06 Aug, 2019

Amendments to the Enforcement and Security Interest Act: Third time’s the charm!

The National Assembly of the Republic of Serbia recently passed the Enforcement and Security Interest (Amendment) Act (“Act”) which is set to be enacted on August 3, 2019 and come into force as of January 1, 2020.  The Act contains a series of amendments to address shortcomings and resolve issues that have arisen in practice, and to ring the changes with the introduction of electronic filing of motions for enforcement, an electronic bulletin board, electronic public auctions, expedited enforcement proceedings etc.  However, much controversy surrounds the fact that Article 170 prescribes that the Act shall come into force as of January 1, 2020, whereas Article 166(6) stipulates that the Act shall enter into force on its enactment date, leaving these two provisions directly at odds with each other.

Bearing in mind the plethora of amended provisions, and the many changes introduced, we shall provide an analysis of some of the key provisions, with a special focus on those requiring enforcement creditors’ immediate attention.

Change of instrument and object of enforcement if the enforcement debtor’s accounts are frozen

First and foremost, we would like to highlight Article 166(6) of the Act which stipulates:

Enforcement on an enforcement debtor’s account which has, on the date on which this Act enters into force, been frozen for a period longer than three years shall be discontinued unless the enforcement creditor submits a motion for change of instrument and object of enforcement within eight days of the date on which this Act enters into force.

The cited provision sets a deadline which runs from the Act’s enactment date i.e. as of August 3, 2019.  Every enforcement creditor who on August 3, 2019 has a claim against a debtor whose account has been frozen for more than three years needs to submit a motion for change of instrument and object of enforcement by August 12, 2019 at the latest, in order to avoid discontinuance of the proceeding and consequently loss of a means to enforce its claim.  However, as previously said, Article 166(6) is directly at odds with Article 170 of the Act which prescribes that the Act shall enter into force as of January 1, 2020, without providing for any exceptions.  This oversight by legislators has thrown a spanner in the works even before the Act’s entry into force. So where do enforcement creditors go from here? Do they roll the dice on Article 166(6) which actually ought to apply as of January 1, 2020, and file a motion for a change of instrument and object of enforcement by August 12, 2019 so as to not be deprived of their rights due to possible inconsistent interpretations by competent authorities, or do they go all in for Article 170 and fulfill their obligation within an eight-day deadline only after the Act’s entry into force.

 Continuance of enforcement proceedings by public enforcement officers

Article 166(1) of the Act further prescribes that pending court-managed enforcement or security interest proceedings, which under the Act come under the exclusive remit of public enforcement officers, shall be assigned and managed by public enforcement officers.  In said cases, an enforcement creditor must make a 25% advance payment as envisaged in the Schedule of Fees of the Public Enforcement Officers within eight days as of advance payment order date, under the threat of discontinuance of enforcement or security interest proceedings.  The idea behind this amendment was to relieve the courts of old cases. However, any tangible results will only be visible with the passage of time.

Pledge over immovable property

In practice problems have arisen in situations where after acquisition of a pledge the owner of the immovable property changes, because previously the law stipulated that the enforcement creditor shall designate the pledger as the enforcement debtor in the motion for enforcement, and required the new owner to accept recovery against the immovable property.  On occasion this left enforcement creditors in limbo as they were prevented from commencing enforcement proceedings as the law required them to designate as enforcement debtors persons who were deceased or entities that had been struck from business registers.  In addition, problems developed when pledgers sold their immovable property to third parties, in which case they should have nevertheless been designated as enforcement debtors, whereby new owners could only have accepted recovery against the immovable property void of any possibility of actively participating in proceedings.  These new owners were also shortchanged of any surplus that remained after the sale and settlement, since the law provided that any surplus shall be disbursed to the enforcement debtor, and not the new owner.  This issue is addressed in Article 70(1) and is certainly a more logical and unambiguous solution:

If after acquisition of a pledge over immovable property the owner of the immovable property is changed, the pledgee shall designate the new owner of the immovable property as enforcement debtor in the motion for enforcement.

In addition, Article 70(2) safeguards the rest of the new owner’s property by allowing enforcement against only the pledged immovable property.

Lease of immovable property

Article 73 of the Act supplements the existing provisions regulating the right of lease of immovable property which prescribed that by selling the immovable property its lease shall not expire if the lease agreement has been registered in the land register before the oldest right of pledge over immovable property or the oldest writ of execution and that the buyer shall assume the rights and obligations of the lessor.  The new provision of Article 73 reads as follows:

If the immovable property has not been registered in the land register, the lease shall expire with the sale of the immovable property, unless the lease agreement has been executed in writing and contains signatures witnessed in accordance with the law, before the oldest execution writ has been rendered.

By requiring lease agreements to unregistered immovable property to be executed in writing and signatures to be witnessed, the legislator aims to resolve the issues arising from the conclusion of fictive lease agreements, which serve to frustrate the settlement of claims.

Interim measures

Article 148 of the Act supplements the existing Article dealing with illicit interim measures by providing:

Imposing an interim measure prohibiting the enforcement shall not be permitted.

This provision serves to improve the position of enforcement debtors since courts have on occasion prohibited enforcement, thereby significantly impeding enforcement creditors’ interests.

Electronic bulletin board and electronic public auctions

The legislator has opted to take advantage of information technologies and introduce electronic bulletin boards and electronic public auctions in enforcement proceedings.

Article 18 of the Act alters the rules on service by prescribing that the courts’ bulletin boards shall be replaced with electronic bulletin boards.  This certainly increases accessibility since the parties will be able to obtain information on decisions, conclusions and other documents by using courts’ web pages, without the need to visit the courts.

Alongside the existing possibilities for sales of immovable property, namely public auctions and private treaty, the amendments to the existing act provide for, starting from March 1, 2020, the sale of movable or immovable property via electronic public auctions, if the public enforcement officer so decides ex officio or on the basis of a party’s motion.  Starting from September 1, 2020 this should be the only way of conducting sales via public auctions.

Furthermore, and in relation to public auctions, it is worth mentioning that Article 81 of the Act prescribes that the security which needs to be deposited for public auctions shall amount to 15% of the estimated value of the immovable property, instead of the current 10%. In this regard, the security will have to be paid two days before the public auction at the latest, thereby putting an end to the current practice of depositing the security fifteen minutes before the sale.  Possibly the most important amendment in relation to the security is that from now on it will be activated where a bidder fails to actively participate in the auction, which has not been the case previously.  The main bone of contention with this latest arrangement is that the remainder of the security, after all costs, price differences, etc. have been settled, will be transferred to the budget of the Republic of Serbia, rather than returned to the bidder.  This arrangement infringes property rights guaranteed to each citizen under the Constitution of the Republic of Serbia.

Filing Deadline for Applications to Rectify Irregularities

Having assessed that Applications to Rectify Irregularities that arise during and in connection with the enforcement have been given too much weight in enforcement proceedings, by replacing legal remedies and jeopardizing legal certainty, the legislator has set out to limit their scope under Article 66 of the Act.  Firstly, it has set a tighter application filing deadline, which now stands at eight days instead of fifteen days from the occurrence of an irregularity. The other limitation is more material in nature as it prescribes that Applications cannot be filed against decisions rendered by the courts or public enforcement officers, but only against conclusions, and then only in instances prescribed by the Enforcement and Security Interest Act.

Rights of enforcement creditors broadened in case of failure of private treaty opted for by an enforcement creditor

Until now Article 190 of the Enforcement and Security Interest Act prescribed that where an enforcement creditor opts for sale by private treaty but fails to conclude the private treaty within the deadline set down in the conclusion ordering the sale of the immovable property by private treaty, or where the price is not paid within the set deadline, the public enforcement officer shall find that the immovable property has not been sold by private treaty as opted for by the enforcement creditor.  The enforcement creditor is invited to request, within а deadline of eight days, settlement by transfer of title to the immovable property, under the threat of discontinuation.

The Act now expands the scope of enforcement creditors’ rights by prescribing that they can request settlement by transfer of title to the immovable property, but also file a motion for a change of instrument and object of enforcement.  This leaves room for enforcement creditors to, if they consider that to be in their best economic interest, not to acquire title to the immovable property, but to file a motion for enforcement using other instruments or objects.

Summary enforcement proceedings

The Act adds a new Chapter 8a which makes provision for summary enforcement proceedings under Articles 326a-326e.  Summary enforcement proceedings may be heard where a dispute between the enforcement creditor and debtor falls under the jurisdiction of a Commercial Court.   Therefore, the basic idea behind this was to expedite transactions between companies. Summary proceedings can be heard only on the basis of the following authentic documents:

  1. Promissory note or check issued by a domestic or foreign entity, with protest if necessary for establishment of the claim;
  2. Unconditional bank guarantee;
  3. Unconditional letter of credit;
  4. Certified statement from the enforcement debtor authorizing the bank to transfer funds from its account to the enforcement creditor’s account.

Compared with enforcement proceedings, summary enforcement proceedings are typified by somewhat shorter deadlines, since an objection may be filed within a five-day deadline.  Enforcement creditors are left with a three-day deadline to respond to the objection, after which the case is submitted to a panel of judges, which is required to rule on the objection within eight days.

It is clear that the summary enforcement procedure is meant to expedite the settlement of claims between companies.  However, it remains to be seen how viable this new arrangement is in practice.

Conclusion

In adopting these latest amendments, the legislator has taken a step forward in creating a more efficient and just environment for enforcement and security interest proceedings.  On the one hand, it is expected that the provisions will backstop the loopholes and address the ambiguities that appeared in practice and, in turn, lead to improved application of the law.  On the other hand, the introduction of electronic public auctions serves as a sound foundation for improving and developing these proceedings.  That said, there is a sense of apprehension as to whether these advancements, e.g. electronic public auctions, will be properly supported technologically or whether will there will be a delay in bringing them on stream.