This content is from: Local Insights

Security takes two forms

Creditors in Bosnia and Herzegovina (BiH) are generally comfortable with the security available under BiH law. In practice, the forms of security generally in use in BiH are mainly influenced by what is accepted by the banking sector, which in BiH is dominated by Austrian banks.

BiH law provides for various forms of security that can be divided into two categories, security in personam and security in rem. Whereas security in personam only creates a relationship between the contracting parties, security in rem extends its effectiveness beyond the contracting parties and can be enforced against third parties, which is especially important in case of bankruptcy.

Security in personam

Suretyship (jemstvo)

Under a surety agreement, the surety undertakes to pay the creditor the original debtor's due debt if the original debtor fails to fulfil his/her obligation. The obligation of the surety is subordinated to the obligation of the original debtor and may be triggered only after the original debtor's obligation becomes due and payable.

The obligations under a surety agreement arise only for the surety. The original debtor has no influence over the conclusion or validity of this agreement and his/her consent is not required. Surety agreements are required to be in writing, but no verification or notarization needs to take place. The validity of the surety agreement depends on the validity and existence of the main agreement between the creditor and the original debtor.

Accession as additional obligor (sajemstvo)

It is also possible for a party to accede to a debt as a co-debtor, for example, by accepting joint and several liability for the debt of the original debtor. The formalities for concluding an accession agreement are similar to those for a surety. The main difference is that accession obligations of the debtors are not subordinated, meaning the obligor is free to choose to make a claim against either the original debtor or the co-debtor.

Guarantees (garancije)

A number of types of guarantee are readily available in BiH. The guarantee is similar to the surety, but unlike a surety, a guarantee can be independent of the existence and validity of the underlying obligation (abstract guarantee).

A common guarantee in use is the bank guarantee, under which the bank is obliged to pay the original debtor's debt upon the creditor's request in the event of a default by the original debtor. Although not expressly stated in law, Bosnian legal entities other than banks are also authorized to issue guarantees. It is common practice for parent companies to issue guarantees for obligations undertaken by their subsidiaries (downstream guarantee) and vice versa (upstream guarantee). When guarantees are made on behalf of a parent company or a sister company (cross-stream guarantee), the applicable capital maintenance rules and rules prohibiting hidden profit distributions must be considered.

Security in rem

Mortgages (hipoteka)

The use of mortgages in BiH is widespread and they are generally regarded as a highly effective security. Under a mortgage agreement, the debtor pledges real estate to secure his/her (or someone else's) original debt.

An agreement on mortgage must be executed as a court deed and recorded in the land register to be perfected and to become valid against third parties. The mortgage becomes effective on the date it is entered in the land register. The ranking of various mortgages on the same real estate depends on the order in which they were recorded in the register.

A mortgage can be transferred to other persons only by assignment of the claim secured by the mortgage. The transfer does not require consent of the party whose real estate is subject to the mortgage.

When the claim secured by the mortgage becomes due and payable, the creditor is authorized to request payment by public sale of the mortgaged real estate. Under BiH law, the parties may not stipulate in a mortgage agreement settlement of a debt secured by a mortgage by transferring the use or ownership of the mortgaged property to the mortgagee.

Usually a mortgage of land would include a mortgage over buildings on that land. However, it is necessary to check any particular piece of land to ensure that this is the case. If not, a separate mortgage of the building might be required.

A mortgage of land does not include lease rights and rentals; these must be separately assigned/pledged.

Pledges (zalog)

In general, pledges are regulated by the BiH Framework Pledge Law (Okvirni zakon o zalozima), which allows pledgors to keep possession and pledgees to monitor pledges entered in the BiH Pledge Registry against the security provided. A pledge encompasses tangible items, including rights, such as shares in a company with limited liability (drustvo sa ogranicenom odgovornoscu), bank accounts and insurance. Security over the latter two types of property may also be taken by way of assignment.

Under Bosnian law, a pledge is constituted if: the parties have concluded a pledge agreement; the pledgor is the owner or will acquire ownership over the pledged property; the pledgee (or a third party in accordance with the pledge agreement) has given a loan to the pledgor (or a third party in accordance with the pledge agreement); and the pledge has been registered at the Pledge Registry (Registar zaloga).

The scope of potential pledges in BiH is wide: it is possible to pledge movables, rights, bank accounts, shares, and receivables. A pledge must be described with enough specificity in the pledge agreement to enable a subsequent determination of the nature and extent of the pledge. The description of the pledge in the Pledge Registry does not have to be detailed, but in the case of a pledge of specific property, as defined in the Framework Pledge Law, the serial number of the pledged property must be entered into the Register.

Under BiH law, the pledge agreement may not provide that the pledgee will acquire ownership over the pledged property in the event of the pledgor's (or original debtor's) default. The pledged property must be sold through a public sale, and the pledgee will have the right to settle its claim from the proceeds of the sale. The ranking of various pledges on the same property depends on the order in which they were recorded in the Pledge Registry.

Assignment (prenos prava)

In practice, lenders, especially banks, often use the assignment of rights as means of security. In this context an assignment requires certain disclosure provisions to be observed. The assignment of future receivables is valid if they can be specified.

The security regime in BiH is well established and functions well, provided that the security is properly executed under BiH law and the enforcement rules are followed.

Sandra Mueller, Renuka Kukanesen and Naida Custovic

Instant access to all of our content. Membership Options | One Week Trial