Restructuring and insolvency law in Croatia

1. What is the primary legislation governing restructuring proceedings in your jurisdiction?

• Bankruptcy Act (Official Gazette no. 71/15, 104/17, 36/22)
• Act on Extraordinary Administration Proceedings over Companies of Systematic Importance for the Republic of Croatia (Official Gazette no. 32/17)
• Financial Operations and Pre-Bankruptcy Settlement Act (Official Gazette no. 108/12, 144/12, 81/13, 112/13, 71/15, 78/15, 114/22).

Out-of-court restructuring isn’t governed by a specific act or regulation. Instead, it operates under the standard corporate, civil obligations and labour laws.

2. How are restructuring proceedings initiated?

Pre-bankruptcy proceedings (predstečajni postupak) and extraordinary administration proceedings (postupak izvanredne uprave) are both types of court-led restructuring procedures. Their primary goal is to reorganise businesses that are financially distressed yet economically feasible. These proceedings can be initiated either by the debtor, or by a creditor provided that the debtor gives consent.

While the primary objective of bankruptcy proceedings (stečajni postupak) is liquidation of the assets and the company, restructuring could still be undertaken if specific conditions are fulfilled. The bankruptcy proceedings can be initiated by the debtor, creditors or the Croatian Financial Agency (FINA).

Operating under the standard corporate, civil obligations and labour laws, rather than a specific act or regulation, out-of-court restructuring is an adaptable process that can be initiated by any party, given that it’s the result of negotiations and agreement between them.

3. Which different types of restructuring proceedings exist and what are their characteristics?

Restructuring in Croatia may be carried out either as an out-of-court restructuring or as a court-driven one.

Out-of-court restructuring

Out-of-court restructuring, which arises purely from negotiations and agreement between involved parties, can encompass both operational and financial restructuring. However, any party engaging in out-of-court restructuring must be aware of potential challenges, such as the potential need to replace or modify existing security documents, the implications of clawback periods within and outside bankruptcy proceedings, the statutory obligations of the debtor and directors, as well as the specifics of the debtor’s current contractual arrangements.

Court-driven proceedings

There are also three different court-driven proceedings envisaged for debtors in financial distress:

• pre-bankruptcy proceedings (predstečajni postupak)
• extraordinary administration proceedings (postupak izvanredne uprave)
• bankruptcy proceedings (stečajni postupak).

Pre-bankruptcy proceedings and extraordinary administration proceedings are primarily designed for both financial and operational restructuring. Although restructuring can be achieved in bankruptcy proceedings, their primary objective is the liquidation of all the debtor’s assets.

While bankruptcy and pre-bankruptcy proceedings are generally applicable to all debtors, extraordinary administration proceedings are exclusively intended for joint stock companies (dionička društva), with the exception of credit and financial institutions. These proceedings are limited to companies that fulfil the following cumulative criteria:

• they maintain an average workforce of more than 5,000 employees throughout a calendar year, including their affiliated companies
• their total debt, including the liabilities of their affiliated companies, exceeds EUR 995,421,063.11.

4. Are there different types of creditors and what is the significance of the differences between them?

Bankruptcy creditors are debtor’s personal creditors who have a claim against the respective debtor at the time of the opening of bankruptcy proceedings. Under the Bankruptcy Act (Stečajni zakon), the classification of bankruptcy creditors is based on their claims, determining their payment ranks. The general principle is that creditors of a higher payment rank must be fully satisfied before creditors of a lower payment rank can receive any settlement. In the case of creditors belonging to the same payment rank, their claims will be settled proportionally. The Bankruptcy Act specifies the following order of ranking for claims and their corresponding creditors:

• bankruptcy estate creditors (vjerovnici stečajne mase): the claims of the bankruptcy estate encompass the costs incurred during the bankruptcy proceedings and other claims related to the bankruptcy estate, including attorney fees and similar expenses
• creditors with separate satisfactory right (izlučni vjerovnici): these creditors are not considered bankruptcy creditors, and they have the right to request the extraction of specific assets to which they are entitled from the bankruptcy estate
• secured creditors (razlučni vjerovnici): secured creditors have claims that are satisfied from assets held as collateral. They are classified as bankruptcy creditors only if the debtor is personally liable to them, which means that they are liable with all their assets for the respective claim. They may satisfy their claims from the bankruptcy estate only if they have waived their right to claim satisfaction from the secured assets or if such satisfaction is not possible
• regular bankruptcy creditors (viši isplatni red): these are unsubordinated and unsecured creditors whose claims are categorised into specific ranks based on the nature of the claim, as follows:
  • first rank: claims of employees and former employees of the bankruptcy debtor arising from employment prior to the opening of the bankruptcy proceedings, as well as certain related claims
  • second rank: all other claims towards the bankruptcy debtor, except for the subordinated claims
• subordinated bankruptcy creditors (niži isplatni red) – the last in line for settlement; their rank within the group depends on the type of their claim.

However, the aforementioned does not apply to out-of-court restructuring, as it operates under standard corporate, civil obligations and labour laws, rather than a specific act or regulation.

5. Is there any obligation to initiate restructuring/insolvency proceedings? For whom does this obligation exist and under what conditions? What are the consequences if this obligation is violated?

There is no legal obligation to initiate pre-bankruptcy or extraordinary administration proceedings.

However, each director is obliged to file for bankruptcy proceedings within 21 days from the time the conditions for filing are met, i.e. the debtor has become unable to meet existing and due payment obligations (nesposobnost za plaćanje) or over-indebted (prezaduženost). This responsibility also extends to the liquidator, supervisory board members and each shareholder under specific additional circumstances.

Non-compliance with the requirement to file for bankruptcy when necessary is classified as a criminal offence in Croatia, punishable by a fine or imprisonment for up to 2 years. Moreover, any person responsible who fails to initiate bankruptcy proceedings within the prescribed period can be held liable for damages inflicted on creditors.

Additionally, the Croatian Financial Agency (FINA) is required to file for bankruptcy of a company if the respective company has unpaid debt registered in FINA’s registry (očevidnik redoslijeda osnova za plaćanje) for 120 days consecutively.

6. What are the main duties of the representative bodies in connection with restructuring proceedings?

Generally, representative bodies are not involved in court-driven restructuring proceedings since control of the debtor is transferred to the bankruptcy trustee or extraordinary commissioner. However, in out-of-court restructuring proceedings, their involvement would be expected.

Croatian law dictates that every director must act with the due care and diligence characteristic of a prudent businessperson and maintain the confidentiality of the company’s trade secrets. Directors who violate this standard could be held jointly and severally liable to the company. Under certain, relatively rare circumstances, a director may be held accountable to the shareholders and/or the company’s creditors.

Moreover, directors of companies facing liquidity issues are expected to refrain from making payments beyond those essential for the regular course of business, and they must not undertake actions that could harm creditors or place them at a disadvantage. Upon the onset of illiquidity, a company is obliged to implement financial restructuring measures to regain liquidity.

Directors could face fines of up to EUR 6,630 for failure to fulfil their duties during periods of company distress, as outlined above. The company itself could be penalised up to EUR 132,720 for the same reasons.

7. What are the main duties of shareholders in connection with restructuring proceedings?

As a general rule, shareholders are not involved in court-driven restructuring proceedings because control over the debtor is transferred to the bankruptcy trustee/extraordinary commissioner; whereas in out-of-court restructuring proceedings they would, depending on the circumstances, most likely be included.

If the debtor has neither a supervisory board nor persons authorised to represent the debtor, each shareholder is required to file for bankruptcy if he/she could have been aware of the existence of a bankruptcy reason (see section 5 above) and the absence of persons authorised to represent the debtor. If the shareholder fails to initiate bankruptcy proceedings within 21 days from the moment the conditions for its initiation (the debtor’s inability to fulfil existing and due obligations or over-indebtedness) have been met, he/she shall be personally liable for damages caused to creditors by failing to fulfil his/her duty.

In case that bankruptcy proceedings are initiated against a company whose shareholders are personally liable for the company’s obligations, claims against such shareholders may be made only by the bankruptcy trustee, whereas in the case of limited liability companies (društvo s ograničenom odgovornošću) and joint stock companies (dioničko društvo), shareholders are generally not liable for companies’ obligations.

However, in the case that a debt-to-equity swap is decided as the restructuring method, a shareholders’ meeting decision is required, otherwise the court will not approve the settlement and a debt-to-equity swap cannot be effectuated. 

1. What is the primary legislation governing insolvency proceedings in your jurisdiction?

• Bankruptcy Act (Official Gazette no. 71/15, 104/17, 36/22)
• Act on Extraordinary Administration Proceedings over Companies of Systematic Importance for the Republic of Croatia (Official Gazette no. 32/17)
• Financial Operations and Pre-Bankruptcy Settlement Act (Official Gazette no. 108/12, 144/12, 81/13, 112/13, 71/15, 78/15, 114/22).

2. How are insolvency proceedings initiated?

Bankruptcy proceedings may (and in some cases should) be initiated by either the debtor, creditors or the Croatian Financial Agency (FINA).

Both pre-bankruptcy proceedings and extraordinary administration proceedings may be initiated by a debtor, or by a creditor with the debtor’s consent.

3. What are the legal reasons for insolvency in your country?

Bankruptcy proceedings shall be opened if one of the following conditions is met:

• debtor’s ability to fulfil due and existing payment obligations is threatened (prijeteća nesposobnost za plaćanje), however only upon debtor’s request
• debtor’s inability to fulfil due and existing payment obligations (nesposobnost za plaćanje)
• debtor is over-indebted (prezaduženost).

Pre-bankruptcy proceedings will commence if the court determines that the first condition listed above is met (the debtor’s ability to fulfil due and existing payment obligations is threatened (prijeteća nesposobnost za plaćanje)), while extraordinary administration proceedings can be commenced under any of the three conditions listed.

4. Which different types of insolvency proceedings exist and what are their characteristics?

The only insolvency proceeding is the bankruptcy proceeding (stečajni postupak). Its primary purpose is to liquidate the insolvent company and allocate its assets to its creditors. This procedure is overseen by a court-appointed bankruptcy trustee (stečajni upravitelj) who assumes management roles, sells off assets and distributes the proceeds according to the priority order stipulated in the Bankruptcy Act.

Pre-bankruptcy proceeding (predstečajni postupak) and extraordinary administration proceeding (postupak izvanredne uprave) are primarily envisaged for restructuring, but if the debtor breaches its statutory obligations, or restructuring is or becomes impossible, the respective proceedings shall be converted into a bankruptcy proceeding and result in liquidating all the assets of the debtor.

5. Are there different types of creditors and what is the significance of the differences between them?

See Q4 under Restructuring above.

6. Is a solvent liquidation of the company an alternative to regular insolvency proceedings?

A company may be liquidated upon a shareholders’ decision only if bankruptcy proceedings are not initiated against the company. Even though liquidation proceedings have been initiated over a company, the liquidator is required to file for bankruptcy in the case that a bankruptcy event occurs, otherwise the liquidator will be personally liable for damages caused to creditors by failing to fulfil its duty.

1. If a lender wants to monitor its borrower very closely (i.e. more closely than the usual information covenants in the credit agreement require), what options are there?

Unless otherwise agreed with the company in the loan agreement, there is no formal mechanism that allows a creditor to monitor the company more closely. However, in practice the company can allow the creditor (for example, its bank) to appoint someone to observe board meetings.

2. What issues arise if a creditor extends credit facilities or offers support conditional on additional or extended guarantees to a company in financial difficulties and/or takes asset security? 

Extending financing to a company facing financial difficulties is feasible under Croatian law, however there are a few factors such creditors need to keep in mind. Firstly, if a bankruptcy proceeding is opened, all undue claims against the company will immediately become due. Secondly, the security provided and repayments made could potentially be contested both within and outside the scope of a bankruptcy proceeding, depending on the circumstances and the timing when the petition for bankruptcy was submitted.

With respect to the duties of the directors and the company in financial distress, see Q6 under Restructuring.

1. How does a lender sell a loan?

Loan sale transactions can fundamentally be categorised into two types, true sales and synthetic transactions.

True sales

True sales are the most prevalent structures in Croatia and can be implemented in three different ways:

Transfer of agreement

In an agreement transfer (prijenos ugovora), the buyer completely assumes the lender’s contractual position, acquiring both rights and obligations, as well as ancillary rights, usually for a fee. This arrangement is typically used when the loan portfolio includes agreements with undrawn commitments under a term loan, or the facility operates as a revolving facility or includes rollover provisions. The validity of such a transaction depends on obtaining the debtor’s consent, which could be prearranged within the loan documentation or set as a precondition for closing. As the buyer will continue to offer loans and other banking services, it must be a licensed credit institution.

Assignment of claims

Assignment of claims (cesija; ustup tražbina) is the most commonly used structure of true sale loan transactions and it includes a transfer of all or particular rights (but not obligations) to the purchaser, usually for a consideration. No formalities in particular are required for an assignment of claims (i.e. consent of the debtor is generally not required, unless expressly stipulated in the loan documentation), except for the obligation of the assignor to notify the debtor of the assignment. Failing to comply with this obligation will not invalidate the assignment itself; however until the debtor is notified, it can discharge the debt by paying the assignor.

Sub-participation

Sub-participation (podsudjelovanje) involves a transfer of the economic interest in the receivables to the purchaser, but does not transfer any of the lender’s rights, remedies or obligations against the debtors. The principal lender will pass interest and capital repayments through to the sub-participant only when it receives them from the borrower, whereby the sub-participant will usually pay a consideration immediately to the lender. The sub-participant has no direct contractual relationship with the borrower and its return is conditional on receipt of capital and interest payments by the principal lender.

Synthetic transactions

Synthetic transactions constitute the second type of loan sale transactions. In this case, the buyer does not directly acquire a loan or other receivable. Instead, they gain risk exposure to it through other arrangements, such as swaps. These types of transactions are not typical in the Croatian market.

2. If the underlying credit agreement prohibits transfer or assignment (i.e. a change in the lender of record), how else – if at all – can a lender transfer the economic risk and/or benefit in the loan? For instance, are sub-participation agreements allowed under the law of your jurisdiction?

As elaborated in Q1 above, receivables can generally be freely assigned (cesija; ustup) unless the parties have agreed otherwise; whereas consent of a debtor is always required in case of agreement transfer (prijenos ugovora).

Even though Croatian law does not specifically regulate sub-participation, it is a feasible option under Croatian law. The same applies for synthetic transactions.

3. Regulatory issues: is any form of licence or prior authorisation from any regulatory authority required for the purchase, sale and/or transfer of loans? Does it fall within the definition of providing banking or financial services in the territory of the assignor or the borrower?

Only financial and credit institutions licensed by the Croatian National Bank are permitted to offer regulated banking and financial services, with the provision of loans (odobravanje kredita) typically falling within this purview. No licence is required in case of assignment and sub-participation; whereas in case of agreement transfer, the purchaser will require a banking licence.

As a general rule, the lender does not need a regulatory authorisation for loan sale, save for in case of sale of a material amount of placements (materijalno značajan iznos plasmana), in which case the lender, acting as the seller, is obligated to notify the Croatian National Bank of the impending sale. This notification, accompanied by all the specified documentation, must be provided at least 60 days prior to the execution of the sale and purchase agreement. If the Croatian National Bank assesses that any of the conditions prescribed have not been met, it will notify the seller within 30 days, and the seller is required to provide the Croatian National Bank with evidence that the relevant conditions have been met in the additional period of 30 days.