Bankruptcy Sale: Buying a Distressed Business

 

Companies “fall into bankruptcy” due to permanent inability to pay a due, over-indebtedness or some other reasons provided by law. However, this does not necessarily mean the end for the company. In our legal system, the institute of going concern asset sale enables the legal continuity of a company that is in a bad financial position. The essence of this institute is in preserving the value and durability of an economic entity, contrary to the tendency to establish new economic entities without any reputation. In that way, it is possible not only to save jobs, but also to reduce the negative publicity that can hinder the success of the new company. The value of a company is reflected in the assessment of the possibility of survival and profit in the future, in contrast to the value obtained by selling assets in the process of bankruptcy. A company should be viewed through its potential, unless there is good reason to believe that shall collapse. Of course, this procedure is not always possible, and in the following text we shall explain which conditions must be met in order to proceed with the sale, as well as what legal consequences accompany going concern asset sale.

 

 

  1. The term

 

Bankruptcy procedure is regulated by the Bankruptcy Law (“Official Gazette of RS”, No. 104/2009, 99/2011 – other law, 71/2012 – decision US, 83/2014, 113/2017, 44/2018 and 95 / 2018, hereinafter “the Law“).

 

The law prescribes two possible ways of conducting bankruptcy procedure over legal entities, namely bankruptcy and reorganization.

 

Bankruptcy means the settlement of bankruptcy creditors from the value of the bankruptcy debtor’s property.

 

In this context, we distinguish four “ways of liquidation” of the bankruptcy debtor’s property, as defined by the Law, namely the sale of the entire property, the sale of the property unit, the sale of individual property and the going concern asset sale.

 

When it comes to the institute of going concern asset sale, this method is implemented when it is estimated the possibility to achieve a greater property gain than which would be achieved by individual sale of the bankruptcy debtor’s property. The consequence of that is that the bankruptcy procedure is suspended over the bankruptcy debtor, and continues for the bankruptcy estate.

 

 

  1. Conditions for conducting the procedure

 

The going concern asset sale is carried out with the fulfilment of the following conditions:

 

  • Making a decision on bankruptcy (Article 131 of the Law)

 

After the decision on bankruptcy is made, the bankruptcy estate is liquidated, then the creditors are settled and after that the bankruptcy procedure is concluded, except in the case of the going concern asset sale when the bankruptcy procedure is suspended. Therefore, the going concern asset sale is the only exception which, after the decision on bankruptcy, does not lead to the conclusion of the bankruptcy procedure, but suspends it. The bankruptcy judge makes a decision on bankruptcy if at the first creditor hearing the appropriate number of creditors who represent at least 50% of the total unsecured claims against the bankruptcy debtor vote for it, if no reorganization plan has been submitted, ie. if no reorganization plan has been adopted at the hearing for consideration of the reorganization plan. Only in the case of fulfilment of the first condition, the decision on bankruptcy can be made before the expiration of the deadline for submitting the reorganization plan.

 

 

  • Obligation to assess the feasibility of the sale

 

The Law prescribes the obligation of the bankruptcy trustee to assess that the going concern asset sale is more feasible than the sale of individual assets of the bankruptcy debtor through an authorized appraiser. The assessment is performed by applying the national standards prescribed by the Rulebook on Determining National Standards for Bankruptcy Estate Management (“Official Gazette of the RS”, No. 62/2018, hereinafter “the Rulebook“). The Rulebook prescribes: “In case he proposes the sale of the entire property of the bankruptcy debtor, property unit or going concern asset sale, for the purpose of selecting an authorized expert (appraiser) to assess the value of the property or bankruptcy debtor as a legal entity and assess the expediency of such liquidation, the bankruptcy trustee publishes an advertisement on the website of the bankruptcy trustee Licensing Agency, inviting experts to submit bids for the assessment. The announcement shall be published at least eight days before the deadline for submission of bids. When the property covered by the sale of the entire property of the bankruptcy debtor, property unit or going concern asset sale is the subject of securing the claims of one or more creditors with separate satisfaction right and pledged creditors, the bankruptcy trustee submits the list of all submitted bids to the board of creditors, which within eight days from the day of submission decides on the selection of the best bidder, taking into account not only the financial bid but also the expertise, references and other elements of the bid. The board of creditors selects the best bidder exclusively from the list of submitted bids and may not invite other bidders to submit bids, nor order the bankruptcy trustee to repeat the announcement. In case the board of creditors does not make a decision within eight days from the day of delivery, the selection of the bidder is done by the bankruptcy trustee, applying the same criteria.

 

 

For the purposes of assessment, the so-called “yield method” (discounted cash flow method) that is in accordance with International Accounting Standards. This method is considered by the company as a mechanism for making profit – profit and the value of the company depends on this ability. Therefore, the essence is not in the simple addition of the estimated values ​​of the parts of the bankruptcy debtor’s property, but the potential of that company to achieve business success and make a profit in the future with its property resources, free from obligations is crucial. The assessment must define the amount of the part of the purchase price at which the creditors with separate satisfaction right and pledged creditors will have the right of priority in settlement in accordance with Article 133, paragraph 12 of the Law. The bankruptcy trustee submits the assessment to the court, the board of creditors and any separate / pledged creditor who has a separate / pledged right to the property covered by such sale. That is why the board of creditors, the separate / pledged creditors are authorized to file an objection to the assessment within 15 days from the date of receipt, in which case the court, based on a conscientious and careful assessment, will determine the feasibility of the proposed method of sale and the appropriate part of the purchase price on which the separate / pledged creditor has the right of priority settlement in a conclusion.

 

  • Obligation to submit notification

 

The bankruptcy trustee has the obligation to notify the separate and pledged creditors in advance of the intention, sale plan, method of liquidation, method of sale and terms of sale no later than 15 days before the day of publishing the announcement, i.e. before the day of the sale by direct agreement. It should be noted that the Law prescribes three methods of selling property, and thus the going concern asset sale: public bidding, sale by public offers collection and sale by direct agreement. When the property covered by the sale is the subject of securing the claim of one or more separate and pledged creditors, they may within five days from the date of receipt of the notice of the proposed sale file an objection to the proposed sale, including a proposal of a more favourable method of liquidation, i.e. the method of selling the property. In case the bankruptcy trustee does not accept the proposal of the separate or pledged creditor on a more favourable way of liquidating the property from the objection, the bankruptcy judge will decide on such a proposal within 5 days, especially taking into account the assessment of the feasibility of going concern asset sale, as well as whether the assessment of the value of the bankruptcy debtor as a legal entity or property subject to separate rights has been performed in accordance with national standards for bankruptcy estate management and whether such sale achieves a clearly less favourable settlement of the separate and pledged creditor than the separate sale. The sale cannot be approached before the court decision (suspensive effect of the objection). In case of approval of the proposal of the separate or pledged creditor, the bankruptcy judge may, by a conclusion, order the bankruptcy trustee to take one or more of the following measures:

 

  1. deferral of sale;
  2. performing a new assessment of feasibility referred to in Article 132, paragraph 2 of the Law or assessment of the value of the bankruptcy debtor as a legal entity, i.e. property that is the subject of a separate and pledged right;
  • separation of the property on which there is a separate and pledged right from the property of the bankruptcy debtor which is in going concern asset sale and its separate sale;
  1. other measures in order to adequately protect the interests of the separate and pledged creditor.

The sale by direct agreement can be made only if such a method of sale is previously approved by the board of creditors and with the prior consent of the separate or pledged creditor, if: no attempt has been previously made by public bidding or sale by public offers collection, that the property being sold is the subject of a lien or separation right and that the proposed purchase price does not cover the entire amount of the secured claim.

We conclude that separate and pledged creditors are multiple protected and have numerous rights in accordance with the binding Law, which was not the case with previous regulations.

 

  • Obligation to obtain the consent of the board of creditors on the proposal of the bankruptcy trustee to conduct the sale;

 

The bankruptcy trustee will proceed with the going concern asset sale after the expiration of 15 days for filing an objection by the board of creditors, the separate / pledged creditor on the submitted assessment of feasibility, or after receiving the bankruptcy judge’s decision on the objection, if the objection was filed. The consent of the board of creditors on the proposal of the bankruptcy trustee for the implementation of the sale is certainly necessary, regardless of the fact whether the objection was previously filed or not.

 

  1. Procedure and consequences of the sale

 

  • Conclusion of the contract

 

The Law does not prescribe the essential elements of the contract on the going concern asset sale, so the rules from the Law on Companies and the Law on Contracts and Torts apply. The contract on the going concern asset sale is the consent of the contractual will, which on the side of the seller of the bankruptcy debtor is represented by the bankruptcy trustee and on the side of the buyer by a natural or legal entity. The contract on the going concern asset sale is, by its legal nature, a complex, bilaterally obligatory, encumbrance and commutative contract.

 

The contract on the going concern asset sale in respect of its subject matter is a complex contract which contains elements of several different contracts and has a sui generis character. This contract primarily regulates the transfer of shares or stocks as ownership and membership rights in the share capital of the bankruptcy debtor, provided that the sale is not made by the actual owners of the capital but by the bankruptcy trustee as the legal representative of the bankruptcy debtor. There is a legal fiction in going concern asset sale, that the bankruptcy debtor subrogates to the position of members of the company and acts as the owner of his own shares and stocks. Article 261 of the Law on Companies regulates the contract on sale of stocks in such a way that the transfer of stocks in companies that are not public joint stock companies is done by a contract concluded in written form and certified in accordance with the law governing signature verification, and Article 175, paragraph 1 of the Law on Companies regulates the manner of transfer of shares in limited liability companies. Furthermore, the contract on the going concern asset sale does not only have the character of a contract on the sale of shares or stakes, because an integral part of that contract in accordance with Article 136, paragraph 2 of the Law is the transfer of assets that was a subject of assessment. It could be said that the transfer of stocks or shares in the going concern asset sale has a more legal-technical character aimed at lawful acquisition of ownership over the bankruptcy debtor because the actual subject of the contract defined by its economic essence does not relate to the transfer of stocks and shares, but the subject of the sale is primarily related to the estimated assets of the bankruptcy debtor. Also, the subject of sale can only be things and rights that are part of the existing assets of the bankruptcy debtor. The newly found assets of the bankruptcy debtor discovered after the sale enter the bankruptcy estate.

 

The contract on the going concern asset sale has a formal character because it is concluded in written form (forma ad solemnitatem) with the possibility that the written form be supplemented by some of the legal forms of qualified form that depends on the subject of sale that makes the assets of the bankruptcy debtor. In case the contract transfers real estate, the contract must have the character of a notarized certified (solemnized) document in terms of the Law on Real Estate and the Law on Notary Public, when the subject of sale is one of the intellectual property rights, the contract is concluded in writing with the obligatory observance of the essential elements prescribed by law, which must be contained in the contracts on the transfer of any form of intellectual property rights.

 

  • Settlement of creditors

 

Bankruptcy proceeding is suspended in relation to the company, which was the bankruptcy debtor, and continues according to the bankruptcy estate which includes the money obtained from the going concern asset sale and the remaining assets that were not subject to assessment of the bankruptcy debtor as a legal entity – it consists of subsequently found property and property known to the bankruptcy trustee which he intentionally left out of the sale and left in the bankruptcy estate. Bankruptcy proceedings are continued by settling creditors in the following order: “If the property was the subject of securing the claim of one or more separate and pledged creditors, the realized price primarily covers the costs of sale and other necessary costs (costs of property valuation, advertising costs, legal obligations, etc.) which include the award of the bankruptcy trustee, and from the remaining amount are paid separate creditors whose claim was secured by the sold property and pledged in accordance with their right of priority. Settlement of separate and pledge creditors must be made within five days from the day when the bankruptcy trustee received funds on the basis of the sale of property, ie collection of receivables. If funds remain after the settlement of separate and pledged creditors, the entire remaining amount enters the bankruptcy estate and is distributed to the bankruptcy creditors in accordance with the provisions of this Law relating to division.” (Article 133, paragraph 12 of the Law).

 

 

  1. Pledge and separate creditors

 

Separate creditors are secured creditors. Their claim against the bankruptcy debtor is secured by a real right to the subject that is part of the bankruptcy debtor’s property.

 

Pledge creditors have the main claim against a third party (other than the bankruptcy debtor), but it is secured by a pledge on the property / right that enters the property of the bankruptcy debtor.

 

Neither separate nor pledge creditors are bankruptcy creditors in accordance with legal definitions.

 

In the case when the subject of sale is a bankruptcy debtor as a legal entity, separate and pledge creditors who had a pledge / separate right to any part of the property covered by such sale have the right of priority in the division of that part of the proceeds, according to the priority in accordance with the Law, and in proportion to the estimated share of the estimated value of the property that is the subject of the pledge / separation right in the total estimated value of the object of sale.

Article 136b establishes the right of a separate or pledge creditor to set off his secured claim with the purchase price, in case he is the best bidder in the sale procedure and has been selected as the buyer of the legal entity, as follows:

 

  • when a secured claim is higher than the purchase price of the part where the separate or pledge creditor has the right of priority, when the buyer of the legal entity has the obligation to deposit the remaining part of the purchase price from which he has no right of priority settlement, ie the amount of difference in the right of priority settlement and the total price, in order to ensure the settlement of secured creditors of a lower order of priority, i.e. collection of that part of the price that belongs to the bankruptcy estate, and

 

  • when the secured claim is less than the purchase price, when the separate or pledge creditor has the obligation to pay the difference up to the full amount of the purchase price, ie the amount of the difference between his secured claim and the total price.

 

This legal solution is economical and rational, and contributes to the realization of the principles of urgency and economy: faster and more efficient liquidation of property, settlement of creditors and separate and bankrupt.

Article 136c stipulates the obligation to obtain the consent of the board of creditors and the separate / pledge creditor for all cases when the purchase price is offered, ie the part where the separate / pledged creditor has the right of priority, lower than 50% of the estimated value of the property to which the separate / pledge creditor is entitled priority settlement. This article contains the provision from National Standard No. 5 on the obligation to obtain the consent of the board of creditors on each such sale, whereby the bankruptcy trustee is obliged to accept any such offer, if accepted by both the board of creditors and the separate / pledge creditor.

 

  1. Bankruptcy creditors

 

A bankruptcy creditor is a person who has an unsecured claim against the bankruptcy debtor on the day of initiating the bankruptcy procedure. If funds remain after the settlement of separate and pledge creditors, the entire remaining amount enters the bankruptcy estate and is distributed to the bankruptcy creditors in accordance with the rules of the Law regarding payment lines.

 

III.           Members / Stockholders

 

If, after the settlement of the bankruptcy creditors, undistributed funds remain, they represent the surplus of the share that the bankruptcy trustee distributes to the members of the company in accordance with the rules of the liquidation procedure.

 

However, it often happens that there are no remaining funds to be shared among members / stockholders. In the situation when there is a lien of a third party on the shares of the stockholders of the company which was sold in the going concern asset sale, by changing the founder, i.e. by erasing the stockholders, the lien on the shares is also erased. These persons should be distinguished from pledge creditors who have the right of priority in collection, because the pledge creditor of a stockholder is not at the same time the pledge creditor of a legal entity. This position was confirmed at the session of the Department for Commercial Disputes of the Commercial Court of Appeal on 7 November 2016 and 8 November 2016 and at the session of the Department for Economic Crimes held on 10 November 2016:

 

 

  1. “The bankruptcy debtor, a joint stock company, was sold as a legal entity in the bankruptcy procedure. A third party had a lien on the stocks of a natural person who owned a certain number of stocks, who submitted a request for payment of the value of the pledged stocks from the purchase price. However, after the bankruptcy creditors were settled, there were no funds left to be distributed among the stockholders. Is the claim of a third party legitimate or did the lien cease over the stocks when the joint stock company was sold in the going concern asset sale?

The answer:

The provision of Article 136, paragraph 7 of the Bankruptcy Law stipulates that changes (legal forms, founders, members and stockholders and other data) are registered in the register of business entities and other appropriate registers on the basis of the contract on going concern asset sale, in accordance with the law governing the registration of business entities. It follows from the cited provision of the Bankruptcy Law that after the going concern asset sale in the register of business entities, based on the contract on the going concern asset sale, the founder is changed, so instead of previous founders, the buyer registers as a new founder and previous stockholders are no longer stockholders, so by erasing stockholders and stocks, the lien on the stocks of a natural person who was the owner of a certain number of stocks is also erased. (Answers to the questions of the commercial courts, determined at the session of the Department for Commercial Disputes of the Commercial Court of Appeal on November 7, 2016 and November 8, 2016 and at the session of the Department for Commercial Crimes held on November 10, 2016) ”

 

  • Legal entity status

 

By conducting the going concern asset sale, the bankruptcy proceeding against this legal entity is suspended, and it continues towards the bankruptcy estate. The company retains its legal personality and continues to operate free of obligations that arose until the suspension of the bankruptcy proceeding. A contract on the going concern asset sale is concluded, which has probative value the sale was made, but it does not represent the legal basis for the registration of a new founder – buyer in the Business Registers Agency. There is a change of founder, i.e. owner of the company, because the buyer of the bankruptcy debtor becomes its only member / stockholder and acquires management and ownership rights, and this change must be registered with the Business Registers Agency. The basis for the registration of a new member / stockholder is the decision of the bankruptcy judge rendered in accordance with Article 133, paragraph 13 of the Law: “The bankruptcy judge shall declare that the sale has been made and order the appropriate register to register property rights and erase encumbrances incurred before the conducted , i.e. to register other rights acquired through sale. The said decision with proof of payment of the price is the basis for acquiring and registering the buyer’s property rights, regardless of previous entries and without encumbrances, as well as without any obligations incurred before the sale, including tax liabilities and obligations to economic entities providing services of general interest relating to the purchased property.” This refers to the originate way of acquiring the right, because the buyer does not derive his right to shares / stocks in the company from the rights of the predecessor, but acquires the right based on the decision of the bankruptcy court. This institute enables legal and business continuity of the company in accordance with the corporate principle of going concern, according to which the company after the sale continues to operate under the same business name from which the phrase “in bankruptcy” is deleted, released from all obligations that fall in the form of liabilities to the bankruptcy estate as a separate legal entity that is formed by force of law and towards which the bankruptcy continues.

 

Article 136, paragraph 5 reads: “For claims against the bankruptcy debtor that arose before the suspension of the bankruptcy proceeding, neither the bankruptcy debtor nor his buyer are liable to creditors, and legal entities that provided services of general interest to the bankruptcy debtor cannot suspend the provision of these services on the basis of unpaid bills incurred before the opening of bankruptcy proceeding.

 

This provision of the Law is an exception to the rule on access to debt according to Article 452 of the Law on Contracts and Torts: “(1) A person to whom a property unit of a natural or legal person, or one part of that unit, transfers on the basis of a contract, shall be liable for debts related to that unit, i.e. to its part, in addition to the previous holder and in solidarity with him, but only to the value of its assets. (2) The provisions of the contract which would exclude or limit the liability determined in the previous paragraph has no legal effect towards creditors “. The conclusion is that the general principle of civil law that obligations accompany property does not apply here, as well as the rules on universal and singular succession, i.e. legal succession, which makes the institute of going concern asset sale an unusual phenomenon in the legal system. This position has also been taken by court practice:

 

  1. „… When the buyer pays the price, the right of ownership over the purchased property is transferred to the buyer, regardless of previous entries and without encumbrances, as well as without any obligations arising before the sale, including taxes and obligations to economic entities providing services of general interest, which relates to the property purchased. Pursuant to the provision of paragraph 12 of this Article, the bankruptcy judge shall state by a decision that the sale has been made and order, upon the irrevocability of the decision, the registration of property rights and deletion of encumbrances incurred before the sale, i.e. registration of other rights acquired by sale, in the appropriate register.

It follows from the above provisions that it is necessary to distinguish the situation in which the bankruptcy debtor was sold as a legal entity, from the situation when parts of the property are sold, whether they are formed by property units or are sold individually. In any case, when the buyer pays the price after the sale, the right of ownership over the subject of sale is transferred to him, without previous encumbrances and without obligations incurred before the sale. In the event that the bankruptcy debtor is sold as a legal entity, the ownership rights over the company are transferred to him, i.e. the ownership rights over the bankruptcy debtor, and the individual assets of the bankruptcy debtor are not transferred to his ownership. At the same time, all possible encumbrances must be erased, both on the shares and on the property of the bankruptcy debtor that has entered the assessment of the bankruptcy debtor as a legal entity.

(From the decision of the Commercial Court of Appeal Pvž. 196/18 of 24 April 2018) ”

 

 

  1. “The provision of Article 136, paragraph 6 of the Bankruptcy Law stipulates that neither the bankruptcy debtor nor his buyer are liable to creditors for claims against the bankruptcy debtor, which arose before the suspension of the bankruptcy proceeding.

Pursuant to Article 136, paragraph 7 of the Bankruptcy Law, the first instance court orders the register of economic entities and other appropriate registers to register changes (legal forms, founders, members and stockholders and other data) on the basis of the contract on going concern asset sale, in accordance with the law by which regulates the registration of business entities.

When the bankruptcy debtor in the bankruptcy proceeding is sold as a legal entity, regardless of whether there is a report of claims of separate creditors or not, whether or not there are pledge creditors and regardless of the fact that these notes were entered before the bankruptcy proceeding, there is an obligation of issuing a decision ordering the appropriate register, RGA, erasing of all encumbrances incurred before the sale, because the property is transferred to the buyer in the bankruptcy procedure without encumbrances.

Therefore, the bankruptcy judge is obliged to, after the going concern asset sale, if he determines that within the sold bankruptcy debtor, as a legal entity, there is property on which a lien is constituted, to issue a decision ordering the deletion of all constituted lien. The temporary measure does not constitute the lien.

(Answers to the questions of commercial courts, determined at the sessions of the Department for Commercial Disputes of the Commercial Court of Appeal on 16 November 2017, 17 November 2017, 20 November 2017 and 30 November 2017 and at the session of the Department for Commercial Crimes held on November 17, 2017) “

 

 

It is interesting that according to the position of court practice, it is allowed and possible for the buyer in the procedure of going concern asset sale to be the founder, who once founded the company – the bankruptcy debtor.

 

  • Legal personality of bankruptcy estate

 

The bankruptcy estate is registered in the Bankruptcy Estate Registry maintained by the Business Registers Agency in accordance with the Decree on the Content, Manner of Registration and Maintenance of the Bankruptcy Estate Registry (“Official Gazette of RS”, No. 4/2010 of January 29, 2010, hereinafter “Regulation“), and is represented by the bankruptcy trustee. It follows that the bankruptcy estate has the status of a legal entity, i.e. has legal, civil and party capacity, so it can be a party to court proceeding. The bankruptcy trustee is a representative of the bankruptcy estate, in accordance with Article 77 of the Civil Procedure Law which prescribes the conditions for a statutory representative – that the person be entered in a certain register, in this case the Register of Bankruptcy Masses and determined by a court decision, in this case of the Bankruptcy Court on the opening of bankruptcy. The Decree itself defines the bankruptcy estate, which is registered as follows: “1) bankruptcy estate which includes money obtained from the sale of the bankruptcy debtor, as well as the assets of the bankruptcy debtor that was not subject to assessment of the bankruptcy debtor as a legal entity during its sale; 2) bankruptcy estate of the bankruptcy debtor, which, after the decision on concluding the bankruptcy procedure over the bankruptcy debtor, consists of funds allocated on the basis of disputed claims and funds realized by concluding litigation in favour of the bankruptcy debtor.

Therefore, the bankruptcy estate consists of the purchase price paid in the going concern asset sale, assets that were not the subject of the sale, reserved funds for disputed claims and funds obtained by concluding litigation in favour of the bankruptcy estate. We conclude that it is an indisputable fact that the bankruptcy estate has an indivisible party capacity, which is a procedural precondition for participation in court proceeding, but it is a completely different issue of active and passive legitimacy, on which the merits of the claim depend. Namely, in the absence of party capacity on the part of the bankruptcy estate as a plaintiff, the court would reject the claim, while in the absence of active legitimacy the court would refuse the lawsuit and resolve the dispute (the lawsuit is procedurally allowed, but not grounded). The bankruptcy estate cannot be actively legitimized for the collection of receivables and the exercise of other rights that arose before the opening of the bankruptcy, because there is a separation of assets from liabilities. The assets remain with the legal entity that was sold to the buyer, and the purchase price enters the bankruptcy estate, on which the burden of liabilities remains. This practically means that the bankruptcy estate will be passively legitimized in terms of all claims that creditors have against the bankruptcy debtor, now the bankruptcy estate. This follows from Article 136, paragraph 5 of the Law: “For claims against the bankruptcy debtor that arose before the suspension of the bankruptcy proceeding, neither the bankruptcy debtor nor his buyer are liable to creditors, and legal entities that provided services of general interest to the bankruptcy debtor may not suspend these services on the basis of unpaid bills incurred before the opening of bankruptcy proceeding. “. Therefore, neither the buyer nor the bankruptcy debtor is responsible for the company’s obligations arising until the suspension of bankruptcy. Also, it should be specified that the active legitimacy remains with the legal entity, and not with the buyer, because he becomes the owner of the capital, while the right to collect receivables and exercise all other rights still retains the legal entity that is no longer bankrupt. However, there is as an exception to the above rule, the bankruptcy estate can be actively legitimized for the collection of receivables from those obligations that are exempt from sale, and for the collection of such receivables, the bankruptcy estate could initiate and conduct litigation.

This position is also represented in court practice, which we can see from the following examples:

 

  1. “After the going concern asset sale, the bankruptcy procedure is suspended over him (the bankruptcy debtor). The buyer of the bankruptcy debtor is not the buyer of individual parts of the bankruptcy debtor’s property, but his capital, and does not acquire the right of ownership over certain parts of the bankruptcy debtor’s property, but acquires a share, i.e. shares over the bankruptcy debtor. On the basis of such sale, the buyer is entered in the Register of Business Entities of the Business Registers Agency as a member, i.e. stockholder of the company over which the bankruptcy procedure has been suspended.

Therefore, in no way he can be actively legitimate to continue the discontinued litigation, as he is not the sole and universal successor of the bankruptcy debtor.

After the suspension of the bankruptcy proceedings due to the going concern asset sale, the bankruptcy proceeding continues for the bankruptcy estate consisting of funds generated by the going concern asset sale, funds obtained by the activities of the bankruptcy estate (eg. interest on time deposits) which, in accordance with the sales documentation, is excluded from the procedure of the going concern asset sale. Therefore, the answer to the question is that legal entity that is actively legitimized to continue the terminated litigation, in which the bankruptcy debtor was the plaintiff, is the legal entity for which the bankruptcy proceedings were suspended, unless the purchase agreement stipulates that specific disputes remain in the bankruptcy estate.

(Answers and questions of the Commercial Courts determined at the session of the Department for Commercial Disputes of the Commercial Court of Appeal held on November 19 and November 20, 2019 and at the session of the Department for Economic Crimes held on November 20, 2019) “.

 

  1. “In the decision no. PKŽ 27/16 of 11 May 2016, it was concluded that if the accused legal entity in bankruptcy was sold during the economic-criminal proceeding, and the subject of sale is the bankruptcy debtor as a legal entity, the bankruptcy proceeding is terminated for the legal entity, and continues towards the bankruptcy estate. Based on the contract on the going concern asset sale, changes (legal form, founders and other data) are registered in the register of economic entities and other registers. It follows from the above that the legal entity does not cease to exist, but on the basis of the sales contract, only appropriate changes are registered, which do not result in the termination of the company, so there is continuity and basis for economic-criminal responsibility. Only in the case of termination of a legal entity on the basis of the conducted bankruptcy or liquidation procedure, as well as in the case of status changes that result in the termination of the company, there could be no economic-criminal liability, which is not the case here.

In the second decision, on the other hand, PKŽ 16/18 from March 22, 2018, in the application of the same provisions of the Bankruptcy Law and its impact on the application of the Law on Economic Offenses, a different conclusion was reached. Namely, in that decision, it was concluded that, after the going concern asset sale in terms of Article 136, paragraph 6 of the Bankruptcy Law, there is a change of founder at the Business Registers Agency in such a way that the buyer of the bankruptcy debtor, enters as its founder. However, neither the buyer nor the designated bankruptcy debtor is liable for the obligations that arose until the suspension of the bankruptcy proceeding. The bankruptcy estate is responsible for the obligations, in accordance with the provisions of the Bankruptcy Law.

The above statement shows a change in the position of the Commercial Court of Appeals in the application of the Law on Economic Offenses in the part relating to the interpretation of the provisions of the Bankruptcy Law on the economic criminal responsibility of a legal entity purchased in bankruptcy proceeding.

 

Summarizing the evolution of the position, the conclusion is that the buyer of the legal entity is not liable for the obligations that arose until the suspension of the bankruptcy proceeding. The interpretation of the application of the Bankruptcy Law to the obligations of the buyer extends to economic-criminal liability, despite the fact that there is continuity of the legal entity.

(Answers to the questions of commercial courts, determined at the session of the Department for Commercial Disputes of the Commercial Court of Appeal on November 8, 2018 and November 9, 2018 and at the session of the Department for Commercial Crimes held on December 5, 2018)”.

 

  • “In the case when the bankruptcy debtor is sold as a legal entity, the ownership rights are transferred to the buyer, with the simultaneous erasing of all encumbrances on the shares and on the property that entered the assessment of the bankruptcy debtor as a legal entity.

From the reasoning:

The consequences of going concern asset sale are regulated by the provision of Article 136 of the Bankruptcy Law. In that sense, the provision of Article 136 paragraph 1 of the Bankruptcy Law, it is prescribed that after the going concern asset sale, the bankruptcy procedure is suspended over the bankruptcy debtor, in paragraph 2. that the contract on the going concern asset sale must also contain a provision that the property of the bankruptcy debtor that was not the subject of the assessment referred to in Article 135 paragraph 2 of this Law, enters the bankruptcy estate, in paragraph 3 that the money obtained from the sale of the bankruptcy debtor, as well as the property of the bankruptcy debtor from paragraph 2 of this Article enters the bankruptcy estate for which the bankruptcy proceeding continues. The provision of paragraph 5 it is envisaged that in the event that the bankruptcy debtor is sold as a legal entity, separate and pledge creditors who were secured by the right to any part of the bankruptcy debtor’s property have the right of priority in the distribution of funds realized by sale, according to the rank of priorities acquired in accordance with law, and in proportion to the estimated share of the value of the property that is the subject of the secured right in relation to the estimated value of the legal entity.

On the other hand, the provision of Article 133 of the Bankruptcy Law, the procedure over the sale of the bankruptcy debtor’s property is prescribed, so that when the buyer pays the price, the right of ownership over the purchased property is transferred to the buyer regardless of previous entries and without encumbrances, as well as without any obligations arising before the sale, including tax liabilities and liabilities to economic entities providing services of general interest related to the purchased property. The bankruptcy judge shall state by a decision that the sale has been made and shall order the entry of property rights and erasing of encumbrances incurred before the sale, i.e. entry of other rights acquired by the sale, after the irrevocability of the decision.

It follows from the above legal provisions that when the buyer pays the price after the sale, the right of ownership over the purchased property is transferred to him without any previous encumbrances and obligations arising before the sale, and in case the bankruptcy debtor is sold as a legal entity, ownership rights are transferred to him with the simultaneous erasing of all encumbrances both on the shares and on the property of the company that entered the assessment of the bankruptcy debtor as a legal entity. Finally, in accordance with the imperative provision of Article 136 paragraph 2 of the Bankruptcy Law, the property of the bankruptcy debtor that was not the subject of assessment, in terms of the provision of Article 135 paragraph 2 of the Bankruptcy Law (assessment of the value of a legal entity), enters the bankruptcy estate. Applied to a specific case it means that depending on which property of the bankruptcy debtor was the subject of assessment of the bankruptcy debtor as a legal entity, in terms of Article 135 paragraph 2 of this Law, i.e. the assessment of SC … in bankruptcy, depends on whether some part of the property that enters the bankruptcy estate remains, and not in the property of the sold bankruptcy debtor. In this regard, the court may order the removal of the encumbrance only on those assets that were subject to assessment and sale, while on those assets that were not subject to assessment, and did not enter the property of the bankruptcy debtor sold as a legal entity, but entered the bankruptcy estate, the erasing of the encumbrance shall be performed only after these parts of the bankruptcy estate are sold in the continuation of the bankruptcy procedure over the bankruptcy estate.

 

Taking care of the legality of the bankruptcy procedure, which includes the procedure of liquidation of property, the court issues a decision stating that the sale was made and orders the erasing of encumbrances incurred before the sale, but when it determines that the conditions are met, i.e. that the property of the bankruptcy debtor that has been sold was the subject of assessment and advertising and for which the purchase price has been paid, and when it comes to the sale of the bankruptcy debtor as a legal entity, it will order erasing of the encumbrance when it determines that the property in respect of which the removal of the encumbrance is requested has been the subject of an assessment. If it was not subject to assessment, it enters the remaining bankruptcy estate. (From the decision of the Commercial Court of Appeal Pvž 145/2017 of 26 April 2017) “.

 

 

  1. Contestation of the going concern asset sale

 

We distinguish between two legal remedies as a means of contradicting the going concern asset sale.

 

  1. Objection to the proposed sale

“When the property covered by the sale is the subject of securing the claims of one or more separate and pledge creditors, the separate and pledge creditor may, within five days from the day of receipt of the notice of proposed sale, file an objection to the proposed sale, including a proposal for more favourable method of liquidation, i.e. method of sale of property.”(Article 133, paragraph 7 of the Law).

The objection of the separate and pledge creditors has already been discussed in section 2. Conditions for conducting the procedure.

 

“The Board of Creditors, creditors and other interested persons, except for the separate or secured creditor referred to in paragraph 7 of this Article, may within five days from the date of receipt of the notice of proposed sale file an objection to the proposed sale due to non-compliance with this law or national standards on managing the bankruptcy estate in the preparation or implementation of sales.

About the objections from Paragraph 7 and 8 of this Article, the bankruptcy judge decides by a conclusion within eight days, and the sale cannot be carried out before the court decision is made.” (Article 133, paragraph 8 and 9 of the Law).

 

All interested persons can submit this objection and the reason can be any irregularity in the procedure, i.e. non-compliance with the law or national standards applicable to the procedure of preparation and implementation of the going concern asset sale. The objection has a suspensive effect, and the sale cannot be approached before the court decision in the form of a conclusion, within 8 days from the submission of the objection. Such a provision contributes to the legal security of all participants in the procedure, and at the same time does not deviate from the principles of efficiency and urgency with short deadlines and suspensive effect.

 

 

  1. Appeal against the decision to suspend the bankruptcy proceeding

 

An appeal may be lodged against the decision to a higher court through the first instance court within eight days from the day the decision was published on the court’s notice board, i.e. from the day the decision was delivered to the participants in the procedure, unless otherwise provided by this law.

The decision on the appeal is made no later than 30 days from the day of receipt of the appeal in the court of higher instance.

An appeal against a decision shall not suspend the execution of the decision, unless otherwise provided by this Law” (Article 46 of the Law).

Considering that the objection to the proposed sale from Article 133 of the Law is a preventive legal remedy, the appeal against the decision on the suspension of the bankruptcy procedure is the only legal remedy that serves to contradict the completed sale. It has already been said that the bankruptcy procedure is suspended over the bankruptcy debtor and that is the basic procedural-legal consequence of the going concern asset sale. In that sense, the court makes a special decision on the suspension of the bankruptcy procedure against where a special appeal is allowed, and this is the only way to contradict the contract on the going concern asset sale. The sale procedure and the sale contract cannot be contradicted separately from the decision on the suspension of the bankruptcy procedure over the bankruptcy debtor. It should be noted that this appeal has no suspensive effect, but in accordance with the principle of urgency of the bankruptcy procedure, the deadline for deciding on the appeal is 30 days.

 

In court practice, the position is taken that it is not allowed to contradict the sale by disputing the contract on the going concern asset sale by applying the general rules of the Law on Contracts and Torts. The only way is the abovementioned appeal against the decision to suspend the bankruptcy procedure.

 

 

  1. “In accordance with the chosen method, the sale of the bankruptcy debtor’s property is realized by concluding a special contract. However, the concluded contract in the bankruptcy procedure does not represent the legal basis through which the buyer acquires the right of ownership over the purchased property. This is indicated by the provision of Article 133, Paragraph 12 of the Bankruptcy Law (Official Gazette of RS, No. 104/2009 and 99/2011), which applies in this particular case. It stipulates that when the buyer pays the price, the right of ownership over the purchased property is transferred to the buyer regardless of previous entries and without encumbrances, as well as without any obligations incurred before the sale, including tax liabilities and obligations to economic entities providing service of general interest related to the purchased property. The bankruptcy judge shall state by a decision that the sale has been made and shall order the entry of property rights and erasing of encumbrances incurred before the sale, i.e. entry of other rights acquired by the sale, according to the irrevocability of the decision. It follows from the stated legal provision that the transfer of ownership rights on the sold property in the bankruptcy procedure can be realized only by irrevocability of decision of the bankruptcy judge, which states that the sale of property was performed and the registration of ownership rights in the appropriate register was defined. The concluded contract has only probative force on the conditions under which the alienation was performed.

 

Based on the presented legal argumentation, it follows that the sale of the bankruptcy debtor’s property is not based on the contract on its alienation, but in the irrevocability decision of the bankruptcy judge which states that the sale was made and orders registration of property rights in favour of the buyer. In that sense, contrary to the auditor’s allegations, the sale of property cannot be legally disputed by initiating civil proceeding to determine the nullity of the concluded contract of sale. There are no grounds for such a lawsuit because the concluded contract on the sale of property is not a legal transaction that represents the basis for the alienation of the bankruptcy debtor’s property. The legal basis for the alienation is the irrevocability decision of the bankruptcy judge on the statement of the sale and determining the entry of property rights in the appropriate register.

 

However, the impossibility of determining the absolute nullity of the contract on the sale of the bankruptcy debtor’s property in civil proceeding does not mean that the participants in the sale procedure, i.e. other interested persons, are deprived of any possibility to dispute its legality. On the contrary. Such a possibility exists, and it is realized according to the rules of the bankruptcy procedure, by filing an appeal against the decision of the bankruptcy judge stating that the sale of the bankruptcy debtor’s property has been performed and registration of property rights in favour of its buyer has been defined. It is a legal way by which the auditor would be able to decide on disputes regarding the composition of the board of creditors of the bankruptcy debtor and the regularity of the sale of his property, which the audit unfoundedly indicates (From the judgment of the Supreme Court of Cassation 576/2018 of 17.10.2018).