The Financial Operations and Pre-Bankruptcy Settlement Act

On 1 October 2012 the Financial Operations and Pre-Bankruptcy Settlement Act (“the Act”) entered into force. The Act regulates the matters of utmost importance for all economic subjects by introducing novelties in resolving the problem of rising illiquidity and insolvency of business entities and removing existing inefficiencies of the bankruptcy proceedings. In its content, the Act regulates the financial operations of the entrepreneurs, meeting deadlines for monetary obligations and legal consequences of default in monetary obligations, corporate actions in terms of illiquidity and the procedure of pre-bankruptcy settlement.  

Basic terms and rules of financial operations

Within the meaning of the Act, the entrepreneur is a legal or natural person who independently performs economic activity with the goal of making profit. The financial operation of the entrepreneur implies provision of financial resources, financial management and deployment of financial assets to ensure the conditions for performing the economic activities.

The Act defines principal obligations of the entrepreneurs (Management Board and Supervisory Board) which are maintaining the company liquid and solvent at every moment. Also, the company must ensure fulfilment of the obligations within the time limits prescribed by the Act.

Risk management includes identifying, measuring, monitoring and assessment of risks, including reporting on the risks, to which the company is exposed or may be exposed in performing the economic activities. The Management Board is responsible for ensuring the implementation of all regular risk management measures. The term risks implies, in particular, credit risk, market risk, operational risk and liquidity risk. The liquidity risk is the risk of loss due to inability to meet maturing obligations. The measures that the Management Board is obliged to take with the purpose of developing and implementing regular liquidity risk management are: planning of known and potential cash outflows and inflows due to the regular course of economic activities; monitoring and managing liquidity on a regular basis; determining measures to prevent or eliminate the illiquidity sources as well as other identifying possibilities.

Payment date

The Act introduced to the Croatian legal system the provisions of the Directive 2011/7/EU of the European Parliament and of the Council of 16 February 2011 on combating late payment in commercial contracts, which tend to solve the problem of non-payment in the European Union.

In the contract between entrepreneurs the period of payment of the monetary obligation may be agreed up to 60 days. In exceptional cases, a longer period of payment of the monetary obligation may be agreed, if the debtor issues to the creditor a mean of securing the claim, having the effect of the writ of execution. The payment period may not be longer than 360 days. If the payment period of the monetary obligation in the contract between entrepreneurs is not agreed upon, the debtor is required to fulfil the monetary obligation within 30 days.

In the contract between entrepreneurs as creditors and entities of public law as debtors, the payment period of the monetary obligation may be agreed up to 30 days. Exceptionally, a longer payment period of the monetary obligation may be agreed upon, but it may not be longer than 60 days. If in the contract between entrepreneurs and entities of public law the payment period is not agreed upon, the debtor is required to fulfil monetary obligation within 30 days.

The debtor in default is obligated to pay a particular lump sum payment of HRK 300,00 to the creditor, regardless of any additionally suffered damages. The particular lump sum payment does not in any way impair, restrict or preclude the right of the creditor to the full compensation of all damages resulting from the debtor’s default.

The liquidity principle

The illiquidity occurs if an entrepreneur cannot, within a certain period of time, meet his monetary obligations maturing during this period. The entrepreneur is in illiquidity if he:  

  • is more than 60 days late in meeting one or more monetary obligations, the amount of which exceeds 20% of the amount of his liabilities disclosed in the annual report for the previous financial year;
  • is more than 30 days late with paying out the contracted amounts of salary and with paying all the corresponding taxes and contributions.

An entrepreneur in the state of illiquidity shall not perform any payment other than those which are necessary for performing regular business operations. The Act defines payments for regular business operations as priority claims; as well as salary for the employees from the date of opening the proceedings of pre-bankruptcy settlement; operating costs (invoices for electricity, water, etc.); procurement of goods and services required for performing regular business operations; value added tax, excise duties, contributions and other taxes which shall be calculated and paid in accordance with the regulations by the debtor; costs of proceedings in front of government agencies; costs of preparing the documentation required for the initiation and implementation of the pre-bankruptcy settlement. If with the measures of financial restructuring the debtor cannot establish the state of liquidity, within 60 days of the occurrence of illiquidity the debtor is obligated to initiate the proceeding of pre-bankruptcy settlement.

The solvency principle

Insolvency occurs when an entrepreneur:

  •  becomes incapable of making payments;
  •  becomes overdue.

The entrepreneur is incapable of making payments if he cannot continuously fulfil his outstanding monetary obligations. The entrepreneur is incapable of making payments if the Financial Agency has recorded his outstanding basis for payment for more than 60 days. The entrepreneur is overdue if the value of his asset does not cover existing obligations. The company is not overdue if it can be reasonably assumed that, in case of continuation of business activities, all the due obligations shall be duly meet. If the debtor is incapable of payment or overdue, he shall, without delay and at the latest 21 days from the occurrence of the insolvency, initiate the proceedings of pre-bankruptcy settlement.

The pre-bankruptcy settlement

The pre-bankruptcy settlement (“Settlement”) procedure may be carried out against a legal person or an individual debtor. As an individual debtor are considered a sole trader or a craftsman. When the Settlement procedure is pending, it is not allowed to commence bankruptcy proceeding. Also, if the bankruptcy proceeding is pending over the debtor, it is not allowed to propose a Settlement procedure. The Settlement procedure is carried out with the purpose of facilitating the financial restructuring of the insolvent and/or illiquid debtor in order to become liquid and solvent again. Also, the Settlement provides creditors more favourable conditions of resolving their claims that would not be possible in the bankruptcy proceeding.

The Settlement procedure is carried out in regional centres of the Finance Agency (“FINA”), whose territorial jurisdiction is determined according to the seat of the debtor. If the debtor has obligations that exceed the amount of HRK 10 Million, the exclusive jurisdiction to carry out the Settlement has the settlement council of the regional centre of Zagreb. The Settlement procedure is urgent and must be completed within 120 days from the opening day, on the debtor`s proposal. After the procedure before the FINA is finished, the Settlement will be concluded in front of the competent commercial court.

The request for commencing the Settlement procedure shall be submitted by the debtor along with: the basic identification information, a report on the financial condition and business operations of the debtor, the financial restructuring plan, operational restructuring plan, auditors' report which includes: assessment of the value of the company and a positive opinion on the plan of the financial and operational restructuring, list of the property and rights which are officially registered, the statement of the debtor that the Settlement will not affect the claims of workers, as well as a description of the negotiations with the creditors that have commenced before the Settlement procedure, if any.

The settlement council shall open the Settlement procedure within 8 days, if all the terms prescribed by the Act are met. In the decision on the opening of the Settlement procedure, the creditors shall be invited to register their claims within 30 days. Also, the decision on the opening of the Settlement procedure shall be made apparent in all official registries. 

The enforcement and security procedures, initiated prior to the opening of the Settlement procedure, shall be interrupted. The accrued claims become due on the day of the opening of the Settlement procedure. If the Settlement procedure is suspended, FINA shall submit a proposal to initiate a bankruptcy procedure, provided the reasons for initiation of the bankruptcy proceeding are met.

The creditors, who are divided into several groups, vote on a financial restructuring plan. Depending on the structure of the creditors, the creditors vote is commonly divided into three groups. The first groups shall constitute public authorities and companies majority owned by the state. The second group is comprised of financial institutions and the third group shall be other creditors, who, depending on the specifics of their claims may be further divided into subgroups.

The financial restructuring plan shall be adopted: i) if the creditors, whose claims exceed half of the value of reported claims of each group of creditors; or ii) if the creditors, whose claims exceed 2/3 of all reported claims vote in favour of the financial restructuring plan. If the disputed share of claims exceeds 25% of the total amount of reported claims, the Settlement procedure shall be suspended.

The debtor shall within 3 days from the date of acceptance of the financial restructuring plan submit the settlement proposal to the competent commercial court. The court hearing shall be held within 15 days from the date of the settlement proposal’s submission. The court shall permit conclusion of the Settlement if the debtor and the creditors who have accepted the financial restructuring plan agreed upon it at the court hearing. In respect to the creditors who have signed the Settlement it shall have a power of the binding and enforceable deed.

Final statistical data instead of conclusion

Within the first five months since the entering into force of the Act: i) the debts of illiquid and insolvent companies exceed HRK 30 billion; ii) 2734 companies are candidates for the Settlement procedure; iii) only 82 companies met legal requirements for the opening of the Settlement procedure and have entered the FINA procedure; iv) FINA has rejected the Settlement proposals for 511 companies.