Lana Vukmirovic Misic and Itana Scekic of Harrisons assess the bankruptcy and insolvency regime in Montenegro

Section 1: processes and procedures

1.1 What reorganisation and bankruptcy processes are available for financially troubled debtors?

Both bankruptcy and reorganisation processes are governed by the Montenegrin Insolvency Law.

In terms of this law, bankruptcy implies settlement of creditors by virtue of sale of the debtor's assets or sale of the debtor as a legal entity. In the course of the reorganisation, creditors are to be settled in accordance with the adopted plan of reorganisation by redefining mutual debtor-creditor relations, changing the legal status of the debtor or some other process as determined by the reorganisation plan.

Reasons for the initiation of both types of insolvency proceedings are: permanent insolvency of the debtor (debtor cannot respond to his financial obligations within 45 days from the date of maturity of the obligation or has completely suspended all payments for more than 30 consecutive days); or over-indebtedness (value of the assets of the debtor is lower than the value of its liabilities).

Insolvency proceedings will be instituted before the competent (commercial) court in Montenegro at the proposal of a creditor, debtor or liquidator. Upon the initiation, the court will appoint a bankruptcy trustee to manage the insolvency proceedings and represent the debtor.

1.2 Is a stay on creditor enforcement action available?

A consequence of opening insolvency proceedings is the stay of all pending judicial and administrative proceedings in relation to the debtor and its assets (as of the moment of the opening of the insolvency proceedings).

After the opening of insolvency proceedings, creditors may exercise their claims against the debtor only in the course of the insolvency proceedings.

Following the opening of insolvency proceedings, no compulsory execution or any other measure of enforcement proceedings can be determined or implemented against the debtor or its assets for the purpose of the settlement of claims, save for the enforcement of obligations of the insolvency estate.

Exceptionally, a court may issue an injunction or stay on creditor enforcement actions prior to the opening of the insolvency proceedings. The injunction is issued until a decision is made on the opening of the insolvency proceedings.

1.3 What are the key features of a reorganisation plan and how is it approved?

Reorganisation is to be implemented if it provides a more favourable settlement of creditors than the bankruptcy proceedings would, especially if there are economically justifiable reasons for the continuation of the debtor's business.

A written reorganisation plan may be submitted simultaneously with the motion for the initiation of insolvency proceeding or after the opening of the insolvency proceedings. In the case of the latter, the plan of reorganisation should be submitted to the bankruptcy judge within 90 days of the day of opening the insolvency proceedings (the deadline can be extended for another 30 days maximally).

The reorganisation plan may be submitted by the debtor, bankruptcy trustee, secured creditors holding at least 30% of secured claims (out of the total amount of claims against the debtor), bankruptcy creditors holding at least 30% of unsecured claims (out of the total claims against the debtor), as well as persons owning at least 30% of the share capital of the debtor.

Voting on the reorganisation plan should be carried out within the classes of creditors (there are at least four classes). The plan will be deemed passed by one class if the creditors of the relevant class with a simple majority of the total claims of that class have adopted it. The reorganisation plan will be confirmed if a majority of the total number of classes voted in its favour.

If the plan of reorganisation does not have the required number of votes, the insolvency judge may offer an additional period, no longer than 30 days, within which the proposer of such plan may submit a revised plan of reorganisation.

If the revised plan of reorganisation is not adopted, the bankruptcy proceedings will be conducted over the debtor.

1.4 Can a creditor or a class of creditor be 'crammed-down'?

If the reorganisation plan is adopted, creditors who have voted against the plan are entitled to the payment which they would have received in the event of bankruptcy in accordance with the level of priority of their claims.

1.5 Is there a process for facilitating the sale of a distressed debtor's assets or business?

The three following methods of sale are recognised under the Insolvency Law: sale by auction, sale by public bidding and sale by direct negotiation. Proceeds received from the sale comprise the insolvency estate, which is protected and managed by the insolvency trustee.

When the property which is to be sold is the subject of security of the claims of one or more creditors, such secured creditor may propose a more favourable means of sale. Proceeds from the sale of such property will primarily cover sale expenses; only when such costs have been covered the remaining funds will be used for satisfying the claims of the secured creditors according to the priority determined under applicable law. The remaining (surplus) funds will be returned to the bankruptcy estate.

The Insolvency Law does not provide for the possibility of stalking horse bids. In terms of credit-bidding, Montenegrin law allows creditors (of the debtor) to participate in the bidding and the secured creditor is generally allowed to bid the amount of its debt as a credit bid.

1.6 What are the duties of directors of a company in financial difficulty?

According to the Montenegrin Companies Act, the executive director and other persons responsible for the management of the company are obliged to act with due care and diligence, in the reasonable belief that their acts are in the best interest of the company. If it is determined that there have been irregularities in the management or operations of the company, the company has the right to sue the responsible person before the Commercial Court and request damages.

In the case of opening of insolvency proceeding, authorisations of executive directors, representatives and proxies cease to exist, as well as the authorisations of governing bodies of the debtor. Such authorisations will be transferred to the bankruptcy trustee.

In addition, Section 5 of the Insolvency Law provides for the possibility of the insolvency trustee and insolvency creditors contesting legal actions of the debtor under the conditions and within the deadlines provided under the Insolvency Law (for example, contesting: legal affairs and other actions violating equal settlement of or harming the bankruptcy creditors; legal actions by which certain creditors are put in a more favourable position; certain transactions that the debtor entered into with the affiliated companies, providing security to a creditor in the last six months before filing for bankruptcy if such creditor knew or should have known about the insolvency of the debtor; and, actions of deliberate or wilful damage to the creditors).

1.7 What priority claims are there and is protection available for post-petition credit?

Costs and expenses of the insolvency proceedings and the obligations of the insolvency estate have priority in settlement.

Bankruptcy creditors are classified into the following payment priorities: (1) first payment priority includes unpaid gross salaries of employees and former employees and employees' claims before and after the filing of the motion for the opening of the insolvency proceedings in the amount of minimal wages for the period of two years preceding the opening of the insolvency and claims in the name of injuries sustained at work with the debtor; (2) second payment priority includes claims based on all public revenues due in the three months preceding the insolvency proceedings, except for contributions for pension and disability insurance; and (3) third payment priority includes claims of other bankruptcy creditors.

Insolvency creditors of lower priority may be settled only after the settlement of insolvency creditors of higher payment priority.

After opening the insolvency, with the prior consent of the board of creditors and insolvency judge, the insolvency trustee may take a non-secured loan or the loan secured by the property from the insolvency estate. The loan is the liability of the insolvency estate and will not affect the acquired rights of secured creditors.

1.8 Is there a different regime for banks and other financial institutions?

Bankruptcy and liquidation proceedings of banks are regulated by a separate law: the Law on Liquidation and Bankruptcy of Banks. Bankruptcy proceedings will be initiated against a bank of which the Central Bank of Montenegro has revoked the licence and which liabilities exceed its assets. Also, bankruptcy proceedings will be initiated upon the proposal of the liquidation administrator when, during the bank liquidation proceedings, it is determined that the bank's assets are not sufficient to meet the claims of its creditors.

Liquidation proceedings will be taken against a bank if the central bank has revoked its licence, but the other conditions for initiation of the bankruptcy proceedings has not been met.

Bankruptcy and liquidation proceedings are opened and conducted before the Central Bank of Montenegro.

Section 2: international/cross border issues

2.1 Can bankruptcy or reorganisation proceedings be opened in respect of a foreign debtor?

Insolvency law does not provide for the possibility of insolvency over a foreign debtor. It stipulates that insolvency proceedings will be conducted by the competent court in which territory is located the seat or residence of the debtor. The debtor, in terms of this Insolvency Law, may be: (i) a legal entity; (ii) a company that does not have the status of legal entity; or (iii) an entrepreneur. The insolvency debtors, in terms of this Law, will not be considered the following: 1) body, organization or institution financed from the budget of Montenegro, budget of local government or state fund; 2) the central bank or an independent regulatory body; 3) legal entity whose insolvency is governed by separate regulations.

2.2 Can recognition and assistance be given to foreign bankruptcy or reorganisation proceedings?

Under the Insolvency Law, the provisions on international insolvency will apply if: (i) the foreign court or another foreign body controlling or supervising the assets or business activities of the debtor or the foreign representative requests assistance in connection with a foreign proceeding; or (ii) the court or insolvency trustee asks for help from a foreign country in connection with the insolvency procedure commenced in Montenegro; and (iii) the foreign proceedings are conducted simultaneously with the insolvency procedure in Montenegro. The recognition of foreign proceedings and cooperation with foreign courts and other competent authorities will be conducted by the competent Commercial Court in Montenegro. The competent court may refuse to take any action in relation to international insolvency proceedings if such action is contrary to the legal system of Montenegro.

Section 3: other material considerations

3.1 What other major stakeholders (such as governmental or regulatory institutions) could have a material impact on the outcome of the reorganisation?

Employees' claims have the first payment priority for the unpaid gross salaries (with included pension liabilities) in the amount of statutory minimum wages for the period of two years preceding the opening of the insolvency. For net salaries exceeding this amount, their claims have a third payment priority. The public revenue claims due in the three months preceding the opening of the insolvency proceedings are ranked as second priority claims.

As to voting on the reorganisation plan, when special classes of creditors are not established and there is only a minimum number of four classes (secured creditors, first ranked, second ranked and third ranked creditors), which is a common situation, the reorganisation plan will have to be voted in three out of four classes. These would include either the employees for their first priority claims or the Tax Authority for their second priority claims.

Section 4: current trends

4.1 Outline any bankruptcy and reorganisation trends specific to your jurisdiction.

The Insolvency Law does not provide a clear procedure for the appointment of members to the board of creditors, which is the source of most inconsistencies and debate. The law provides only that the board of creditors should have three to five members, but does not set out the procedure for their appointment or the procedure for determining the number of members to the board of creditors.

The board of creditors' approval is required for all matters which are of high importance for the bankruptcy estate, including the taking and providing of loans and continuance of the debtor's business during insolvency.

Common practice in major insolvency proceedings over the last few years involving a large number of employees is that most employees are re-employed by the bankruptcy trustee (even though the law explicitly provides that the bankruptcy trustee may re-employ only a number of employees required for conducting the commenced operations and the bankruptcy proceedings). The funds for the social programme for the reemployed were secured by the government. Also, the bankruptcy debtor usually continues its business during the course of insolvency proceedings without any prior analyses; this is usually conducted by the way of entering into a management agreement with a third party who is not always selected in a transparent process.


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Lana Vukmirovic Misic

About the author

Lana is a senior associate in Harrisons based in Podgorica, Montenegro. She focuses mainly on matters of corporate, commercial and real estate law and has many years' experience in advising international companies in Montenegro on various legal matters. She advises clients in all aspects of development including land acquisition, compliance and permitting issues, as well as with their general business. She has extensive experience in real-estate matters including structuring, negotiating and closing sensitive transactions and has advised clients in the major real estate development projects in Montenegro.

Misic also advises on all aspects of liquidation and insolvency matters and represents domestic and international companies in litigation and enforcement proceedings. She focuses on major energy projects in Montenegro and has advised clients in a number of privatisation matters through all phases of the projects.

Misic is designated legal counsel of the Austrian Embassy in Podgorica.


Itana Scekic

About the author

Itana is an associate at Harrisons based in Podgorica, Montenegro, where she focuses on corporate and real estate transactions. She works on company formation, contracting of all forms, liquidation procedure and also advises clients on employment related matters (employment agreements, advice on termination issues, leave, discipline, protection at work, and immigration requirements).

Scekic is involved in real estate development projects, including company establishment, due diligence and tax-related issues. In addition, she works on commercial litigations, enforcement proceedings and bankruptcy proceedings.