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Act on Financial Operations and Pre-Bankruptcy Settlement

February 2013

The Act on Financial Operations and Pre-Bankruptcy Settlement entered into force on 1 October 2012. The Act regulates financial operations of companies, periods for settlement of monetary debts, status of companies in case of illiquidity and insolvency and pre-bankruptcy settlement procedure. It was expected that the Act will not only improve previous inefficient restructuring model (many bankruptcy proceedings have lasted for more than 10 years) but that its enactment will solve the problem of illiquidity and insolvency of many Croatian companies as well.

The new model introduced by the Act allows debtors to accept a restructuring plan and agree to a pre-bankruptcy settlement with creditors. The initiative for the procedure lies with the debtors, i.e. illiquid or insolvent companies, that are required to initiate the pre-bankruptcy settlement procedure within 60 days as of becoming illiquid (if restructuring efforts would have failed) or latest within 21 days as of becoming insolvent. The proceedings are initiated before and primarily run by the Croatian Financial Agency (“FINA”). Noncompliance with an obligation to initiate the pre-bankruptcy proceedings exposes a debtor to misdemeanor fines (monetary fines for the company and the responsible person within the company). The duration of the pre-bankruptcy procedure is limited and the procedure has to be completed within 120 days.

However, immediately upon its entry into force, numerous deficiencies and ambiguities arose in the application of the Act and affected its initial success (e.g. content and form of documentation necessary for opening of the pre-bankruptcy procedure were not well sufficiently defined, relationship with the bankruptcy procedure was not regulated, etc.). More specifically, while the Government expected that FINA would have received over 20.000 requests for pre-bankruptcy settlement procedure by the end of 2012, FINA had actually received only about 240 requests by December 2012. The Government therefore decided to amend the Act swiftly and directly by enacting the Ordinance on 21 December 2012. The amendments to the Act mostly relate to procedural issues of pre-bankruptcy settlement with the aim of simplifying the whole procedure. For example, some of the changes to the Act include: (i) less documentation required for initiation of the pre-bankruptcy settlement procedure; (ii) the possibility (in exceptional cases) of freeing the debtor’s bank accounts even prior to the ruling on the opening of the pre-bankruptcy procedure; (iii) changes related to the effects of the settlement, etc.

It appears from the preliminary available data that the amendments have achieved some success. Specifically, by the end of January 2013, FINA received more than 3.000 requests for initiation of pre-bankruptcy settlement procedure. However, as the initial hearings were scheduled for February 2013 it remains to be seen how these procedures will end and whether the Act will ultimately fulfill its intended goals.

Overview: The Act on Financial Operations and Pre-Bankruptcy Settlement