The Law on Financial Operations

On the 30th of December 2016, the application of the Law on Financial Operations (Law) will commence in the Federation of Bosnia and Herzegovina. The Law is intended to ensure the proper functioning of the internal market by introducing adequate and systematic risk management measures and solvency measures, as well as to promote the competitiveness of local commercial enterprises by legislating a culture of prompt payment.

To whom does it apply?

The Law applies to companies who independently produce and sell products and provide services in the market in order to obtain a profit, in accordance with the regulations of the Company Law, as well as to entrepreneurs who independently carry out commercial activities in BH, in accordance with the regulations of the Entrepreneurs Law.

The financial sector is excluded from the application of the Law (financial services, banking, investment management, leasing, insurance services and social security funds).

Management and Supervisory Board duties

General obligations of the Management:

• Ensuring solvency;
• Managing assets and obligations in a way that ensures timely fulfilment of obligations;
• Ensuring capital adequacy.

General obligations of the Supervisory Board:

• Monitoring solvency;
• Enacting adequate measure for eliminating insolvency.

Risk Management (credit risk, market risk, operational risk, insolvency risk):

• Identify;
• Measure/assess;
• Monitor;
• Report.

What is Capital Inadequacy?

Capital inadequacy = the losses accrued in the business year + the losses transferred from the previous years ≥ ½ core capital.

Remedy: The Law provides for specific actions to be taken by the Management, Supervisory Board and Shareholder Assembly within 90 days.

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What about Commercial transactions?

The Law applies to all commercial transactions between companies/entrepreneurs/public entities concluded after the 30th of December 2016, as well as to commercial transactions concluded prior to this date for which realization has not been initiated (goods delivered, services provided) prior to the 30th of December 2016.

The deadline for the execution of monetary obligations in commercial transactions can be stipulated up to:

If the debtor does not fulfil its monetary obligation within the stipulated deadline, the creditor is entitled to an additional compensation in the amount of BAM 100.

Insolvency

Insolvency = the inability to fulfil monetary obligations that are due within:

• 60 days – short-term monetary obligations in the amount which exceeds 20% of its short-term liabilities, as disclosed in the annual report for the previous financial year; or
• 30 days – salaries, taxes and social security contributions.

Remedy:

The Law provides for financial restructuring measures to be taken to recover solvency within 60 days.

In case of insolvency, only payments which are necessary for regular business operations are permitted (supply of goods and services necessary for regular business operations, operative costs etc.) and all other payments will be considered to result in damaging creditors.

Supervision

The Tax Administration of the Federal Ministry of Finance and the Budget Inspection can issue sanctions: BAM 1,500 – BAM 15,000.