Restructuring and insolvency law in Croatia

• Bankruptcy Act (Official Gazette no. 71/15, 104/17)
• European Regulation on Insolvency Proceedings (2015/848)
• 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)

Out-of-court restructuring is not regulated by a special law, which means regular corporate, civil obligations and labour laws are applicable.

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.

Since out-of-court restructuring is a result of negotiations and agreement between the parties, it can be initiated by either party.

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

• debtor’s ability to fulfil due and existing obligations is threatened (Prijeteća nesposobnost za plaćanje), however only upon debtor’s request
• debtor’s inability to fulfil due and existing 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 obligations is threatened – Prijeteća nesposobnost za plaćanje), while extraordinary administration proceedings can be commenced under any of the three conditions listed.

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 is purely a result of negotiations and agreement between the parties, which means it may be carried out as both operational and financial restructuring. Each party entering out-of-court restructuring negotiations needs to be aware of its challenges (e.g. changes in existing security documents and corresponding registries is sometimes required, clawback periods within and outside bankruptcy proceedings, debtor’s and directors’ statutory duties and specific clauses in the debtor’s existing agreements).

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), and
• bankruptcy proceedings (Stečajni postupak).   

Pre-bankruptcy proceedings and extraordinary administration proceedings are primarily envisaged for restructuring (financial and operational); and while restructuring is also possible in bankruptcy proceedings, its main purpose is liquidating all the assets of a debtor.

Extraordinary administration proceedings

While bankruptcy and pre-bankruptcy proceedings are envisaged for all debtors in general, extraordinary administration proceedings are envisaged only for joint stock companies (dionička društva), excluding credit and financial institutions, who cumulatively meet the following criteria:

• average of more than 5,000 employees in a calendar year, including its affiliated companies, and
• debt of more than HRK 7,500,000,000 (approx. EUR 992,825,358), including its affiliated companies. 

As a general rule, bankruptcy creditors are classified in payment ranks according to their claims. Creditors of subsequent payment rank cannot be settled until the creditors from the previous rank have been completely settled. Creditors of the same payment rank will be settled proportionally to their claims.

Pursuant to the Croatian Bankruptcy Act, claims and their creditors are ranked respectively as follows:

• bankruptcy estate – claims of the bankruptcy estate include bankruptcy proceedings costs and other claims of the bankruptcy estate (attorney claims etc.)
• creditors with separate satisfactory right (Izlučni vjerovnici) – are not bankruptcy creditors and they may request extraction of objects to which they are entitled out of the bankruptcy estate 
• secured creditors (Razlučni vjerovnici) – their claims are satisfied from secured assets. Secured creditors are also bankruptcy creditors only if the debtor is personally liable to them, and they are entitled to satisfy their claims from the bankruptcy estate only if they waived their right of satisfaction from the secured assets or are unable to do so
• regular bankruptcy creditors (Viši isplatni red) – are unsubordinated and unsecured creditors whose claims are classified into ranks depending on the particular claim as follows: 
  • first rank – claims of employees and of former employees of the bankruptcy debtor which arose from employment until the opening of the bankruptcy proceedings and certain related claims 
  • second rank – all the other claims towards the bankruptcy debtor, except for the subordinated claims
• subordinated bankruptcy creditors (Niži isplatni red) – are the last in line for settlement and their rank within the group depends on the type of their claim.

Each director is required 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.

In addition, the liquidator, supervisory board members and each shareholder are also required to file for bankruptcy if certain additional conditions are met.

Failure to initiate bankruptcy proceedings when required is considered a criminal offence under Croatian law and the offender may be fined or imprisoned for up to 2 years.

Furthermore, failure to initiate bankruptcy proceedings within the set time frame by the responsible person means he/she shall be personally liable for damages caused to creditors by failing to fulfil his/her duty.
There is no obligation to initiate pre-bankruptcy or extraordinary administration proceedings.

As a general rule, each director must act with the due care and diligence of a prudent businessperson and keep the company’s trade secrets. Directors who breach this standard are jointly and severally liable to the company. In certain, rather exceptional, cases a director may be liable towards the shareholders and/or company’s creditors.

Furthermore, directors of illiquid companies must refrain from making any payments other than those necessary for its ordinary course of business and must not undertake actions which could result in damaging creditors or placing them at disadvantage. In addition, from the occurrence of illiquidity, each company is required to undertake financial restructuring measures in order to restore its liquidity. 

The directors of a company may be fined up to HRK 50,000 (approximately EUR 6,600) for failing to comply with their responsibilities at the time of company’s distress as described above, whereas the company itself may be fined up to HRK 1,000,000 (EUR 132,000) for the same reason.

Also, directors are required to file for bankruptcy in the case that a bankruptcy event occurs (see point 6 above).

In general, representative bodies are not involved in bankruptcy or extraordinary administration proceedings. As of the commencement of bankruptcy/extraordinary administration proceedings, all rights of the debtor and its bodies are transferred to the bankruptcy trustee/extraordinary commissioner. If the debtor disposes of assets after the commencement of bankruptcy/extraordinary administration proceedings, such dispositions are without legal effect. However, the debtor is required to disclose relevant information and cooperate in order to assist the bankruptcy trustee with the fulfilment of its duties. 

In pre-bankruptcy proceedings, the debtor must refrain from making any payments other than those necessary for its ordinary course of business or related to debts assumed in the course of the pre-bankruptcy proceedings and in accordance with it. In addition, certain transactions in pre-bankruptcy proceedings, such as the disposition of assets, are subject to the pre-bankruptcy commissioner’s or court’s approval.

If the debtor has neither a supervisory board nor persons authorised to represent the debtor, each shareholder is required to file for bankruptcy if it could have been aware of the existence of a bankruptcy reason (see point 3 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, it shall be personally liable for damages caused to creditors by failing to fulfil its duty.

In the 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 (društva s ograničenom odgovornošću) and joint stock companies (dionička društva), shareholders are not liable for companies’ obligations.

In addition, providing security for the repayment of a shareholder loan may be challenged in a bankruptcy proceeding, assuming such action was undertaken 5 years before the moment the bankruptcy proceeding was initiated. The same applies if a debtor guaranteed to its shareholder to pay it back, however only assuming that such action was undertaken 1 year before the moment the bankruptcy proceeding was initiated.

In general, shareholders have no right to make decisions in relation to the debtor because control over the debtor is transferred to the bankruptcy trustee/extraordinary commissioner.

In addition, shareholders may be involved in bankruptcy/pre-bankruptcy/extraordinary administration proceedings as subordinated creditors (see point 5 above).

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

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 (see points 3 and 7 above), otherwise the liquidator will be personally liable for damages caused to creditors by failing to fulfil its duty. 

In addition, failure to initiate bankruptcy proceedings when required is considered a criminal offence under Croatian law, and a liquidator may be fined or imprisoned for up to 2 years.

At the moment, a legal framework for preventive restructuring does not exist in Croatia, i.e. Directive (EU) 2019/1023 on preventive restructuring frameworks has not yet been implemented.

Bankruptcy proceedings mostly end up in the liquidation of assets and the cessation of the debtor, i.e. even though restructuring is possible, it is improbable. No information is available in relation to how many bankruptcy proceedings end up in restructuring instead of liquidation. 

Only one extraordinary administration proceeding resulting in a settlement has been carried out (Agrokor), however the respective settlement has not yet been fully implemented.

For the period 2012–2020, out of 8,959 pre-bankruptcy proceedings:

• 3,188 have resulted in settlement
• 5 are still pending
• the remaining cases have either been dismissed or rejected. 

No information is available regarding the success rate of pre-bankruptcy settlement implementation.