A Board of Creditors (“Board”) is a representative body of unsecured and secured creditors in bankruptcy proceedings, appointed in accordance with The Law on Bankruptcy[1] (“Law”). The cardinal rule of sitting in a Board is that the members act on behalf of and represent the interests of all creditors, and not only on their own behalf. The number of Board members must be an odd number but not higher than seven.
Sometimes it happens that a Board member resigns, gets settled, gets dismissed, or loses legal capacity. In such instances, a new Board member must be appointed, so the Board can continue to operate in full capacity.
Pursuant to the Law, the Creditors Assembly appoints the Board members, but the Law also allows the Board to co-opt a new member to fill a vacancy.
During the co-optation in bankruptcy proceedings, it is necessary to make a difference between whether a member of the Board is elected from the ranks of unsecured creditors or secured creditors. It should be born in mind that, before the 2017 amendments, the Law did not allow for secured creditors to be Board members, which means that for bankruptcy proceedings initiated before 2017, different rules apply.
For unsecured creditors the Law prescribes the following:
If a bankruptcy judge or a Creditors Assembly dismisses a Board member from the ranks of unsecured creditors, or a Board member from the ranks of unsecured creditors resigns from the membership in the Board, or if membership of a Board member from the ranks of unsecured creditors ceases, the Board may appoint a new member from the ranks of unsecured creditors whose term of office lasts until the first next meeting of the Creditors’ Assembly where a new member of the Board shall be elected.
For secured creditors the following applies:
If, within 30 days from the day of cessation of membership in the Board, secured creditors do not elect a Board member from the ranks of secured creditors and within the same time limit fail to notify thereof the bankruptcy judge and the Board, the Board may then appoint a new member of the Board from the ranks of secured creditors, i.e. unsecured creditors if no secured creditor accepts such an appointment, whose term of office lasts until the first following meeting of secured creditors whereon a new Board member shall be selected from the ranks of secured creditors.
Co-optation of a Board member is meant to speed up the bankruptcy proceedings by giving an opportunity to the Board to elect a new temporary member if it is left without one, without convening the Creditors Assembly. Without the possibility of co-optation, it would have been necessary for the President of the Assembly to convene an extraordinary session of the Creditors Assembly at the proposal of unsecured creditors. If the President of the Creditors Assembly fails to convene the session within five days from the receipt of the proposal made by unsecured creditors, then unsecured creditors whose claims exceed 20% of total claims of all unsecured creditors could convene the session and propose the agenda. This way of electing a missing Board member would require a lot of time and would generate additional costs, which is contrary to the general principles of the Law.
Once co-opted, the member will have full speaking, voting and attendance rights and will act as a full member of the Board with the privileges and responsibilities that pertain to a Board member.
Below we answered some questions concerning cooptation of a new Board member which have been raised so far within the commercial courts’ case-law.
- If the Board has only one member left, can a single member of the Board co-opt a new member, or should an assembly be convened?
This question was raised when the Board had three members, and then two members resigned before the assembly was convened, and it was unclear whether that single Board member could perform cooptation of a new member.
According to case-law, in this situation the only Board member cannot co-opt new members, because the Board is a collegial body, hence co-optation can only be performed by the Board as a body of bankruptcy proceedings, and not by one member only. This was confirmed at the session of the Department for Commercial Disputes of the Commercial Court of Appeal, which was held on 12 November 2013 and 14 November 2013.
- Is cooptation allowed if there is an even number of Board members?
Even though the Law says that the number of Board members must be odd, the legislator’s intention was not to disable cooptation if there is an even number of Board members. The conclusion is that an even number of Board members can co-opt members, too. This has also been confirmed by the Decision of the Commercial Court of Appeal, no. Pvž 290/2019 dated 27 June 2019.
- In case of the purchase of receivables of a Board member, is it enough to co-opt a new member, or is it necessary to convene an assembly and inform the bankruptcy judge?
Membership in the Board cannot be automatically canceled by losing the status of a creditor in the bankruptcy proceedings. Therefore, in this situation it is necessary for the member to resign, or to be dismissed by the Creditors Assembly or the bankruptcy judge. After that it is possible to co-opt a new member in accordance with the Law.
Conclusion
Co-optation of a Board member allows for a cheaper and more flexible filling of vacant positions in the Board. Independently from convening the Creditors Assembly, the Board may elect a new member who will have the same rights and responsibilities as a member elected by the Creditors Assembly. Thereby the obstructions of the bankruptcy proceedings are avoided, and full capacity of its bodies is secured throughout the whole process.
[1] Official Gazette of the RS, No. 104/2009, 99/2011 – other law, 71/2012 – Decision of the CC, 83/2014, 113/2017, 44/2018 and 95/2018
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