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The Bankruptcy of Entrepreneurs – a Path Towards Personal Bankruptcy?


According to the data of the Serbian Business Registers Agency (SBRA) currently, there are 281,805 registered entrepreneurs in the Republic of Serbia. This means that in Serbia, there are two times more entrepreneurs than registered companies.

Keeping in mind the abundance of entrepreneurs, and the undoubted significance they have for the whole economy, it is interesting that Serbia is one of the few countries, not only in the region but in Europe as well, which has lawfully regulated the matter of the bankruptcy of entrepreneurs. Although the Serbian Law on Bankruptcy of 2004 provided the possibility of initiating bankruptcy of entrepreneurs (natural persons), since it was not implemented in practice, this legal institution was left out during the revision of the Law in 2010 and has not existed in the Serbian legislation since then.

However, as a workgroup has been formed to draft the law that would regulate the bankruptcy of entrepreneurs, this area will not be left unregulated for much longer. The final goal of regulating the bankruptcy of entrepreneurs is a gradual introduction of the institution of bankruptcy of natural persons and personal bankruptcy into the Serbian legislation, which means that the over-indebted citizens will be enabled to pay their obligations. The plan is to introduce these institutions gradually, taking into consideration potential risks, as well as considering the capacities of the courts.

Who is an Entrepreneur?

An entrepreneur is a natural person who performs business activity for the purpose of generating income, which is registered as such before the BRA, for a definite or indefinite period.

The entrepreneur is liable with their entire property for all obligations that arise in connection with the performance of business activities, until their liability ceases by deletion from the BRA. Being liable with the entire personal property of the entrepreneur is the basic and most important difference between the entrepreneurs and members of the limited liability company, who are held liable for the obligations of the company only for their share in the company.

Besides entrepreneurs who are registered at the BRA, entrepreneurs are also natural persons who are registered in specific registries performing business activities of autonomous professions, governed by special rules (for example, attorneys at law).

What Exactly is Bankruptcy?

Bankruptcy is a court proceeding representing the most favorable collective settlement of the creditors over the debtor, by which there is a tendency to achieve the highest possible value of the debtor in bankruptcy.

It can be implemented by either filing for bankruptcy or by reorganization.

To put it simply, when one entrepreneur (the bankruptcy debtor) cannot pay what they owe, this represents a reason for bankruptcy, and the debtor’s creditors (the bankruptcy creditors) still have the right to ask for payments from the debtor. The aim of the bankruptcy procedure is to make as many creditors get paid by the debtor and to still make it the most favorable manner of payment for the debtor.

Lawful Regulation of Bankruptcy of Entrepreneurs

Nowadays, in Serbia, it is only possible for companies to file for bankruptcy, while entrepreneurs do not have this possibility.

The Ministry of Economy has formed a workgroup to draft a law which would regulate the bankruptcy of entrepreneurs, in accordance with the Program for solving problem loans for the period from 2018 until 2020 (available only in Serbian), which was adopted by the Government of the Republic of Serbia (hereinafter: Program).

The idea is to formulate the bankruptcy of entrepreneurs simply, in order to encourage creditors and debtors to start this process.

The bankruptcy of entrepreneurs should be regulated by the Law on Bankruptcy, so this means that the law would be amended, while the bankruptcy of natural persons would be regulated either by this law or by a completely new law which would be adopted, depending on the decision on court’s authority.

The Aim of Bankruptcy of Entrepreneurs

stecaj preduzetnika

The bankruptcy of entrepreneurs aims to ensure the release of entrepreneurs from over-indebtedness within an efficient period. Comparative practice has shown that the most effective approach is one that allows debt relief and a “new beginning” for the entrepreneur through the reorganization process, but at the same time care must be taken to prevent abuse. This specifically means that the protection of creditors must be ensured and the collection of their claims prevented from being circumvented.

Besides the reorganization of entrepreneurs, the possibility of non-institutional reorganization is also being considered – the so-called, financial restructuring.

It is also announced that some property of entrepreneurs will be excluded from the bankruptcy estate. The bankruptcy estate normally consists of the entire assets of the bankruptcy debtor on the day of the opening of the bankruptcy, but also those assets that the bankruptcy debtor acquires during the bankruptcy.

In terms of exemption of certain entrepreneur’s assets from the bankruptcy estate, various criteria are mentioned: exemption based on value, exemption based on the amount of money, type of assets, use of assets, and need for certain assets by the debtor and their household members.

It is necessary to use the existing institutional framework, which would certainly be applied more easily when it comes to the bankruptcy of entrepreneurs, and it shall represent a greater challenge when the bankruptcy of natural bodies will start being regulated.

The most commonly listed issue in implementing this procedure in practice is that it is often quite difficult to differentiate between the entrepreneur’s business debts, and other debts of that same individual, which are unrelated to their business activity, since the bankruptcy of entrepreneurs should not be limited only to business debts.

Since introducing bankruptcy of entrepreneurs is the first stage towards introducing bankruptcy of natural persons, the lack of this procedural regulation of bankruptcy of natural bodies is that it requires an implementation of a new institution, especially because of personal data protection. Therefore, some consider that this kind of amendment of the bankruptcy procedure is a forced solution. The implementation of the bankruptcy procedure over natural persons (individuals) will also require special training of the administrative receivers, which requires material resources as well as time.

Although it was announced that the draft law would be prepared by June 2020, it is evident that the crisis caused by COVID-19 has contributed to this procedure being prolonged.

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