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Croatia: Insolvency and Restructuring

Croatia: Insolvency and Restructuring

Issue 10.12
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In Croatia, the legal landscape governing insolvency and restructuring is meticulously outlined in the Insolvency Act (Official Gazette no. 71/15, 104/17,36/22) providing a comprehensive framework for the initiation and execution of pre-insolvency and insolvency proceedings, outlining the ensuing legal consequences, and delineating the respective rights and obligations of debtors and creditors. With the recent amendment to the Insolvency Act introduced in 2022, solutions from the European Union have been adopted to encourage early restructuring of sustainable businesses, maintaining the continuity of company operations, and preventing insolvency. With these new changes, emphasis is being placed on insolvency prevention while also providing a strong framework for the protection of the creditors.

In line with recent developments, a noteworthy change is that now, only debtors have the authority to propose the initiation of pre-insolvency proceedings and restructuring plans. Additional changes pertain to the substance of the proposal in the restructuring plan, the timeframe for submitting the plan to the court (set at 21 days following the decision on acknowledged and contested claims), and the voting procedure (creditors who fail to submit a voting form at the start of the session will be presumed to have voted in favor of the plan). The law clearly outlines the essential elements of a restructuring plan, including details on planned costs and measures for operational and financial restructuring. Additionally, the plan must provide a rationale, demonstrating how it is likely to effectively prevent the debtor’s illiquidity and ensure long-term business sustainability. Once the plan is accepted, the court decides whether to approve it. The amendments specify conditions for court rejection of approval, such as when the debtor can settle debts without impending insolvency. The court no longer oversees the scrutiny of reported claims, deeming them established unless challenged by the debtor, pre-insolvency administrator, or a creditor within the stipulated timeframe. It now oversees the examination hearing. Pre-insolvency proceedings duration has been reduced from 300 to 120 days (an extension of up to 180 days is permissible under exceptional circumstances).

The latest amendments enhance existing solutions, promoting and encouraging restructuring as a viable option. Ultimately, a well-crafted and feasible restructuring plan remains a powerful strategy for mitigating the negative consequences of insolvency, providing an efficient, impactful, and cost-effective approach.

It’s crucial to recognize that in certain scenarios, insolvency may be the sole viable option. Insolvency proceedings can be initiated through a proposal submitted by the debtor, creditor, and in some cases, the Financial Agency. Reasons for initiating insolvency include incapacity for payment and over-indebtedness, but the procedure can be conducted even when these circumstances are not met if it seems likely that the debtor will not be able to fulfill its obligations in a timely manner. Before the actual insolvency proceedings, a preliminary procedure can be initiated by a decision of the competent court. The purpose of this procedure is to determine whether conditions for initiating insolvency proceedings are met, and if so, insolvency proceedings are initiated. Also, it allows the court to implement protective measures preventing detrimental changes in the debtor’s financial position.

A recent change allows the debtor to submit the insolvency plan concurrently with the proposal for initiating insolvency proceedings. Additionally, following the commencement of insolvency proceedings, both the insolvency administrator and the debtor hold the right to present an insolvency plan to the court. This plan can deviate from legal provisions on cashing out and distributing the estate. Secondly, it’s crucial to highlight that the insolvency administrator takes over control of the business, inheriting the rights of the debtor’s bodies. Creditors play a role by registering claims, subject to validity examination. The overall process involves monetizing the debtor’s assets or implementing the insolvency plan. Finally, distribution occurs, settling creditors based on varying payment orders. Following the court’s decision and successful distribution, the company is deleted from the court register, resulting in its cessation.

In conclusion, Croatian legislation diligently oversees insolvency proceedings, striking a balance between safeguarding creditors’ interests and providing opportunities for the debtor’s business survival. Aligned with European legislation, legal regulations on restructuring and insolvency proceedings are tailored to practical needs, with a notable emphasis on preventing insolvency. The intention here is to spotlight achievements and positive attributes, with future discussions possibly exploring challenges or refinements. 

By Dora Horvat, Partner, Petra Marijanovic, Senior Associate, and Nela Perisic Varosanec, Junior Associate, Ilej & Partners in cooperation with Karanovic & Partners

This article was originally published in Issue 10.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.