Restructuring and Insolvency in Croatia 2024

Restructuring and Insolvency in Croatia 2024 - Supreme Court of Croatia

Restructuring and Insolvency in Croatia 2024 – Supreme Court of Croatia

RESTRUCTURING AND INSOLVENCY 2024

CROATIA

Vice Mandarić

(Schoenherr)

GENERAL

Legislation

  1. What main legislation is applicable to insolvencies and reorganizations?

The Bankruptcy Act contains provisions on bankruptcy and pre-bankruptcy proceedings for legal entities. For consumers, the Consumer Bankruptcy Act is applicable.

Further, there are specific provisions for companies active in the financial sector in the Credit Institution Act, the Insurance Act, the Act on Resolution of Credit Institutions and Investment Firms and the Act on Financial Operations and Pre-Bankruptcy Settlement.

Since 2017, the Act on Extraordinary Administration Proceedings for Companies of Systemic Importance for the Republic of Croatia contains a special restructuring regime for joint-stock companies that employ (together with their subsidiaries) more than 5,000 people and have approximately €1 billion of debt (the only proceeding under this Act so far has been with respect to the Agrokor group).

Excluded entities and excluded assets

  1. What entities are excluded from customary insolvency or reorganization proceedings and what legislation applies to them? What assets are excluded or exempt from claims of creditors?

Croatia, funds financed by Croatia (e.g, the Croatian Health Insurance Fund and the Croatian Pension Insurance Fund) and units of local and regional self-government (cities, municipalities and counties) cannot be subject to bankruptcy proceedings. Bankruptcy proceedings against legal entities whose main activity is the production of weapons and military equipment or the providing services to the Croatian armed forces for the purpose of defense and security require the approval of the ministry of defense. If approval is not granted, Croatia becomes a joint and several debtor for the liabilities of the entity.

Pre-bankruptcy proceedings cannot be initiated against financial institutions, credit unions, investment companies, investment funds management companies, credit institutions, insurance companies, reinsurance companies, lease companies, payment transactions institutions and electronic money institutions.

Pre-bankruptcy proceedings may be initiated against the debtor who has been legally convicted of a criminal offence of abuse of trust in business operations, fraud in business operations, causing bankruptcy, preference of creditors or violation of the obligation to keep business books in accordance with the Criminal Code, only if the debtor undertook appropriate measures to eliminate the issues that led to the convictions and notified its creditors during the restructuring negotiations on the details of the measures taken and their results.

In principle, all assets owned by the debtor on the date when the bankruptcy proceedings are opened and assets acquired by the debtor during the bankruptcy proceedings are subject to the proceedings.

If the debtor is an individual, there are certain exceptions.

Public enterprises

  1. What procedures are followed in the insolvency of a government-owned enterprise? What remedies do creditors of insolvent public enterprises have?

Croatian insolvency law does not provide for specific procedures for government-owned enterprises.

Protection for large financial institutions

  1. Has your country enacted legislation to deal with the financial difficulties of institutions that are considered ‘too big to fail’?

The Act on Extraordinary Administration Proceeding for Companies of Systemic Importance in the Republic of Croatia was enacted to provide for an efficient and expedient voluntary procedure for preventive restructurings. The aim is to safeguard Croatia’s economic, social and financial stability through a single procedure that applies to the debtor and all of its affiliates domiciled in the country.

Directive (2014/59/EU) (the Bank Recovery and Resolution Directive), Directive (EU) 2017/2399 as regards the ranking of unsecured debt instruments in insolvency hierarchy and Regulation (EU) No. 806/2014 (the Single Resolution Mechanism) have been implemented in Croatia in the Credit Institutions Act and the Act on Resolution of Credit Institutions and Investment Firms.

Courts and appeals

  1. What courts are involved? What are the rights of appeal from court orders? Does an appellant have an automatic right of appeal or must it obtain permission? Is there a requirement to post security to proceed with an appeal?

Bankruptcy proceedings are conducted in front of a commercial court of the debtor’s registered seat. The first-instance proceedings are conducted by a single judge. Decisions are published online on the e-bulletin board of the relevant court. The High Commercial Court, acting as the court of second instance, decides on the appeal in a panel consisting of three judges. The decisions of the High Commercial Court are final but appellants can request approval for an extraordinary appeal from the Supreme Court.

There is no requirement to post security to proceed with an appeal.

TYPES OF LIQUIDATION AND REORGANIZATION PROCESSES

Voluntary liquidations

  1. What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

There is no voluntary liquidation under Croatian law.

Voluntary reorganizations

  1. What are the requirements for a debtor commencing a voluntary reorganization and what are the effects?

A voluntary reorganization may be achieved through pre-bankruptcy proceedings, extraordinary administration proceedings and self-administration proceedings. Self-administration proceedings have to date never been used. The effect of all these proceedings is an immediate stand-still, a stay on enforcement procedures and the obligation of the creditors to register their claims within the procedures.

Pre-bankruptcy proceedings can be initiated by the debtor. Pre-bankruptcy proceedings may be initiated if there is an impending inability to pay.

The opening of pre-bankruptcy proceedings will result in:

  • a prohibition of non-essential payments and asset disposals without prior approval from the court or pre-bankruptcy trustee;
  • stay on civil, arbitration and enforcement proceedings against the debtor; and
  • interruption of pending proceedings.

Enforcements by existing secured creditors, proceedings for employees’ claims, security measures in criminal proceedings and certain tax inspection proceedings are not affected by the stay of proceedings.

Successful reorganizations

  1. How are creditors classified for purposes of a reorganization plan and how is the plan approved? Can a reorganization plan release non-debtor parties from liability and, if so, in what circumstances?

A reorganization plan has few restrictions as long as it observes the principle of equal treatment of creditors of the same class. In pre-bankruptcy and bankruptcy proceedings, creditors are classified into the following groups:

  • secured creditors if the reorganization plan affects their rights;
  • unsecured creditors;
  • lower-ranking unsecured creditors in certain cases;
  • stockholders, shareholders and holders of other founders’ rights in legal entities if the reorganization plan affects their rights; and
  • employees.

Additional groups of creditors may be created according to the similarity of their economic interests (e.g, financial creditors, suppliers and so on). Creditors with small claims may be classified in a separate group.

The reorganization plan does not release non-debtor parties of their liabilities.

Involuntary liquidations

  1. What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?

There is no involuntary liquidation proceeding under Croatian law, only normal bankruptcy proceedings.

An unsecured creditor may file a petition to open bankruptcy proceedings if it makes the existence of its claim and the grounds for bankruptcy probable.

In bankruptcy proceedings, the management board of the company is replaced by the insolvency administrator, while during the (voluntary) pre-bankruptcy procedure the existing management remains in place with the supervision of the court and the pre-bankruptcy administrator.

Involuntary reorganizations

  1. What are the requirements for creditors commencing an involuntary reorganization and what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?

There are no involuntary reorganization proceedings. The creditors may order the insolvency administrator to prepare the bankruptcy plan.

Expedited reorganizations

  1. Do procedures exist for expedited reorganizations (e.g, ‘prepackaged’ reorganizations)?

In theory, self-administration proceedings could be used for expedited reorganizations, but this type of proceedings has never been used in practice.

Unsuccessful reorganizations

  1. How is a proposed reorganization defeated and what is the effect of a reorganization plan not being approved? What if the debtor fails to perform a plan?

In pre-bankruptcy proceedings, a proposed reorganization plan is deemed accepted by the competent court if the debtor gives its consent, and:

  • the majority of all creditors voted in favor of the plan; and
  • the sum of the claims of creditors who voted in favor of the plan exceeds twice the sum of the claims of creditors who voted against the plan in each group of creditors.

If the reorganization plan is not accepted by the creditors, a cramdown of a single class of creditors is possible if:

  • the creditors in this class are in no worse position than without the reorganization plan;
  • the creditors adequately participate in economic benefits that are afforded to the parties in the reorganization plan; and
  • the majority of voting classes have voted for the reorganization plan by the required majorities.

There are several situations in which the competent court may refuse the pre-bankruptcy reorganization plan (the debtor can pay the claim amount, the procedural rules for the adoption and content of the reorganization plan have been breached, the reorganization plan is detrimental to creditors’ interests and so on), which is especially so if the creditor, debtor, stakeholder, shareholder or holder of other founders’ rights in legal entities are put in worse position than if the plan did not exist.

If the debtor fails to perform the pre-bankruptcy reorganization plan following the conclusion of the procedure, the pre-bankruptcy trustee must report this to the court and the creditors affected by the pre-bankruptcy proceedings, provided the court established the supervision over the fulfillment of the plan. Creditors may then initialize the commencement of the bankruptcy proceedings against the debtor.

If the plan is not approved, the pre-bankruptcy proceedings will be suspended and bankruptcy proceedings will be opened with respect to the debtor.

In bankruptcy proceedings, a proposed bankruptcy plan is accepted by the court if the creditors cast their vote as described above, including the cramdown of a single class of creditors.

If the bankruptcy plan is not accepted, the assets of the debtor will be sold and the debtor will be liquidated. If the debtor fails to perform the bankruptcy plan, creditors may initialize reopening of the bankruptcy proceeding.

Both reorganization plan and the bankruptcy plan may be used by the creditors to commence the enforcement proceeding against the debtor to collect their claims.

Corporate procedures

  1. Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

Yes, the Companies Act provides for the voluntary dissolution of a company. After successful liquidation, the company will be dissolved.

The dissolution is initiated voluntarily by the shareholders of the company who wish to wind down the company. This procedure may be conducted only if the company has sufficient assets to repay all of its creditors in full. Voluntary liquidation is not feasible for companies in financial distress.

Conclusion of case

  1. How are liquidation and reorganization cases formally concluded?

Liquidation and reorganization cases are formally concluded by the court’s decision. In bankruptcy procedures, the entity is deleted from the court registry. In the reorganization cases, the entity may survive or be deleted from the registry depending on what is envisaged by the reorganization plan.

INSOLVENCY TESTS AND FILING REQUIREMENTS

Conditions for insolvency

  1. What is the test to determine if a debtor is insolvent?

There are two different criteria under the Bankruptcy Act for establishing insolvency:

  • illiquidity; and
  • over-indebtedness.

Bankruptcy proceedings may also be opened due to impending illiquidity.

If the debtor is unable to fulfil its accrued and outstanding payment liabilities on a more permanent basis, it will be deemed illiquid. The debtor will be deemed illiquid if the company’s bank accounts are blocked for a period exceeding 60 days or if the company did not pay wages for three consecutive months.

If the debtor’s liabilities exceed the company’s assets it is deemed over-indebted unless:

  • under the circumstances it may be reasonably assumed that the company will continue to settle its liabilities as they fall due if it maintains its business operations; or
  • a shareholder of the company, who is a natural person uninvolved in bankruptcy, assumes joint liability for the company’s liabilities.

Impending illiquidity is presumed if a debtor either:

  • the company’s bank accounts are blocked;
  • is in default for more than 30 days with a payment of wages to employees; or
  • is in default for more than 30 days with a payment of social contributions and taxes on wages.

Mandatory filing

  1. Must companies commence insolvency proceedings in particular circumstances?

The debtor must petition for bankruptcy proceedings within 21 days of the occurrence of bankruptcy reasons. The obligation to file a petition for the commencement of bankruptcy proceedings applies to:

  • the debtor’s legal representative; and
  • the debtor’s liquidator.

If the debtor does not have a legal representative, each member of the debtor’s supervisory board is also under an obligation to file. If the debtor has neither a legal representative nor a supervisory board, the shareholders are also under an obligation to file. The application for the commencement of bankruptcy proceedings must be submitted jointly by all persons that have a filing obligation. Otherwise, the application is admissible only if the petitioner makes the existence of the grounds for bankruptcy probable.

Additionally, the Financial Agency (the central organization for payment collection or enforcement) must file a petition for the commencement of bankruptcy proceedings if a debtor’s accounts have been blocked for an uninterrupted period of 120 days.

DIRECTORS AND OFFICERS

Directors’ liability – failure to commence proceedings and trading while insolvent

  1. If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if a company carries on business while insolvent?

Persons obliged to file for bankruptcy proceedings but fail to do so are liable to creditors for any damage caused by this omission.

Management board members and liquidators could also face criminal liability, punished by a monetary fine or imprisonment of up to two years (article 626 of the Companies Act). However, criminal proceedings are rarely initiated in practice.

In the case of non-initiation of the bankruptcy procedure, the members of the management board may be jointly and severally liable to the company for damages.

Directors’ liability – other sources of liability

  1. Apart from failure to file for proceedings, are corporate officers and directors personally liable for their corporation’s obligations? Are they liable for corporate pre-insolvency or pre-reorganization actions? Can they be subject to sanctions for other reasons?

Members of the management board of a limited liability company or a joint-stock company are under a general obligation to apply the diligence expected from a responsible business person when conducting the company’s affairs. Failure to do so may result in a civil law obligation for damages.

The members of the management board must use their best efforts to preserve the company’s liquidity and sound financial structure. Also, members of the management board have a duty to manage and continuously assess credit risk, market risk, operational risk and liquidity risk, and they have a specific duty to act in the case of known crises – capital inadequacy. In the case of a breach of these duties, the company and the members of the management board may receive misdemeanor monetary penalties that are rarely issued.

Directors’ liability – defenses

  1. What defenses are available to directors and officers in the context of an insolvency or reorganization?

In the event of a dispute, members of the management board must prove that they have acted with the required diligence.

Shift in directors’ duties

  1. Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganization proceeding is likely? When?

No.

Directors’ powers after proceedings commence

  1. What powers can directors and officers exercise after liquidation or reorganization proceedings are commenced by, or against, their corporation?

In pre-bankruptcy proceedings, the directors and officers continue to represent the company under the supervision of the court-appointed trustee.

In bankruptcy proceedings, the bankruptcy administrator assumes duties of all corporate bodies (management board, supervisory board and shareholders’ assembly).

MATTERS ARISING IN A LIQUIDATION OR REORGANIZATION

Stays of proceedings and moratoria

  1. What prohibitions against the continuation of legal proceedings or the enforcement of claims by creditors apply in liquidations and reorganizations? In what circumstances may creditors obtain relief from such prohibitions?

Pending legal proceedings

By commencing the pre-bankruptcy proceedings, civil and arbitration proceedings are stayed, and the new ones relating to claims affected by the pre-bankruptcy proceedings cannot be initiated.

The Civil Procedure Act imposes an ex lege interruption on proceedings. Once bankruptcy proceedings have been formally opened, proceedings can be continued. Those that concern assets that form the bankruptcy estate may be continued but are assumed by the insolvency administrator. If the proceedings concern claims that are affected by the bankruptcy proceedings, they are stayed.

Enforcement of claims

In the pre-bankruptcy proceedings enforcement of claims affected by the proceedings are not possible, and ongoing enforcements of those claims are stayed. This prohibition is limited to only 120 days, which may be prolonged by the court.

Once bankruptcy proceedings have been formally opened, creditors are prevented from enforcing their claims. In certain circumstances, the bankruptcy court could impose a stay on the initiation of enforcement of claims or suspend pending enforcement actions before proceedings are formally opened. Creditors cannot, in general, apply to the court to lift this moratorium on enforcement actions.

Secured creditors are exempted; they may claim preferential satisfaction of their claim from the respective asset. The secured creditors may not autonomously conduct the sale of real estate, ships, aircraft and other registered rights. The sale of those assets is conducted by the bankruptcy administrator through an electronic auction system. The first-ranking secured creditor may buy the asset by setting off its claim against the determined value of the underlying asset. The assets are sold to the buyers free and clear of claims.

Doing business

  1. When can the debtor carry on business during a liquidation or reorganization? Is any special treatment given to creditors who supply goods or services after the filing? What are the roles of the creditors and the court in supervising the debtor’s business activities?

In the pre-bankruptcy procedure, the debtor continues its operation with certain restrictions on payments (i.e, the claims for the ordinary course of business may be fulfilled). In bankruptcy proceedings, the creditors decide on the continuation or discontinuation of the debtor’s business operations. This decision may be subsequently amended by the creditors.

The claims that occur after the commencement of the procedure are claims of the bankruptcy estate that have priority over pre-filing claims. The bankruptcy administrator may not incur new liabilities that cannot be paid from the available funds. During the entire bankruptcy proceedings, the bankruptcy administrator must ensure that there are sufficient funds to settle projected bankruptcy estate obligations.

The bankruptcy administrator is supervised by the court, the creditors’ committee and the assembly of creditors. The court may replace the bankruptcy administrator if it does not follow the court’s instructions or does not act in line with the law. The creditors may request the replacement of the bankruptcy administrator at any time with a simple majority.

Post-filing credit

  1. May a debtor in a liquidation or reorganization obtain secured or unsecured loans or credit? What priority is or can be given to such loans or credit?

A debtor in the pre-bankruptcy reorganization may obtain secured or unsecured loans provided that two-thirds of recognized creditors consent. In the case of subsequent bankruptcy, the new debt ranks higher than second-ranking creditors (unsecured creditors) but lower than first-ranking creditors (employees and certain taxes) and the claims toward the bankruptcy estate.

The Bankruptcy Act allows the bankruptcy administrator to obtain financing with the consent of the creditors’ committee, or alternatively with the consent of the assembly of creditors’ if the creditors’ committee is not formed.

Sale of assets

  1. In reorganizations and liquidations, what provisions apply to the sale of specific assets out of the ordinary course of business and to the sale of the entire business of the debtor? Does the purchaser acquire the assets ‘free and clear’ of claims or do some liabilities pass with the assets?

The bankruptcy administrator is entitled to liquidate the assets and obtain funds for the repayment of creditors unless the bankruptcy creditors decide otherwise. The sale of assets is conducted in line with the guidelines and decisions of the assembly of creditors and the creditors’ committee. The purchaser takes over the ownership of specific assets clear of financial encumbrances that are registered in the public registries, but certain rights (e.g, the right of way) remain registered.

Negotiating sale of assets

  1. Does your system allow for ‘stalking horse’ bids in sale procedures and does your system permit credit bidding in sales?

‘Stalking horse’ bids are allowed if the assembly of creditors decides to use this sale procedure. Otherwise, the sale through an electronic auction system is applied as the default mode of sale.

A credit bid is allowed to the first-ranking secured creditors who may buy the secured asset by setting off their claim against the determined value of the underlying asset. Other creditors may not implement a credit bid.

Rejection and disclaimer of contracts

  1. Can a debtor undergoing a liquidation or reorganization reject or disclaim an unfavorable contract? Are there contracts that may not be rejected? What procedure is followed to reject a contract and what is the effect of rejection on the other party? What happens if a debtor breaches the contract after the insolvency case is opened?

The bankruptcy administrator has the choice to either accept an existing contract or to reject or disclaim a contract. The other party may request from the bankruptcy administrator to state whether the debtor will fulfil the mutual agreement or not. If the bankruptcy administrator does not choose to fulfil the obligations the contract falls away, in which case the counterparty may register its claim for damages as an unsecured claim.

If a contract is accepted, the claims thereunder, including breaches of contracts after the bankruptcy case is opened, may create the obligation of the bankruptcy estate for damages, as claims that are created post-initiation are ranked higher than pre-filing claims.

Intellectual property assets

  1. May an IP licensor or owner terminate the debtor’s right to use the IP when a liquidation or reorganization is opened? To what extent may IP rights granted under an agreement with the debtor continue to be used?

There are no specific statutory provisions dealing with intellectual property rights in insolvency; therefore, the general rule on the bankruptcy administrator’s options to either continue the contract or to reject it would apply. For this reason and in the event of the bankruptcy of the licensee, the bankruptcy administrator has the right to continue the license agreement under its present terms or reject its continuation.

A contractual clause providing for a right of the licensor to terminate the license agreement upon the opening of bankruptcy proceedings over the estate of the licensee may be null and void as such clause would deprive the bankruptcy administrator from the option to choose to continue the license (article 197 of the Bankruptcy Act).

Personal data

  1. Where personal information or customer data collected by a company in liquidation or reorganization is valuable, are there any restrictions in your country on the use of that information or its transfer to a purchaser?

The Bankruptcy Act does not have special rules on the personal information or customer data collected by the debtor that may be used or transferred to a purchaser. In any case, the data protection rules need to be adhered to, namely Regulation (EU) No. 2016/679 (the General Data Protection Regulation).

Arbitration processes

  1. How frequently is arbitration used in liquidation or reorganization proceedings? Are there certain types of disputes that may not be arbitrated? Can disputes that arise after the liquidation or reorganization case is opened be arbitrated with the consent of the parties?

Arbitrations and mediations are not common in liquidation or reorganization proceedings. The Bankruptcy Act allows the bankruptcy creditors to request from the court that the validity of a disputed bankruptcy claim is determined in front of a permanent arbitration court. Other cases could also be arbitrated, but the bankruptcy administrator would need the approval of the creditors’ committee or the assembly of creditors to enter into such proceedings.

CREDITOR REMEDIES

Creditors’ enforcement

  1. Are there processes by which some or all of the assets of a business may be seized outside of court proceedings? How are these processes carried out?

No.

Unsecured credit

  1. What remedies are available to unsecured creditors? Are the processes difficult or time-consuming? Are pre-judgment attachments available?

No remedies are available after the commencement of the bankruptcy proceedings.

CREDITOR INVOLVEMENT AND PROVING CLAIMS

Creditor participation

  1. During the liquidation or reorganization, what notices are given to creditors? What meetings are held and how are they called? What information regarding the administration of the estate, its assets and the claims against it is available to creditors or creditors’ committees? What are the liquidator’s reporting obligations?

The notices, decisions of the bankruptcy court and the periodical status reports by the bankruptcy administrator are made public and available online on the e-bulletin board run by the Ministry of Justice and Public Administration. For Croatian creditors, this is the only way notices are served in bankruptcy and pre-bankruptcy proceedings.

When the insolvency court renders the decision on the opening of a bankruptcy proceeding, the court immediately sets dates for the information hearing and the examination hearing, which usually take place on the same day. At the information hearing, the bankruptcy administrator reports on the status of the debtor after which the creditors decide whether to continue the operations of the debtor or shut down the debtor’s business. The creditors may also decide to form a creditors’ committee. At the subsequent examination hearing, the registered claims are examined by the court and the bankruptcy administrator.

During the bankruptcy procedure, additional hearings may be held for discussion and voting on various matters, including whether the reorganization plan should be prepared.

At the final hearing, the bankruptcy administrator’s final statement of fees is discussed, as well as any objections against the final list of creditors. The insolvency court also decides on the final distribution.

The creditors’ committee has the right to inspect all business records and documentation of the debtor and may examine the administrator’s reports. The creditors’ committee has the duty to inform creditors about the course of the bankruptcy proceedings and the balance of the bankruptcy estate. The administrator has the obligation to report on the status of the estate, the actions taken in the liquidation of assets and fulfillment of creditors’ claims.

Creditor representation

  1. What committees can be formed (or representative counsel appointed) and what powers or responsibilities do they have? How are they selected and appointed? May they retain advisers and how are their expenses funded?

The creditors’ committee may be formed if the bankruptcy creditors decide to do so. Also, to protect the interests of creditors in the bankruptcy proceedings and before the first creditors’ hearing, the court may establish the creditors’ committee and appoint its members, but the creditors decide on whether to keep the committee at the first assembly of creditors.

The creditors’ committee must have an odd number of members, and it may not have more than nine members. The members of the creditors’ committee are chosen to represent both the bankruptcy creditors with the highest claims and the creditors with small claims. Also, a representative of the debtor’s former employees should be a member of the creditors’ committee, unless they, as bankruptcy creditors, participate with insignificant claims. Secured creditors and outside experts may also be appointed as members of the creditors’ committee.

Enforcement of estate’s rights

  1. If the liquidator has no assets to pursue a claim, may the creditors pursue the estate’s remedies? If so, to whom do the fruits of the remedies belong? Can they be assigned to a third party?

Only the bankruptcy administrator may pursue claims belonging to the estate. The bankruptcy administrator is not allowed to authorize a creditor to pursue a claim. Insufficient funds to pursue a claim would indicate that the bankruptcy estate is not enough for settling the costs of the proceedings, in which case the court may discontinue and close the proceedings. The bankruptcy proceedings must not be discontinued and closed if the creditors opposing the discontinuation jointly and severally advance sufficient funds to settle the costs of the proceedings, within the period the court stipulated for that purpose by a ruling. Also, the creditors could provide the necessary funds to the estate as a loan.

Alternatively, if the bankruptcy administrator does not have assets to pursue a claim, it would be possible to assign a receivable belonging to the estate to a third party.

Claims

  1. How is a creditor’s claim submitted and what are the time limits? How are claims disallowed and how does a creditor appeal? Can claims for contingent or unliquidated amounts be recognized? Are there provisions on the transfer of claims and must transfers be disclosed? How are the amounts of such claims determined?

Creditors may submit their claims using a prescribed form and attaching supporting documents.

The registration has to be sent to the administrator within 60-plus-eight days as of the publication of the decision on the initiation of the bankruptcy proceedings on the e-bulletin board.

At the examination hearing, the amount and ranking of claims is determined. A claim is deemed to have been admitted if no objection has been raised by the debtor, the administrator or another creditor. After the examination hearing, the bankruptcy court will prepare a table of registered claims showing which claims have been admitted and setting out the amount and the ranking of each claim. The creditors whose claims were contested can file a lawsuit to prove the existence and rank of their claim. If the creditor holds an execution title, then the person contesting the existence and ranking of the creditor’s claim needs to initiate the court proceedings.

The transfer of claims is allowed before or after the examination hearing. The claim acquired at a discount may be enforced for its full face value. The interest accruing after the initiation of procedure are lowest-ranked claims that may be claimed only after all second-ranking (unsecured creditors) are fully paid.

Set-off and netting

  1. To what extent may creditors exercise rights of set-off or netting in a liquidation or in a reorganization? Can creditors be deprived of the right of set-off either temporarily or permanently?

Claims that existed before the filing for bankruptcy may be set off provided that:

  • the claim of the creditor existed and was due and payable at the time of the opening of insolvency proceedings; and
  • that the claim of the estate was also existing at the time of the commencement of insolvency proceedings.

If the claim or counter-claim is contingent or not yet due at the date of the opening of insolvency proceedings, the set-off may be effected once the claim becomes unconditional or due.

Set-off is not possible if:

  • a creditor’s debt towards the estate incurred after the opening of the insolvency proceedings;
  • a creditor acquires its claim from another creditor following the opening of the insolvency proceedings (even if the original creditor’s claim predated the insolvency);
  • the claim was ceded to the bankruptcy creditor during the past six months before the date of the opening of pre-bankruptcy proceedings, and the bankruptcy creditor was aware or should have been aware of the debtor’s insolvency or that the petition to open pre-bankruptcy or bankruptcy proceedings was filed against the debtor; or
  • if the creditor has obtained the right to set-off by a legal action that can be annulled.

Netting (close-out netting) is protected in relation to qualified financial agreements, which are not impacted by the opening of pre-bankruptcy or bankruptcy proceedings. Netting will be performed in accordance with the terms of the respective agreement. If after the netting certain claims of the creditor remain, the creditor may claim the remaining amount in bankruptcy proceedings.

Qualified financial agreements are financial agreements to which at least one party is a credit institution, financial institution, investment firm, leasing company, management company, alternative investment fund management company, pension fund management company or insurance undertaking, which create obligations needing to be performed at a certain time or within a certain deadline. These are in particular:

  • agreements with financial instruments;
  • repo agreements and other financial collateral agreements;
  • use of financial instruments, including loans as ancillary services;
  • netting agreements; and
  • foreign exchange sales and purchase transactions.

Modifying creditors’ rights

  1. May the court change the rank (priority) of a creditor’s claim? If so, what are the grounds for doing so and how frequently does this occur?

The bankruptcy court has no competence to modify the rank (priority) of a creditor’s claim.

Priority claims

  1. Apart from employee-related claims, what are the major privileged and priority claims in liquidations and reorganizations? Which have priority over secured creditors?

Apart from employee-related claims, there are no priority claims for bankruptcy creditors. The obligations that occur after the commencement of the procedure are the obligation of the bankruptcy estate and have the highest ranking.

Secured creditors have the right to payment out of the proceeds from secured assets after payment of enforcement-related costs.

Employment-related liabilities

  1. What employee claims arise where employees’ contracts are terminated during a restructuring or liquidation? What are the procedures for termination? (Are employee claims as a whole increased where large numbers of employees’ contracts are terminated or where the business ceases operations?)

The initiation of bankruptcy is a valid reason to terminate the employment contract with a shorter notice period of only up to one month. There is no collective termination procedure in the case of bankruptcy.

Pension claims

  1. What remedies exist for pension-related claims against employers in insolvency or reorganization proceedings and what priorities attach to such claims?

Mandatory pension insurance is paid from the salary of employees. The gross amount of unpaid salary, including unpaid pension contributions, would have priority over normal insolvency claims. Other pension schemes are rarely used, and they would have general priority as unsecured claims.

Environmental problems and liabilities

  1. Where there are environmental problems, who is responsible for controlling the environmental problem and for remediating the damage caused? Are any of these liabilities imposed on the insolvency administrator personally, secured or unsecured creditors, the debtor’s officers and directors, or on third parties?

The debtor must adhere to the environmental law before and after the commencement of the procedure. Claims for damages are treated as any other claim by a third-party creditor.

The bankruptcy administrator may be liable for a misdemeanor or criminal offence, or both, related to breaches of environmental laws.

Liabilities that survive insolvency or reorganization proceedings

  1. Do any liabilities of a debtor survive an insolvency or a reorganization?

As a general rule, the liabilities of a debtor do not survive insolvency as the debtor ceases to exist. In the reorganization proceedings, the secured creditors’ rights survive unless otherwise stipulated by the reorganization plan.

Distributions

  1. How and when are distributions made to creditors in liquidations and reorganizations?

Interim distributions can be made whenever there are sufficient funds collected by the bankruptcy administrator. Such distributions require the consent of the creditors’ committee or the bankruptcy court (if there is no creditors’ committee).

The final distribution takes place once all the assets of the estate have been sold and the consent of the bankruptcy court has been obtained.

Distributions pursuant to a reorganization plan are not restricted by the terms of the Insolvency Act, but should be made in accordance with the reorganization plan.

SECURITY

Secured lending and credit (immovables)

  1. What principal types of security are taken on immovable (real) property?

Immovable property can be encumbered by way of a mortgage.

Secured lending and credit (movables)

  1. What principal types of security are taken on movable (personal) property?

Croatian law provides for pledges and retention of title as security over movable property.

CLAWBACK AND RELATED-PARTY TRANSACTIONS

Transactions that may be annulled

  1. What transactions can be annulled or set aside in liquidations and reorganizations and what are the grounds? Who can attack such transactions?

Legal actions, including omission of actions, undertaken before the opening of bankruptcy proceedings that are detrimental to the pari passu satisfaction of the creditors (damage to the creditors) or that are more favorable to certain creditors (favoring the creditors) may be contested by the bankruptcy trustee on behalf of the bankruptcy debtor and by the bankruptcy creditors.

The clawback period ranges from three months to 10 years for intentional damages. The clawback proceedings have to be initiated within two years of the opening of the bankruptcy proceedings and require the consent of the bankruptcy judge.

Additionally, each creditor is entitled to file a lawsuit to contest legal actions of the debtor on its own behalf and at its own cost within two years of the opening of the bankruptcy proceedings.

If the creditor successfully contests the legal action, the court ruling will affect the bankruptcy estate and other creditors. The other party is obliged to return all unlawfully received economic proceeds from the debtor to the bankruptcy estate. In some cases, the creditor that successfully contested the legal action may have the right to settle their claims before other creditors.

Equitable subordination

  1. Are there any restrictions on claims by related parties or non-arm’s length creditors (including shareholders) against corporations in insolvency or reorganization proceedings?

Loans by shareholders with more than 10 per cent of the share capital in a limited liability company may be subordinated in the bankruptcy proceedings to other claims if they were provided at a time of crisis. The same may apply to the third-party loans for which the shareholder provided security (ie, they may also be classified as lower-ranking claims in the bankruptcy procedure).

Any repayment of a loan made in the year before the opening of insolvency proceedings will generally be voidable.

Furthermore, any transaction with a related party may be contested if it causes direct damage to the creditors except if the transaction was concluded more than two years before the filing of the petition for the opening of bankruptcy proceedings, or if the other party was not aware nor should have been aware of the debtor’s intention to cause damage to the creditors.

Transactions on a non-arm’s length basis may be challenged if they qualify either as legal actions without compensation or with insignificant compensation. The hardening period is four years.

Lender liability

  1. Are there any circumstances where lenders could be held liable for the insolvency of a debtor?

This type of liability is not expressly regulated.

GROUPS OF COMPANIES

Groups of companies

  1. In which circumstances can a parent or affiliated corporation be responsible for the liabilities of subsidiaries or affiliates?

Absent any contractual undertaking (e.g, guarantee or tax union) a parent company is not responsible for liabilities of subsidiaries or affiliates. Additionally, the bankruptcy administrator may request the piercing of the corporate veil if the shareholder abused the provisions on the limited liability of the shareholder.

Combining parent and subsidiary proceedings

  1. In proceedings involving a corporate group, are the proceedings by the parent and its subsidiaries combined for administrative purposes? May the assets and liabilities of the companies be pooled for distribution purposes?

As a general rule, proceedings cannot be combined.

Proceedings under the Act on Extraordinary Administration Proceedings for Companies of Systemic Importance for the Republic of Croatia contain some elements of group proceedings but also in these proceedings assets and liabilities are not pooled for distribution purposes.

INTERNATIONAL CASES

Recognition of foreign judgments

  1. Are foreign judgments or orders recognized, and in what circumstances? Is your country a signatory to a treaty on international insolvency or on the recognition of foreign judgments?

Within the European Union, foreign judgments by EU member states are automatically recognized based on Regulation (EU) 2015/848 (the Recast Insolvency Regulation).

A non-EU foreign judgment can be granted recognition by a court order provided that:

  • the foreign court has jurisdiction;
  • the judgment is enforceable under an applicable foreign law; and
  • the judgment is not contrary to the Croatian public order.

UNCITRAL Model Laws

  1. Have any of the UNCITRAL Model Laws on Cross-Border Insolvency been adopted or is adoption under consideration in your country?

Croatia has not adopted the UNCITRAL Model Law on Cross-Border Insolvency.

Foreign creditors

  1. How are foreign creditors dealt with in liquidations and reorganizations?

Foreign creditors are treated the same as domestic creditors. Additionally, foreign creditors enjoy the benefit of an individual notice on the initiation of bankruptcy proceedings (article 54 of the Recast Insolvency Regulation).

Cross-border transfers of assets under administration

  1. May assets be transferred from an administration in your country to an administration of the same company or another group company in another country?

There are no specific provisions on such an asset transfer. The general provisions would allow asset transfers according to a sale and purchase agreement or a court-approved reorganization plan.

COMI

  1. What test is used in your jurisdiction to determine the COMI (center of main interests) of a debtor company or group of companies? Is there a test for, or any experience with, determining the COMI of a corporate group of companies in your jurisdiction?

The center of main interests (COMI) is the place where the debtor conducts the administration of its interests on a regular basis and that is ascertainable by third parties. There is no experience in Croatia with determining the COMI of a corporate group.

Cross-border cooperation

  1. Does your country’s system provide for recognition of foreign insolvency proceedings and for cooperation between domestic and foreign courts and domestic and foreign insolvency administrators in cross-border insolvencies and restructurings? Have courts in your country refused to recognize foreign proceedings or to cooperate with foreign courts and, if so, on what grounds?

Croatia automatically recognizes insolvency proceedings in other EU countries. The Recast Insolvency Regulation provides a framework for cooperation.

The non-EU foreign insolvency proceedings may be recognized in Croatia by a court’s decision. A secondary insolvency proceeding may also be opened.

Cross-border insolvency protocols and joint court hearings

  1. In cross-border cases, have the courts in your country entered into cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries? Have courts in your country communicated or held joint hearings with courts in other countries in cross-border cases? If so, with which other countries?

Apart from the provisions of the Recast Insolvency Regulation, there are no protocols or other arrangements. To date, there have been no recorded joint hearings with courts in other countries in cross-border cases.

Winding-up of foreign companies

  1. What is the extent of your courts’ powers to order the winding-up of foreign companies doing business in your jurisdiction?

If the foreign company is from an EU member-state country and its COMI is in Croatia, the Croatian court would have the jurisdiction to conduct the bankruptcy proceedings.

UPDATE AND TRENDS IN RESTRUCTURING AND INSOLVENCY IN CROATIA

Trends and reforms

  1. Are there any emerging trends or hot topics in the law of insolvency and restructuring? Is there any new or pending legislation affecting domestic bankruptcy procedures, international bankruptcy cooperation or recognition of foreign judgments and orders?

Croatia has implemented Directive (EU) 2019/1023 on preventive restructuring frameworks, on the discharge of debt and disqualifications and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132. The implementation took place by means of amendments to the Bankruptcy Act on 31 March 2022.

* The information in this chapter was accurate as at September 2023.

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