceedings. A bankruptcy proceeding is conducted for the purpose of satisfying the debtor’s creditors collectively through the liquidation of its property and distribution of the generated proceeds to the creditors.

5. Are there different types of creditors and what is the significance of the differences between them?

There are four categories involved in insolvency proceedings:

• insolvency creditors (stečajni povjerioci): creditors who at the time of the opening of insolvency proceedings have established a claim towards the insolvency debtor
• creditors of the insolvency estate (povjerioci stečajne mase): creditors who during insolvency proceedings acquire a claim towards the insolvency estate
• extraction creditors (izlučni povjerioci): persons who have the right to extract an asset from the insolvency estate as the latter does not belong to the insolvency debtor, and who are not considered insolvency creditors
• secured creditors (razlučni povjerioci): creditors with a claim secured by an asset included in the insolvency estate that are authorised to request separate settlement of their claim from the subject of the security.

According to their type of claim, creditors are classified in payment priorities: higher, general or lower payment priority.

6. Is a solvent liquidation of the company an alternative to regular insolvency proceedings?

Generally, shareholders can initiate liquidation proceedings if the legal entity is capable of meeting its existing obligations. However, if a debtor is unable to meet its accrued and outstanding monetary liabilities (see Q3 above), shareholders cannot decide to voluntarily liquidate the company, and solvent liquidation is not an alternative to regular insolvency proceedings.

In other words, if shareholders initiate a liquidation procedure in an entity where conditions for conducting a liquidation procedure have not been met, the liquidator shall within 15 days submit a proposal to suspend the liquidation procedure and open insolvency proceedings. 

1. If a lender wants to monitor its borrower very closely (i.e. more closely than the usual information covenants in the credit agreement require), what options are there?

There is no provision in applicable laws that entitles a lender to closely monitor a debtor that is not yet subject to insolvency proceedings, but contractual terms may be agreed. During insolvency proceedings, lenders may monitor the company more closely and in a manner prescribed by applicable insolvency proceedings rules.

2. What issues arise if a creditor extends credit facilities or offers support conditional on additional or extended guarantees to a company in financial difficulties and/or takes asset security?

A creditor cannot take asset security over the company’s assets after the opening of bankruptcy proceedings. Any procedure upon request to secure assets pending at the moment of opening the bankruptcy proceedings will be terminated.

However, even if the extension of credit facilities or support conditional on extended or additional guarantees to a company in financial difficulties is conducted before opening bankruptcy proceedings, it may fall within one of the following reasons for contesting legal actions/transactions:

Congruent settlement

Legal transactions and actions entered into up to 12 months before filing for bankruptcy proceedings, which provide security or settlement to a creditor, may be contested if the debtor was insolvent at the time, or the creditor knew or ought to have known of the debtor’s insolvency.

Incongruent settlement

Legal transactions and actions that provide security or settlement for one creditor which it was not entitled to request, or which it was entitled to request but not in the manner and at the time when it was provided, may be contested if the transaction was entered into up to 6 months before filing for bankruptcy proceedings and the bankrupt debtor was insolvent at the time of the legal action. Additionally, regardless of whether the bankruptcy debtor was insolvent at that time, the same legal transaction may be contested if it was entered into 90 days before the opening of bankruptcy proceedings.

If legal action is finally contested for any of the above-mentioned reasons, the creditor would be obliged to return to the bankruptcy estate all property benefits acquired on the basis of the contested action.

1. How does a lender sell a loan?

According to applicable regulations in BiH, any claim (including a NPL) may be transferred, unless the claim is non-transferable because:

• there is a non-assignment clause in the underlying agreement
• the law so provides, or
• the claim is personal in nature and cannot be transferred to another person.

Assignment does not necessarily require the consent of the borrower, but loan agreements usually provide for such consent. The original loan agreement stays in place and assignment will be effective towards the debtor when it has received notification from the assignor or the assignee. If a loan is assigned, the new creditor takes over the position of the original creditor.

2. If the underlying credit agreement prohibits transfer or assignment (i.e. a change in the lender of record), how else – if at all – can a lender transfer the economic risk and/or benefit in the loan? For instance, are sub-participation agreements allowed under the law of your jurisdiction?

Sub-participation agreements (agreements between the existing lender and the sub-participant whereby the sub-participant assumes the benefits and risks associated with a loan granted by the existing lender) are recognised by the laws of BiH. However, sub-participation agreements are allowed only provided that specific requirements prescribed in Decisions on Purchase and Sale of Bank Placements, adopted in both FBiH and RS, are fulfilled. Due benefits and risks associated with the loan may be sold to another bank or legal person registered for the performance of receivables collection. Benefits and risks that are not due may only be sold to another bank.

In order to sell the risks connected to the loan in question, the bank shall obtain a permit from the Federal Banking Agency (FBA) or Banking Agency of RS (BARS). The aforementioned authorities determine if the conditions for the assignment of economic risk are fulfilled.

3. Regulatory issues: is any form of licence or prior authorisation from any regulatory authority required for the purchase, sale and/or transfer of loans? Does it fall within the definition of providing banking or financial services in the territory of the assignor or the borrower?

Even though applicable regulations imply that certain authorisation should be required for companies dealing with the purchase of loans, currently this sector is considered a grey area as no specific obligation for obtaining any kind of authorisation/licence/permit is required. The purchaser of a loan must only be registered before the competent court registry in BiH for the performance of such services. (According to BARS, this falls within “Other financial service activities”.) Agencies registered for the performance of such activities are usually established as LLCs and, as such, do not fall under the supervision umbrella of the FBA or BARS.

In order to sell a loan, according to the Decision on Purchase and Sale of Bank Placements (FBiH and RS), a bank must obtain a permit from the relevant banking agency (FBA or BARS), which determines if the criteria for the sale are met. Before making a decision on concluding a contract, among other requirements, a bank intending to sell a loan is required to evaluate the buyer from the aspect of its legal status, its business and its financial, personnel and technical abilities to take over the loan.