Banking & Finance 2019 Comparisons

Last Updated November 12, 2018

Contributed By Porobija & Porobija

Law and Practice

Authors



Porobija & Porobija 's banking and finance team consists of three partners and two other qualified lawyers. The team’s practice focuses on project finance, syndicated loans, asset finance, and various projects dealing with commercial and company law, securities offerings, law of contracts and real estate law. The team has been engaged in a number of capital investment projects, as well as in major Croatian infrastructure development projects, mostly on behalf of international clients. The experience of Porobija & Porobija's banking and finance team includes: acting for arranging banks and lenders, as well as for the borrowers in virtually every type of commercial and financial transaction; advising national and foreign clients on Croatian energy market issues; extensively advising international lenders on detailed aspects of the development and financing of the largest-ever wind farm in Croatia; advising an international bank syndicate on the refinancing and financing of additional phases of the Istrian Y Motorway project; and advising the concessionaire on the financing of the construction and development of the Zagreb Airport project.

As reported by the Croatian National Bank, after the process of converting loans indexed to the Swiss franc ended in mid-2016, the volume of new household lending mostly stagnated. However, new long-term borrowing was noted in 2017, with particular growth in housing loans. Such activity is largely supported by the implementation of the Government’s housing loans subsidy programme, which will be continued until 2020. 

As of mid-2017, the easing of credit standards (as regards the amount of interest margins, fees and collateral requirements) was recorded primarily as a result of stronger competition and the reduced costs of funding sources. New household borrowing was done predominantly with interest rates that protect consumers from interest rate risk for a certain period. The volume of domestic currency loans increased, but EUR-denominated loans remain dominant. 

The corporate sector in 2017 was dominated by the Agrokor Group crisis, which was so extensive that it led to the state intervening with special legislation. As the Croatian National Bank reports, the risk of the spill over of the crisis onto creditors and suppliers was reduced considerably in the second half of 2017. However, the process of ownership and business restructuring is still ongoing and creates uncertainty in the non-financial corporate sector, and the extent to which the risk will be reduced, and at what pace, depends on its final implementation.

The total indebtedness of the non-financial corporate sector towards financial institutions continued to decline, with the main factor being the sale of NPLs of HRK8.342 billion. The volume of sold NPLs increased by 39.63% in comparison to 2016, with 73.76% of sold NPLs being non-financial loans. If the effects of the exchange rate fluctuations, write-offs, price adjustments and the sale of claims are excluded, non-financial corporations increased their debt based on transactions in 2017 – ie, they assumed more new liabilities than the old ones they repaid. 

In 2017, non-financial corporations increased their long-term borrowing with domestic banks, while their short-term borrowing decreased. Such movement in the structure of newly granted loans is due to the generally good business performance of corporations, the reduced need for the financing of inventories and working capital, and the restructuring of debt by borrowing from domestic banks in the second half of 2017, among other reasons. The long trend of decreasing long-term interest rates of domestic banks continued, and short-term interest rates also started to decline at the end of 2017, after almost two years of stagnation, both being a result of favourable conditions in the banking sector market (including the high liquidity of banks and their competition) and reduced risk premium for Croatia, among other factors.

The high-yield market remains relatively modest, as the credit institutions retain their dominant position in the financing market in Croatia. The Zagreb Stock Exchange listed only five new bonds in 2017, four of which were state bonds aggregating 98% of the volume. In 2018, new state bonds were issued and listed at the Zagreb Stock Exchange.

The Agrokor case highlighted an alternative way of financing the corporate sector by way of factoring agreements. As the financial services regulatory agency reports, the problems within the Agrokor group, however, led to a significant decrease (56.5%) in the volume of assets of factoring companies in 2017, whereby a third of the registered companies filed a request for termination of the licence. This somehow determined the status and trends of the most important business activity indicators at the level of factoring activity in 2017.

The Government has reported on great progress in EU fund payments from ESI funds, with an increase of 225% in comparison to 2016. The Government has also reported a 277% increase in the volume of contracted projects, reaching almost EUR4 billion at the end of 2017. 

The portion of financing by way of crowdfunding remains minor, although independent sources report an increase of 400-500%.

No response provided.

Credit standards tightened considerably as the amended Enforcement Act and the Decision on the additional criteria for the assessment of consumer creditworthiness and on the procedure for the collection of due and unpaid claims and voluntary foreclosure came into force. This decision is one of the secondary regulations to further enable the implementation of the Consumer Housing Loan Act, which entered into  force in October 2017 in the course of further harmonisation with EU legislation. Credit institutions must assess the creditworthiness of consumers, provide clients with detailed information about all risks, conditions and costs associated with the loan, unconditionally, and at the client's request convert a foreign currency loan into kuna. The possibility of contracting a walk away clause has also been introduced, allowing the transfer of ownership of the property (as a security instrument) to a credit institution if all the remaining obligations arising from the loan agreement are fully met. 

The risk of a slowdown in credit activity due to the potential negative effects of the new legislation is still present, but the CNB reports that recent developments suggest that these legislative changes have so far had no negative impact on household lending dynamics.

This is connected, inter alia, with the Government subsidy programme, which has had a considerable impact on the growth of new housing loans, which should continue until 2020 under the Law on Subsidising Housing Loans.

Local banks continue to focus on interest rate risk and foreign exchange risk, and consumer awareness of such risks, mostly as a consequence of the Swiss franc case. In September 2017, the CNB adopted the Recommendation to mitigate the interest rate and interest rate-induced credit risk in long-term consumer loans, with the aim of reducing risks associated with a possible rise in interest rates, including non-binding measures for banks aimed at mitigating interest rate risk in the household sector and interest rate-induced credit risk in the banks’ portfolios. Besides encouraging banks to extend their loan offer with new loans to be granted at fixed interest rates, the Recommendation primarily targets loans with remaining maturities equal to or longer than seven years.

The Credit Institutions Act was amended in February 2018, in order to align national law with EU legislation. The amendments further regulate the powers of the CNB and further regulate consumer protection matters. The New Capital Market Act entered force in July 2018. It implements 15 directives and nine regulations, including MiFID II, and introduces a new platform for the growing market of small and medium businesses. 

Pursuant to the Croatian Credit Institutions Act, banks (credit institutions) would need to satisfy the following requirements in order to be authorised to provide financing in the territory of Croatia:

  • obtain a licence to provide banking services from the Croatian National Bank (in the case of a Croatian-based credit institution or a Croatian branch of an EU-, EEA- or a third country-based credit institution); or
  • directly render mutually recognised financial services (in case of an EU- or EEA-based credit institution) on the basis of a “passport” notification to the Croatian National Bank, provided such services are not rendered on a regular, frequent or ongoing basis.

In addition, under Croatian law and pursuant to the views of the Croatian National Bank, if a lender's activities are not effectively carried out in the territory of Croatia (but rather on a cross-border basis or on the basis of consumption abroad) the lender (both banks and financial institutions) should be able to provide financing to a company organised in Croatia, but would then need to make sure that:

  • the loan agreement is not executed in Croatia;
  • the offer to finance a Croatian borrower is not made in Croatia (including via the international lender’s representative, agent or similar); and
  • the offer to finance a Croatian borrower is given on a reverse inquiry basis.  

In Croatia, financing can also be granted by other legal and natural persons without any special licence, provided such activity is not considered as business activity of the relevant entity.

In principle, foreign lenders are not restricted in granting loans, provided that the lending activities are pursued in a manner described under 2.1 Requirements for Authorisation to Provide Financing to a Company and, particularly in relation to cross-border lending, that, inter alia, a loan agreement is either executed by both parties outside Croatia or is at least executed by distant means of communication (eg, by an exchange of documents via email, fax or mail), without the lender's personnel, agent or similar being present in Croatia, and (pursuant to the views of the Croatian National Banks) that the financing is based on reverse solicitation by the borrower. Lending transactions by foreign lenders to Croatian residents are generally subject to reporting requirements to the Croatian National Bank for statistical purposes.

However, taking into account the recent adoption of the Act on Nullity of Loans with an International Element Concluded in the Republic of Croatia and the lack of any higher court practice (or ECJ decision), lending by foreign lenders may turn out to be problematic, depending on the circumstances, and any failure to abide by said rules could constitute grounds for application of said act, resulting in the risk of a loan agreement and related security documents being considered null and void. 

There are no particular restrictions or impediments on granting security or guarantees to foreign lenders, although a foreign lender needs to obtain a personal identification number in order to be registered as a holder of any security interest in any Croatian register. The process of obtaining of the so-called “OIB” number is generally straightforward and swift, and requires the submission of a filled in form, with a copy of an extract from the relevant (court or similar) registry for the respective entity (with certified translation thereof in the Croatian language) and (if applicable) a special power of attorney issued by said entity. 

Pursuant to the Croatian Foreign Exchange Act, when a resident grants a loan or issues a guarantee for the benefit of a non-resident, it must obtain some form of adequate security or collateral in return, in order to secure repayment. Failure to do so represents a misdemeanour, and the respective resident may be fined from HRK50,000 to HRK1 million (together with the responsible natural person), although they may be released from the fine if the respective non-resident is of such creditworthiness that it can be expected with certainty to repay the respective obligation on time and in full.

Foreign currency loans can be granted to residents only by the banks, and such loans can be repaid in foreign currency. Other residents are not allowed to grant each other loans in foreign currency.

The transfer abroad by a non-resident of a profit arising from direct investment is free, under the condition that the applicable profit tax is paid in the Republic of Croatia. 

Various foreign exchange-related transactions (eg, non-resident investments, investments abroad, loans and hedging arrangements with non-residents, etc) need to be reported to the Croatian National Bank, pursuant to the applicable secondary legislation.

Payment and collection in foreign currencies between residents and non-residents for capital affairs are generally permitted, except in the case of the purchase of real estate in the Republic of Croatia and shares in companies with a registered office in the Republic of Croatia, and in relation to the sale of securities listed or issued in the Republic of Croatia, except securities that are issued in the Republic of Croatia and listed abroad.

A borrower’s use of proceeds from loans and debt securities should be in line with the conditions set out in the respective loan agreement or prospectus. The effects of a failure to do so depend on the contractual arrangements and/or the generally applicable rules on obligations. The failure of an issuer of debt securities to use the respective proceeds in line with the purpose specified in the prospectus may lead to the liability of an issuer and some other persons for damage caused to the investor by the fact that the information that is relevant to the valuation of the debt securities is incorrect or incomplete, if such incorrect or incomplete information in the prospectus is their fault. The issuer and its responsible persons may also be fined if the prospectus does not contain the correct and complete information prescribed by the applicable laws and regulations. 

Agent and trust concepts are generally not recognised by Croatian law, under which a holder of a security interest has to be a creditor of the respective secured claim. 

In cases where more creditors are envisaged (eg, a syndicated loan or a bond issue), a secured party is usually a security trustee or a security agent holding the respective security; however, given that under Croatian law (as governing for the security interests to be registered in Croatian registries) the security interest is an accessory to the claim it secures and thus has to remain with the creditor and cannot be held by an agent/trustee, for years now this has been resolved in relevant transactions by way of a so-called parallel debt or joint creditor relationship, governed by English law (or another applicable law that recognises such concept), being concepts that are also used in various other European jurisdictions to deal with the same issues. On this basis, the security trustee holding the security interest becomes a creditor as well (similar to a joint creditor concept under Croatian law), whereby any discharge of any such obligation to the security trustee or the bondholders, to the same extent, discharges the corresponding obligation owing to the other. Assuming this concept is valid, binding and enforceable under English law (or another applicable law) as the law governing security trust arrangements, it should work under Croatian law as well. This concept has been used in Croatian practice for years now, but as far as is known has not yet been tested in practice in terms of enforcement.

Pursuant to the Croatian Code of Obligations, any receivable is assignable, unless the assignment of such receivable is proscribed by law, a receivable is strictly personal or a receivable is by its nature controversial to the assignment. Furthermore, the assignment contract will have no effect towards the obligor (ie, the borrower) if the underlying contract between the lender and the borrower prohibits the transferability of the receivables – ie, the borrower will be validly discharged from its obligations by fulfilment to the original lender, even if it has been notified of the assignment. 

After the execution of the assignment agreement, the borrower should, in principle, be notified by the original or new lender of the assignment and the fact that the new lender is now the creditor of the receivables, although this is not a precondition for the effectiveness of the assignment. In the case of assignment, together with the claim being transferred, accessory rights are automatically transferred to the new lender (security instruments, rights to interest, contractual penalties, etc), noting, however, that the transfer of the respective security interests registered in various registries should be registered therein and that the formal (and notarised) consent of the transferring lender is required. 

It is generally advisable for the security document being notarised (as to its content) to contain a direct enforcement clause and the explicit consent of the borrower for the transfer of the whole contractual position set out in the security document, and for the transferring lender and the new lender to execute a notarised security assignment agreement.

It should be noted that the assignee shall have the same legal position towards the debtor as was previously held by the assignor. Furthermore, the debtor may raise any objections against an assignee that it could have raised to the assignor until the moment of being notified of the assignment, in addition to objections the borrower has against the new lender. Any documentation in relation to the assigned claim should be handed over to the new lender – ie, the assignee.

If there is a need to transfer the whole contractual relationship between the original lender and the borrower to the new lender (eg, in the case of loans not fully disbursed, revolving loans, etc), the transfer of the loan agreement is needed and the borrower needs to consent to such transfer, noting that such consent may either already be given in advance in the relevant loan agreement (in which case only notification to the borrower is required for the transfer of the loan agreement) or may need to be obtained at the time of the transfer as a condition for the effectiveness of such transfer. As mentioned above, it is advisable that the respective security documents contain the consent of the borrower given in advance for the transfer to the new lender of the rights and obligations arising from the security documents. 

Novation structures are not used under Croatian law as they would lead to the accessory security interest to terminate.

Pursuant to the Consumer Credit Arrangements Act, there is an obligation for the original lender to notify the borrower about the assignment of rights, unless the original lender continues to render credit services to the borrower, pursuant to an agreement with the new lender. The consent of the borrower of the assigned receivables for the assignment thereof may be needed only if it is so prescribed by the respective loan agreement.

Pursuant to the relevant regulations of the Croatian National Bank, the originator is obliged to report to the Croatian National Bank about a change of the creditor of the assigned receivable if the new creditor would be a non-resident, provided the respective resident debtor is not made aware of such change in the creditor.

The transfer of rights and benefits from a contract needs to be exercised in accordance with the applicable data protection and GDPR-related regulations. 

Debt buy-back is permitted by Croatian law and would generally result in the relevant debt ceasing to exist ex lege due to confusion (if the debt purchase is by the borrower). Acquisition of the debt by an affiliated entity may result in the application of thin capitalisation rules and/or rules on loan in lieu of the capital to apply, which may have unwanted effects for such lender, particularly in the context of the potential (pre)bankruptcy of the borrower.

Croatian law imposes a duty to negotiate in good faith. Subject to the circumstances listed below in the context of takeover bids, there is no legal or regulatory requirement to provide a "certain funds" confirmation, and such concept is used in acquisition transactions only if it is negotiated by the relevant parties. Therefore, what constitutes "certain funds" differs between transactions. 

In certain acquisitions of shares in a public limited company with a registered office in Croatia whose voting shares are admitted to trading on a regulated market in Croatia or another European Economic Area country, or the acquisition of shares in a public limited company with its registered office in another European Economic Area country, whose voting shares are admitted to trading on a regulated market in a European Economic Area country, when the takeover bid is published, the bidder is obliged to ensure the necessary funds for the payment for all outstanding target company shares by way of making a cash deposit on a separate account held by the Central Clearing and Depository Company or obtaining an irrevocable and unconditional bank guarantee payable on first demand, for the purpose of securing the payment of the purchase price for the shares.

Pursuant to the Croatian Profit Tax Act, withholding tax (in principle, 15%, subject to certain exemptions, in which case it is 20%) is levied on profits generated by a non-resident in Croatia and is charged on, inter alia, interest, dividends, shares in profit, etc paid to foreign entities that are not physical persons. By way of exemption from the above, the withholding tax shall not be payable on interest paid in relation to, inter alia, loans granted by foreign banks or other financial institutions, nor on interest paid to foreign persons as holders of sovereign or corporate bonds.

If the respective lender is not considered a bank or other financial institution, the withholding tax exemption would not apply and the withholding tax would need to be paid, subject to any applicable double taxation avoidance treaty.

Subject to the restrictions noted above, no stamp, registration or similar duty or tax is payable in the Republic of Croatia in respect of loan agreements and related security documents, apart from the fees and stamp duties for the solemnisation/notarisation of the Croatian law security and other documents being notarised and other related notary public actions and documents, and the stamp duties and/or fees payable for the registration of the security interest over the security assets in the competent registry (eg, land registry, registry of court and notary securities kept with Financial Agency (FINA)) and for the issuance of excerpts and certificates related to the registration of the security interests in that registry. 

Currently, the rate of contractual interest between merchants may not exceed 15.43% per annum, and the rate of contractual interest in contracts involving non-merchant parties currently may not exceed 10.23% per annum.

The default interest rate payable on due but unpaid amounts arising from contracts between merchants currently amounts to 8.82% per annum, but may be contracted differently under certain conditions, in which case such rate may not exceed 15.43% per annum. The default interest rate payable on due but unpaid amounts arising from contracts involving non-merchant parties currently amounts to 6.82% per annum.

The maximum interest rate payable under consumer loans with a variable interest rate depends on the purpose of the loan (housing or general consumer loan) and the currency of the liability. 

Concerning the interest rate on loans between related parties for purposes of the corporate profit tax, the arm’s length interest rate is 4.55% per annum, effective 1 January 2018; this is the maximum tax-deductible interest rate on loans received by a taxpayer from a foreign related party and at the same time the minimum taxable interest rate on loans provided by a taxpayer to a foreign related party. These rules also apply to loans between two Croatian taxpayers if one of the taxpayers is in a “favourable position” concerning corporate profit tax.

The Croatian legal system recognises different types of legal instruments that aim to take a security interest over various assets, noting that the securities that have in rem effect are most commonly used in practice.

Security interest in Croatia may be granted in the form of a pledge (or a mortgage in the case of real estate, a ship or an aircraft) or in the form of a fiduciary transfer of ownership of the relevant asset. There is also a possibility to enter into financial collateral arrangements – ie, special regime collateral arrangements where the financial collateral consists of cash, financial instruments or credit claims, and which are entered into between persons falling into the prescribed categories. 

The pledge is a commonly used security instrument for various objects, including movables, shares, bank accounts, claims and intellectual property rights, as well as any other right that is subject to the same legal regime applied to the movables.

A pledge may be established as a registered or non-registered pledge. 

The granting of a registered pledge may be through either a security agreement executed before a court, or a security agreement executed before a notary public, and in each case followed by the registration of the pledge in the Registry of Court and Notary Security Interest on Movables and Rights (Registry) or, in the case of dematerialised shares in the share capital of a public limited company, in the depository operated by the Central Depository & Clearing Company’s registry (CDCC). 

Generally, full perfection of the registered pledge takes place after the decision on the entry of the security interest in the registry becomes final, at which point it is deemed that the security interest has been created retroactively – ie, as from the time when the application form for the entry thereof was submitted to the registry. 

In the case of a non-registered pledge, creation of the respective security interest remains outside of the public domain, which represents a risk and is certainly less beneficial to the secured creditor. Therefore, such type of security is rare in practice, and it is advisable and common to opt for a registered pledge, as it provides a higher level of creditor’s protection(eg, in terms of publicity and priority ranks, in case of bankruptcy, etc). 

In relation to the pledge of claims, the secured creditors commonly require that the granting of the pledge is notified to the counterparty(ies) (ie, the debtors of the pledged claims) and that (if at all possible) they acknowledge the receipt of the notification and confirm they would act in accordance with the instructions given in the notice of pledge. Namely, when it comes to the pledge of claims of various types, it is common to agree on out-of-court enforcement rules, for which it is essential to obtain support and co-operation from the relevant counterparties. In order to achieve that purpose, relevant notices are sent and acknowledgements are requested, although, strictly legally speaking, those do not form part of the perfection requirements.

The fee for the registration of the collateral in the Registry amounts to approximately EUR35 per application, and it generally takes around eight days for a pledge to be registered.

The notary public’s fees, duties and costs related to the granting of the security interest (provided the document is solemnised, ie, notarised as to content) depend on the amount of the secured claim. Generally, if the value of the secured claim or the collateral exceeds approximately EUR5 million, the notary public fees and duties for each such security document amount to approximately EUR3,500.

A mortgage over real estate is created upon entry thereof into the land registry of the competent court, and is commonly used as a security interest. When it comes to mortgages (as well as any registered pledge), the principle of “first in time, first in right” applies, so a mortgage registered first has priority over all subsequently registered mortgages, although that does not preclude a creditor holding any of the subsequently registered mortgages from starting enforcement over the mortgaged real estate.

The stamp duties for registration of the mortgage in the land registry amount to approximately EUR35, whilst public notary's fees and duties are determined under the same rules as for the pledge – please see above.

A fiduciary transfer of ownership enables the secured creditor to become a fiduciary owner of the relevant assets and to become a true owner thereof under certain conditions. A fiduciary transfer of assets is generally registered in the relevant public registries (ie, the Registry and the land registry).

Although using the fiduciary transfer as a security concept was popular following its introduction, due to the fact that this concept has gone through several changes in law (which have not always been clear and applicable in practice) and due to certain problematic and controversial provisions of the Enforcement Act, this type of security interest has not been seen in practice very often in the past ten years. As a result, this type of security interest is generally not recommendable.

Financial collateral arrangements were introduced into Croatian law via the Financial Collateral Law (the FCL), which was adopted in 2007 with the intention of implementing the Council Directive 2002/47/EC regarding financial collateral arrangements. 

Generally, no formal act is required in order for the financial collateral arrangement to be valid; instead, it is only necessary to have written evidence or evidence in a durable electronic medium of the execution of the respective agreement and the delivery/acquisition of the collateral. The financial collateral is considered delivered/acquired once the title transfer or creation of a special pledge over the financial collateral is noted on the relevant account with the registry of financial instruments (in case of securities collateral) or at the relevant bank account (in case of cash collateral). 

The FCL was drafted to a great extent by way of translating and transposing the relevant Directives into national law. Unfortunately, analysis of the FCL reveals that uncertainty persists over the material scope of application of the FCL, as well as the definition of crucial terms, even at a rather basic level. To a great extent, it seems that the reason for that is the translation of provisions of relevant Directives, which is not always adequate and, on the other hand, the overall non-compliance of the FCL with the traditional approach of Croatian law to the granting of security interests, both of which result in significant legal uncertainty in practice and therefore an almost complete lack of any practical value for those type of security interests. 

Information on the existence and/or the scope of such arrangements is limited to contractual relationships between the parties; there is no publicly available information on the scope of such arrangements and the impact of their implementation in business practice, and it seems that their use in practice is much more the exception rather than the rule. There is also no publicly available information on any court proceedings or decisions with respect to the enforcement of rights and obligations deriving from the financial collateral arrangements under this regime. 

The Croatian legal system recognises a kind of floating pledge as a contractually created registered pledge of movables of all kind or movables of a specific kind (goods, inventory, spare parts, furniture, tools and alike), which are located in a specific place (eg, a warehouse, factory, business premises) otherwise owned or leased by the debtor. The pledge of individual movables is not registered separately, and the registration of the pledge in the Registry is of a constitutive nature.

The main characteristic of the floating pledge is that a debtor (owner of the relevant movables) retains control over the assets – ie, the debtor continues to be entitled to dispose of the movables subject to the floating pledge and a person who acquires the possession of such movables acquires it free of encumbrances (ie, free of floating pledge) as the floating pledge ceases to exist by the mere taking of the relevant movables out of the specific place/area (ie, a warehouse, factory, business premises where it was originally specified the movables were located). It should be noted that the provisions of the relevant law impose an obligation on the debtor to substitute disposed-of assets with new ones in accordance with the nature of its business operations (unless that obligation is contractually excluded) – ie, unless agreed otherwise, the debtor does not have an obligation to substitute disposed-of assets immediately, as the nature of the debtor’s business generally allows it to adjust the timing of the substitution. Ultimately, the rights of the pledgee may be heavily affected if the debtor fails to act accordingly and effectively substitute the relevant assets promptly.

If the secured creditor initiates the enforcement proceedings on the basis of the floating pledge, the relevant enforcement will effectively include all movables found in the specific place/area set out in the pledge agreement at the moment the seizure list (in the course of enforcement proceeding) is created.

Since the floating pledge is registered in the Registry, the information on fees listed under 5.1 Assets Typically Available and Forms of Security applies by analogy. 

Affiliated companies may generally provide guarantees for the obligations of their related companies, subject to certain limitations.

When granting any type of guarantee to foreign legal entities, Croatian companies must comply with certain additional obligations under the Croatian Foreign Exchange Act – please see 3.3 Restrictions and Controls on Foreign Currency Exchange, above. In addition, pursuant to the Bankruptcy Act, if the appropriate security (or other type of consideration) is not provided to a guarantor, a guarantee may be considered to be at no value or at no considerable value, and may be avoided upon the insolvency of the respective guarantor.

Also, when granting guarantees, Croatian legal entities need to take into consideration the applicable capital maintenance rule contained in the Croatian Companies Act (the CA), as any support in whatever form by a company for the debt of the shareholder or its affiliated companies/subsidiaries may also be considered as contrary to the applicable capital maintenance rules, pursuant to which a company is generally not allowed to repay the paid-in capital to its shareholders (Article 217 of the CA). Namely, according to Article 406 of the CA, shareholders are not entitled to request repayment from a company of their contribution to the share capital and, according to Article 407 of the CA, payments made to a shareholder from the company’s assets that would be equal to the value of the company’s share capital are not allowed. If the shareholder would receive a payment contrary to the rules prescribed by the CA, the company’s articles of association or shareholder resolutions, such payment would be considered to be contrary to the capital maintenance rules, and the shareholder(s) would be obliged to return the payments made by the company. If it is not possible to collect such prohibited payment that has reduced the value of the company’s share capital, either from the shareholder(s) who received it or from the management board, other shareholder(s) shall be jointly responsible for the decrease of the company’s share capital, in proportion to their basic shares in the company, provided such funds are necessary for settling the creditor(s). Such request from the company becomes statute-barred five years after the receipt of such payment constituting a breach of the capital maintenance rules, unless the company can prove that the shareholder who received the payment knew it was not permitted.

Namely, distribution of assets to shareholders outside of the regular distribution of profits is not allowed, so any potential subsequent payment by the company to the creditor on the account of the company’s co-debtorship/security provided for the debts of its shareholder or its affiliated companies/subsidiaries may be construed as a breach of the applicable capital maintenance rules and thus as prohibited payment. In practice, the respective guarantees often contain guarantee limitation wording specifying that the obligations and liabilities of the guarantee granted by a guarantor shall not include any liability to the extent it would result in payments made to the shareholders being considered contrary to the provisions of Articles 406 and 407 of the CA.

The CA also includes provisions on using one's influence in the company. Pursuant to the CA, a person who intentionally instructs a member of the management or supervisory board, a procurist or an attorney to undertake actions detrimental to such public limited company or its shareholders, by way of using its influence in a public limited company, is liable for the damages caused to the public limited company and/or its shareholders. The same applies to limited liability companies.

In addition to such person, members of the management and supervisory board of a public limited company would also be held jointly and severally personally liable for settlement of such damage incurred if they breach their duties. A person (eg, a lender) who benefits from the detrimental actions undertaken by the above-mentioned persons could potentially also be held jointly and severally liable for the damages caused to a public limited company (and/or its shareholders), provided such person intentionally participated in undertaking such detrimental actions. However, in practice, such liability of the banks seems to be of a rather theoretical nature and therefore represents a risk that banks are usually prepared to take in similar transactions.

An indemnification claim could also be made by the creditors of the public limited company, if such creditors could not satisfy their claims from the public limited company itself.

Furthermore, pursuant to the CA, in a situation where no management agreement has been entered into between the controlling company and the controlled company, the controlling company is not allowed to use its influence to instruct the controlled company to undertake detrimental actions or to execute contracts that may cause damage thereto, unless the controlling company would oblige itself to settle any damage that would arise therefrom for the controlled company. If the damage would not be settled before the end of the accounting period, the controlling company and the controlled company would have to agree on the terms and conditions for settling the damage by the controlling company, no later than at the end of the accounting period, and the controlled company would have to be provided with the appropriate legal claim against the controlling company. Pursuant to the terms and conditions prescribed by the CA, in addition to the controlling company, the legal representatives thereof that instructed the controlled company to undertake the aforementioned actions, and in certain cases the members of the management board and supervisory board of the controlled company, would also be held jointly and severally personally liable for settlement of the damage incurred.

Subject to certain exceptions, the CA does not allow a target that is a Croatian public limited company to support the acquisition of shares therein with the assets of that target. The consequence of any legal transaction that would be qualified as prohibited support is that the respective security interest would be null and void, including, for example, an assumption of debt, a payment guarantee or upstream security by the target company for liabilities arising from the share purchase agreement by way of pledging of the shares held by the target in subsidiaries, mortgages, pledges of receivables or accounts, issuance of debenture bonds, etc. To the extent the respective financing transaction includes both the actual financing of the acquisition of shares in the target and other financing of the target (eg, working capital loans or similar), it is necessary for the acquisition financing facility to be separated from such other facility(ies), and that any security granted by the target does not relate to such acquisition financing.

While the aforementioned restriction is not prescribed for limited liability companies, the capital maintenance rules apply to both types of companies.

As mentioned above, an exception to the rule exists and refers to transactions where such support is provided, among others, to the target’s employees or the affiliated company’s employees or members of corporate bodies of the target, or in case of regular business activities of banks and financial institutions; even in such cases, certain conditions related to arm’s-length acquisition terms, internal corporate authorisations, maintenance of the target’s net assets, etc, need to be met in order for the exception to apply. 

Besides the above-mentioned restrictions, actions like the granting of security, issuing of a guarantee, repayment of a loan and others may be subject to claw back provisions contained in the Croatian Bankruptcy Act, which prescribes conditions under which the bankruptcy administrator and bankruptcy creditors are entitled to challenge certain legal actions of a bankruptcy debtor taken during the prescribed hardening period before the opening of the (pre)bankruptcy proceedings if such actions are deemed to disrupt the right of the balanced settlement of the bankruptcy creditors or are taken in favorem of certain bankruptcy creditors. The hardening periods vary between one month and ten years, depending on the type of legal action, the bankruptcy debtor’s intentions and/or the relationship with the respective party, among other factors.

Upon the repayment of the secured claim, the registered security interests are not automatically deregistered from the competent registry. In order for deregistration of the mortgage and registered pledge to occur, a security release statement issued by the secured creditor is required, and such statement has to be notarised before the notary public.

When it comes to mortgages, the principle of “first in time, first in right” applies, so a mortgage registered first has priority over all subsequently registered mortgages, although that does not preclude a creditor holding any of the subsequently registered mortgages from starting enforcement over the mortgaged real estate, in which case the other mortgagees would basically be required to join said enforcement procedure and their claims may effectively be accelerated – ie, proceeds from the sale of the mortgaged real estate would be used to repay the claims being secured by the mortgages created over the relevant real estate (respecting the order of priority).

The above-mentioned principle applies equally to the registered pledge.

Contractual subordination of certain claims is generally possible, but the extent to which the insolvency court would give effect to contractual subordination arrangements is uncertain and would in any case be subject to the mandatory provisions of Croatian law. Therefore, creditors entering into intercreditor arrangements and agreeing on different priority between different group of lenders should not assume the insolvency court or the bankruptcy administrator would act in accordance with such contractual arrangements and distribute the respective proceeds according to the agreed waterfall provisions; instead, they should rely on the effectiveness of the relevant distribution provisions inter partes and outside of the bankruptcy/enforcement proceeding.

Security interests may generally be enforced upon a default (however such is defined in the underlying agreement), leading to the occurrence of a payment default that remains unremedied. Depending on the type of security interest and security assets, and depending on the type of underlying obligation, and in each case subject to the contractual arrangements, enforcement may be conducted both out-of-court and before the court (eg, in case of shares, claims, accounts, movables) or solely in the enforcement procedure run by the court (eg, real estate). Enforcement proceedings are generally regulated by the Enforcement Act. In each case, a proper enforcement title needs to be in place in order for the enforcement to be initiated (eg, enforceable notarised deed, enforceable court decision, etc) and thus it is a market standard that a security document is executed in the form of a notarised deed containing an appropriate enforcement clause allowing for direct enforcement (provided the contracted conditions are met) and that way allowing the secured creditor to avoid having to obtain a previous final and enforceable ruling from a competent authority and enabling the secured creditor to start the relevant enforcement proceeding (out-of-court or before the court) directly. 

To the extent allowed given the specifics of the assets and contractual provisions of the underlying contracts, out-of-court enforcement depends on various circumstances, including market demand, the co-operation of other participants (eg, debtor of the pledged claims), the content of the contractual arrangements, etc (unless the enforcement is related to the accounts, in which case it is operated by the Financial Agency and is subject to the strict rules). Court enforcement (mostly exercised via public auctions) tends to be time-consuming and inefficient, and may generally be subject to potential mala fide actions of the debtors and/or third parties aiming to prolong the enforcement to the detriment of the creditors. 

As a general rule, Croatian conflict of law rules recognise the choice of foreign law to govern the contract containing an international element and involving a Croatian party (and any contractual obligations connected with such contract) as being effective on such Croatian party, and the choice of foreign law as the governing law of the relevant contract would be upheld as a valid choice by the courts of Croatia, assuming, inter alia, that the goal of such choice of law is not to avoid application of the Croatian law, that the choice of foreign law to govern the relevant contract has been made freely in good faith by each of the parties thereto and that there is no reason for avoiding such choice on the grounds of Croatian law public policy. Should the relevant foreign law-governed contract be without an international element, it can still be governed by foreign law, but would nevertheless remain subject to the mandatory rules of Croatian law. 

Generally, provisions in a contract that provide for the submission by a Croatian party to the foreign court are valid, binding and enforceable on such Croatian party under the laws of the Republic of Croatia, to the extent that there is no exclusive competence of the Croatian court or other Croatian competent authority (such exclusive competence exists in, eg, enforcement procedures to be initiated under Croatian law against a Croatian party and in relation to any of its assets located in Croatia, and/or in disputes related to such enforcement procedures and any related bankruptcy procedures) and at least one party in the dispute is an entity with a registered office outside the Republic of Croatia, or another acceptable international element exists in relation to such dispute. 

Waivers of immunity provisions are generally binding (unless otherwise prescribed by Croatian law), ie, generally, all assets are available for enforcement unless they are indispensable to the performance of the party’s activities and enforcement would result in the discontinuation of the party’s business; such limitations do not apply in relation to the assets if the relevant entity explicitly agreed to the creation of the security interests over said assets. The following assets are ex lege excluded from the enforcement under Croatian law: res extra commercium (eg, water, air, sea, public roads, etc) and other assets that are excluded from the enforcement pursuant to any special law. Special restrictions apply to the immunity applicable to the assets of the Republic of Croatia and local self-government (municipalities, cities and counties and their bodies). Whether an object or a right may be subject to enforcement (in relation to the applicable exceptions from enforcement) will be evaluated on the basis of circumstances existing at the time of submitting the request for execution, unless provided otherwise by the applicable enforcement law.

Different rules apply for the recognition of foreign judgments, depending on whether a judgment was given by the court of an EU or non-EU Member State.

Recognition of a judgment given by a court of an EU Member State is regulated by Regulation (EU) no 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Brussels I), which regulates that a judgment given in an EU Member State shall be recognised in other EU Member States without any special procedure being required – ie, without re-examination of the merits of the case. 

Recognition of a judgment given by a court of a non-EU Member State is regulated by the Croatian conflict of law rules, and such judgments will be recognised and enforced in the Republic of Croatia except in the following cases: 

  • if the Croatian court determines that the defendant was not permitted to take part in the proceedings against it due to procedural irregularities in the court of that foreign jurisdiction;
  • if it is within the exclusive competence of the Croatian court or other competent authority (as explained under 6.2 Foreign Law and Jurisdiction above); 
  • if a final judgment in respect of the dispute in question has already been rendered by a Croatian court or other competent authority, or if another foreign court’s judgment made in the same matter has already been recognised in the Republic of Croatia; 
  • if there is no reciprocity with the foreign jurisdiction (reciprocity prima facie exists under Croatian private international law, unless proven otherwise); or 
  • if the judgment of the court of the foreign jurisdiction contradicts Croatian public policy.

An award of an arbitral tribunal seated in a jurisdiction that is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (the New York Convention) may be recognised and enforced in the Republic of Croatia by the Croatian courts in accordance with the provisions of the New York Convention.

In a legal proceeding before a Croatian court, any relevant document that is in a language other than Croatian would have to be translated by a certified court interpreter into Croatian in order to become admissible in evidence in Croatia. 

Under Croatian law, a creditor (unless domiciled in EU) may be required to post security for the costs of the debtor.

International lenders should also be aware of the Act on Nullity of Loans with an International Element Concluded in the Republic of Croatia, which applies to loan agreements with an international element that are concluded in Croatia between debtors and unauthorised creditors, save for contracts concluded by the following debtors:

  • the Croatian state or local regional governments;
  • a legal person owned or majority owned by Croatia or a local or regional government at the time of execution of the contract;
  • a legal person being a budgetary or an extra-budgetary user of a state budget or the local or regional budget at the time of execution of the contract; or
  • a legal person considered to be a 'large' or 'medium' enterprise pursuant to the law regulating the accounting of enterprises at the relevant time (ie, the date of execution of the loan agreement). 

Furthermore, pursuant to the Act on Nullity, in order to be considered an unauthorised creditor, on the date of conclusion of the agreement, the person must have had a registered office outside Croatia, and offered or provided loan-related services in Croatia without meeting the conditions prescribed by any special regulation (ie, it had no prescribed authorisations or consents from the competent Croatian authorities).

In the sense of the Act on Nullity, a loan agreement with an international element includes a loan or other agreement whereby an unauthorised creditor has granted a debtor a certain amount of money and the debtor has undertaken to pay the contractual interest and return the money used at the time and in the manner stipulated in the respective agreement. 

The Act on Nullity prescribes that loan agreements with an international element that are concluded in Croatia between debtors and unauthorised creditors are null and void ex tunc (with retroactive effect). The Act on Nullity also applies to other legal transactions concluded in Croatia between debtors and unauthorised creditors arising as a consequence of, or based on, said agreements (eg, security documents). Furthermore, the act prescribes the nullity of notary public acts concluded on the basis of, or in connection with, the null and void loan agreements. However, the parties may not claim the nullity of a loan agreement if said agreement has been fulfilled in its entirety.

The Act on Nullity continues to be criticised by the public, and some Croatian scholars and judges have already expressed their concerns and raised issues, including the fact that the Act on Nullity is unconstitutional and in contravention of EU law. Therefore, it is possible that the Act on Nullity will not survive its challenge before the Constitutional Court. In addition, at the end of 2017, the Rijeka Municipal Court referred a request for a preliminary ruling to the European Court of Justice (ECJ), raising questions concerning the compatibility of the Act on Nullity with EU law. It remains to be seen how the ECJ will rule.

Under the Croatian Bankruptcy Act, the restructuring of companies outside of bankruptcy proceedings is possible through the pre-bankruptcy proceeding. Croatian law also recognises the restructuring of companies through the bankruptcy proceeding, either via the bankruptcy plan, most commonly seen in practice, or, on an exceptional basis, through a self-administration proceeding within the bankruptcy proceeding.

Additionally, the Act on Extraordinary Administration in Companies of Systematic Importance for the Republic of Croatia, adopted for the first time in April 2017, may be regarded as one option for reorganisation outside of the bankruptcy proceeding, although the scope of this Act is quite restricted to specific circumstances in exceptional cases. The main purpose of the Act is to deal with the restructuring of companies that are ‘too big to fail’, and it was enacted particularly for the reorganisation proceeding of Croatian company Agrokor, one of the largest privately owned Croatian companies in the field of the production and distribution of food and beverages and retail (similar to the Italian Parmalat case).

Generally, the most common way of voluntary reorganisation is exercised through pre-bankruptcy. The debtor can initiate pre-bankruptcy proceedings if it is considered imminently insolvent – ie, if the competent commercial court determines that the debtor will be unable to fulfil its outstanding monetary obligations upon their maturity. The debtor shall be considered to be imminently insolvent if it has one or more unsettled monetary obligations registered within the registry of the Financial Agency, or if it is in default of the obligation to pay salaries to employees for more than 30 days, or if it fails to pay employment-related contributions or taxes for more than 30 days following the date on which salaries should have been paid out.

Pre-bankruptcy is effectively always voluntary as it is initiated directly by the debtor, or by a creditor with the consent of the debtor. Such procedure was introduced in Croatian legislation in a time of severe illiquidity in 2012, with the purpose of allowing the restructuring of illiquid companies with a business perspective, but without initiating a rather ineffective, long-lasting bankruptcy procedure carried out by a bankruptcy manager. Namely, unlike the bankruptcy procedure, in the pre-bankruptcy procedure, the company is run by the management appointed by the shareholders. The application for the opening of pre-bankruptcy proceedings must be accompanied, inter alia, by the restructuring plan, which is the basis for the pre-bankruptcy settlement to be proposed to the creditors in the respective proceedings. Pre-bankruptcy proceedings produce legal effects as of the date when the court’s decision on the opening of the proceedings is published on the court’s online notice board. 

The essential legal effects of opening pre-bankruptcy proceedings include the following:

  • all creditors are obliged to report their claims within the deadline determined in the decision on the opening of the proceedings;
  • the debtor can only make payments related to the ordinary course of business, and in relation to supplies made after the opening of pre-bankruptcy (such legal effect arises upon submission of the application for opening the pre-bankruptcy procedure);
  • without prejudice to the secured creditors' rights, the initiation of litigation, enforcement or administrative proceedings or proceedings aimed at securing claims against the debtor is prohibited, while all ongoing proceedings shall be suspended; and
  • the seizure of funds on the debtor’s accounts is suspended, except with respect to the claims related to salaries, severance payments and temporary injunctions issued in criminal proceedings.

As previously mentioned, in the case of pre-bankruptcy proceedings, management retains its representation powers; however, it may exercise only those powers that fall within the scope of the ordinary course of business. Also, in the course of a pre-bankruptcy procedure, the debtor may dispose of its assets only with the prior approval of the pre-bankruptcy trustee or the court. Otherwise, such transactions have no legal effect.

The focus of the pre-bankruptcy proceeding is the restructuring plan, consisting of a variety of possible restructuring measures, such as debt reduction and debt refinancing, taking on new monetary loans for the purpose of financing the company’s business operations in continuity during the pre-bankruptcy proceeding, converting creditors' claims into shares of the company via share capital increase, grace periods, etc. If the pre-bankruptcy debtor is granted new loan(s) in order to ensure the continuity of its business operation during the pre-bankruptcy procedure and a bankruptcy proceeding subsequently opens anyway, the creditors of such loans will have a priority claim over claims of other bankruptcy creditors in the bankruptcy proceeding, with the exception of the prescribed employment-related claims. 

The pre-bankruptcy proceeding may only last up to 300 days from the date of its opening and, in exceptional circumstances only, the court may, upon the debtor’s proposal, allow a prolongation for a further 60 days if it considers that such would be appropriate to enable execution of the pre-bankruptcy agreement. If the pre-bankruptcy agreement is not entered into within such time, it will be suspended by the court. If the creditors accept the restructuring plan, the court would decide to accept the restructuring plan and confirm the pre-bankruptcy agreement, subject to certain exemptions prescribed by the Bankruptcy Act in which the court may nevertheless decide not to adopt a decision and confirm the pre-bankruptcy agreement. Employees’ claims arising from employment relationships shall generally be omitted from the pre-bankruptcy agreement, as shall claims of creditors’ with separate enforcement rights such as pledges and mortgages, unless otherwise requested by such creditors. 

Prior to voting for the restructuring plan in the pre-bankruptcy proceeding, the creditors are arranged in specific groups, which vote separately. Voting rights generally belong to the creditors whose claims are established by the court. The restructuring plans shall be considered to have been accepted by the creditors if the majority of all creditors votes for the restructuring plan and if, in each group, the sum of such creditors’ claims exceeds twice the sum of the claims of creditors who voted against the restructuring plan. When the restructuring plan is accepted by the creditors in accordance with the applicable voting rules, the court shall adopt a decision that the restructuring plan has been accepted, and shall confirm the pre-bankruptcy agreement.

The confirmed pre-bankruptcy plan has a legal effect on all creditors, even those that have not participated in the process and those that have participated and whose disputed claims have been established subsequently.

Once the bankruptcy proceeding has been opened, all creditors’ claims towards the bankruptcy debtor become due. Creditors should report their claims to the bankruptcy administrator, and such claims may only be settled through the bankruptcy proceeding. All rights, authorisations and obligations of the debtor’s corporate bodies, such as authorisations of the management board, etc, shall pass on to the bankruptcy administrator, who becomes authorised to represent the company and administer the bankruptcy estate. All assets of the bankruptcy debtor existing at the time of opening the bankruptcy proceeding form the bankruptcy debtor’s bankruptcy estate.

Upon the opening of the bankruptcy proceeding, bankruptcy creditors – including creditors with a right to separate satisfaction – may not initiate new enforcement or security proceedings over the debtor’s assets forming a part of the bankruptcy estate, nor over any other assets of the debtor. However, the bankruptcy court will take over and continue such proceedings initiated by the creditors with the right to separate satisfaction by applying the otherwise applicable enforcement rules for cashing in the object of such rights, noting that certain assets are cashed in by the bankruptcy administrator (eg, movables in the possession of the bankruptcy administrator, claims) and in certain cases the creditor with the right to separate satisfaction may settle its claim by cashing in the respective assets on its own.

In cases where the bankruptcy court initiated a preliminary bankruptcy proceeding for the purpose of assessing the debtor’s assets in order to establish whether they are sufficient to cover the expected costs of the bankruptcy proceeding, during the preliminary bankruptcy proceeding the bankruptcy court may, either ex officio or upon request, impose certain measures, such as, inter alia, prohibiting the disposal of the debtor's assets or restricting such disposal by prior consent of the court or the temporary bankruptcy administrator, or prohibiting or temporarily delaying the enforcement of security proceedings against the debtor.

Pursuant to the Croatian Bankruptcy Act, in the bankruptcy proceeding creditors are classified into payment ranks. Claims of the creditors of a lower payment rank can only be settled after the creditors of the higher payment rank have been fully settled. Within the same payment rank, creditors’ claims are settled pro rata.

First higher ranking claims include employees’ and competent authorities’ claims arising out of an employment relationship, such as salaries, contributions and related tax. All other claims against the bankruptcy debtor are considered claims of the second higher rank, unless they have been classified into a lower payment rank (eg, interest owed to bankruptcy creditors accrued following the opening of the bankruptcy procedure, bankruptcy creditors’ costs, claims of the shareholders mentioned under 7.4 Concept of Equitable Subordination below, certain contractually subordinated claims, etc). 

Creditors with the right to separate satisfaction (such as holders of pledges and mortgages) generally preserve their rights to separate satisfaction directly from the respective security assets (ie, respective sale/enforcement proceeds, following the payment of certain mandatory enforcement costs), and such settlement is independent from the settlement of other bankruptcy creditors.

Pursuant to the CA, and subject to certain exceptions, if a shareholder grants a loan to the company at the time of the company’s adverse financial situation (ie, when the company is considered to be in crisis), instead of providing equity to the company, it is entitled to make a request for repayment of such loans in the bankruptcy proceedings against the company only as a creditor with a lower rank claim. The same rule is applied with respect to any other legal transaction that may be construed as a loan from a commercial point of view. Pursuant to the Bankruptcy Act, claims for the repayment of loans in lieu of equity are claims of a lower rank, which may be settled only after claims of all creditors of higher rank and all other creditors of lower rank are settled.

Furthermore, in cases where a third party, at the time when the solvency of the company is an issue (ie, when the company is considered to be in crisis), grants a loan to the company in the capacity of a creditor while obtaining a security or guarantee for the repayment of such loan from the company’s shareholder, who should have instead provided equity to the company, such third party may apply for a loan repayment in the bankruptcy proceeding only for the part of the claim that has not been settled via the enforcement of security or guarantee given by the relevant shareholder.

Bankruptcy proceedings are usually time-consuming, and any satisfaction of the creditors (even secured creditors) is subject to a significant time delay and rarely results in satisfactory repayment of the debt (including for reasons of lack of adequate demand for the respective assets, etc). 

Moreover, under the Bankruptcy Act, there are a number of circumstances under which legal actions of the debtor that have been taken prior to the opening of bankruptcy proceedings that either undermine the right to even satisfaction of the creditors (creditors’ damage) or that put certain creditors in a more favourable position (preferential treatment of creditors) may be challenged by the bankruptcy administrator and other creditors by a lawsuit, in which case further significant costs and delay may be expected. Very often, such challenges may be expected from the other unsecured creditor as a way of putting pressure on the debtor and the creditor that has allegedly been put in a more favourable position. The respective hardening period may vary between one month and ten years, depending on the circumstances.

Furthermore, it is up to the discretion of the bankruptcy administrator whether  contracts in which the debtor is a contracting party that are not fully or partially fulfilled at the time of the opening of the bankruptcy proceeding shall survive or be terminated. If a bankruptcy administrator refuses to continue to exercise rights and obligations arising from such contracts on behalf of the debtor, the other contracting party may only report its claim in the bankruptcy proceeding as a bankruptcy creditor (unless its claims are otherwise secured).

There is no separate legal framework in Croatian applicable solely to project finance and thus generally applicable laws and regulations dealing with secured financing apply. In addition to that, various other laws and secondary regulations need to be taken into consideration depending on the type of the specific project, including those dealing with public procurement, urban planning/construction, particular industry licences, environmental matters etc.

Special-purpose vehicles are standardly engaged in project finance transactions, mostly in the form of a limited liability company and depending on specifics of individual transaction and negotiations among the parties, transactions may be on a non-recourse or recourse basis (sponsors may provide surety or other type of security for liabilities incurred in relation to the project).

The project finance concept is used in Croatian mainly in connection with infrastructure, energy, real estate and other concession and public-private partnership (PPP) projects.

The Croatian legal framework related to public-private partnership transactions (in the wider sense of that concept) includes the  special PPP Act and related secondary regulations, the Concessions Act and a number of sector-specific laws and regulations dealing with sector-specific concessions (eg roads, airports, sea ports, waters sectors, liner shipping and coastal maritime transport, gas market act, mining, railways, etc) relevant in the PPP project where for the purpose of implementing thereof a concession has to be awarded, the Public Procurement Act and other relevant laws and regulations otherwise applicable to projects in specific sectors. The overall public-private partnership/concessions framework tends to be complex and the relevant laws and regulations are not necessarily aligned, which in practice may lead to different interpretation and legal uncertainties.

The PPP Act regulates procedure of preparing and approving the proposals for PPP projects, supervision of implementation of PPP projects, content of PPP contracts, issues concerning small-value PPP projects and other related matters, as well as competencies of the Agency for Investments and Competitiveness when implementing the PPP Act. PPP is defined as a long-term contractual relationship between the public and the private partner, the subject of which is construction and/or reconstruction of public infrastructure for the purpose of rendering public services otherwise being within the public partner's competence, whereby during implementation of PPP project, the private partner assumes from the public partner obligations and risks regarding the building process and at least one of the following risks: public building availability risk and demand risk. A public body may, in accordance with the purpose of a PPP project, allow the performance of commercial activities intended to collect revenues from the third parties on the market.

Pursuant to the PPP Act, PPP projects are implemented via two models, ie (i) a contractual PPP model where the mutual relationship between a public partner and the private partner’s SPV is regulated by a PPP contract or (ii) institutional PPP model based on shareholdings of the public partner and the private partner in a jointly owned company to which implementation of the project has been entrusted. The object of a PPP project may not exclusively be delivery of goods or a concession for the economic use of a public or some other good.

The maximum contracted period may vary from three to 40 years, unless a longer period is allowed by a particular sector law.

There are no specific laws in Croatia that govern project finance transactions, and therefore approvals, taxes, fees or other charges required in these transactions are generally those that are required for any sector-specific project/transaction, including but not limited to applicable zoning requirements, location and building permits, specific sector regulatory licences and permits, competition, safety, environmental and health regulations, etc. In public procurement, concession and PPP projects, additional requirements from both procedure and substance aspects apply and various consents may be required by different authorities (eg public procurement authority, concession grantor, other competent sector-related authorities, etc).

When it comes to the PPP and concession projects, as well as in some other cases (eg in energy sector), registrations in the respective registries is required. Other than that, general requirement for registering or filing the transaction documents apply with respect to the granting of certain types of security interests (registered pledges mortgages, etc).

Project documents are often governed by Croatian law, while the related finance documents tend to be governed by English law (often in line with standard LMA forms), unless the financing is granted by Croatian finance parties, in which case the loan agreement is governed by Croatian law. Security documents with respect to Croatian related/based assets are governed by Croatian law.

Generally, the Croatian energy sector regulatory framework consist of several basic laws, as follows:

  • the Energy Act (OG 120/2012, 14/2014, 95/2015, 102/2015, 68/2018); 
  • the Electricity Market Act (OG 22/2013, 95/2015, 102/2015, 68/2018);
  • the Gas Market Act (OG 18/2018);
  • the Liquefied Natural Gas Terminal Act (OG 57/2018);
  • the Heat Energy Market Act (OG 80/2013, 14/2014, 102/2014, 95/2015, 76/2018);
  • the Oil and Oil Products Market Act (OG 19/2014, 73/2017);
  • the Act on Biofuels for Transport (OG 65/2009, 145/2010, 26/2011, 144/2012, 14/2014);
  • the Act on Regulation of Energy Activities (OG 120/2012, 68/2018);
  • the Energy Efficiency Act (OG 127/2014); and
  • the Renewable Energy Sources and High-Efficiency Cogeneration Act (OG 100/2015, 123/2016, 131/2017).

There are also other regulations, such as the Croatian Power Development Strategy, the Energy Balance Regulation and the Act on Establishing Infrastructure for Alternative Fuels, as well as numerous by-laws adopted on the basis of the above-mentioned laws, such as the Regulation on Energy Activity Permits and Permits Registry, etc.

The main regulatory body is the Croatian Energy Regulatory Agency (HERA), an independent legal person with public authority to regulate energy activities.

Regarding mining and hydrocarbons, the basic Croatian laws are the Mining Act (OG 56/2013, 14/2014, 52/2018) and the Hydrocarbons Act (OG 52/2018), with the Ministry of Economy, the Ministry of Environment and Energy and the Croatian Hydrocarbon Agency being the competent authorities.

The general legal framework for investments is provided in the Investment Promotion Act, the Strategic Investment Projects Act, the Companies Act and other applicable regulations. The Republic of Croatia has signed over 50 treaties for avoidance of double taxation.

Investments are encouraged through incentives prescribed by the EU harmonised Investment Promotion Act, which prescribes various forms and types of state aid, including tax-related aid, aid for the eligible expenses of creating new jobs, aid for development and innovation activities, activities of business support and aid for labour-intensive projects.

The Strategic Investment Projects Act provides measures aiming to shorten and accelerate the licensing procedure for public and private investment projects as well as for public-private partnership investment projects of strategic interest for the Republic of Croatia. The Act regulates the criteria and application procedures for strategic investment projects, the process of assessment, selection, preparation and implementation of strategic projects, the disposal of state-owned real estate for the purpose of strategic project implementation, granting concessions and issuing the necessary administrative acts.

Legal entities registered in Croatia are considered domestic legal entities, notwithstanding who the shareholders are and what is the origin of capital. As a general rule, foreign investments are not subject to restrictions under Croatian law, but certain strategic sectors or assets/sources are either subject to restrictions that apply generally, irrespective of the citizenship of the acquirer (eg maritime domain) or are subject to restrictions applicable to persons not having Croatian or other EU country citizenship or which in certain cases apply to all foreigners (including EU citizens/legal entities) – please see 8.7 The Acquisition and Export of Natural Resources for further details.

In practice, most of the project companies are established in the form of limited liability companies, as their incorporation and operation is the simplest one and sufficiently flexible and straightforward. Funding of the project company is often by way of combination of equity and loan financing, in some cases including certain level of limited recourse in the form of the guarantees, security interest provided by sponsors etc.

The main risks to be taken into consideration when structuring a project finance transaction in Croatia primarily includes aspects like legal and technical (including matters related to zoning, permits, construction, ownership, employment and taxation, inconsistencies within legal framework, uncertainties with respect to interpretation and implementation of laws), political (unexpected changes in strategies and legislation, different approaches at the state, county and municipal levels) and commercial risks, including credit and repayment risk. In order to try to mitigate some of the mentioned risks in the conducting of an adequately detailed due diligence dealing with the relevant areas is common. In addition, engaging of very experienced (local) professionals with respect to the most critical areas (depending on the type of the project) is often advisable.

Typical financing sources for project finance include bank financing and equity. Project bonds are rarely used in practice due to the fact that this segment of the capital market in Croatia is still undeveloped.

Croatian laws and regulations set out various restrictions relating to natural resources, ranging from the general exclusion of certain natural resources from any trade or ownership (eg, air and water in rivers, lakes and sea, as well as the seashore (common good)) to specific measures adopted for certain categories of natural resources. 

Certain restrictions apply generally, irrespective of the citizenship of the acquirer. For example, a right of ownership or any other property right cannot be acquired on a maritime domain (coastal sea waters and territorial seas) on any basis, as it represents a common good of interest for the Republic of Croatia. 

On the other hand, legal entities or natural persons not having Croatian or other EU country citizenship are prevented from acquiring forests/forest land owned by the Republic of Croatia, subject to exceptions regulated by international treaties.

All foreigners (including EU citizens/legal entities) are prevented from acquiring the ownership of agricultural land, unless regulated differently by international treaties. 

Real estate within the area of protected parts of nature are also excluded from acquisition by foreigners. In addition, transactions with real estate within national parks or strict or special nature reserves are subject to pre-emptive rights in favour of the Republic of Croatia, regional and local self-government entities. Similar pre-emptive rights exist in the sale of real properties on undeveloped or inhabited islands, or in the sale of cultural monuments, which are generally prevented from export from the Republic of Croatia. 

Export prohibition applies, among others, to natural sources as protected minerals and fossils. Mineral resources are owned by the Republic of Croatia, enjoy its special protection and may be exploited under terms and conditions set out by the law. Any exploitation of mineral raw materials requires the obtaining of a concession. Hydrocarbons, geothermal water and geological structures suitable for the storage of natural gas and the permanent disposal of carbon dioxide are also owned by the Republic of Croatia, and any exploitation thereof has to be conducted under terms and conditions prescribed by the law.

Additional acquisition and export restrictions may apply, depending on the category of natural resources in question, so  Croatian and foreign investors should seek reliable legal advice in this respect prior to acquiring any such properties.  

The environmental legal framework that is relevant for projects consists of an EU-harmonised set of laws and regulations, and includes the umbrella Environmental Protection Act and various other laws regulating specific environmental areas (the Nature Protection Act, the Air Protection Act, the Act on Sustainable Waste Management, the Water Act, the Noise Protection Act, the Act on Protection against Light Pollution). These laws are further implemented through specific detailed ordinances and regulations that need to be complied with (eg, the Environmental Impact Assessment Regulation, the Regulation on Environmental Permit, the Ordinance on the Environmental Permits’ Registry Act), depending on the nature and scope of the project. Any project that might have a significant impact on the environment must be assessed, and the results of the assessments must be followed in the course of the development of a project and, in principle, also during the operational stage of a project. 

Various authorities are relevant for the supervision and implementation of environmental measures. At a national level, the tasks of the Ministry of Environment and Energy focus on the protection and conservation of the environment and nature in line with the sustainable development policy of the Republic of Croatia, as well as on water management and administrative and other tasks from the field of energy. At a regional level, the competent administrative body in the county or the City of Zagreb and other state administrative and expert organisations/institutions (eg, the directorate for inspectional affairs, the directorate for environmental impact assessment and sustainable waste management, the nature protection directorate) deal with various environmental protection matters within the scope of their responsibilities. 

Health and safety issues are primarily regulated by the Law on Occupational Health and Safety, which contains detailed regulations on health and safety issues and prevention measures, for both employers and employees. Investors in projects that include the performance of construction works should bear in mind the requirements prescribed by additional laws and regulations that are specifically applied to construction sites, such as the Regulation on Safety at Work on Temporary Sites. 

The Ministry of Labour and Pension System is the main administrative body for safety and health at work in the Republic of Croatia, with the involvement of additional institutions included in the implementation of safety and health at work. In this respect, the Institute for Occupational Safety Improvement is the main national institution in charge of monitoring and improving safety at work, while the Institute for Health Protection and Safety at Work provides professional assistance. The Health Insurance Fund provides financing for health protection and safety at work, and the labour inspectorate conducts inspections of the implementation of regulations in the field of occupational health and safety.

There is currently no specific legal or tax framework for Islamic finance in Croatia.

As far as is known, there are no current initiatives related to such potential developments. The current legal framework contains certain obstacles for Islamic finance, including, from a tax perspective, limitations that apply to a credit institution's total holdings of tangible assets and the status of any such tangible assets held by a credit institution following its insolvency or restructuring. However, this does not mean that certain Islamic finance products may not become available in the Croatian market, given that a financial institution offering Islamic finance and being an authorised institution in another EU Member State is entitled to offer products throughout the EU on the basis of the cross-border services “passport” and without the need to have a separate licence or a physical presence in Croatia.

Porobija & Porobija

Galleria Importanne
Iblerov trg 10/VII, p.p. 92
HR-10000 Zagreb
Croatia

+385 1 4693 999

+385 1 4693 900

porobija@porobija.hr
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Law and Practice

Authors



Porobija & Porobija 's banking and finance team consists of three partners and two other qualified lawyers. The team’s practice focuses on project finance, syndicated loans, asset finance, and various projects dealing with commercial and company law, securities offerings, law of contracts and real estate law. The team has been engaged in a number of capital investment projects, as well as in major Croatian infrastructure development projects, mostly on behalf of international clients. The experience of Porobija & Porobija's banking and finance team includes: acting for arranging banks and lenders, as well as for the borrowers in virtually every type of commercial and financial transaction; advising national and foreign clients on Croatian energy market issues; extensively advising international lenders on detailed aspects of the development and financing of the largest-ever wind farm in Croatia; advising an international bank syndicate on the refinancing and financing of additional phases of the Istrian Y Motorway project; and advising the concessionaire on the financing of the construction and development of the Zagreb Airport project.

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