Avoidance rights in Bosnia and Herzegovina

On 7 December 2022, the EU Commission published a draft directive harmonising certain aspects of insolvency law, which is now undergoing EU legislative procedure. In light of this the proposal, this article provides an overview of the current state of avoidance rights regulation under the insolvency legal framework in Bosnia and Herzegovina.

Insolvency avoidance rights regulation in Bosnia and Herzegovina

Bosnia and Herzegovina (BiH) consist of two distinct administrative entities: the Federation of BiH (FBiH) and Republika Srpska (RS), and the special administrative unit Brčko District of BiH (BD). In accordance with the constitutional division of competences, insolvency falls under the authority of administrative entities.

The laws of Bosnia and Herzegovina already recognise the right to avoid debtor's legal actions. This right is generally recognised within the Law on Contracts and Torts of FBiH, Law on Contracts and Torts of RS and Law on Contracts and Torts of BD. Due to the particularities that the insolvency proceedings entail, however, avoidance of insolvency debtor's legal actions is specifically regulated by the insolvency laws adopted at the level of administrative units (i.e. Law on Insolvency of FBiH, Laws on Insolvency of RS and Law on Insolvency of BD). With the entry into force of the new Law on Insolvency in FBiH, the rules regarding insolvency proceedings have been largely harmonised across the territory of BiH.

General requirements for avoidance actions under BiH legal framework

According to the existing insolvency framework in BiH (FBiH, RS and BD), insolvency debtor's legal actions may be contested if (a) they violate equal settlement of insolvency creditors; or (b) they put individual creditors in a more favourable position than other creditors. In each case, contested legal action (e.g. an act or an omission) is considered taken at the moment in which its legal effects take place. In case legal action is limited by a term or condition, the occurrence of such a term or condition will not be taken into account.

According to all applicable insolvency regulations in BiH, compulsory enforcement is also considered a legal action that can be contested in avoidance proceedings.

Relevant laws also provide an exhaustive list of non-contestable legal actions taken within the restructuring proceedings. Those actions include: (a) transactions made by the insolvency debtor in a regular course of business; (b) transactions made by the insolvency debtor outside the regular course of business for which the insolvency debtor has been authorised by the court or commissioner; (c) transactions made as part of the execution of an approved financial and operational restructuring plan.

Specific requirements for avoidance actions under BiH legal framework

Avoidance of the usual cover actions (congruent cover)

Legal acts benefitting a creditor or a group of creditors by satisfaction or collateralisation can be declared void if: (a) they come into force within the last 12 months prior to the submission of the request for the opening of insolvency proceedings; and (b) at the time of such action the insolvency debtor was insolvent or the creditor knew or could not have been unaware of such insolvency (due to a gross negligence). The applicable laws also allow avoidance in case of the congruent cover if (a) the action is taken after the submission of the request for the opening of insolvency proceedings; and (b) the creditor was aware or could not have been unaware (due to a gross negligence) of the debtor's financial situation or the opening of insolvency proceedings.

Avoidance of actions directly detrimental to the creditor (non-congruent cover)

Non-congruent cover exists when the insolvency debtor's legal action provided the creditor with satisfaction or collateralisation the creditor was not entitled to claim. In case of non-congruent cover, insolvency debtor's legal action can be declared void if (a) it had been taken 90 days prior to the submission of the request for the opening of insolvency proceedings or after such a request; or (b) it has been taken six months prior to the submission of the request for the opening of insolvency proceedings and the insolvency debtor was insolvent at that time.

Avoidance of legal actions that are intentionally detrimental to the creditor

Insolvency debtor's legal acts that are intentionally detrimental to creditors can be declared void if such action were taken within five years prior to the submission of the request for the opening of insolvency proceedings or after such a request, and that the other party knew or should have known of such detrimental intent.

Avoidance of actions without compensation or with inadequate compensation

Actions against no compensation or inadequate compensation taken by the insolvency debtor are voidable unless taken five years prior to the submission of the request for the opening of insolvency proceedings. It is considered that legal action is without compensation or inadequate compensation when the insolvency debtor gave up some property value without receiving an appropriate countermeasure as compensation. Ordinary occasional gifts of insignificant value cannot be contested.

In addition to the above, applicable regulations recognise voidability in regard to loans that compensate the share capital. If the security was provided for a shareholder’s claim for return of a loan that compensates the share capital or for a corresponding claim, such action can be contested if it was taken in the last five years prior to the submission of the request for the opening of insolvency proceedings or after such a request. If a cover has been secured for the same claim of a shareholder, such action can be contested if it was taken within the last three years prior to the submission of the request for the opening of insolvency proceedings or after such a request.

Avoidance procedure and consequences of avoidance

Under the existing legal framework, an insolvency officer or any creditor (provided that the insolvency officer does not initiate litigation at the creditor's invitation within 30 days from the date of receipt of such an invitation) can contest the actions described above by a lawsuit within two years from the day of the opening of insolvency proceedings. The competent court to resolve the disputes initiated by the avoidance lawsuit is the court on whose territory a registered office of a legal entity or a residence of an individual debtor is located. The actions may also be contested by filing a counterclaim or objection in an ongoing lawsuit. In such case, however, the two-year limitation does not apply.

If an act is avoided, it is considered to have never existed, and any benefits received based on the avoided act will need to be reimbursed to an insolvency estate. Even the recipient of an action/service without compensation or with inadequate compensation would have to return received benefits if such person knew or should have known that the service causes damage to a creditor.

For more information on the proposed directive and avoidance regulations in BiH, contact your CMS client partner or these CMS experts.