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CHANGES IN BANKRUPTCY LAW

New provisions of the Bankruptcy Act will enter into force from 1 September 2015 which aim to strengthen the protection of creditors and the transparency of the process. In Croatia there are 14 thousand companies without any employees, owing nearly 15 billion kuna. Croatian law provides two possible procedures to insolvent companies – pre-bankruptcy proceedings and bankruptcy proceedings.

Pre-bankruptcy settlements

In a pre-bankruptcy settlement the debtor can write off a part of their debts to creditors and the remaining debt will be paid back in accordance with a repayment plan which fits the business plan of the debtor – this information must be included in the pre-bankruptcy settlement. Pre-bankruptcy settlements are intended for companies that do not meet the necessary requirements to file for bankruptcy, and would like to avoid bankruptcy by reaching a settlement with the creditors. Once a successful pre-bankruptcy settlement has been reached, the debtor can continue to do business in an improved fashion.

Conducting pre-bankruptcy settlements is in the interest of creditors when, for example, they believe that the debtor, if they comply with the pre-bankruptcy settlement conditions, will pay off a bigger part of their debt than could be charged from the existing assets of the company in the event of bankruptcy, or if the creditors expect future earnings by continuing their business cooperation with the debtor.

Pre-bankruptcy settlements may be initiated either by the debtor, or by the creditors, if the debtor agrees.

In order for the pre-bankruptcy settlement to be reached it has to be ratified by at least 50% of creditors in each group of creditors, and by 66% of all creditors, providing that creditors who accept the settlement have twice the amount of claims of those who do not accept. If the debtor fails to comply with the pre-bankruptcy settlement, bankruptcy will be initiated.

Amendments to the law stipulate that after the company’s assets have been frozen for 60 days, the debtor loses the right to initiate a pre-bankruptcy settlement. Furthermore, the procedure in the jurisdiction of the Financial Agency is transferred to the commercial court, which will decide on all matters regarding pre-bankruptcy settlements which have not explicitly been placed under the authority of other bodies.

Bankruptcy proceedings

Unlike pre-bankruptcy settlements, traditional bankruptcy proceedings liquidate the assets of the debtor and the debtor ceases operating. Creditors are reimbursed from the value of the debtor’s assets, according to the percentage of their claims with respect to all the debts of the debtor, after the expenses of the proceedings have been paid as well as privileged claims (e. g. employee salaries).

The novelty introduced by these legislative changes is that the Financial Agency must, within eight days, initiate the liquidation of companies which have been blocked for more than 120 days compared to companies without employees. As for companies that have at least one employee, in such cases the 120 days before the bankruptcy proceedings are initiated are counted starting from the date of entry into force of the new bankruptcy law. An additional condition for bankruptcy for such companies will be that they had not paid their employees’ any salaries for three months in a row. Bankruptcy proceedings will be initiated even in cases of companies that have claims exceeding debts.

Changes to the bankruptcy law state that responsible persons in the company are liable for damages to the creditors and will be automatically charged the court fees for the bankruptcy proceedings as soon as it is initiated by the Financial Agency. In addition to directors and members of upper management, the new law also considers members of the supervisory board and the founder of the company to be responsible persons. They can be charged up to 20,000 kuna in advance by the Financial Agency for the costs of the bankruptcy proceedings when the Financial Agency initiates the bankruptcy proceedings ex officio, in the event that the company does not have sufficient funds to cover the costs of the proceedings. It should be noted that although the Criminal Code contains a provision for the compulsory initiation of bankruptcy proceedings by a responsible person, the initiation of criminal proceedings for this crime is rare in practice. It is expected that changes to the bankruptcy law could be reflected in an increased prosecution of this crime.

The aim of these legal changes is to solve the issue of having many indebted inactive companies without assets where the responsible persons have not formally requested their business to be deregistered in accordance with the current legal procedure. It should be noted that many responsible persons do not take account of the fact that their inactive companies often do not pay the obligatory flat benefits to the state (e. g. annual company tax), which means that these companies also qualify for ex officio bankruptcy proceedings. The new legislation aims to force the responsible persons in these companies to regulate their status, under the condition that otherwise the state will do this, but at their expense.

Legislative changes also bring back the ability to continue doing business during the course of the bankruptcy proceedings, as well as to draft an insolvency plan without restrictions. However, the continuation of business is allowed for a maximum length of one and a half years since the initial hearing, unless an insolvency plan has been submitted to the judge in charge of the bankruptcy proceedings.