Collection of Claims Against the Controlling Member of a Company…

This text will further elaborate on the regulation concerning the legislature of the Republic of Serbia addressing the collection of claims against a controlling member of company liquidated in compulsory liquidation. Since we have discussed this regulation in Serbia previously, here, we will explore how this identical issue is regulated at the regional level (available versions in Serbian: https://vp.rs/2022/10/03/kontrolni-clan-privrednog-drustva-u-postupku-prinudne/, and in English: https://vp.rs/en/2022/10/03/controlling-member-of-a-business-in-enforced-collection/).

This discussion will set aside the well-known course of enforcement of domestic decisions arising from litigations, where most judgements determine that the claim has been transferred to the liable person – the controlling member, who is a foreign citizen. Instead, we will focus exclusively on the enforcement directly against the controlling member, a foreign citizen with residence in a foreign country, or rather we will address the recognition and enforcement of decisions arising from the enforcement, which was conducted under domestic legislation against a controlling member. Thus, we come to the question of whether we can avoid conducting a litigation marathon to obtain a decision against the controlling member, which is later accepted and enforced in a foreign country – can we overcome the international legal barriers and enforce compulsory collection of claims abroad with an enforceable and authentic document where the debtor is not mentioned (meaning only the company is stated within the enforceable-authentic document), and the claim is transferred to the controlling member?

If after compulsory liquidating a company we come to the understanding that a controlling member of said company is a foreign citizen, that is has residence in a foreign country, two situations arise, followed by several legal issues:

1. Initiating an enforcement against the controlling member of a company who is a foreign citizen, that is has residence in a foreign country. Can we initiate an enforcement for the creditor to collect claims against a compulsory liquidated company from the controlling member of said company, who is foreign citizen, similarly to how the law regulates said proceedings in the Republic of Serbia? Specifically, along with the proposition for the enforcement which contains all the necessary elements, can we simply submit a public document which proves that the liabilities of the company were transferred to the controlling member (person not indicated in the enforceable or authentic document without a previously conducted litigation)?
2. Situations where the enforcement against the debtor – the company was initiated earlier, and suspended during the compulsory liquidation of said company, then later continued with the public enforcement officer issuing a decision to continue the proceedings against the controlling member of a company who acts as the debtor. Thus, in addition to the Decision on Enforcement, here we have a domestic decision made by the public enforcement officer – the Decision on the Transfer of Claims, which means that, theoretically, we can apply the general rules applicable to the recognition and enforcement of court decisions to the recognition and enforcement of this Decision.

1.1. Initiating an enforcement against the controlling member of the company, who is a foreign citizen, that is has residence in a foreign country.

We come to the question of the possibility of initiating an enforcement against a controlling member of a compulsory liquidated company who is a foreign citizen, in his country of residence, only with the enforceable/authentic document and a domestic public document (which does not relate to a court decision) which prove that the claims were transferred to the same person, without previously conducting a litigation to determine said transfer of claims.

If the legal system of the foreign country whose citizen is the controlling member (whose right would in this case be applicable to initiating an enforcement) is regulated similarly to the domestic law, meaning that the provisions of the foreign law explicitly allow the initiation of an enforcement against a controlling member, then there is no obstacle for using the authentic/enforceable document together with the documentation which proves the transfer of claims to initiate the enforcement without a prior litigation (which would, aside from other complications, have the foreign element).

However, the problem arises when the legal framework of the foreign country doesn’t recognize this legal institution. In this case, there is no possibility of initiating an enforcement against a controlling member through the course regulated by Serbian law.

For instance, some countries of the region and their laws which regulate the position of companies don’t recognize the concept of a controlling member the same way as Serbian legislature. In addition, the laws which regulates the enforcement of these countries don’t recognize the possibilities of initiating the enforcement, that is continuing the enforcement against the person not earmarked in the authentic/enforceable document solely on the basis of the submitted public document which confirms the transfer.

Hence, in Albania, Montenegro, North Macedonia the legal regulative is similar to the domestic one before the amendment of the Company Law and the Law on Enforcement and Security Interests. The Company Law of the mentioned countries regulates the matter in a similar way. What these laws have in common, is the fact that the Company Law does not recognize the controlling member of the company as defined by the Serbian Company Law (“Official gazette of the Republic of Serbia, nos. 36/2011, 99/2011, 83/2014 – other law, 5/2015, 44/2018, 95/2018, 91/2019 and 109/2021), i.e., they do not recognize the norms of unlimited liability of the company member, unless the said norm arises from company abuse.

Thus, Albania, Montenegro and North Macedonia apply the system where the company, if solvent, in order to be deleted from the Registry of Business Entities, must undergo the liquidation procedure (which is not relevant in terms of a controlling member, since the claims have been settled) that is the bankruptcy procedure, during which the creditors receive payment before absolute compulsory liquidation. If this is proven by a court judgement within a litigation, the founders of these companies are liable with all their assets for the obligations of said companies in an appropriate manner and within the appropriate time frame. Otherwise, these individuals will not be liable for the obligations of said companies which were deleted from the Registry.

An exception to the previous statement is when the company members obtain a certain benefit through abuse of rights, whereto they shall answer with their assets, however, this doesn’t concern the issue of implementing the enforcement against the controlling member.

Bearing in mind the hereto said, even though the legal regulative of the Republic of Serbia within the domestic framework eases the collection of claims against the controlling member of a company liquidated in compulsory liquidation by allowing the additional option of conducting an enforcement procedure against a person not indicated in the enforcement document, it is useless when initiating the enforcement against a foreign controlling member, with the address-seat in a foreign country (a country which does not recognize this legal norm).

2.2. Situations where the enforcement against the debtor – the company was initiated earlier, and suspended during the compulsory liquidation of the company, then later continued with the public enforcement officer issuing a Decision to continue the proceedings against the controlling member of a company who acts as the debtor.

Considering the possibility that the creditor enforces the domestic decision, the Decision on Enforcement against the compulsory liquidated company and the Decision on the Continuation of the Enforcement against the controlling member (which determines that the claims from the Decision on Enforcement were transferred to the controlling member and that said member acts as debtor (as per the laws of the Republic of Serbia)), and how in theory, these Decisions can be the subject of recognition and enforcement by a foreign body in a foreign country (theoretically, the Decision of a foreign member acting as a debtor is considered an integral part of the Decision on Enforcement) it is necessary to consult the general recognition regime and the enforcement of foreign decisions in countries where we want to collect claims applicable to a specific case.

Reciprocity, i.e., mutuality represents a common condition for recognizing foreign court decisions in domestic law. The reciprocity condition can be easily overcome by ratifying bilateral and multilateral agreements/conventions. In addition, there is the question and the recognition of foreign court decisions as a previous issue.

2.2.1. International Agreements /Conventions

The Republic of Serbia has not signed any multilateral conventions relating to the exclusive recognition and enforcement of foreign court decisions, still, it has recognized certain conventions which, inter alia, in part regulate specific issues on recognition and enforcement, which are the 1954 Convention on Civil Procedure HCCH, the 1980 Convention on the Civil Aspects of International Child Abduction HCCH, the 1963 Vienna Convention on Civil Liability for Nuclear Damage, the 1980 European Convention on Recognition and Enforcement of Decisions concerning Custody of Children and on Restoration of Custody of Children and the 1956 New York Convention on the Recovery Abroad of Maintenance.

The Republic of Serbia ratified many bilateral conventions which possessed provisions of the recognition and enforcement of court decisions on civil and economic matters (with Bulgaria, Bosnia and Herzegovina, Montenegro, North Macedonia, Romania, Russia and Cyrus).

With France and Greece, Serbia entered into bilateral agreements which deal specifically with the recognition and enforcement of decisions in civil and trade issues.

The 2019 Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters is, unfortunately, still not ratified by the Republic of Serbia; however, said ratification would lead to the unification of legal norms of international recognition and enforcement  of foreign decisions, the elimination of the reciprocity ’gap’, i.e. the mutuality demanded by the domestic International Private Law and lastly, lead to an imminent improvement of the country’s economic situation.

2.2.2. Initiating enforcement against the controlling member who is a foreign citizen, with a previous enforcement against the company where the court made the Decision to Continue the Enforcement against the controlling member

In the Republic of Serbia, the following situation is common in practice:

An enforcement is conducted, and the company, the debtor, is at one point deleted from the BRA Registry through the process of compulsory liquidation, and the enforcement is suspended. Extract from the BRA Registry clearly states who the controlling member is (a foreign citizen, or a person who has become a foreign citizen in the course of the enforcement). Then, the public enforcement officer makes a decision for the controlling member to act as the debtor in the specified enforcement. The decision (which allows a remedy) is duly served to all parties as per the legal norms (a particular legal issue aside from the form of submission, temporary representative, etc.). The Decision on the Controlling Member to Act as the Debtor becomes legally binding and enforceable by domestic law. The enforcement can thus be suspended due to any of the procedural reasons, e.g., the debtor doesn’t own any assets in the Republic of Serbia which were suitable for the collection of claims.

In this specific case, the court, which made the initial Decision on Enforcement, secured its jurisdiction, thus it is not disputed over which court receives the possible remedy against the public enforcement officer’s Decision on the Controlling Member to Act as a Debtor.

Hence, if we assume that the creditor possesses the Decision on Enforcement, and the Decision on the Controlling Member to Act as a Debtor functions as a, technically, integral part of the Decision on Enforcement, and as the said Decision by the acting public enforcement officer presents an enforceable document (if the procedure is suspended and the terminated actions don’t specify the Decision on Enforcement) the creditor may initiate the proceedings for recognition and enforcement of the decision in a foreign country.

Bearing in mind that the recognition of the aforementioned Decision would avoid a litigation with foreign elements, or rather entering into the merit of a case, and the previously stated would, in theory, represent the most efficient tactic for the collection of claims.

Since the issue of this case is the recognition and enforcement of a Serbian domestic decision in a foreign country, the following text includes a brief summary and comparison of how the countries of a region regulate the matter of recognition and enforcement of foreign court decisions.

The following part succinctly looks back on how the recognition and enforcement of foreign court decision is regulated in the countries of the region. Hence, to implement the enforcement on the controlling member, we first need to go over the recognition procedure, and after, on the basis of the recognized decision we can initiate the enforcement before a foreign court.

Albania

On July 2^nd 2019, Albania adopted the Convention on the Recognition and Enforcement of Foreign Judgments (HCCH 2019). The recognition and implementation of foreign judgements is regulated by the Code of Civil Procedure (CPC) and bilateral agreements, as well as the Private International Law Act (PILA).

CPC doesn’t demand reciprocity for the recognition of judgements. International agreements have an advantage over the CPC in case of disputes. The Appellate Court makes decisions on the recognition of foreign judgments, and the parties submit claims with necessary documentation, translated into Albanian and notarized.

For the recognition, it is necessary to submit:

1. A copy of the judgement and a certificate of enforcement;
2. Power of Attorney;
3. A notarized and translated claim;

Additionally, the bilateral agreements demand conformation that the party is notified and represented. Appellate courts recognize decisions, and enforcement officers implement them. If the court receives the recognition, the appeal is allowed to go to Higher Courts.

The recognitions have two phases:

1. A procedural review and possibility of supplementing the documentation;
2. Substantive review of the decision;

The enforcement follows general rules, with a 15 day deadline for voluntary compliance before a compulsory enforcement. The enforcement cannot be initiated per the authentic document alone. A domestic decision is necessary, which undergoes the recognition procedure before the compulsory enforcement.

Albania’s CPC doesn’t allow the recognition of foreign decisions as a previous issue, thus, the enforcement can be initiated after the recognition.

Bosnia and Herzegovina

The main source of the Private International Law in Bosnia and Herzegovina is the Law on Resolving the Conflict of Law, inherited from the old Yugoslavia. This law doesn’t follow contemporary legal trends and it lacks a clear definition of the recognition and enforcement of court decisions. The law also gives precedence to international legal sources over national laws.

The jurisdiction for the recognition of foreign court decisions falls under District Courts in the Republic of Serbia and Cantonal Courts in the Federation of Bosnia and Herzegovina. The courts recognize all final judgements which are conclusive. The Law on Resolving the Conflict Law doesn’t differentiate between the recognition of decisions as a main or previous issue.

The procedure of foreign decision recognition is regulated by the Law on Non-contentious Proceedings of the Federation of Bosnia and Herzegovina, the Republic of Serbia and Brčko District. The decision must be final in the country of issuance, in the original or notarized transcript, with a notarized translation.

The enforcement officers in Bosnia and Herzegovina have a minimal role, consisting of the implementation of the enforcement, without participation in the recognition of the decision. They are employed at courts, and the lack of advancement and low income burden the efficiency of the enforcement.

It is not possible to initiate an enforcement in Bosnia and Herzegovina per an authentic document alone. A domestic decision, which must undergo the recognition procedure first, is necessary for a proceeding against a controlling member. The recognition of a foreign decision can be the main request or the previous issue, however, the Enforcement Law doesn’t enable the recognition of a foreign decision as a previous issue in an enforcement.

Kosovo

The Kosovo Act on Private International Law (PIL) is inherited from the Yugoslavia period. The recognition of court decisions is under the Basic Court jurisdiction, and there is an initiative for establishing a Commercial Court. The enforcement excludes enforcement officers, and the recognition and enforcement procedure of foreign decisions is classified as a non-contentious proceeding.

The recognition and enforcement of foreign decisions can be the main request or a previous issue. However, due to the political situation, the formal framework for the collection of claims is unreliable. Kosovo is undergoing the procedure of adopting a new Private and International Law Act.

It is not possible to initiate enforcement per authentic document alone. A domestic decision, which underwent the recognition proceedings, is necessary for the proceedings against a controlling member. The recognition of a foreign decision may be a main request or a previous issue, however, only in a litigation, since enforcements don’t recognize foreign decisions as a previous issue.

Montenegro

The main legal source for the recognition and enforcement of foreign legal decisions in Montenegro is the Private International Law Act and bilateral agreements. Foreign court decisions are recognized in specific non-contentious proceedings, which require reciprocity. The Basic and Commercial Courts have exclusive jurisdiction for the recognition of these decisions.

The conditions for recognition are for the judgement to be final and that there are no violations of Montenegrin rights. The recognition may be placed as a main request or a previous issue only in litigations, and not in enforcements, due to the Enforcement Law.

Public enforcement officers implement enforcements, their authority is clearly defined by the Law on Enforcement and Security Interest. With the application for recognition and enforcement of foreign court decisions, a Decision on the Original or Notarized Transcript is submitted, with a notarized translation and a conformation that the decision is final and enforced by the law of the country in which it was made.

In Montenegro, it is not possible to initiate an enforcement per authentic document alone. A domestic decision arising from the recognition proceeding is necessary in a proceeding against a controlling member. The Enforcement Law doesn’t acknowledge the recognition of a foreign decision as a previous issue.

North Macedonia

The legal source for the recognition of foreign court decisions in North Macedonia includes international agreements and national laws, including the Private International Law Act adopted in 2020. Basic Courts with an expanded jurisdiction decide on the recognition and enforcement of these decisions.

The enforcement of foreign court decisions is regulated by the Law on Non-contentious Proceedings. The recognition can be initiated as the main request or the previous issue only in litigations. The Law on Enforcement and Security Interests doesn’t envisage the recognition of foreign court decisions as previous issues within enforcements.

Along with the proposition for a recognition, it is necessary to submit the foreign decision, notarized copy, and the proof of the finality per the law of the country where the Decision was made. The enforcement officers act in accordance with the Law on Enforcement and Security Interests which has come into force on January 1^st 2017.

Conclusion

And while the regulative for collections of claims against the controlling member of a compulsory liquidated company has slowly, but surely taken off within the domestic framework, the international framework views the similar issue as the love life of a young adolescent – a whole lot of theory and no practice.

The legal regulative for the Law on Enforcement and Security Interests, Law on Business Corporations, and Code of Civil Procedure in the Republic of Serbia is progressive in the legal context, bearing in mind the additional possibility for the proceeding against the controlling member of a compulsory liquidated company to be conducted without a prior litigation. Nevertheless, due to the fact that countries of the region, which border the Republic of Serbia and achieve the highest legal turnover, don’t recognizing this legal institute it makes it useless within a regional (private international) framework.

The countries of the region, especially those who are still not members of the European Union, regulate their legislature similarly in view of recognitions and enforcements of foreign decisions, which is partly a consequence of inheriting one joined legal system which did follow the legal trends of its time, and still definitely needed modernization, given the positive Private International Law.

The best course for advancing the efficiency of the system for recognition and enforcement of foreign court decision is via ratifications and bilateral and multilateral agreements (with emphasis on the latter).

The 2019 Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters represents the possibility for unification of legal norms of international recognition and enforcement of foreign resolutions; thus, the ratification of the said Convention in Serbia would inevitably lead to an accelerated economic and business development of the country. With all the hereto said in mind, it is necessary for the Republic of Serbia to ratify the said Convention as soon as possible and to undertake the necessary actions for the purpose of its practical implementation.