Throughout our advisory work, we have frequently represented clients in the forced liquidation of companies in the Serbian market. Although this process is generally straightforward under the relevant regulations, it can still raise specific legal questions arising from certain legal concepts. One such concept in Serbia’s legal system is the “right of use” of land. This inspired us to write this article to explore what happens to land a company does not formally own but holds only the “right of use” over when the company undergoes forced liquidation.
Forced liquidation is an involuntary way of terminating a business entity. It must be carried out whenever the conditions prescribed by law are met. In such situations, company shareholders are often most concerned about what will happen to the assets owned by the company, which will now cease to exist. The issue is particularly complex when it comes to property over which the company did not have ownership but only a right of use, a concept both unique and legally unregulated in the context of forced liquidation.
Forced liquidation of a company may happen for several reasons that we describe here. For instance, the company may be subjected to a ban on conducting its activities. Also, the period for which the company was established (if it was founded for a fixed term) may have expired. Another reason may be that the founding act of the company may be voided. Some other specific reasons may also be the cause for liquidation.
Serbian business registres agency will publish a notice on its website, that the conditions for initiating the liquidation procedure have been met. The company is given a period of 90 days to remedy deficiencies in its operations that are the reason for liquidation, provided they are correctable. Summing up all the deadlines prescribed by law, the forced liquidation process cannot exceed 180 days, after which the company is removed from the business register.
From the date when the notice is published, the company’s governing bodies continue their work, but the company may not engage in new business activities, only completing previously initiated tasks.
The question then arises: what happens to the assets of a deregistered company?
The assets of the liquidated company become the property of its shareholders and are distributed proportionally to their shares in the company’s capital. If the liquidated entity operated as a general partnership, without the founding capital, the assets are divided equally among the partners. After the company’s deletion from the register, the members (excluding controlling members) remain liable for the company’s obligations up to the value of the assets they received.
What happens to land subject to a right of use?
The right of use is a transferable property right, narrower than ownership. The holder of the right of use is not the owner but has the right to use the asset. This right has been a legally controversial concept, repeatedly abolished and reinstated in the legal system. It was particularly common during socialism, when land was predominantly state-owned, while citizens and companies held the right of use. During the transition from social to free market economy, that former Yugoslav republics when through, citizens and companies got the opportunity to convert their “right of use” to “right of ownership”. In Serbia, those who requested conversion had to pay the fee, but since 2023 this financial obligation was abolished. Nevertheless, a considerable number of citizens and companies failed to perform this conversion to date.
The right of use in the context of forced liquidation remains legally unregulated. Our position is that both ownership and the right of use should be transferable to the members of the liquidated company in proportion to their shares in the company’s capital. It is common practice for individuals to transfer the right of use through inheritance, so it is unclear why this should not apply to legal entities that have ceased to exist and their members as legal successors.
Of course, if the conditions are met, it is possible and appropriate to convert the right of use into ownership. However, this cannot be done once forced liquidation begins, as all judicial and administrative proceedings of the company are suspended after that point, while the conversion process is an administrative procedure conducted before the relevant Real Estate Cadastre Office.
Authors: Aleksandar Ilić, Senior partner at IVVK Lawyers, Mina Djurdjević, Junior assocciate at IVVK Lawyers