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Bankruptcy in Kosovo – The Case of an Attractive Market with Untested Bankruptcy Law

The business environment in Kosovo is becoming highly attractive for investors, offering a favorable tax system, easy access to EU and regional markets, an abundance of natural resources, a skilled and cheap workforce, protection for foreign investments, and a generally well developed legal framework. Nevertheless, according to World Bank’s Doing Business Report, resolving insolvency remains Kosovo’s weakest indicator, as it ranks 163 out of 189 countries.

The legal framework governing Bankruptcy in Kosovo (Law No. 2003/4 on Liquidation and Reorganization of Legal Persons in Bankruptcy, hereinafter the “Bankruptcy Law”) reflects international best principles and modern developments, but it remains short in addressing important aspects of bankruptcy, and there is no developed practice by the courts. It is the lack of court practice and the business community’s distrust in bankruptcy proceedings that causes Kosovo to rank so low in the World Bank’s Doing Business Report.

Bankruptcy remains untested in Kosovo, with neither creditors nor debtors considering it a suitable remedy in times of financial difficulties, and with courts therefore unable to develop practices to enhance legal security for parties entering into bankruptcy. This approach has also been influenced by creditors’ heavy reliance on taking security interests in movable and immovable personal property, as well as in personal, bank, and corporate guarantees, mainly due to the efficient enforcement system in Kosovo and developed practice and legislation in these areas. In addition, the lack of reliable financial reporting and underdeveloped corporate governance structures in Kosovo further enforced these patterns.

Salient Features of the Current Bankruptcy Law

Kosovar Bankruptcy Law provides for two types of proceedings: one is liquidation and sale of the debtor as a whole or sale of assets, and the other is reorganization of the debtor, aimed at preserving the debtor’s business in accordance with the reorganization plan approved by the court based on voting by the creditors.

The threshold for initiating bankruptcy proceedings is very low in Kosovo, which fails to take into account short term liquidity problems and materialization of normal business risks which do not justify bankruptcy. A creditor or group of creditors may initiate bankruptcy proceedings by filing a petition with the competent court if: (1) the overdue debt exceeds EUR 2,000 and is at least 60 days overdue; (2) it is not disputed; and (3) the debtor generally is not paying debts as they become due. In addition, a debtor may initiate voluntary bankruptcy by filing a petition with the competent court if: (1) overdue debt exceeds EUR 5,000 and is at least 60 days overdue; and (2) the debtor generally is not paying debts as they become due.

In terms of efficiency, transparency, and procedural timelines, the Bankruptcy Law is in line with best practices. The World Bank’s Doing Business Report calculates that completing a bankruptcy case in Kosovo should take 2 years, compared to 1.7 years in OECD high income countries. In addition, there are mechanisms which ensure transparency of the whole bankruptcy process.

The competent court for bankruptcy cases is the Basic Court in Prishtina – the Department for Commercial Matters. While this is not a specialized court for bankruptcy, it is specialized in Commercial Law, handling disputes between business organizations. Judges have attended several specialized training programs in bankruptcy, and there have been many other investments in building the capacity of the courts. In addition, the Ministry of Justice has certified bankruptcy administrators who have undergone a rigorous training program and examination.

New Legal Framework for Bankruptcy in Sight

Bankruptcy has become a priority for Kosovo in its efforts to improve the business environment. In order to further modernize the legal framework with respect to bankruptcy, a new law on bankruptcy is foreseen in the legislative agenda of the Assembly of Kosovo, and the Ministry of Trade and Industry is already preparing a draft. The new law will purportedly bring significant changes and offer more detailed solutions. First, it will introduce a better and a more balanced solution between interests of secured creditors in relations to unsecured creditors and other stakeholders. Second, it makes Kosovo more debtor friendly, slightly favoring reorganization and empowering the debtors in cases where reorganization is an option. Third, the new law will address the bankruptcy of debtors as natural persons, which are not regulated at all by the current Law on Bankruptcy. Finally, there are requests that the new law also regulate the issue of cross-border insolvency cases, taking into account the Foreign Business Organizations and their branches in Kosovo. Therefore, the new law will greatly increase the legal security of the parties in bankruptcy.

In conclusion, the legal framework concerning insolvency in Kosovo is in line with best international practices; however, it remains untested. With the new advanced Bankruptcy Law in Kosovo’s legislative agenda and ongoing investments in capacity building of the courts, administrators, and other relevant institutions, the prospects for the future are bright.

By Visar Ramaj, Partner, RPHS

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