Effects of Liquidation and Bankruptcy on Employment Relationships – Similarities and Differences
Newsletter 145
Liquidation and bankruptcy are legally prescribed methods for the termination of a company’s existence. Liquidation is carried out when a company has sufficient funds to settle all its obligations, while bankruptcy is conducted when a company does not have enough funds to fulfill its obligations (or when there is a threat that its assets will not be sufficient to satisfy all creditors’ claims).
Regarding the effects that liquidation and bankruptcy have on the existence / termination of employment relationships, it should be noted at the outset that the Labour Law stipulates that the termination of the employer’s operations is a reason for the termination of employment relationship by law, regardless of the will of the employer and the employee.
The Law on Companies stipulates that a company ceases to exist by being removed from the register of business entities based on the conducted liquidation or bankruptcy procedure.
From the above, it logically follows that an employee’s employment relationship terminates by law at the moment the company is removed from the register maintained by the Serbian Business Registers Agency (SBRA), which implies the moment of completion of the liquidation or bankruptcy procedure, not the moment of initiation.
It is very important to distinguish between the termination of employment relationship by law and the termination of the employment contract by the employer, which in the case of bankruptcy is directly regulated by the Bankruptcy Law. The opening of bankruptcy proceedings is a reason for the termination of the employment contract concluded between the bankrupt debtor (the company undergoing bankruptcy) and the employees.
The termination of the employment contract by the employer in the case of the initiation of liquidation proceedings is not regulated by any law. In this situation, the following usually occurs:
- Employees are declared redundant due to the cessation of the need for certain jobs or due to the reduction in the volume of work that liquidation inevitably brings,
- Agreements on the termination of employment are concluded with employees.
However, in one of the recent Supreme Court decisions on this topic (Rev2 2835-21 3.5.15), it was held that “the initiation of liquidation proceedings is a reason for the termination of the employment decision by law’’, considering that the initiation of liquidation proceedings means the cessation of registered activities, i.e., the cessation of the employer’s operations.”