Insolvency 2023 Comparisons

After the anomalies seen in the trend of the number of registrations and open bankruptcies in the two COVID-19 pandemic years (2020 and 2021), in 2022 a recovery and return to pre-pandemic trends has been visible.

The number of registrations and open bankruptcies in 2022 was similar to the indicators from 2019. On an annual level, the number of registrations was only 2% lower than the number of registrations in 2019, while the total number of open bankruptcies was 7.1% higher.

When viewed on a quarterly basis, registrations in the fourth quarter of 2022 were 7,048, down 4.8% from the same quarter of 2019.

The number of open bankruptcies in the fourth quarter of 2022 was 10.8% higher than in the fourth quarter of 2019.

The largest number of open bankruptcies (290) in the fourth quarter of 2022 was seen in:

• the wholesale and retail trade;
• repair of motor vehicles and motorcycles (area G); and
• activities of providing accommodation and preparing and serving food (area I) (250).

To understand the regulation of insolvency procedures in Croatia, it is important to note that the Croatian Insolvency Act (Official Gazette: 71/15, 104/17, 36/22) makes a distinction between two procedures – ie, bankruptcy and pre-bankruptcy proceedings – which are two separate procedures with different goals.

An insolvency procedure implies the collective settlement of creditors, by cashing out assets and distributing the collected funds to creditors, as well as the cessation of the business’s existence.

A pre-bankruptcy procedure implies regulation of the debtor’s legal position and its relationship with creditors, prevention of its insolvency and continuation of its business.

Insolvency proceedings are carried out for the purpose of the collective settlement of creditors of the bankrupt debtor, by cashing out their assets and distributing the collected funds to creditors.

Although insolvency proceedings may be initiated against a natural person or legal entity, the Croatian Insolvency Act does not provide a uniform insolvency procedure for individuals and companies; therefore, the same applies only to companies, while insolvency procedures against natural persons are regulated by the Consumer Insolvency Act (Official Gazette: 100/15, 67/18, 36/22).

Also, according to the Croatian Insolvency Act, pre-insolvency and insolvency proceedings cannot be conducted regarding:

• the Republic of Croatia, and funds financed from the budget of the Republic of Croatia;
• the Croatian Institute for Health Insurance;
• the Croatian Institute for Pension Insurance; and
• local and regional self-government units.

Depending on the circumstances of the case, Croatian law allows for both voluntary (which may be initiated by the debtor) and mandatory insolvency proceedings. These must be initiated by a financial agency if the legal entity or debtor has unexecuted payment bases recorded in the Record of Order of Payment Basis for a continuous period of 120 days.

Besides the financial agency, the proposal for the opening of bankruptcy proceedings must be submitted without delay, and no later than 21 days after the date of bankruptcy, by:

• a person authorised to represent the debtor by law;
• a member of the board of directors of the joint stock company;
• a liquidator;
• a member of the supervisory board of the debtor, if there are no persons authorised to represent the debtor by law; or
• a member of a limited liability company if the debtor does not have a supervisory board.

In the case of illiquidity and over-indebtedness, the filing for insolvency is mandatory. Regular insolvency proceedings – bankruptcy procedures – usually lead to the debtor’s liquidation.

While bankruptcy procedures may be voluntary or mandatory, pre-bankruptcy procedures may only be initiated by the debtor itself; therefore, they are always voluntary. Restructuring plan proceedings, as well as insolvency plan proceedings and self-administration (often combined in practice) aim at restructuring the debtor’s business.

In general, the Croatian Insolvency Act provides three different reasons to file for insolvency proceedings.

Illiquidity

A debtor is illiquid if it is unable to meet its payment obligations when due. Illiquidity is generally to be assumed if the debtor has suspended its payments. If the company’s liquidity cannot be eliminated within the 120 days, insolvency is generally to be assumed.

There is no illiquidity in the case of minor cash-flow shortages and short-term payment problems, which will be resolved within a period shorter than 60 days.

Over-Indebtedness

This occurs when the debtor’s assets no longer cover the existing liabilities, unless the going concern of the company is predominantly likely. Over-indebtedness applies only to private limited companies and stock corporations (and to similar legal entities), but not to individuals.

The balance sheet has to be prepared based on liquidation values to be determined in accordance with insolvency law standards. All liabilities, even those not yet due, are to be taken into account.

Illiquidity and over-indebtedness lead to a mandatory application for insolvency.

Imminent Illiquidity

A debtor is allowed, but not obligated, to file for insolvency if illiquidity is imminent – ie, if it will likely be unable to meet its existing obligations to pay on the date of maturity.

According to Article 109 of the Croatian Insolvency Act, creditors may commence bankruptcy proceedings if they plausibly demonstrate that grounds for insolvency exist and that the creditor does indeed hold a claim against the debtor.

Also, there is an obligation of submitting a proposal for commencing the insolvency procedure when the requirements predicted by the law occur. The persons obligated to submit a proposal for opening the insolvency procedure are:

• the financial agency;
• the legal representative;
• a member of the board of directors of the joint stock company;
• the liquidator;
• a member of the debtor’s supervisory board (if there are no persons authorised to represent the debtor by law); or
• a member of a limited liability company (if the debtor does not have a supervisory board, and if there are no persons authorised to represent the debtor by law).

Given that, according to the Croatian Insolvency Act, only the debtor is entitled to commence the pre-insolvency procedure, this could be said to be a voluntary procedure; while conversely, the insolvency (bankruptcy) procedure is a mandatory procedure. This is because when the reasons for insolvency stipulated in the Insolvency Act occur, there is an obligation of certain persons to submit a proposal for commencing the insolvency (bankruptcy) procedure.

In general, the Croatian Insolvency Act does not provide special rules in the case of an insolvency of specifically regulated entities; however, the pre–insolvency procedure (ie, voluntary insolvency procedure) cannot be initiated against:

• a financial institution;
• a credit union;
• an investment company;
• an investment fund management company;
• a credit institution; and
• an insurance company.

The Croatian Bankruptcy Law does not regulate out-of-court settlement and restructuring of debtors – ie, there are no informal measures with the general rules and formal measures provided for in the Croatian Bankruptcy Law.

The Croatian Bankruptcy Law provides for two possibilities, both of which involve the conduct of court proceedings.

• The first is that the party who so desired (and of course, met the conditions) has the legal framework to initiate pre-insolvency proceedings. The company could have done this at the beginning of the account freeze, before the damage was done to the company.
• The second involves the mandatory insolvency procedure, cashing in the debtor ’s assets and settling the debtor ’s claims.

Namely, the financial agency was introduced into the insolvency proceedings as a key actor, which automatically initiates insolvency proceedings before the competent commercial court after 120 days of the company ’s blockade.

If the debtor opts for formal proceedings under the Croatian Insolvency Act, it is able to restructure the company under the regime of a court-confirmed restructuring plan, and avail of further measures supplementing the restructuring, such as a moratorium or writing off part of creditors’ claims.

Secured creditors are not usually part of the restructuring plan, but they can explicitly request to be a part of the restructuring – in such case, the restructuring plan may reflect on their claims.

In any case, the unsecured creditors with established claims (reported within the prescribed period and not contested by the insolvency administrator or creditor) shall be part of the restructuring plan and vote for or against the proposed plan.

Creditors vote in writing on the prescribed voting form, which must be submitted to the court no later than the beginning of the voting hearing and must be signed and certified by an authorised person. If the creditors do not submit a voting form by the start of the voting hearing, or submit a form from which it cannot be unequivocally determined how they voted, they will be deemed to have voted for the restructuring plan.

Each group of creditors with voting rights votes separately on the restructuring plan. All creditors of the same group are guaranteed the same rights and are settled in proportion to their claims.

Creditors will be deemed to have accepted the restructuring plan if in each group the majority of creditors voted for the plan, and if the sum of claims of creditors who voted for the plan exceeds twice the sum of claims of creditors who voted against the plan.

Creditors who have a common right or whose rights constituted a single right before the occurrence of the pre-bankruptcy reason are counted as one creditor when voting.

Upon its confirmation by the court, the plan becomes legally binding and effective.

According to the Croatian Insolvency Act, for the pre-insolvency procedure, the debtor may, with the consent of the creditors who together have more than two thirds of legally established claims, propose taking on a new debt in money from an existing or new creditor for the purpose of temporary financing that is justified and urgently needed to ensure business continuity and to increase the value of the property during the pre-bankruptcy procedure. The consent shall be given in writing no later than at the hearing for voting on the restructuring plan.

The court will examine whether the required number of creditors have given their consent, and whether the charge for temporary financing is justified and urgently needed in order to ensure business continuity and to increase the value of assets during the pre-bankruptcy period procedure.

If the new indebtedness for the purpose of temporary financing meets all the legal requirements, the court will determine the amounts and terms of the indebtedness as well as the terms in which the claims from that indebtedness will be settled.

In the restructuring plan, the debtor may provide for new financing from an existing or new creditor, which is necessary for the implementation of the restructuring plan and does not unjustifiably harm the interests of the creditor, where this creditor is included as a participant in the restructuring plan.

If insolvency proceedings are subsequently opened against the debtor, the claims of creditors on the basis of temporary financing and the claims of creditors on the basis of new financing will be settled before other insolvency creditors, except for creditors of the first higher payment order.

If insolvency proceedings are subsequently opened against the debtor, the temporary financing and the new financing cannot be contested, and the providers of such financing are not subject to liability on the grounds that it damages the totality of creditors – unless it is determined that there would be:

• a violation of the principles of conscientiousness and honesty;
• a conflict of interests of the insurance provider; or
• a criminal offence.

There is no specific legal framework in Croatia regarding duties on creditors. In general, they have to act in good faith when entering into agreements and avoid any criminal acts and tort (based on the general rules), as in any other normal business activity.

There is no specific legal framework in Croatia regarding out-of-court financial restructuring or workout.

Croatian law differentiates between movable property (points one to five below) and immovable property (points six to seven below), and relevant claims/rights, as follows.

• Pledge – a legal security of a claim by creating a lien on movable property, rights or claims in favour of the pledgee. In practice, receivables, bank accounts and share pledges are common securities.
• Retention – the seller retains the title to goods over the assets and the selling thereof until receipt of the purchase price.
• Guarantee – a unilaterally binding contract by which a third person undertakes towards the creditor to assume responsibility for the fulfilment of the debtor’s liability.
• Promissory note – a private document certified by a notary public, in which the debtor gives its consent that, in order to collect the claim of a certain creditor, all or only certain accounts it has with legal entities that perform payment transactions are seized, and that the funds from these accounts, in accordance with the statement debtor, form payments directly to the creditor. It is important to note that as the promissory note is considered a writ of execution, it is possible for a creditor to initiate execution in relation to all assets of the debtor.
• Assignment of a claim for insurance purposes.
• Mortgage – a voluntary lien that is established on things without handing them over to the creditor in possession, and which does not authorise the creditor to keep the pledge in possession.
• Fiduciary – a legal security of a claim by which a debtor transfers its ownership of its item to the creditor in order to secure the collection of its claim.

If the debtor defaults on the payment of its secured obligations, security rights may be enforced in accordance with the underlying contract. In practice, secured creditors usually terminate their loan due to an event of default under the loan agreement.

Once a formal insolvency procedure has been initiated, secured creditor rights, remedies and liens may be suspended by court order.

After the opening of insolvency proceedings, depending on the kind of security, secured creditors can claim for their assets to be separated from the insolvency estate and handed over to them, or for preferential satisfaction.

Creditors entitled to separation of their securities may pursue their claims in regular civil proceedings, while most other securities lead to a right to preferential satisfaction.

Creditors with a right to preferential satisfaction may not enforce their security right in the case of the debtor’s insolvency, but need to notify the insolvency administrator of their security right.

Claims of such secured creditors will be satisfied by preferential satisfaction, most often with the application of the rules of enforcement procedure.

See 4.2 Rights and Remedies.

The Croatian Insolvency Act provides for different types of creditors – but in general, according to Article 137, insolvency creditors are the personal creditors of the debtor who, at the time of opening the bankruptcy procedure, have reported their undisputed claims.

Bankruptcy creditors are classified into payment lines according to their claims. Creditors of the later payment order can be settled only after the creditors of the previous payment order have been paid in full. Bankruptcy creditors of the same order of payment are settled in proportion to the size of their claims.

The Croatian Insolvency Act also provides rights for persons who are not insolvency creditors – ie:

• persons entitled to the separation of their securities/assets (that are not insolvency creditors); and
• persons with a right to preferential satisfaction (that may or may not be insolvency creditors).

Creditors to the insolvency estate concern liabilities that are paid preferentially from the unsecured assets in the event of an insolvency. These are liabilities that arise after commencing of the insolvency, such as:

• claims resulting from court fees;
• costs of proceedings; or
• contracts newly entered into or continued by the insolvency administrator.

In Croatia, there is no special treatment of trade creditors. If applicable, they may have a retention right.

In a pre–insolvency procedure, unsecured creditors’ rights may be affected by restructuring plan proceedings. However, affected unsecured creditors (and affected secured creditors) are able to prevent the restructuring plan from coming into force, provided their respective stakeholder group does not reach the required majority for an adoption of the restructuring plan.

During insolvency proceedings, unsecured creditors have creditors’ participation rights and will be settled in proportion to the size of their claims.

Since unsecured creditors make their decision as an assembly, they cannot interfere with the proceedings individually.

The Croatian Insolvency Act provides for pre–judgment attachments during the phase of the court’s assessment regarding the existence of conditions for commencing insolvency (bankruptcy) proceedings.

According to Article 118 of the Croatian Insolvency Act, from the date of filing the proposal for the commencing of insolvency proceedings until the final decision on the proposal for the commencing of pre-bankruptcy proceedings has been made, the court may, at the request of the petitioner or ex officio, determine all the necessary measures in order to prevent changes in the debtor’s financial position that could be unfavourable for creditors – such as:

• appointing a temporary insolvency administrator;
• prohibition of disposal of the debtor’s assets; or
• determination that the debtor can dispose of its assets only with the prior consent of the court or of the temporary insolvency administrator, etc.

The Insolvency Act does not prescribe restrictions regarding the type and number of security measures, so the court can determine all security measures that it considers necessary in the specific case.

According to the Croatian Insolvency Act, the costs of insolvency proceedings, including the insolvency administrator’s fees, have to be paid from the estate. Next in order are the preferential creditors for new money claims.

There are no preferences for employee claims against the insolvency estate dating prior to the opening of the insolvency proceedings (they are considered unsecured creditors of higher payment order).

There are no priority claims for taxes, social security, etc, to the extent that they belong to periods prior to the insolvency proceedings.

Regarding a new money claim, if insolvency proceedings are subsequently opened against the debtor, the claims of creditors on the basis of temporary financing and the claims of creditors on the basis of new financing will be settled before other insolvency creditors, except for creditors of the first higher payment order.

Also, if insolvency proceedings are subsequently opened against the debtor, the temporary financing and the new financing cannot be contested and the providers of such financing are not subject to liability on the grounds that it damages the totality of creditors – unless it is determined that there would be:

• a violation of the principles of conscientiousness and honesty;
• a conflict of interests of the insurance provider; or
• a criminal offence.

The Croatian Insolvency Act provides both for pre-insolvency financial restructuring via a restructuring plan and for insolvency financial restructuring via a bankruptcy plan.

Pre-insolvency Financial Restructuring

A restructuring plan in the pre-insolvency procedure aims for a restructuring and reorganisation of the debtor’s finances, and in general consists of information required by law – ie, all the information regarding the estate of the debtor, including:

• the causes of the crisis and the measures to be taken to manage the crisis;
• the basis and effects of the restructuring plan;
• analysis of all claims by amount and type (claims of workers and former debtor’s workers;
• exclusive rights;
• separate rights;
• claims for which proceedings are being conducted;
• unsecured claims and other claims;
• announcement of debt in money for the purpose of temporary new financing;
• whether the debtor has foreseen such a restructuring measure;
• the planned amount of restructuring costs;
• an indication of the category of claims that are not affected by the restructuring plan in accordance with the law; and
• most importantly, an offer to creditors classified in a group by the appropriate application of the rules on the classification of participants in the bankruptcy plan, which contains the methods, terms and conditions of claim settlement.

The final plan requires approval by the affected creditors and the confirmation of the court.

Creditors whose claims have been determined have the right to vote. They vote in writing on the prescribed voting form, which must be submitted to the court no later than the beginning of the voting hearing and must be signed and certified by an authorised person. If the creditors do not submit a voting form by the start of the voting hearing, or submit a form from which it cannot be unequivocally determined how they voted, they will be deemed to have voted for the restructuring plan.

Each group of creditors with voting rights votes separately on the restructuring plan. All creditors of the same group are guaranteed the same rights and are settled in proportion to their claims.

Creditors will be deemed to have accepted the restructuring plan if in each group the majority of creditors voted for the plan, and if the sum of claims of creditors who voted for the plan exceeds twice the sum of claims of creditors who voted against the plan.

Creditors who have a common right or whose rights constituted a single right before the occurrence of the pre-bankruptcy reason are counted as one creditor when voting.

Upon its confirmation by the court, the plan becomes legally binding and effective.

Any affected creditor has a right to appeal against the judicial decision on confirmation of the restructuring plan.

Insolvency Financial Restructuring

According to Article 303 of the Croatian Insolvency Act, after the opening of the insolvency (bankruptcy) proceedings, it is permitted to draw up a bankruptcy plan/insolvency financial restructuring, in which it is possible to deviate from the legal provisions on cashing out and distribution of the bankruptcy estate.

The restructuring plan consists of both a preparatory basis and an implementation basis.

In the preparatory basis of the bankruptcy plan, the measures are stated that were taken before the commencing of bankruptcy proceedings, or that should be taken, to create the foundations for the planned realisation of the participant’s rights. The preparatory basis must also contain all other information about the foundations and consequences of the bankruptcy plan that are important for the creditor’s decision on the bankruptcy plan and for its court confirmation.

The implementation basis contains provisions on how the bankruptcy plan will change the legal position of the debtor and other participants in the procedure.

Participants in the bankruptcy plan are classified into groups when determining their rights. Creditors with different legal positions are classified into special groups in the bankruptcy plan. At the same time, it is necessary to distinguish between:

• creditors with the right to separate settlement, if the bankruptcy plan also encroaches on their rights;
• bankruptcy creditors who are not of a lower order of payment;
• bankruptcy creditors of certain lower payment orders, if their claims do not cease according to the Insolvency Act; and
• shareholders, and holders of other founding rights of legal entities, if the bankruptcy plan encroaches on their shareholder, holder or founding rights.

Creditors of the same legal position may be grouped according to the similarity of their economic interests. Such classification must be based on valid reasons. The criteria for classification will be specified in the bankruptcy plan. A special group consists of workers. Creditors with small claims may be classified into a special group.

If, according to the bankruptcy plan, its effects would be the same for all bankruptcy creditors, these creditors will not be classified into special groups.

The final restructuring plan requires approval by the affected creditors and confirmation of the court.

Creditors whose claims have been determined have the right to vote. The plan shall be deemed accepted if the sum of the claims of the creditors who voted for it is greater than the sum of the claims of the creditors who voted against it. Upon its confirmation by the court, the plan becomes legally binding and effective.

Any affected creditor has a right to appeal against the judicial decision on confirmation of the bankruptcy plan.

The position of the company during insolvency procedures depends on the type of the insolvency procedure – ie, pre-insolvency procedure or insolvency (bankruptcy) procedure.

Pre-insolvency Procedure

For the pre-insolvency procedure, from the date of submission of the proposal for the commencing of the pre-insolvency procedure until the adoption of the decision on the commencing of the pre-insolvency procedure, the debtor may only make payments necessary for regular business operations, which are considered:

• payments from the employment relationship in the gross amount for workers and former employees of the debtor, whose claims are due by the opening date of the pre-bankruptcy procedure;
• severance pay up to the amount prescribed by law and the collective agreement;
• claims based on compensation for damages suffered due to injuries at work or occupational diseases;
• wages of workers increased by the amount of contributions to the base, and other material rights of workers in accordance with employment contracts and collective agreements due after the submission of a proposal for the commencing of pre-bankruptcy proceedings; and
• payments for the costs of pre-bankruptcy proceedings and other payments necessary for regular operations prescribed by a special law.

Also, during that period, the debtor may not alienate or encumber its property.

From the day of the commencing of the pre-insolvency procedure until its completion, the debtor may:

• only make payments necessary for regular business operations and fulfil obligations from the new debt that it has secured in accordance with the Insolvency Act;
• not fulfil obligations incurred and due before the opening of pre-bankruptcy proceedings, except those payments necessary for regular business operations; and
• undertake legal actions only based on the prior approval of the insolvency administrator or the court, if it (the debtor) has not been appointed.

Otherwise, legal actions undertaken by any other person have no legal effect towards creditors if the third party knew or should have known that the legal transaction undertaken exceeded the scope of the debtor’s regular business and that its undertaking was not approved by the insolvency administrator or the court if it (the debtor) was not appointed.

Bills of exchange, checks and other payment orders issued before the opening of pre-bankruptcy proceedings are not charged to the debtor’s account for the duration of the proceedings, but the presentation of bills of exchange is permitted, provided that the date (day) of presentation be determined on the bill of exchange and a certificate issued that the promissory note was not paid because pre-bankruptcy proceedings were opened against the debtor.

New Money

The debtor may, with the consent of the creditors who together have more than two thirds of the legally determined claims, propose taking on a new debt in money from an existing or new creditor for the purpose of temporary financing that is justified and urgently needed to ensure business continuity and to increase the value of assets during the pre-bankruptcy procedure.

Consent shall be given in writing at the latest at the hearing for voting on the restructuring plan.

If the new indebtedness for the purpose of temporary financing meets the requirements of the law, the court will determine the amounts and terms of the indebtedness, and the terms in which the claims from that indebtedness will be settled.

In the restructuring plan, the debtor can provide for new financing from an existing or new creditor which is necessary for the implementation of the restructuring plan and does not unjustifiably harm the interests of the creditor, where this creditor is included as a participant in the restructuring plan.

Insolvency Procedure

Taking into account the purpose of insolvency proceedings – cashing out assets and settling creditors’ claims – it is not expected that the debtor would continue carrying out their regular business activities.

Therefore, with the commencing of insolvency proceedings, the rights of the debtor’s legal entity cease and are transferred to the bankruptcy trustee, and the rights of the individual debtor to manage and dispose of the property included in the bankruptcy estate are transferred to the bankruptcy trustee.

In the pre-insolvency procedure, the main role of creditors is to protect their rights by voting for or against the proposed restructuring plan. Following that, the creditors are put into separate groups for the purpose of voting on the final restructuring plan. Conversely, in the insolvency procedure, creditors can exercise their influence in the creditors’ committee and the creditors’ assembly.

The creditors’ committee is obligated to:

• supervise the insolvency administrator and assist them in managing their affairs;
• monitor the course of business;
• review business books and business documents; and
• order a check of turnover and the amount of cash.

Members of the creditors’ committee are entitled to a reward for their work in such committee.

In addition to the fact that the bankruptcy trustee submits a report to the court on the state of the bankruptcy estate and their actions every three months, the work of the insolvency administrator is also supervised by the court, the creditors’ committee and the creditors’ assembly, which are authorised to request the administrator’s notifications or reports at any time.

Considering that the final restructuring plan does not need unanimous acceptance, and that in the case of acceptance by a majority of creditors and confirmation by the court the restructuring plan will also be effective for dissenting creditors, it is possible that some claims of dissenting creditors may be modified without their consent.

There is no trading prohibition under Croatian law. Nonetheless, the Insolvency Act provides that if the insolvency creditor trades (alienates) its claim that it has registered in the proceeding, its acquirer enters the legal position of its ancestor.

The Croatian Insolvency Act does not provide for a substantive consolidation of the assets of individual or group companies.

During insolvency proceedings, pre-insolvency proceedings and insolvency proceedings, any use of the debtor’s assets must serve the creditors’ interests in the best possible way.

Accordingly, from the day of the opening of the pre-insolvency procedure until its completion, the debtor may:

• only make payments necessary for regular business operations and fulfil obligations from the new debt that it has secured in accordance with the Insolvency Act;
• not fulfil obligations incurred and due before the opening of pre-bankruptcy proceedings, except those payments necessary for regular business operations; and
• undertake legal actions only on the basis of the prior approval of the insolvency administrator or the court if it (the debtor) has not been appointed.

Otherwise, legal actions undertaken by any other person have no legal effect towards creditors if the third party knew or should have known that the legal transaction undertaken exceeded the scope of the debtor’s regular business, and that its undertaking was not approved by the insolvency administrator or the court if it was not appointed.

From the day of commencing the insolvency procedure, the bankruptcy administrator has the rights and obligations of the body of the debtor of a legal entity. The bankruptcy administrator represents the debtor, and manages only those affairs of the individual debtor that relate to the bankruptcy estate and represents it as a bankruptcy debtor with the powers of a legal representative.

The pre-insolvency procedure does not include sale of assets; therefore, the following refers to the insolvency (bankruptcy) procedure only.

After the reporting hearing, the insolvency administrator is obligated to liquidate the assets that are part of the insolvency estate without delay, if this is not contrary to the decision of the creditors’ assembly. The insolvency administrator is obligated to monetise the assets of the insolvency estate in accordance with the decisions of the creditors’ assembly and the creditors’ committee.

Creditors, who are entitled to preferential satisfaction due to security rights in assets to be sold, shall receive amounts of purchase price (diminished for a liquidation lump sum).

However, individual creditors (even secured creditors) cannot prevent the sale of assets or enforce contractual consent requirements. Nevertheless, the sale of the whole business (and certain other assets particularly important for the insolvency proceedings) requires the consent of the creditors’ committee or, if not implemented, of the creditors’ assembly and a court decision.

There are no prohibitions for creditors from bidding for assets being sold as part of the insolvency procedure.

The purchaser acquires valuable assets with good title, free and clear of claims.       

In general, according to Croatian law, secured creditor liens, security arrangements and other claims may be released by fulfilling the secured creditor’s claim.

See 3.3 New Money.

During insolvency proceedings, pre-insolvency proceedings and insolvency proceedings, any filed creditor’s claim will be verified, valued and accepted, or disputed, by the insolvency administrator. In the case of a dispute, the competent court decides on the claim upon the creditor’s application. Also, the debtor itself may dispute the creditor’s claim.

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

In general, according to Croatian law, third parties’ liabilities cannot be released without the consent of the particular creditor. Following that, third parties’ liabilities and securities granted by third parties are sustained during the insolvency procedure. 

According to the Croatian Insolvency Act, if an insolvency creditor was entitled to set off a claim on the date the insolvency proceedings were commenced, this right shall remain unaffected by the proceedings; however, if at the time of the commencing of bankruptcy proceedings, one or more claims that have to be set off under a deferred condition are either not due or have not been directed to similar actions, the offset will occur when the necessary prerequisites are met. If the claim to be set off becomes unconditional and becomes due before the offset becomes possible, the offset is excluded.

If the company fails to observe the terms of an agreed and confirmed restructuring plan, creditors are entitled to request forced collection of its claims based on the restructuring plan, which is considered an enforcement document. If the debtor is not able to settle its due obligations as provided for in the restructuring plan, and as a result of which the reasons for insolvency are realised in relation to it, the insolvency (bankruptcy) proceedings shall be initiated.

The option of receiving or retaining any ownership or other property on account of existing equity owners’ ownership interests may occur if the claims of all insolvency creditors can be settled in full during the final division.

Namely, according to the Article 285 of the Insolvency Act, “if the claims of all insolvency creditors can be settled in full during the final division, the insolvency administrator will hand over the remaining amount to the individual debtor.”

If the debtor is a legal entity, the insolvency administrator will give each person who has a share in the debtor that part of the surplus that they would be entitled to in the event of liquidation outside insolvency proceedings.

Croatian law provides different possibilities for termination of the company – ie, insolvency proceedings provided by the Insolvency Act and liquidation proceedings provided by the Company Act.

Two different insolvency procedures are stipulated in the Insolvency Act:

• the pre-insolvency procedure, with the aim of restructuring and continuing the debtor’s business; and
• the insolvency (bankruptcy) procedure, which is carried out for the purpose of collective settlement of debtors’ creditors and after liquidation of the company.

Therefore, commencing of the insolvency procedure provided by the Insolvency Act implies restrictions on the disposal of property – ie, management of the property through a manager (see 6.2. Position of the Company).

There is also a difference between initiation of the pre-insolvency procedure and of the insolvency procedure. The pre-insolvency procedure is initiated by the debtor (therefore, it is a voluntary procedure), while the insolvency procedure is a mandatory procedure which needs to be initiated by certain persons at the moment of fulfilment of the conditions stipulated by law (see 2.2. Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Liquidations).

In both cases, creditors are invited to report their claims, which may be contested by the pre-insolvency manager, the insolvency manager and the debtor itself. After the hearing to determine the claims, the court issues a decision on the established and disputed claims.

The work of the bankruptcy administrator is supervised by the court, the creditors’ committee and the creditors’ assembly, which are authorised at any time to request notifications or reports on all circumstances, obligations and information within the administrator’s jurisdiction.

The liquidation procedure stipulated under the Company Act is carried out when reasons for the termination of the company occur, and when there are no insolvency reasons. The liquidation procedure is carried out by all the members of the company as liquidators, if otherwise is not differently regulated in a shareholders’ agreement. Within the limits of their business activity, the liquidators represent the company.

The liquidators must:

• complete the current affairs;
• collect the claims of the company;
• monetise the remaining assets; and
• settle with the creditors.

In order to complete ongoing work, they can conclude new work.

After the company’s debts are settled, the liquidators must distribute the remaining assets to the members in proportion to their shares in the company’s capital, which is determined on the basis of the final financial statements.

During the liquidation, if it is not needed to settle creditors, the money can be temporarily distributed. Amounts necessary to cover outstanding or disputed obligations must be retained, as must securing amounts due to members for final distribution.

If there is a dispute between the members of the company regarding the division of the company’s assets, the liquidators will postpone the division until the dispute is resolved.

As mentioned in 6.8 Asset Disposition and Related Procedures, in the bankruptcy proceedings, the sale of assets is one of the basic activities of the insolvency administrator. The insolvency administrator is both entitled and obligated to liquidate the assets that are part of the insolvency estate without delay.

When selling certain assets by way of a tender via a financial agency, it is necessary to obtain the court’s approval for terms of the tender. In the case of a direct, unrestricted sale of assets, the consent of the creditors’ committee is required – the decision on the sale is validly made if:

• the majority of the creditors who voted on the committee voted for it; and
• the sum of the claims of the creditors who voted in this way exceeds twice the sum of the claims of the creditors who voted against the sale, excluding separate creditors.

When selling the entire business, it is necessary to prepare a description and valuation of the debtor’s business enterprise provided by an expert appointed by the court.

Sale of assets within bankruptcy proceedings enjoys execution sale effect, and the purchaser acquires valuable assets with good title. Security expires even without the permission of the secured creditor.

See 5.1 Differing Rights and Priorities.

The court may, in order to protect the interests of creditors in insolvency proceedings, establish a creditors’ committee and appoint its members before the first hearing of creditors.

In the creditors’ committee, insolvency creditors with the highest claims and insolvency creditors with small claims must be represented. A representative of the debtor’s previous employees should also be represented in the creditors’ committee, unless they participate as insolvency creditors with insignificant claims. It is also possible for persons who are not creditors to be appointed as members of the creditors’ committee (if they could contribute to the work of that committee with their expertise). There must be an odd number of members of the creditors’ committee, and a maximum of nine. If the number of bankruptcy creditors is less than five, all creditors have the authority of the creditors’ committee.

The creditors’ committee is obligated to:

• supervise the insolvency administrator and to assist them in managing their affairs;
• monitor the course of business;
• review business books and business documents; and
• order a check of turnover and the amount of cash.

In particular, and within the scope of its mandate, the creditors’ committee:

• considers the insolvency administrator’s reports on the progress of the insolvency proceedings and the state of the insolvency estate;
• examines the business books and all documentation taken over by the bankruptcy trustee;
• submits an objection to the court on the work of the insolvency administrator;
• approves the estimate of the costs of the insolvency proceedings;
• gives an opinion to the court on the monetisation of the debtor’s property, when the court requests it;
• gives an opinion to the court on the continuation of the started business – that is, on the work of the insolvency debtor, when the court requests it; and
• gives an opinion to the court on the recognition of justified deficiencies determined by the list of assets, when the court requests it.

The creditors’ committee is obligated to inform the creditors about the progress of the insolvency proceedings and the state of the insolvency estate.

Members of the creditors’ committee are entitled to a reward for their work in the creditors’ committee. The reward is determined up to the amount of the average daily wage in the Republic of Croatia per day spent performing tasks within their scope. The average daily wage is determined according to the average monthly unpaid wages per employee in legal entities of the Republic of Croatia for the period of January to August. The court decides on the awards and costs in question by special decision, on the proposal of the creditors’ committee.

Exceptionally, the court may determine an award to a member of the creditors’ committee who is not a creditor, taking into account the scope and complexity of the tasks entrusted to them. Members of the creditors’ committee have the right to reimbursement of expenses, with the appropriate application of the rules on reimbursement of expenses, to the insolvency administrator.

The general rules of Croatian law on the recognition of a foreign court decision are applied appropriately to the recognition of a foreign decision on the opening of bankruptcy proceedings.

According to Article 402 of the Croatian Insolvency Act, along with the proposal for the recognition of the foreign decision on the opening of bankruptcy proceedings, the following should be attached:

• the original or a certified copy of the decision and a certified translation into Croatian;
• confirmation of its enforceability by a competent foreign body; and
• a list of the debtor’s known assets in the Republic of Croatia and a list of its creditors with appropriate evidence.

Considering that, in pre-bankruptcy and bankruptcy proceedings, the rules of civil procedure are appropriately applied in proceedings before commercial courts for which the co-operation of domestic and foreign courts is foreseen, there is no obstacle to such co-operation.

The general rules of Croatian law on the recognition of a foreign court decision are applied appropriately to the recognition of a foreign decision on the opening of bankruptcy proceedings.

Foreign creditors register their claims and participate in the proceedings in the same way as domestic creditors. A key factor is whether the claim in question is subject to Croatian law.

According to Article 403 of the Croatian Insolvency Act:

A foreign decision to commence bankruptcy proceedings will be recognised if:

• it was issued by a court or a body that has international jurisdiction under Croatian law;
• it is enforceable according to the law of the country where it was adopted; and
• its recognition would not be in conflict with the public order of the Republic of Croatia.

The court will reject the proposal for the recognition of a foreign decision if, due to the objection of the debtor or any other participant in the procedure:

• it determines that the act by which the procedure was initiated was not delivered to the debtor in accordance with the law of the country where the decision was made; and
• in that procedure, its fundamental rights to defence were violated.

A foreign decision to commence bankruptcy proceedings will be recognised even if it is not final.

Both insolvency procedures involve an administrative person who takes over business management of the debtor in question.

Even the provisions of the Insolvency Act provide that the presumptions for the appointment of a pre-insolvency administrator/trustee are the same as the presumptions for the appointment of an insolvency administrator, including the supervision of their work, responsibility, and reward and compensation for work.

Obligations of the insolvency administrator/trustee are provided for in Article 24 of the Insolvency Act, and include obligations to:

• examine the debtor’s operations;
• examine the list of assets and liabilities of the debtor;
• examine the credibility of reported claims;
• dispute the claims if, based on the creditor’s communication or for some other reason, they suspect their existence;
• supervise the debtor’s operations – especially the debtor’s financial operations, the creation of obligations towards third parties, the issuance of means of payment insurance, and operations in the sale of goods or services – while making sure that the debtor’s property is not damaged;
• submit a report to the court if the debtor acts contrary to the restrictions related to business;
• provide assistance to the debtor in the preparation of a restructuring plan or in negotiations on that plan;
• take over partial management of the debtor’s assets or affairs during negotiations, except for the part of which the debtor can freely dispose;
• issue orders and certificates provided for by law;
• monitor the timeliness and completeness of the settlement of the costs of the pre-bankruptcy procedure;
• submit reports to the court on the progress of the pre-bankruptcy procedure on the prescribed form; and
• perform other tasks in accordance with this law, and if the law does not stipulate otherwise, the insolvency administrator has the rights and obligations of the body of the debtor of the legal entity.

If the bankrupt debtor continues to do business during the bankruptcy proceedings, the business is managed by the insolvency administrator. The insolvency administrator represents the debtor. The insolvency administrator manages only those affairs of the individual debtor that relate to the insolvency estate and represents them as an insolvency debtor with the powers of a legal representative (Article 88 of the Insolvency Act).

Unless otherwise stipulated by the law, the selection of an insolvency administrator in insolvency proceedings is carried out by the method of random selection from the list of insolvency administrators for the area of the competent court.

If the court considers that the insolvency administrator chosen by the random selection method does not have the necessary expertise or business experience needed to conduct insolvency proceedings, it may choose another person from the list of insolvency administrators for the jurisdiction of the court as the insolvency administrator.

A person who would have to be exempted as a judge in insolvency proceedings cannot be appointed as an insolvency administrator, in particular:

• a person who was employed by the insolvency debtor or was a member of one of its bodies;
• a close relative of the judge;
• persons responsible for obligations in insolvency proceedings; or
• members of the management and other bodies of the debtor, creditors and persons who are in a relationship of rivalry with the insolvency debtor.

A person who, according to law, could not be appointed as a member of the debtor’s management, board of directors, supervisory board or similar body cannot be appointed as an insolvency administrator.

The court may ex officio, or at the proposal of the creditors’ committee or creditors’ assembly, dismiss the insolvency administrator if they do not perform their duties successfully or for other important reasons, and especially if they do not act according to the court’s orders.

The insolvency administrator has the right to appeal against the decision on dismissal. The creditors’ committee and every bankruptcy creditor who voted in favour of the proposal for the bankruptcy trustee’s dismissal at the creditors’ meeting have the right to appeal against the decision on the rejection of the motion for dismissal.

The court can dismiss the bankruptcy trustee at a personal request for justified reasons. Only the bankruptcy trustee has the right to appeal against the decision on the rejection of the personal request for dismissal.

In general, according to the Insolvency Act, one of the most important legal duties of the board members of the debtor is filing the application for the commencing of the insolvency procedure in the due time. Failure to do so can result in liability towards creditors – directly from the board members’ assets.

Namely, according to Article 110 of the Insolvency Act, the proposal for the opening of insolvency proceedings must be submitted without delay, and no later than 21 days after the date of the bankruptcy cause by:

• a person authorised to represent the debtor by law;
• a member of the board of directors of the joint stock company;
• a liquidator;
• a member of the debtor’s supervisory board, if there are no persons authorised to represent the debtor by law, if they could have known of the existence of the bankruptcy reason and the absence of persons authorised to represent the debtor by law; or
• a member of a limited liability company if the debtor does not have a supervisory board, and there are no persons authorised to represent the debtor by law, if they could have known the existence of the bankruptcy reason and the absence of persons authorised to represent the debtor by law.

The aforementioned persons are personally liable to the creditors for the damage they have caused to them by failing to fulfil their duties as determined by that provision.

The right to compensation for damages expires within five years from the date of the commencing of bankruptcy proceedings.

In principle, after commencing the insolvency procedure, the insolvency administrator is entitled to pursue respective claims of the company.

The Croatian Insolvency Act provides that the insolvency administrator can challenge pre-insolvency transactions which disrupt the right to uniform settlement of insolvency creditors (damage to creditors) – ie, which put individual insolvency creditors in a more favourable position.

Actions that could be challenged by the insolvency administrator are defined in the Insolvency Act as follows.

• Legal actions by which a particular insolvency creditor is given or enables insurance or settlement in a manner and at a time in accordance with the content of its right (congruent coverage), if it was undertaken in the last three months prior to the application for the commencing of the insolvency procedure, but only if at the time it was undertaken the debtor was unable to pay and if the creditor knew about this inability at the time.
• Legal actions by which a particular insolvency creditor is given or enables insurance or settlement in accordance with its rights, if it was undertaken after the application for the commencing of the insolvency procedure, and if the creditor at the time of its undertaking knew of the debtor’s illiquidity or of the proposal for commencing the insolvency proceeding.
• Legal actions by which a particular insolvency creditor is given or enables insurance or settlement, which it did not have the right to demand, or did not have the right to demand in that way or at that time (incongurent coverage), if that action:
1. was undertaken in the last month prior to the application for the opening of the insolvency procedure or after that;
2. was undertaken during the third or second month prior to the application for the opening of the insolvency procedure, and the debtor was illiquid at the same time; or
3. was taken during the third or second month prior to the application for the opening of the insolvency procedure, while the particular creditor knew at that time that the action would harm the other creditors.
• Legal actions taken by the debtor in the last ten years prior to the application for the commencing of the insolvency procedure or thereafter with the intention of damaging its creditors, if the other party knew of the debtor’s intention at the time the action was taken.

A legal action of the debtor without compensation or with insignificant compensation can be contested, unless it was taken four years before the submission of the proposal for the opening of bankruptcy proceedings (if it is a usual occasional gift of insignificant value, the action cannot be contested).

An omission, due to which the insolvency debtor lost any right or by which property claims against it were based, maintained or secured, is equated with a legal action.

A collection agreement concluded between the debtor and a person close to it can be contested if the bankruptcy creditors are directly damaged by it. This contract cannot be contested if:

• it was concluded earlier than two years before the submission of the proposal to open bankruptcy proceedings; or
• the other party proves that at the time of the conclusion of the contract it was not aware, nor should it have been aware, of the debtor’s intention to harm the creditors.

As stated in 11.1 Historical Transactions, according to the Croatian Insolvency Act, there are different look-back periods for challenging the particular debtor’s transaction, in principle depending on the legal basis that is the subject of challenge:

• up to three months prior to the application for the commencing of insolvency proceedings (congruent coverage);
• up to three months prior to the application for the commencing of insolvency proceedings (incongruent coverage);
• up to four years before the submission of the proposal for the commencing of bankruptcy proceedings and a legal action of the debtor without compensation or with insignificant compensation; and
• up to ten years prior to the application for the commencing of insolvency proceedings, if the action was wilful disadvantage coverage.

The insolvency administrator and creditors are the persons authorised to submit requests for annulment of disputed transactions.