Insolvency 2019 Second Edition

Last Updated November 20, 2019


Law and Practice


LOVRIĆ NOVOKMET SMRČEK deploys cross-practice teams with significant experience in dealing with restructuring transactions and providing straightforward, practical advice on the various issues that arise in the course of insolvency proceedings. The Insolvency and Restructuring practice is made up of two partners and three associates. The team was involved in the recent Agrokor insolvency which amounted to one of the largest restructuring processes in Europe in 2018, advising shareholders and creditors of members of the Agrokor group in the pre-petition process as well as throughout the proceedings, including lateral legal proceedings (contestation of other creditor’s claims and upstream guarantees of group companies).

The latest publicly available data shows that, during 2018, there were 36.97% fewer new bankruptcy proceedings in Croatia compared to 2017, and that the number of unresolved bankruptcy proceedings was reduced significantly.

However, it remains the general perception of practitioners that a significant number of resolved files relate to the relatively simple, open-and-shut cases where there are no assets available for distribution, or cases where only a small number of creditors are involved. More complicated cases, involving significant assets and a larger number of creditors, usually take several years to resolve.

In addition, there are many entities in Croatia which, although insolvent, are not subject to either bankruptcy or pre-bankruptcy within legally prescribed deadlines. This is not because of out-of-court restructuring, but rather because creditors are reluctant to pre-finance opening of bankruptcy, and sanctions for debtors’ failure to initiate insolvency procedures are rarely imposed.

In April 2017 the Act on the Extraordinary Administration in Companies of Systemic Importance for the Republic of Croatia (OG No 32/17, the “Extraordinary Administration Act”) entered into force, introducing a new restructuring procedure through special administration over companies that are of systemic importance for the Republic of Croatia. This procedure was almost immediately opened over companies affiliated with Agrokor, a company which holds shares in many significant subsidiaries, which include the largest retail company in Croatia, as well as big producers of food and beverages. The extraordinary administration over Agrokor and its affiliates was concluded in late 2018 and will be remembered as the largest insolvency procedure in Croatia’s history. Many procedures which were initiated in relation to this are still ongoing and the case will likely remain a hot legal topic for years to come.

The adoption of the Extraordinary Administration Act and the completion of the first procedure under this legislation has been, by far, the most important development in the market. While generally aimed at introducing preventive restructuring of companies that are ‘too big to fail’, it is widely perceived as the Government’s attempt to manage the crisis which occurred in Agrokor. Only days after adoption of the Extraordinary Administration Act, Agrokor filed for the extraordinary administration procedure to be opened. Many aspects of the process, which involves thousands of creditors with claims in billions of euro, have been vigorously challenged by various groups of creditors and shareholders and the outcome of consequential legal challenges is not yet known.

The complexity of this case was due to the fact that the extraordinary administration was conducted over 77 different companies and Agrokor, as the dominant shareholder, used various, sometimes very unorthodox, financing schemes. The procedure produced, and will likely continue to produce, court practice on many legal matters which are up to now underdeveloped in Croatia, such as problems of upstream guarantees, financial assistance, liability for dealings favouring the controlling shareholder, etc.

The principal piece of legislation regulating insolvency and reorganisations in Croatia is the Bankruptcy Act (OG No 71/15, 104/17, the “Bankruptcy Act”), which contains rules on bankruptcy and pre-bankruptcy proceedings.

The Extraordinary Administration Act is designed to regulate the restructuring of companies which are deemed to be of strategic importance. It applies only to companies or groups with more than 5,000 employees and approximately EUR1 billion of debt.

Liquidation is regulated by the Companies Act (OG No 111/93 – 40/19, the “Companies Act”). Supplemental legislation that also applies to some aspects of insolvency and  restructuring consists of, but is not limited to, the Act on Financial Operations and Pre-Bankruptcy Settlement (OG No 108/12 – 71/15), the Civil Procedure Act (OG No. 53/91 – 70/19), the General Administrative Procedure Act (OG No 47/09), the Enforcement Act (OG No 112/12 – 73/17), the Act on the Securement of Employees’ Claims (OG No 70/17) and the Civil Obligations Act (OG No 35/05 – 29/18).

Additional rules can be found in legislation which regulates entities from specific sectors, such as banks and insurance companies.

A voluntary reorganisation is achieved through pre-bankruptcy and extraordinary administration proceedings, while involuntary reorganisation can be achieved through bankruptcy proceedings.

Voluntary liquidation is commenced with the purpose of termination of the company and the distribution of all of its assets, after all the company’s liabilities towards the creditors have been settled. In Croatia, liquidation is not a process that can be used for restructuring an insolvent company, because if insolvency is established, liquidation turns into bankruptcy.

Commencement of bankruptcy proceedings is mandatory within 21 days following the occurrence of either of the prescribed bankruptcy reasons. A bankruptcy reason is either insolvency or over-indebtedness. The law provides for elaborate criteria to check whether either of these reasons is deemed to have occurred.

Persons obliged to commence mandatory bankruptcy proceedings who fail to do so are personally liable to creditors for any damage caused by this omission.

Management board members and liquidators could also face criminal liability since failure to initiate bankruptcy is a felony, with prescribed penalties of a monetary fine or imprisonment of up to two years. However, the general perception is that these sanctions are rarely imposed in practice.

Once a company encounters financial difficulties, there is a window in which it may commence pre-bankruptcy, if the legal prerequisites are fulfilled. Once the stricter legal prerequisites for bankruptcy are met, the company will no longer have that choice and it will be obligated to initiate bankruptcy. Both pre-bankruptcy and bankruptcy are conducted before commercial courts.

Creditors may initiate bankruptcy proceedings if they can prove that their claims are at least probable and that the prescribed bankruptcy reasons exist with respect to the debtor. A creditor who holds a proprietary security over the debtor’s asset but also holds a direct claim towards the debtor is entitled to initiate bankruptcy if it is probable that their claim may not be fully collected out of the security.

Also, the state-operated Financial Agency is obliged to submit a proposal to commence bankruptcy proceedings ex officio if its records show that a company has one or more registered outstanding payments over an uninterrupted period of 120 days.

Insolvency or over-indebtedness are prescribed as the reasons for the opening of bankruptcy proceedings.

Insolvency is defined as a permanent inability of fulfilment of monetary obligations. A debtor that has outstanding monetary obligations registered within the Financial Agency for more than 60 days is considered insolvent. Another criterion for considering a debtor insolvent is related to payment of salaries; failure to pay three consecutive salaries to its employees is considered evidence of insolvency.

The other reason for bankruptcy, over-indebtedness, occurs when a debtor’s overall obligations are greater than its assets.

Imminent insolvency of the debtor is required to commence (voluntary) pre-bankruptcy proceedings. Imminent insolvency exists if the court determines that the debtor will be unable to fulfil its outstanding monetary obligations upon their maturity. The debtor shall be considered imminently insolvent if it has unsettled monetary obligations registered within the registry of the Financial Agency, or if the debtor is in default of the obligation to pay salaries, employment-related contributions or taxes for more than 30 days.

Pre-bankruptcy proceedings cannot be initiated over a financial or credit institution, credit union, investment company, investment fund management company, insurance and reinsurance company, leasing company, institution for payments or institution for electronic money. This does not exclude commencement of bankruptcy proceedings for these entities.

The Extraordinary Administration Act, which was recently enacted to regulate voluntary restructuring of companies which have systemic importance for the Republic of Croatia, explicitly excludes credit institutions from the scope of its application.

There are specific procedural rules applicable to the bankruptcy of certain entities such as credit institutions and insurance companies.

Only the regulator can initiate bankruptcy over a credit institution, if certain sector-specific bankruptcy reasons occur. In relation to the generally prescribed repayment rankings, claims of the Croatian National Bank, claims based on eligible deposits up to prescribed amounts, and claims based on eligible deposits exceeding prescribed amounts are ranked higher in relation to other types of claims.

If bankruptcy is opened over an insurance company, the court is obliged to immediately inform the regulator. Aside from the bankruptcy administrator, the court also appoints a special administrator obliged to provide support to insured persons, which includes applying their claims within the procedure. In relation to the generally prescribed repayment rankings, certain claims arising in relation to insurance contracts, as well as claims for reimbursement of payments out of a special Guarantee Fund, which is set up by law, enjoy priority in relation to other types of claims.

Croatian law does not require preliminary mandatory and/or consensual restructuring negotiations as a prerequisite for commencement of a formal statutory process, and does not provide a specific legal framework for out-of-court restructuring proceedings.

Croatian legal practice is more focused on statutory debt collection and/or restructuring, as initiation of bankruptcy becomes mandatory once the prescribed bankruptcy reasons are satisfied.

Since out-of-court restructuring is not often seen in practice, no specific timeline can be identified for this process. However, this does not mean consensual restructuring negotiations are not allowed provided this does not violate any other applicable legislation (eg, dissemination of price-sensitive information for publicly listed companies, completing any out-of-court restructuring scheme before bankruptcy reasons kick in, etc).

New money is not protected by law if granted outside of statutory procedures and contractual security may fall under additional scrutiny if restructuring fails. This may be one of the important reasons why the practice of out-of-court restructuring is not very developed.

In the event of consensual out-of-court restructurings, the parties have to comply with general principles of corporate and insolvency law. Once financial difficulties occur, creditors tend to be additionally careful in their dealings because any arrangements made at that time can be subject to claw-back if bankruptcy is not avoided after all.

Due to the absence of a legal framework for consensual restructurings outside insolvency, there is a necessity for a wide consensus among the parties. Any dissenters may be bound only if restructuring is conducted through one of the statutory processes.

Claims are most commonly secured by the right of pledge over a certain asset (real estate, movables, claims and other type of rights). Also, establishing of “fiduciary ownership” is quite common in relation to real estate. Fiduciary ownership entails a transfer of ownership of immovable property to the creditor, who remains the owner until the claim is settled. These security rights must be registered with the competent registries in order to produce effects towards third parties.

Outside of a statutory process, a creditor may seek to enforce a security instrument if it is structured as an enforceable deed (this is mostly the case with larger claims and claims of financial creditors). Otherwise, a litigation is required before a security becomes enforceable. As of opening of bankruptcy, the ongoing sale of assets within enforcement is ceased and continued exclusively by the bankruptcy court, therefore secured creditors cannot satisfy their claims through enforcement proceedings.

Additionally, any involuntary proprietary security acquired within 60 days before submitting the proposal for the opening of bankruptcy proceedings will be terminated and deleted from the public registers.

Secured creditors are obliged to inform the bankruptcy administrator of their right to separate satisfaction, the legal basis of that right and the part of the debtor's assets to which it relates. If they submit their claim as bankruptcy creditors, they must indicate in the application the portion of the debtor's assets to which they relate their right to separate satisfaction and the amount of their claim that will not be settled by that right. The timeline for execution of a security within bankruptcy proceedings varies, and in extreme cases it can take several years, but typically fits within the timeframe of four to 18 months.

Foreign secured creditors have all the same rights as domestic creditors. They do have to obtain a personal identification number from the competent Tax Administration; however, this is a simple and fast process.

Secured creditors whose rights were duly registered before the initiation of the proceedings will have priority in the process of the settlement of their claims out of the value of the asset which is the object of security, independently of the other bankruptcy creditors.

Claims are classified and settled in the following general order of priority:

  • creditors with separate satisfaction right, in relation to their security interest;
  • creditors of a higher priority rank; and
  • creditors of a lower priority rank.

Secured creditors generally have priority over unsecured creditors in settling their claims out of the value of the security. Creditors holding claims of a higher priority are settled before creditors of a lower priority.

Unsecured creditors should submit their claims to the bankruptcy proceeding and expect pro-rata distribution of funds achieved during the course of the bankruptcy, based on their repayment rank.

After bankruptcy is opened, no formal actions for the purpose of collection or obtaining security are allowed outside those bankruptcy proceedings.

Before a bankruptcy is opened, unsecured creditors can initiate enforcement proceedings according to the provisions of the Enforcement Act. A court is also authorised to issue a decision granting proprietary security to an unsecured creditor before a final and enforceable judgment is obtained, if certain prerequisites are met. To achieve this security, a creditor should obtain at least a non-final judgment or payment order against the debtor, and should show that, without the requested decision, any collection would probably be unsuccessful or severely hindered.

After the opening of bankruptcy, unsecured creditors can, by participating in the creditors' assembly, decide to delay sale of the debtor’s assets and to allow the debtor’s business operations to continue. However, this is limited to a maximum period of 18 months after the first hearing at which the bankruptcy administrator presented the financial and operating state of the debtor. Following the elapse of the stated period, the debtor’s assets must be sold, unless a restructuring plan is presented to the court by that time.

Pre-judgment temporary injunctions can be issued by a court, limiting the debtor’s disposal of certain assets until a final decision is made in a litigation. To obtain this, the creditor must demonstrate that there is a danger that the debtor will prevent or severely hinder collection of the claim by the time the litigation reaches finality.

Depending on enforcement title and the object of execution, enforcement proceedings can be initiated before the Financial Agency, a court or a notary public. Normally, these proceedings should not be time-consuming, as the bodies deciding on the creditor’s enforcement applications must act in limited timeframes prescribed by law. However, should the debtor file an appeal, the procedure could be significantly prolonged. If the creditor does not possess an enforceable deed of any kind, the procedure could turn into a litigation, which typically takes three to five years.

Landlords have a pledge over a tenant’s assets located in the leased premises by virtue of law, as security for claims for rent and other claims a tenant may have under the agreement. However, in bankruptcy the reach of this pledge is limited only to the year preceding the opening of bankruptcy. Further, in bankruptcy this pledge does not secure any compensation of damages caused by the cancellation of the lease by the bankruptcy administrator.

Foreign creditors do not face significant additional hurdles in terms of procedure.

In the event of liquidation of a company, generally all creditors who submitted their claims to the liquidator shall be satisfied equally, as liquidation is a process which can only be conducted if a company is solvent.

Claims which arose following formal initiation of an insolvency procedure, such as any new loan, will have priority over pre-petition claims as they will have to be satisfied in due course and they will not be included in settlement ranks which comprise only “old claims”.

In bankruptcy, there is a statutory “waterfall” of claims – first, the costs of bankruptcy proceedings (ie, post-petition claims), claims of employees and former employees and employment-related contributions incurred until the opening of the bankruptcy proceedings are covered. After these claims, other claims towards the debtor are satisfied, other than those which are explicitly designated to be of low priority (such as interests, penalties, procedural expenses incurred by creditors). It is safe to say that in a bankruptcy scenario claims that hold a low repayment priority are never satisfied.

Generally, no other claim has priority over secured creditor claims in a bankruptcy when it comes to the secured asset. However, importantly, a portion of any purchase price will be reserved for the bankruptcy estate, as a form of mandatory participation of a secured creditor in the overall cost of the process. This participation usually amounts to up to 10% of the achieved price, however, it can sometimes also be set at an even higher level.

A restructuring plan is available in pre-bankruptcy, bankruptcy and extraordinary administration proceedings. The plan is typically drawn up by the debtor and should observe the principle of equal treatment of creditors that have equal legal position in the procedure. The restructuring plan can introduce a wide variety of measures, such as debt-to-equity swaps, debt write-offs and rescheduling, and transfers of assets to new entities. Any plan of this kind is generally limited by the requirement that no participant should be placed in a worse position than it would be in if the plan were not put in place.

In order to be put into effect, the plan is voted on by the creditors, and the court must confirm it. Creditors vote on the plan divided into groups based on their different legal positions. Creditor approval thresholds vary depending on the type of procedure.

Both in pre-bankruptcy and extraordinary administration, the plan will be deemed accepted if the majority of creditors voted in favour of the plan, and if, in each individual creditor group, the sum of claims held by creditors who voted in favour of the plan exceeds the sum of claims of dissenting creditors at least twofold (in pre-bankrupty) or by an ordinary majority (in extraordinary administration). Exceptionally, an additional threshold is envisaged for extraordinary administration, whereby the plan will be deemed accepted also if it received a positive vote of creditors who hold at least two thirds of all claims within the procedure.

In bankruptcy, it is required that, in each group, a majority of creditors participated in the vote, and that the sum of claims held by creditors who voted in favour of the plan exceeds the sum of claims of dissenting creditors at least twofold.

In all types of insolvency proceedings (pre-bankruptcy, bankruptcy and extraordinary administration), some degree of a standstill is prescribed in relation to all litigation, enforcement and/or collection proceedings against the debtor and its affiliated companies. All types of proceedings envisage an option to continue the debtor’s business throughout the process.

In pre-bankruptcy proceedings, management retains its representation and management authorities only to the extent required for the conducting of the regular course of business. For any action outside the regular course of business, management must obtain the approval of a court-appointed trustee.

In bankruptcy, management of the debtor is assumed by a court-appointed bankruptcy administrator.

Within extraordinary administration, the management regime combines the rules of bankruptcy and pre-bankruptcy: a court-appointed extraordinary administrator assumes management and representation of the debtor, while the earlier management board members of the debtor’s affiliates retain their position, now with the obligation to seek consent from the extraordinary administrator for any action which falls outside the regular course of business.

In bankruptcy and extraordinary administration, creditors are represented through a creditors' committee and a creditors' council, respectively. These bodies consist of representatives of different groups of creditors, so that every group with a distinct legal position is represented.

The most important powers granted to these bodies comprise of participation in drafting of the restructuring plan and granting consents for certain extraordinary dealings of the debtor.

Due to the majority thresholds which are prescribed for voting on restructuring plans, minority creditors can be crammed down and their claims restructured without their consent, if the qualified majority of creditors approved the restructuring plan. However, dissenting minorities have at their disposal certain legal remedies designed for protection of the minority against breaches of the equal treatment principle by the majority.

Creditors are allowed to transfer their applied claims to a third party during the process. By virtue of this transfer, the transferee becomes a creditor in the proceedings and assumes the legal position of the transferor, based on a notarised document or a statement given by the transferor before the court.

Only extraordinary administration proceedings can be applied for reorganisation of a corporate group through a single restructuring plan. Restructuring plans in pre-bankruptcy and bankruptcy are applied on a single-debtor basis; however, several different plans may be intertwined so that several debtors are simultaneously restructured.

Sales of assets during the process are possible, but there is an approval process in place involving the creditors or court-appointed officers. For sales of significant assets in bankruptcy, the bankruptcy administrator is obliged to obtain an approval from the creditors' committee. In pre-bankruptcy, the pre-bankruptcy trustee is authorised to grant an approval. During extraordinary administration proceedings, the extraordinary administrator needs to obtain the approval of the creditors’ council for disposals that exceed prescribed thresholds.

During a restructuring process, the assets that are required for the realisation of the restructuring plan are normally not sold. Non-core assets may be sold if the required approvals are granted, as mentioned previously.

If a sale is conducted in the process leading up to the restructuring plan, any security over the asset being sold is released only if the secured creditor will receive the funds arising from the sale.

During pre-bankruptcy, new financing can be obtained if more than two-thirds of creditors provide their approval. If pre-bankruptcy fails and bankruptcy is opened, this financing will have a super-senior status.

In bankruptcy, the bankruptcy administrator can obtain a loan, which will be treated as a cost of the bankruptcy estate and will have priority in relation pre-petition claims. For any significant financing, approval of the creditors' committee is required.

During extraordinary administration, the extraordinary administrator may, with the prior consent of the creditors’ council, assume new borrowings on behalf of and for the debtor's account for reduction of systemic risk, business continuance, safeguarding of assets, and payments which arise out of “operative business”. These claims will have priority over other creditors’ claims (except for current and former employees' claims), and super-senior status if the proceedings turns into a bankruptcy.

A restructuring plan will typically involve a complete or partial write-off of certain claims, to the degree to which they will not be able to be satisfied under the plan.

In all types of insolvency procedures, if and when a settlement is adopted by the creditors, the court should issue a formal decision whereby a settlement is confirmed, in order for the settlement to become an enforceable deed. The court does have the authority to refuse to confirm the settlement, in cases of material breaches in the procedure leading up to the adoption of the plan, and this includes the requirement of equal treatment of creditors. Also, the court is obliged to establish whether the plan puts any creditor in a worse position compared to if the plan were not put in place.

A restructuring plan can have a very broad scope of application, which may also introduce changes in the debtor’s contractual relations. The bankruptcy administrator can choose to reject certain agreements following opening of bankruptcy, ie, in the process leading up to the structuring of the plan, so that the plan is made free of undesired agreements.

Rights of set-off or netting are typically exercised following opening of bankruptcy, with the legal effects as of the day on which the bankruptcy was opened.

A court decision on adoption of a restructuring plan has the legal effects of an enforceable deed, which means that any creditor can initiate enforcement against the debtor on the basis of the restructuring plan. In bankruptcy, a significant default of the debtor with regard to payment of a claim which was rescheduled or reduced in the plan may lead to reinstatement of the claim to its previous maturity and amount.

A restructuring plan could envisage retention of ownership over the debtor. However, in practice this happens only in pre-bankruptcies because in those proceedings restructuring plans are drafted by the pre-petition management, which obviously has ties with the debtor’s owners. In bankruptcy and extraordinary administration, newly appointed officers structure the plan and retention of incumbent shareholders is rarer. In any case, since the creditors and not shareholders are voting on any plan, even in those pre-bankruptcies where earlier shareholders retain a share in the debtor, they are usually heavily diluted.

Very few entities qualify as companies of strategic importance, and therefore can be subject to extraordinary administration.

Therefore, statutory insolvency and liquidation proceedings available to most entities in Croatia comprise of (voluntary) pre-bankruptcy, (involuntary) bankruptcy, and liquidation (mandatory when a solvent company ceases its operations). All these proceedings are opened and supervised by the competent court.

Pre-bankruptcy Proceedings

Pre-bankruptcy proceedings are aimed at restructuring the debtor’s business and not for sale of assets for the purpose of satisfaction of creditors. The procedure should last for 360 days, at the most. Upon opening of pre-bankruptcy, creditors are obliged to apply their claims within the deadline determined in the decision on the opening of the proceedings, and the debtor can only make payments of subsequent claims related to the ordinary course of business.

The proceedings can be initiated by the debtor or a creditor with the debtor’s consent, if the debtor is considered imminently insolvent, and before insolvency. Bankruptcy becomes mandatory when a company becomes insolvent. The application for the opening of pre-bankruptcy proceedings must be accompanied, among other things, by a proposal of a restructuring plan. The restructuring plan is the basis for the pre-bankruptcy settlement that will be put to the creditors’ vote at the end of the process.

For as long as pre-bankruptcy is ongoing, there is a stay on litigation, enforcement and administrative proceedings, or other types of proceedings against the debtor that are affected by pre-bankruptcy (primarily, proceedings in relation to claims which arose prior to opening of pre-bankruptcy), whereas all ongoing proceedings shall be suspended.

During pre-bankruptcy, the debtor continues business operations under the supervision of the pre-bankruptcy trustee and the court, and general civil law applies with regard to the debtor's contractual obligations.

If the prescribed majority of creditors supports the restructuring plan, the process ends with court’s confirmation of the plan, otherwise the case turns into a bankruptcy.

Bankruptcy Proceedings

Bankruptcy proceedings can be initiated by the debtor, a creditor (regardless of the debtor’s consent) and by the Financial Agency. During bankruptcy, the debtor’s assets are sold in order to satisfy claims submitted by the creditors, unless the creditors decide to continue the debtor’s business and try to agree on a restructuring plan. The debtor’s business can be continued with a maximum of one and a half years following the initial court hearings, unless a restructuring plan is being prepared.

Claims become due and payable on the day bankruptcy is opened. Similar to the pre-bankruptcy regime, during bankruptcy there is a prohibition of initiation of litigation, enforcement, administrative proceedings or proceedings against the debtor that arose prior to the opening of proceedings, whereas all ongoing proceedings shall be suspended.

In bankruptcy, representation and management of the debtor are transferred to a bankruptcy administrator, who is obliged to manage the debtor in a way which preserves and protects the bankruptcy estate.

In bankruptcy proceedings, the bankruptcy administrator is entitled to “cherry pick” among unfulfilled agreements and decide which not to continue. Pre-petition legal actions of the debtor are scrutinised by the bankruptcy administrator and creditors, and can be contested if they undermine the satisfaction of the creditors, or put certain creditors in a favourable position.

If a creditor had the right of set-off at the time of the initiation of bankruptcy, they shall be allowed to exercise this right and the initiation of the bankruptcy proceedings shall have no effect on the creditor’s right. However, should the claims on which the set-off is based be conditional or not yet due at the moment of initiation of the bankruptcy proceedings, the set-off may be conducted only at the moment when the required conditions are met.

Bankruptcy is closed when all the value of the bankruptcy estate is distributed, or, if a restructuring plan is adopted by the required majority of creditors, when the decision on confirmation of the restructuring plan becomes final.


Liquidation is commenced with a shareholders’ resolution on termination of the company, which is registered with the court registry. The appointed liquidators shall give notice to the company’s creditors to file their claims. For most types of companies, creditors should file their claims with the company within six months of the publication of the notice. The company must directly inform all of the known creditors.

Assets of the company that remain after fulfilment of all liabilities shall be distributed to the shareholders in proportion to their shares in the company’s capital, unless other criteria are established in the corporate documents of the company. If, at any given moment, the liquidators establish that the company’s assets do not suffice to settle all the creditors’ claims, they shall immediately suspend the liquidation and propose initiation of bankruptcy proceedings.

Specific rules on the sale of debtors’ assets are prescribed for bankruptcy, as pre-bankruptcy and extraordinary administration are intended primarily for achieving a restructuring plan in which the debtor should continue to operate.

The sale process is conducted by the bankruptcy administrator, with supervision of the court. Sales of certain significant assets, such as an enterprise or a share in some other company, must be approved by the creditors' committee. The creditors’ assembly is authorised to define the sale process for all assets other than real estate, vessels and aircraft which are encumbered with proprietary security. In this kind of decision, the creditors can also set up a stalking horse bidding system, or even decide to effectuate pre-negotiated sales transactions.

In the absence of any specific decision of the creditors' assembly regarding disposal of assets, as well as in all cases of sale of encumbered real estate, vessels and aircraft, sale is conducted pursuant to the rules which regulate enforcement, which typically means that assets are sold at public auctions. In the event of an unsuccessful auction, the starting price decreases at each subsequent auction.

Credit bidding is allowed, however, the secured creditor with a first ranked pledge can only bid at the price equal to the estimated value of the real estate. The purpose of this rule is to prevent secured creditors from bidding at very low amounts and thus preserving the remaining part of their claims. Also, even in case of a credit bid, the bidder must pay the amount required to cover procedural costs which have priority to the settlement of his secured claim.

In bankruptcy, assets are predominantly sold individually, and they are transferred to buyers "free and clear" since holders of proprietary security are satisfied out of the achieved price. Assets are released from any part of security which was not fully satisfied out of the purchase price. The creditors' assembly and the court are also authorised to approve a sale of all the debtor’s assets as a whole. In that case all assets, with security interests, may be transferred to the buyer, unless encumbered assets are expressly carved out of the sale.

In pre-bankruptcy, if the debtor becomes unable to fulfil the obligations arising from the restructuring plan, bankruptcy will be opened.

In bankruptcy, if the bankruptcy administrator determines that the restructuring plan is not fulfilled or will not be fulfilled, they are obliged to submit a notice to the court and the creditors' committee without delay. Claims arising out of a restructuring plan can be enforced, but also, in cases of significant delays, rescheduled claims are reinstated to their original amount and maturity.

New money can be loaned during the statutory process, within the regime described in 6.10 Priority New Money.

Within the extraordinary administration procedure, a single restructuring plan is structured to encompass the debtor and all of its affiliates.

Pre-bankruptcy and bankruptcy are conducted on a single-debtor basis; however, there is no obstacle to structuring several complementary plans for several debtors, for example to merge two debtors into a single new entity.

In bankruptcy, creditors participate in the process through the creditors' assembly. A smaller representative body, a creditors’ committee, may be established by creditors or by the court. The creditors' committee must include creditors with the highest claims and bankruptcy creditors with small claims. Representatives of former employees should also be represented in the creditors' committee, unless the employees hold insignificant claims. The creditors' committee is obliged to supervise the bankruptcy administrator and to review business books and documents. The creditors' committee may authorise individual members to perform certain tasks within its scope of competence.

The members of the creditors’ committee are entitled to a reward for their work, which is rather symbolic and does not include costs of advisers; it is determined up to the amount of the average daily salary in the Republic of Croatia per day for the performance of its activities.

Extraordinary disposal of assets is allowed in pre-bankruptcy proceedings only upon consent of the pre-bankruptcy trustee, while these actions of the debtor in bankruptcy proceedings is regularly conducted if the creditors’ assembly decided not to continue the debtor’s business or if allowed by the bankruptcy plan. Sales are governed by the rules stated earlier in this section.

Regarding liquidation proceedings, since the purpose of these proceedings is the sale of the assets and the payment of the creditors and shareholders of the liquidated company, sales are naturally allowed.

The decision of a foreign court on opening of bankruptcy and/or of the approval of a bankruptcy plan may be filed by a foreign bankruptcy administrator or by a creditor. The Croatian court will recognise such  decision if it was reached by a foreign body that has international jurisdiction under Croatian law, if the decision is enforceable under foreign law, and if the recognition is not against the rules of Croatian public policy.

We are not familiar with any practice showing that courts have entered into cross-border insolvency or bankruptcy protocols with courts in other countries.

Croatian commercial courts have exclusive jurisdiction for bankruptcy proceedings over a debtor whose centre of business operation is in the territory of the Republic of Croatia. If bankruptcy proceedings are initiated against the same debtor in Croatia and in another state, bankruptcy administrators in these proceedings shall co-operate and are obliged to exchange all legally permitted information that may be of importance for the proceedings.

Croatian bankruptcy law is harmonised with EU legal sources and generally follows the principles set forth in the UNCITRAL Model Law on Cross-Border Insolvency.

Foreign and domestic creditors are in principle treated equally; foreign creditors will have to register with the Croatian tax authorities to obtain an identification number which is already available to domestic creditors.

In pre-bankruptcy proceedings a pre-bankruptcy trustee is appointed.

In bankruptcy proceedings or an extraordinary administration, a bankruptcy administrator or extraordinary administrator is appointed, respectively.

Liquidation is conducted by a liquidator.

A pre-bankruptcy trustee examines the business operations of the debtor, prepares a list of all assets and liabilities of the debtor, examines submitted claims, and has the authority to dispute claims. While management of the debtor remains in place, the pre-bankruptcy trustee oversees the business operations of the debtor. Liability of the pre-bankruptcy trusty is examined, mutatis mutandis, according to the rules of bankruptcy law regarding the liability of the bankruptcy administrator.

A bankruptcy trustee assumes control of the business of the debtor and its assets, and represents the debtor towards third parties. It is the duty of the bankruptcy administrator to review and either accept or challenge all claims submitted by creditors at the start of the process, to conduct sale of the debtor’s assets and/or to participate in the drafting of a restructuring plan.

The bankruptcy trustee is liable for any damages caused to participants of the proceedings (primarily, the creditors) as a result of breach of their duties. If damage was caused by an action conducted based on an approval or an instruction of the bankruptcy court, the bankruptcy administrator will be exonerated unless the approval or instruction was obtained by fraudulent means.

An extraordinary administrator represents the debtor independently and individually, and manages the debtor’s day-to-day operations. Their duties and responsibilities correspond to those of the bankruptcy administrator in bankruptcy.

Liquidators represent the company within boundaries of their business activity. They must complete ongoing operations, collect the receivables of the company, cash the remaining assets and pay off creditors. To complete any pending operations, they may also enter into new business transactions.

A pre-bankruptcy trustee or bankruptcy administrator is appointed by a court’s decision, from the list of bankruptcy administrators managed by the Ministry of Justice. In bankruptcy the creditors' assembly may appoint another bankruptcy administrator, by a majority of claims of creditors who participated in the vote.

Liquidation is carried out by all company members as liquidators, unless a decision of the members decides or the articles of association stipulate that certain company members or other persons should be appointed as liquidators.

During pre-bankruptcy, directors retain their representation powers; however, they must abide by the rule of conducting only those payments that fall within the scope of the ordinary course of business.

During bankruptcy, the bankruptcy administrator assumes management of the debtor. This means that all powers previously held by the debtor’s corporate bodies are unconditionally transferred to the bankruptcy administrator.

During extraordinary administration, the extraordinary administrator represents the debtor independently and individually. Management of affiliated companies of the debtor retains its representation and management authorities only to the extent required for the conducting of the regular course of business. For any action outside the regular course of business, the management of affiliated companies must obtain the approval of the extraordinary administrator.

During liquidation, the liquidator assumes the management of the debtor, with the sole purpose of closing businesses, collecting receivables, cashing in the remaining assets, paying the creditors, distributing the remaining assets to the shareholders and liquidating the company.

A pre-bankruptcy trustee or bankruptcy administrator can be a person accepted onto the list of bankruptcy administrators managed by the Ministry of Justice. A person who was either employed by the debtor or served as a member of the debtor’s corporate body cannot serve as a bankruptcy administrator. Also excluded are close relatives of the judge, members of the debtor’s corporate bodies and creditors.

In order to serve as extraordinary administrator in extraordinary administration proceedings, a person must only fulfil the general requirements for a management board member under the rules of company law.

Accountants and other professionals may serve as statutory officers in pre-bankruptcy and bankruptcy proceedings, if they are listed as bankruptcy administrators, and if they are independent from the debtor company, to avoid any conflict of interest.

In practice, professional advisers act as counsel to the debtor or to a creditor in all types of insolvency proceedings. As all statutory insolvency processes are conducted as court procedures, legal advisers are almost always involved, both on the side of the debtor and on the creditor side.

Aside from legal advisers, various valuation experts are often appointed for the assessment of the debtor’s assets' values (real estate, rights and claims). Based on those assessments, the creditors may, for example, decide to sell the assets as a whole, instead of cashing in only parts of the assets, or steer the process towards a restructuring plan instead of insisting on closing the debtor’s business operations.

Also, the court may order that financial experts examine the final account produced by the bankruptcy administrator. The bankruptcy administrator may engage experts for compiling a list of assets and their values, as well as for compiling a list of creditors. In more complex cases, the bankruptcy administrators engage specialised restructuring advisors to facilitate structuring of the restructuring plan.

Advisors engaged by the bankruptcy administrator are compensated out of the bankruptcy estate.

The creditors and the court have the general authority to supervise and control the actions of the bankruptcy administrator, including engagement of external advisors.

Advisors engaged by the bankruptcy administrator are responsible to the bankruptcy estate and, indirectly, to the creditors (the ultimate beneficiaries from the bankruptcy estate).

Arbitrations and mediations are not common in restructuring and insolvency matters.

In bankruptcy proceedings, ongoing arbitration proceedings regarding the bankruptcy estate shall be assumed by the bankruptcy administrator. The Bankruptcy Act explicitly provides for the possibility to initiate arbitration proceedings regarding claims which were made during bankruptcy proceedings.

Arbitration is rarely used in insolvency proceedings in Croatia.

Croatian courts do not order mandatory arbitration or mediation in judicially supervised insolvency or restructuring proceedings.

Upon opening of bankruptcy, the bankruptcy court will have jurisdiction over all disputes related to the bankruptcy proceedings, which includes disputes on the validity of pre-petition claims arising from agreements containing arbitration clauses.

Arbitration is governed by the Arbitration Act (OG 88/01) and mediation is governed by the Mediation Act (OG 18/11).

Parties may choose the number of arbitrators, but if that number is not determined, there shall be three judges in the arbitration proceedings.

Appointment of a mediator is conducted under the rules agreed upon by the parties. The parties may agree whether the mediation shall be carried out by one or more persons and who shall be appointed as the mediator. If the parties cannot agree on the number of mediators, they may request that they be appointed by a third party.

Parties may agree on any person to serve as an arbitrator. However, there are some restrictions for Croatian judges, who may only be appointed as presiding arbitrators or as sole arbitrators.

In relation to the company, the directors have to conduct business with the diligence of a prudent businessman. Failure to do so may trigger damages liability. Directors can also be held liable under civil and criminal law for a delayed filing for bankruptcy, with prescribed penalties of a monetary fine or imprisonment of up to two years.

Although creditors are entitled to claim for compensation of damages outside of bankruptcy, they do so on behalf of the company, and in bankruptcy a damages claim against a director must be asserted by the bankruptcy administrator, in order not to put any creditor in a privileged position.

The appointment of specialist Chief Restructuring Officers is not common in Croatia and, in any case,they would be obliged to report to the statutory officer.

Concepts similar to shadow directorship are included in Croatian company law. Any person who can influence the management of a company can be held liable for damages, if actions taken by the company under this influence lead to damage either to the company or to its shareholders. These rules could also apply to creditors that obtain an influence over a company’s management which could result in damages liability. The claim for compensation of damages would primarily be held by the company and enforced by either the company or other creditors. If bankruptcy is opened, this authority is no longer granted to creditors but to the bankruptcy administrator. In some cases, the right to initiate damages compensation on the basis of undue influence is granted also to the shareholders.

Owners/shareholders may become liable to creditors if it can be established that they abused the general legal regime of limited liability, for example by willingly using a company to evade payment of certain obligations, or by managing the assets of the company without regard to the fact that the company is a legal entity separate from the owner

Certain transactions of the bankruptcy debtor effected within a particular statutory period before the filing for bankruptcy are, or may be, deemed ineffective in relation to the bankruptcy estate, if they disrupt regular satisfaction of creditors or if they grant certain creditors a privileged position.

There are several “suspect periods” covering transactions that can be challenged or set aside preceding the bankruptcy declaration. These periods may vary from 30 days to ten years. As a general rule, for contesting transactions which are further back in time, a more onerous burden of proof is set for the claimant in terms of bad faith of the debtor and the other transaction party.

The bankruptcy administrator or bankruptcy creditors may invalidate any transaction made prior to opening of bankruptcy which adversely affects the position of the other creditors. In practice, however, use of claw-back in the bankruptcy often primarily depends on the diligence of the bankruptcy administrator. Individual creditors have a back-up option to file claims themselves, if the bankruptcy administrator refuses to do so.

In bankruptcy, certified court experts may be involved even before bankruptcy is formally open, in cases where the existence of bankruptcy reasons is unclear or contested. Upon formal initiation of insolvency proceedings, valuation through certified court experts may be used for determination of the debtor’s financial and operating state. Valuation serves as the basis determining the distributable value for the purpose of debt-to-equity swaps. Valuations made by a certified court expert are also the basis for setting a starting price for the sale of assets encumbered by proprietary security instruments such as mortgages.

Valuation is most often initiated by the statutory officer, but the court also has the authority to directly involve court experts in the process, as the court has the authority to independently determine all facts relevant for the proper course of the procedure.

Insolvency and restructuring valuation jurisprudence is not very developed in Croatia. The courts typically appoint valuers from the general lists of certified court experts, which are available for the area of each commercial court. These lists of sworn court experts are divided up on the basis of fields of expertise (real estate valuation, finance and accounting, etc), and experts from these lists are usually involved in all court procedures, including insolvency and restructuring.


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Law and Practice


LOVRIĆ NOVOKMET SMRČEK deploys cross-practice teams with significant experience in dealing with restructuring transactions and providing straightforward, practical advice on the various issues that arise in the course of insolvency proceedings. The Insolvency and Restructuring practice is made up of two partners and three associates. The team was involved in the recent Agrokor insolvency which amounted to one of the largest restructuring processes in Europe in 2018, advising shareholders and creditors of members of the Agrokor group in the pre-petition process as well as throughout the proceedings, including lateral legal proceedings (contestation of other creditor’s claims and upstream guarantees of group companies).

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