Contestation rights in Croatia and the impact of the EU’s insolvency law draft Directive

Regarding the draft Directive proposed by the European Commission that harmonises facets of insolvency law, it is worth noting that the draft Directive does not prevent EU member states from maintaining or adopting provisions that offer greater protection to creditors than those outlined in the Directive. Since the existing Croatian law framework on contestation rights provides numerous and detailed rules that go beyond the draft Directive, its implementation is not expected to require extensive or substantial modifications.

Legal acts intentionally detrimental to creditor (Art. 8)

The acts of the debtor that are intentionally detrimental to its creditors are the most commonly used grounds for avoidance in Croatia.

The knowledge of the other party of such intention is a requirement, and there are specific rules regarding when it can be deemed that the other party was aware of the debtor’s intent or when it is presumed that it was aware of it. The contestation period is ten years prior to filing for the opening of insolvency proceedings or after the proceedings are opened. There is also a two-year suspect period regarding actions involving a party closely related to the debtor, which will apply provided certain other conditions are met.

Under the draft Directive, certain level of the other party’s knowledge is also required, and if the other party was closely related to the debtor, such knowledge is presumed.

A major distinction between Croatian law and the draft Directive, however, lies in the suspect period with the Directive specifying a substantially shorter duration of only four years.

Therefore, the Croatian regime is stricter when it comes to acts intentionally detrimental to the creditor, meaning no amendments will be required from the local legislator.

Legal acts against no or a manifestly inadequate consideration (Art. 7)

As for this contestation ground, the conditions for challenging resemble each other with no major distinctions between the provisions in Croatian law and those outlined in the draft Directive.

Both regimes allow contesting actions against no consideration, and those with an “insignificant consideration” in the wording of Croatian law (i.e. those with a “manifestly inadequate consideration” in the wording of the draft Directive) excludes the challenging of gifts and donations of symbolic value.

The difference in the suspect period, however, is present here as well. Croatian law allows challenging the actions that were taken within four years prior to filing for opening bankruptcy proceedings, which is significantly longer than the suspect period of only one year under the draft Directive.

Therefore, the existing local framework is more rigorous in this case as well, and the implementation of the draft Directive will not require specific amendments.

Preferences (Art. 6)

In terms of other grounds for contestation, the draft Directive takes a broader approach, contrasting with the more specific approach of Croatian law, which delves into greater detail on the types of actions that can be challenged.

Generally, the draft Directive allows any legal act that has benefited a particular creditor or a group of creditors to be declared void. This includes acts involving satisfaction, security, or any other means of benefiting a creditor. The requirements are that (i) the act was perfected after the filing for the opening of insolvency proceedings; or (ii) that the act was perfected within three months before the filing and the debtor was unable to pay its debts.

In instances of congruent coverage, the Directive mandates an additional subjective requirement – that the other party knew or should have known that the debtor was unable to pay its debts or that a request for the opening of insolvency proceedings has been filed.

The rules on congruent coverage under Croatian law more or less align with those outlined in the draft Directive, both in terms of requirements and suspect period.

In addition to the coverage regulations, Croatian law provides special rules governing certain grounds and scenarios.

Such specific scenarios involve, for example, satisfaction or collateralisation of the debtor’s obligations under a shareholder’s loan with the suspect period of one year in case of satisfaction and five years in case of collateralisation. Also, void are the acts that are directly disadvantaging the creditors. This ground is triggered by the mere perfection of the debtor’s legal act. Among other requirements, a certain level of knowledge on the part of the creditor is required and the suspect period is three months.

Procedural aspects

All the above rules concerning avoidance in Croatian law are applicable to both bankruptcy proceedings and extraordinary administration proceedings, but do not extend to pre-bankruptcy proceedings. In such cases, the general rules of obligation law will come into play. If pre-bankruptcy proceedings, however, eventually evolve into bankruptcy proceedings, the suspect period will be calculated from the submission of the proposal for initiating the pre-bankruptcy proceedings.

Another procedural point worth noting is the limitation period. Croatian law stipulates a two-year limitation period (from the date of the opening of insolvency proceedings.) whereas the draft Directive proposes a longer three-year period. Given that the draft Directive aims to set minimum harmonization rules for creditor protection, adjustments concerning the duration of the limitation period will be required in Croatian law to align with the provisions of the Directive.

What is to be expected in the future

In terms of substantive rules governing contestation rights, Croatian law already aligns with the draft Directive to a significant extent. Nonetheless, there is an opportunity for enhancement in protecting creditors' rights, most notably on the procedural side. In this context, the Croatian legislator, in particular, will need to address the limitation period by extending the current two-year period by another year, which will be a welcome step in terms of creditor protection and the creation of a safer business environment.

For more information on this draft Directive and insolvency law in Croatia, contact your CMS client partner or these CMS experts.