Bankruptcy Law
The goal of bankruptcy law is to allow for the fair and efficient dissolution of businesses that are not viable and, for those businesses that have a chance at achieving viability, the opportunity to extend, reduce, or wipe-out debt and protect themselves from pursuit by Creditors. A modern, credit-based economy requires predictable, transparent and affordable methods of enforcing debt, and a clear and efficient bankruptcy regime is central to such a system.
In Kosovo, a sound foundation for a workable bankruptcy regime has been laid through UNMIK Regulation 2003/7, which pertains to the Liquidation and Reorganization of Legal Persons in Bankruptcy (hereinafter “Bankruptcy Law”). Several issues, however, conspire to render this foundation inoperable to date.
First, although the Bankruptcy Law states that implementing rules would be enacted within 90 days of its promulgation on July 14, 2003, these rules have not been disseminated.
Second, the Bankruptcy Law applies only to “legal persons” – defined as general partnerships, limited partnerships, limited liability companies, and joint stock companies – but not to personal businesses, even those that are properly registered pursuant to the Law on Business Organizations (UNMIK Regulation 2001/6). Thus, until there is a vast shift in the way that enterprises understand the significance of limited liability and become registered accordingly, an enormous sector of Kosovo’s economy will neither contribute to nor benefit from the potential advantages of a viable bankruptcy system. Moreover, the ease with which all companies may “deregister” under the Law on Business Organizations means that Creditors seeking to enforce debt through the bankruptcy process may find that their Debtors have simply ceased to exist as “legal persons,” and therefore are not subject to the Bankruptcy Law.
Third, although the previously discussed Commercial Court seems generally prepared to assume jurisdiction over bankruptcy cases, the legal community is ill-equipped to provide adequate representation to either Debtors or Creditors. Not only are most lawyers uninformed about bankruptcy, but also there is not yet a pool of trained, experienced professionals in Kosovo who would qualify to serve in the vital role of bankruptcy Administrator.
Fourth, there is no apparent demand for a more viable bankruptcy system at this time. Major secured Creditors, chiefly the banks and especially the foreign-owned Reiffeisen Bank, typically use the existing pledge laws to enforce debt and thus have the ability to effect liquidation of a business at the expense of virtually all other Creditors, who tend to be less aggressive in collection efforts. In the category of unsecured credit, Kosovo’s public utilities reportedly clog the civil docket of the Municipal Courts with actions arising from unpaid bills and indeed use the courts as a first resort for enforcement, rather than making serious internal attempts at collection. Other unsecured Creditors, given the virtual absence of written contracts among smaller enterprises, can rarely provide sufficient proof of debt and, in any case, do not appear to consider bankruptcy as among their enforcement options.
An effort to build capacities now would have a direct effect on the long-term usefulness of the Bankruptcy Law. A plan to implement and support Kosovo’s bankruptcy regime must necessarily encompass: (a) the dissemination of implementing rules; (b) reform of the “deregistration” process, such that it cannot be used by Debtors as a simple tool to avoid bankruptcy; (c) the training of judges, lawyers, and businesses about the details of the Bankruptcy Law, with an emphasis on the significance of business registration options, the importance of secured debt, and opportunities presented through business reorganization; (d) special training for persons who seek to serve as Administrators and Appraisers; and (e) better resources in the area of commercial law generally.
