SPECIAL ISSUE PREVENTIVE RESTRUCTURING 17. Pre-Insolvency Proceedings in Croatia: Genuine Restructuring or Just a Facade?

1. Introduction

"Prevention is better than cure", as the saying goes, aptly summarises the aim of the European Union's Preventive Restructuring Directive (PRD 2019).^[1] This Directive offers Member States a framework to promote negotiations between creditors and debtors who are on the brink of insolvency or facing operational challenges. Preventive restructuring frameworks are crafted to assist debtors in restructuring at an early stage, thereby avoiding insolvency and preventing unnecessary liquidation. These frameworks not only aim to preserve jobs and retain valuable skills but also seek to maximise returns for creditors compared to what they might recover through liquidation or other alternatives.^[2]

However, the PRD 2019, composed of numerous lengthy recitals and 35 articles, is often dense, challenging to interpret, and lacks systematic coherence. This complexity stems from the many compromises and differing approaches of the parties involved in its creation. Given this diversity, it is unsurprising that the Directive's final text lacks internal consistency.^[3] While Member States have been granted significant discretion in implementing the PRD 2019, this freedom is accompanied by the responsibility to ensure its effective application. In Croatia's case, it appears that the opportunity offered by the PRD 2019 has not been fully realised.^[4] This article explores how Croatia has implemented the PRD 2019, assessing whether these efforts signify genuine restructuring opportunities or merely serve as formalities within the broader EU context.

The second section of this article provides an overview of Croatia's pre-insolvency proceedings prior to the implementation of the PRD 2019, tracing their evolution from compulsory settlements under socialist Yugoslavia to the current framework established by the 2015 Insolvency Act. The Croatian legislature chose to integrate elements of the PRD 2019 into existing pre-insolvency proceedings. The third section critiques the implementation of the PRD 2019 in Croatia, emphasising missed opportunities for a comprehensive overhaul of the pre-insolvency framework. The fourth section details the operational framework of Croatia's pre-insolvency procedure, including the roles and responsibilities of the debtor, the commercial court, the practitioner, and other involved actors. It outlines the procedural steps, from the debtor's initial application to the finalisation of the restructuring plan, highlighting key features and potential challenges within the proceedings. The fifth section discusses the moderate reception of the new pre-insolvency proceedings, highlighting issues such as complexity, rigidity, and procedural burdens that may deter early engagement in preventive restructuring. Finally, the concluding section underscores the necessity for ongoing reforms, suggesting that a more flexible and strategically aligned framework is essential for effective preventive restructuring in Croatia.

2. From Compulsory Settlement to Pre-Insolvency Proceedings

2.1 Foundations of Croatia's Insolvency Framework

The current structure of pre-insolvency proceedings in Croatia cannot be fully comprehended without considering the context in which they developed.^[5] The socio-economic and legal transformations that have taken place over time have profoundly shaped the development of these proceedings. Croatia's emerging economy, coupled with its transition from a socialist system to a market-oriented one, has played a pivotal role in shaping the legal frameworks governing insolvency.

After World War II, Croatia, as part of socialist Yugoslavia, adopted a socialist economic model, abandoning pre-existing insolvency laws based on former Austrian legislation from 1914. As the 20th century progressed, the legal framework remained biased towards debtor protection. Insolvency proceedings during this period prioritised job preservation over financial responsibility, reflecting the socio-economic priorities of the socialist regime. The Financial Operations Act^[6] and the Law on Compulsory Settlement, Bankruptcy, and Liquidation^[7] of 1989 did not significantly deviate from earlier legislation, allowing proceedings to be extended to assist debtor recovery while leaving creditors under-compensated.^[8]

The compulsory settlement mechanism served as the principal tool for debtor rehabilitation, frequently accomplished through deferred payments or reductions in creditor claims. During periods of high inflation, the exclusion of interest accrual during settlement or bankruptcy proceedings significantly eroded creditor claims over time, enabling debtor recovery. Debtors were able to initiate out-of-court or in-court compulsory settlements, effectively delaying commencement of bankruptcy proceedings. This mechanism safeguarded primarily debtor interests, often at the expense of creditors' rights to asset disposition, and left creditors without adequate compensation.^[9]

After gaining independence in 1991, the Republic of Croatia adopted, in principle, federal laws, but the insolvency landscape remained largely unchanged. The Homeland War (1991-1995) not only resulted in numerous human casualties and material damage but also devastated the economy, leading to significant disruptions in business operations. Amidst these challenges, developing true market relations proved difficult, and the transformation of large social enterprises was occasionally hindered by corruption and the influence of emerging tycoons.

2.2 The 1996 Insolvency Act

A new Insolvency Act was enacted in 1996^[10] and came into effect on January 1, 1997. This act eliminated the compulsory settlement mechanism and aligned Croatian insolvency law with a central principle: the assets of an insolvent debtor should economically belong to the creditors, who should have the authority to initiate proceedings and decide on the management and liquidation of debtor assets.^[11]

The Croatian Insolvency Act was notably influenced by the German Insolvenzordnung. An anecdotal claim suggests that Croatia adopted the German framework before Germany did, due to a lengthy vacatio legis period in Germany,^[12] during which Croatia translated and implemented the insolvency framework. However, this is not entirely accurate, as Croatia also incorporated specific local characteristics, albeit not always consistently or aligned with the model it was copying.

Over time, gradual changes to the insolvency legislation, often poorly drafted, have led to numerous problems and ambiguities, making the legal text even more difficult to understand and apply in practice. Debtors often prioritise securing the real estate and other valuable assets for personal interests, as many small businesses in Croatia are family-run or connected through close personal relationships. Their primary interest is to avoid insolvency proceedings as long as possible. Creditors, on the other hand, tend to be passive, knowing that they can recover only a small fraction of their claims through insolvency proceedings.

The process of selling assets through auctions does not always achieve the prices that debtors hope for and creditors desire. There have been instances of abuse where a few individuals colluded to inflate the price without the genuine intention of purchasing the asset. This tactic allows their associate to acquire the property at a lower price once the others potential buyers have ceased bidding. Insolvency practitioners frequently face significant challenges navigating these intricacies in proceedings, particularly as there is a tendency to initiate insolvency at a stage when restructuring is no longer a real opportunity as the business is no longer viable.

Additionally, insolvency proceedings, if the debtor has substantial assets, can last several years, with some cases recorded to have extended over a decade. The prolonged litigation arising from insolvency cases, coupled with the overall insufficient efficiency of the Croatian judiciary,^[13] further complicates the situation. This has resulted in liquidation being the predominant outcome of insolvency proceedings in Croatia. Due to these factors, insolvency proceedings in Croatia carry a negative connotation and are commonly perceived by the public as lengthy judicial proceedings that leads to job losses.

Regarding restructuring, Croatian law has permitted it through an insolvency plan modeled on the German system since 1996. However, due to the late initiation of proceedings and overwhelming debts, only a few cases have successfully concluded with an insolvency plan.

2.3 The Pre-Insolvency Settlement Procedure

In response to the challenges posed by the ongoing effects of the 2008 financial crisis, Croatia introduced the Act on Financial Operations and Pre-Insolvency Settlement, which came into force on 1 October 2012.^[14] This was accompanied by the removal of sections in the Insolvency Act that related to insolvency plans. Debtors were no longer permitted to propose a restructuring plan within insolvency proceedings. Instead, any restructuring aimed at restoring liquidity and continuing business operations could only be pursued through the pre-insolvency settlement procedure. The official explanation framed these changes within the context of European and global trends favoring restructuring over liquidation. However, the new Act also bore a striking resemblance to the former Yugoslav law of the same name, which dealt with compulsory settlement.

The law sought to facilitate the financial restructuring of distressed debtors, thereby restoring their liquidity and solvency, while also providing creditors with more favourable settlement conditions than those available through standard insolvency proceedings. Another objective was to ensure a smoother transition into insolvency for debtors who could not be returned to financial health. In such cases, debtors were exempt from paying the relatively high fees associated with initiating insolvency proceedings, a provision that many took advantage of.

The urgency for reform was highlighted by staggering financial data from 30 April 2012, when outstanding debts processed through the Financial Agency (Fina)^[15] reached approximately EUR 5.77 billion. Notably, 80% of this debt was owed by legal entities, and the majority of these bank accounts had been blocked for over 360 days.^[16] Given Croatia's population of less than 4 million, these figures were particularly striking.

The pre-insolvency settlement procedure was conducted by the Fina, a decision that elicited considerable criticism, as it was argued by many that such proceedings should be handled by the courts. The bodies involved in these proceedings were the Fina panel, comprising three members appointed by the Minister of Finance, and the practitioner appointed in the pre-insolvency settlement procedure. The role of the panel was to ensure adherence to legal frameworks and guide the parties towards an agreement, while the practitioner primarily oversaw the debtor's compliance with the imposed restrictions. If an agreement was reached, the settlement was concluded before the commercial court.

As in insolvency proceedings, creditors were required to submit their claims. The law included specific rules for determining when claims were considered admitted. These rules applied to claims where there was an agreement between the debtor and creditor regarding the existence and amount of the claim, claims backed by enforceable titles, and claims that were not submitted by creditors but were listed by the debtor in their report. Additionally, later amendments to the law considered claims for which the debtor had deducted VAT as admitted, unless proven otherwise. Litigation, enforcement, and administrative proceedings initiated against the debtor prior to the commencement of the pre-insolvency settlement were stayed at the debtor's request, and the initiation of any such proceedings was prohibited for the duration of the settlement process.

Due to poor legislative drafting and the haste with which the Act was prepared, it underwent several rapid amendments in an effort to clarify and align its provisions with practical needs and challenges. While some issues were eventually addressed, certain adverse outcomes proved irreversible. The law was also partly amended by government decree, a move that understandably provoked concerns regarding its constitutionality. Moreover, both the law and some of its amendments were enacted without a vacatio legis period, leading to a swift series of significant changes in a short timeframe.

Several significant issues emerged during the implementation of the law.^[17] One concern was the treatment of claims that creditors failed to submit to Fina. Additionally, many settlements were poorly drafted, rendering them difficult to put into effect. Questions also arose regarding the handling of denied claims within the pre-insolvency settlement proceedings, particularly when a creditor later succeeded in litigation after the settlement had already been concluded. A particularly problematic issue involved claims submitted by joint and several guarantors and sureties who had the right of recourse against the debtor after satisfying the debtor’s obligations. In some instances, fictitious guarantors or sureties were introduced, as debtors realised that these related parties, acting as creditors, could influence the conclusion of a pre-insolvency settlement in their favour. To address this, it was eventually stipulated that joint and several guarantors and sureties with connections to the debtor would be excluded from voting.

2.4 The 2015 Insolvency Act

Due to these issues, the pre-insolvency settlement procedure was largely viewed unfavourably by the public. Ultimately, the entire process, now referred to as pre-insolvency proceedings, was transferred to the courts, where the appointment of a practitioner became optional rather than mandatory. Fina assumed the role of an auxiliary body to the court, assisting in the administration of claim submissions. This transition was implemented through the Insolvency Act of 2015, which, with subsequent amendments, remains in force today.^[18] The Act reintroduced provisions for insolvency plans, which now coexist with the rules governing pre-insolvency proceedings. If one disregards the provisions on pre-insolvency procedings, the new law does not constitute a radical departure from the insolvency framework established in 1996.

It is important to acknowledge that, despite widespread criticism, the pre-insolvency settlement procedures yielded some statistically significant outcomes during their implementation. Over nearly three years (35 months), approximately 4,200 pre-insolvency settlement procedures were initiated, with successful settlements concluded in just over 3,000 cases. Data suggest that slightly more than half of the debtors who entered into these settlements managed to maintain liquidity for some time.^[19] However, these outcomes were largely achieved at the creditors' expense, who, admittedly, would not have fared much better in the debtor's insolvency.

In the context of restructuring, it is important to mention the controversial lex Agrokor, officially known as the Act on the Procedure of Extraordinary Administration in Companies of Systemic Importance to the Republic of Croatia,^[20] which was enacted on 6 April 2017. Agrokor, Croatia's largest private company engaged in the production and distribution of food and beverages as well as retail, entered extraordinary administration just a few days later, on 10th April 2017, affecting 77 subsidiaries. The law defines a company as systemically significant if it employs over 5,000 workers and has liabilities exceeding EUR 1 billion. It establishes an extraordinary administration procedure involving the court, an extraordinary practitioner, an advisory body tasked with providing opinions on the decisions and actions of the practitioner, and a creditors' council, all aimed at reaching a settlement to ensure the company’s sustainable future. The Government nominates the practitioner, who is then appointed by the Commercial Court in Zagreb, either at the request of the debtor or creditors, with the debtor's consent. The creditors' settlement was approved with 80.20% of claims, leading to the transfer of operations, assets, and part of the debt to Fortenova Group in 2019. Agrokor d.d. was removed from the court register in October 2022 after the procedure concluded. The law was included in Annex A of the EU Insolvency Regulation in July 2018^[21] and was upheld by Croatia's Constitutional Court in May 2018.^[22]

Be that as it may, the Croatian insolvency framework has undergone notable improvements over time. One significant reform was the automatic initiation of insolvency for companies that remained financially blocked for extended periods, leading to the insolvency of thousands of companies, primarily through summary procedures. A separate legislative measure facilitated the deregistration of companies that failed to submit financial reports for three consecutive years, effectively purging the commercial register of non-viable entities.

Advancements in the digitalisation of insolvency procedures have also increased efficiency, with judges now having direct access to key digital systems. The introduction of an electronic bulletin board and document service has further enhanced transparency and public oversight, aided by the regular publication of quarterly reports by insolvency practitioners and court decisions. E-auctions have improved transparency and public participation in the auction process within insolvency proceedings. The responsibilities of company management in the face of impending insolvency have been clarified, ensuring directors are held accountable for their companies' financial health. Moreover, while still not prevalent, the adoption of insolvency plans has become more frequent than in the past.

3. PRD 2019: A Missed Opportunity for Reforming Croatia’s Pre-Insolvency Framework

It is regrettable that the obligation to implement the PRD 2019 was not fully leveraged as an opportunity for a thorough reassessment of Croatia's pre-insolvency proceedings. The varied experiences, both negative and positive, from previous pre-insolvency proceedings could have informed the development of a more robust and effective procedure. By not fully capitalising on this opportunity, the potential for significant improvements in the domestic restructuring framework has, to some extent, been overlooked.

The provisions of the PRD 2019 were incorporated with varying degrees of success into the existing pre-insolvency framework. Those involved in the legislation drafting working group have indicated that the final version of the 2022 amendments to the Insolvency Act, as submitted to Parliament by the Croatian Government, was insufficiently refined and inadequately scrutinised.^[23] Nevertheless, the amendments to the Insolvency Act that implemented the PRD 2019 came into force on 31 March 2022, even before the official deadline for implementation.

The proper implementation of the PRD 2019 was further impeded by the opaque nature of its language and the inherent complexities of the options it provides. The resulting body of law, rather than offering clarity and guidance, often raises more questions than it resolves. Consequently, legal practitioners and stakeholders have struggled to fully comprehend and apply the new rules, potentially leading to inconsistent application and uncertainty in practice.

To date, no clear and transparent early warning tools have been established to detect circumstances likely to lead to insolvency and prompt timely action.^[24] Additionally, there has been no systematic collection of data on procedures related to restructuring, insolvency, and debt discharge.^[25] Beyond the provisions directly related to the implementation of the PRD 2019, revisions were made to the regulations governing insolvency practitioners^[26], aimed at enhancing the overall quality of their work. Additionally, certain aspects of the insolvency procedure and the framework for insolvency plans were refined.

4. The Croatian Pre-Insolvency Proceedings: Structure, Procedure, and Compliance with the PRD 2019

4.1 A Brief Overview of the Pre-insolvency Proceedings

The pre-insolvency proceedings operate as follows, in broad outline: the proceedings begin with the debtor submitting a formal application to the competent commercial court. Upon receipt of a duly filed application, the court is required to issue a decision to commence the proceedings within eight days and to appoint a practitioner. This practitioner’s responsibilities include scrutinising the debtor’s business activities, verifying and assessing the submitted claims, assisting in the development of the restructuring plan, and generally overseeing the overall process. Upon the commencement of the proceedings, a stay of all litigation and enforcement proceedings related to claims arising before the opening of the pre-insolvency procedure occurs ex lege.

Following the publication of the court’s decision to open the pre-insolvency proceedings on the e-Bulletin Board, creditors are given 21 days to submit their claims to Fina. Within three days of the claim submission deadline, Fina publishes a list of the submitted claims along with the accompanying documentation. The debtor and the practitioner are then obliged to review these claims and submit their observations to Fina within 30 days of the claims table’s publication. Fina, in turn, will publish these observations - or indicate their absence - within three days.

Fina is also responsible for preparing the table of submitted claims, as well as the table of denied claims. The court presides over the hearing for the examination of these claims. Any claims submitted within the designated timeframe are considered admitted unless denied by the debtor, the practitioner, or another creditor. The court will then issue a ruling on both admitted and denied claims, referring any denied claims to litigation for resolution. Creditors with voting rights, typically those whose claims have been admitted or are backed by enforceable titles, then vote on the restructuring plan. If the plan is approved by the requisite majority and is in compliance with further legal requirements, it is subsequently confirmed by the court.

The pre-insolvency procedure is intended to conclude within 120 days from the date of its commencement (Article 63(1) IA). However, the court may exceptionally allow an extension of this period by up to an additional 180 days upon the request of the debtor, a creditor, or the practitioner, provided that the court deems that relevant progress has been made in the negotiations on the restructuring plan and that there is a reasonable likelihood of the successful conclusion of the pre-insolvency proceedings (Article 63(2) IA). Although the law clearly envisages such extensions as exceptions, in practice, they have frequently become the norm. Due to the statutory timelines, it takes 104 days merely to proceed from the commencement of the pre-insolvency proceedings to the claims determination hearing. At this juncture, the court is not in a position to adequately assess whether meaningful progress has been made in restructuring plan negotiations or if there is a genuine prospect of a successful resolution to the pre-insolvency proceedings.

4.2 Objective and Scope of the Pre-insolvency Proceeding

The primary objective of the pre-insolvency procedure under the IA extends beyond merely regulating the debtor's legal status, relationships with creditors, and maintaining operations. This framework has been expanded to serve as a preventive mechanism, specifically designed to avert insolvency before it becomes unavoidable (Article 2(1) IA).

This procedure applies not only to legal entities but also to the assets of individual debtors classified as entrepreneurs (Article 3(1) IA). However, the framework imposes specific restrictions on access in particular circumstances. For instance, a debtor convicted of certain economic offences - such as abuse of trust, fraud, causing insolvency, preferential treatment of creditors, or failure to maintain proper accounting records - may only enter the pre-insolvency procedure after implementing adequate corrective measures. Additionally, the debtor must provide creditors with detailed disclosures regarding these measures and their outcomes, both during restructuring negotiations and within the application for pre-insolvency proceedings (Article 3(7) IA).

The IA further delineates its scope to exclude specific entities that from both pre-insolvency and insolvency proceedings, a provision that predated the implementation of the PRD 2019. These exclusions encompass sovereign entities such as the Republic of Croatia, the Croatian Health Insurance Fund, the Croatian Pension Insurance Fund, and local and regional self-government units (Article 3(2) IA). Additionally, entities involved in national defence are shielded from such proceedings, unless explicit approval is obtained from the Minister of Defence (Article 3(3) IA). Financial institutions, including credit unions, investment firms, insurance companies, and payment institutions, are similarly exempt from accessing the pre-insolvency and insolvency framework (Article 3(6) IA). These exclusions broadly align with the restrictions set forth in the PRD 2019 (Article 1(2)).

4.3 Criteria for Entering the Pre-insolvency Proceeding

Only the debtor is entitled to initiate pre-insolvency proceedings (Article 25 IA) and retains the exclusive right to submit a restructuring plan (Article 26a IA). To commence such proceedings, the debtor must submit a formal application to the competent commercial court, which is responsible for assessing whether the necessary criteria have been fulfilled. The threshold for initiating pre-insolvency proceedings is based on the concept of "imminent inability to pay," defined as the likelihood that the debtor will be unable to meet its existing obligations as they become due (Article 4(1) IA). Crucially, the debtor must not yet be insolvent, meaning they must not be persistently unable to meet their due financial obligations (Article 5(1) IA).

The determination of whether the threshold for pre-insolvency proceedings has been met is guided by the presumption that insolvency is imminent if the debtor’s bank account is blocked or if they have been more than 30 days late in paying wages and the associated contributions (Article 4(2) IA). This is in contrast to the presumption of insolvency, which applies if a debtor’s bank account has been blocked for over 60 days or if they have failed to pay three consecutive wages. For example, if a debtor's bank account has been blocked for 58 days, pre-insolvency proceedings may still be pursued; however, if the blockage extends to 62 days, insolvency proceedings should be initiated instead. While, in our view, it would be more appropriate to consider the debtor’s circumstances at the time of adjudication, prevailing case law deems the status at the time of filing the application as determinative.

While these presumptions have simplified the court's task in determining whether to commence pre-insolvency or insolvency proceedings, questions remain as to whether the thresholds are appropriately set. In certain cases, it may be more prudent to initiate insolvency proceedings rather than pre-insolvency proceedings, in particular when prospects for successful restructuring are minimal, as pre-insolvency proceedings might otherwise serve as a procedural formality rather than a genuine attempt at restructuring. Notably, the "imminent inability to pay" is not only the standard for initiating pre-insolvency proceedings but also a ground for commencing insolvency proceedings (Article 5(3)-(4) IA), thereby providing the debtor with an additional option, though this is not exercised frequently.

4.4 Involved Actors

4.4.1 Debtor

As previously mentioned, the debtor possesses the exclusive right to initiate the pre-insolvency proceedings and to propose a restructuring plan (Articles 25 and 26a IA). Upon filing a petition to commence pre-insolvency proceedings, a special legal regime is immediately imposed, signifying a substantial shift in the debtor's financial autonomy and restricting its ability to freely undertake and settle obligations.^[27] This interim regime is intended to be brief.^[28] During the period from the petition's filing to the court's decision on whether to open proceedings, the debtor is prohibited from engaging in any financial transactions that are not essential to the ordinary course of business.^[29] Additionally, the debtor is barred from disposing of or encumbering any assets until the formal opening of pre-insolvency proceedings (Article 29(3) IA). The debtor is also prohibited from seeking provisional measures to block enforcement against their monetary assets during this time (Article 30 IA).^[30]

Once the court's decision to initiate pre-insolvency proceedings is published on the publicly available e-Bulletin Board, the legal effects of these proceedings come into force (Article 34(4) IA). From this point until the conclusion of the pre-insolvency proceedings, the debtor is restricted to making only those payments that are strictly necessary for regular business operations (Article 67(1) IA). Notably, the debtor is barred from fulfilling any obligations that arose and became due prior to the commencement of the pre-insolvency proceedings (Article 67(2) IA). Any disposal or encumbrance of assets by the debtor requires prior approval from the appointed practitioner (Article 67(3) IA).^[31]

Legal transactions conducted by the debtor without the practitioner’s approval are deemed void vis-à-vis creditors, particularly where a third party knew or ought to have known that the transactions were unauthorised (Article 67(4) IA). Furthermore, bills of exchange, cheques, and other payment orders issued before the commencement of pre-insolvency proceedings cannot be debited from the debtor’s bank account during these proceedings (Article 67(5) IA). In addition to maintaining regular business operations, the debtor is required to meet obligations arising from any new debts related to interim and new financing secured during this period, as mandated by the Directive’s implementation (Article 67(1) IA).^[32]

4.4.2 Commercial Court

Upon receiving the debtor’s petition, the commercial court evaluates whether the conditions for commencing pre-insolvency proceedings are satisfied. It appoints a practitioner and has the authority to approve or reject the proposed restructuring plan. The court must also ensure that the proceedings adhere to legal standards and that the rights of all parties are protected. However, it is generally recognised that legal professionals in Croatia, including judges, often lack the economic expertise required to make well-informed assessments and decisions in more complex cases.

4.4.3 The Financial Agency

Following the enactment of the new Insolvency Act in 2015, Fina functions as an auxiliary body to the court in pre-insolvency proceedings, oversseing the administrative aspects of the process. Its responsibilities include the preparation of the table of claims submitted by creditors and the table of disputed claims (Article 43 IA), as well as publishing relevant documents on the e-Bulletin Board. Throughout this process, Fina’s work remains under the court’s supervision (Article 45 IA).

4.4.4 The Practitioner

In every pre-insolvency proceeding, the court is now mandated to appoint a practitioner, thereby removing its previous discretion to decide on the necessity of such an appointment. The practitioner’s duties encompass evaluating the debtor’s financial situation, determining the admissibility of claims submitted by creditors, and assisting in the preparation of a feasible restructuring plan. Additionally, the practitioner is required to report regularly to the court, ensuring ongoing oversight throughout the process (Article 24 IA). The practitioner must also grant approval for the debtor to dispose of or encumber assets (Article 67(3) in conjunction with Article 29(3) IA) and for the enforcement of claims arising after the initiation of pre-insolvency proceedings (Article 69(2) IA).

All rules governing the appointment, supervision, liability, remuneration, and reimbursement of expenses for insolvency practitioners apply equally to practitioners in pre-insolvency proceedings (Article 23 IA). It has long been recognised that the fees prescribed under this framework^[33] are insufficient and do not adequately incentivise the efficient resolution of pre-insolvency and insolvency proceedings.^[34]

The selection of a practitioner for each proceeding is determined through a random selection method from a list of insolvency practitioners maintained for each court's jurisdiction. If the court determines that the selected practitioner lacks the necessary expertise or business experience required for the specific case, it may appoint another individual from the list (Article 84(1)-(2) IA).

Although the Ministry of Justice provides workshops for insolvency practitioners, there remains a significant need for more structured and systematic training, particularly in areas such as negotiation and the preparation of restructuring plans.

4.4.5 Creditors

As a general rule, all creditors' claims that have become due before the commencement of pre-insolvency proceedings are subject to the proceeding. However, certain creditors' claims remain unaffected. This exemption applies to existing and future claims of current or former employees, maintenance claims arising from family relationships, parentage, marriage, or affinity, and claims resulting from the debtor's tortious liability (Article 66(1) IA). Additionally, qualified financial contracts are similarly protected from the effects of pre-insolvency proceedings (Article 66(2) IA).^[35]

Furthermore, creditors are now required to submit all other claims directly to Fina. Notably, the previous presumption that a creditor’s claim would be considered submitted merely because it was listed in the debtor’s petition for the commencement of pre-insolvency proceedings, even if the creditor had not formally submitted it, has been abolished. This situation has given rise to a significant issue in practice: what becomes of claims that a creditor fails to submit within the prescribed timeframe? Some argue, by analogy with insolvency proceedings, that such claims cannot be enforced (unless insolvency proceedings are subsequently initiated against the debtor).^[36] However, a more compelling interpretation points to Article 62(1) IA, which stipulates that a creditor who fails to submit their claim, despite being duly notified of the commencement of proceedings (with all creditors deemed properly notified via the court's e-Bulletin Board), may still have their claim satisfied, but only in the manner, within the deadlines, and under the conditions outlined in the restructuring plan applicable to the creditor group to which they would have belonged had they submitted their claim.^[37] The practical application of this rule remains uncertain, raising concerns about how such creditors can effectively enforce their claims.

The provisions regarding secured creditors are also somewhat ambiguous. Secured creditors are required to notify Fina of their security rights and submit a statement indicating whether they waive or retain their right to separate satisfaction (Article 38(1) IA), as well as their consent or refusal concerning the postponement of satisfaction from the secured asset (Article 38(3) IA). However, the IA stipulates that the restructuring plan may limit the rights of secured creditors to satisfaction from the secured asset only if this is explicitly stated in the plan (Article 38(4) IA). Furthermore, such limitations can be imposed even without the creditors' consent, provided that the plan does not place them in a worse position than they would have been in had insolvency proceedings been initiated instead (Article 66(4) IA). Nevertheless, it seems that, as currently regulated, secured creditors should still be able to satisfy their claims from the secured asset, potentially with prior approval from the practitioner (see Article 69(4) IA).^[38]

The provisions concerning creditors with exclusionary rights are equally unclear. These creditors are also required to notify Fina of their rights and submit a statement of consent or refusal regarding the postponement of the exclusion of the asset subject to their exclusionary rights (Article 38(2)-(3) IA), which might suggest that these creditors can exercise their exclusionary rights during the pre-insolvency proceedings. Exclusionary creditors may participate in the restructuring plan only if they explicitly and voluntarily consent to do so (Article 66(5) IA).

4.4.6 Workers

Pre-insolvency proceedings do not affect workers' claims. Workers are guaranteed both individual and collective rights under Union and national labour law, incorporating the relevant EU directives. The PRD 2019 provisions in this respect have been faithfully implemented. However, it appears that the rights established under Directives 98/59/EC, 2001/23/EC, and 2008/94/EC were not explicitly referenced—likely an oversight (Article 66(6) IA). These directives establish a robust framework for safeguarding employees' rights across the EU, mandating protections in scenarios of collective redundancy, transfer of undertakings, and employer insolvency to ensure continuity of employment, uphold contractual entitlements, and secure claims for unpaid remuneration. When a restructuring plan proposes changes to the organisation of work or the terms of employment contracts, these changes must be approved by the affected workers (Article 66(7) IA).

4.5 Stay

Croatian law adopts a stringent approach by imposing a uniform stay on all creditors, without permitting selective relief for individual creditors. This stay is automatically imposed upon the initiation of pre-insolvency proceedings. From the moment these proceedings commence, all enforcement actions and security measures against the debtor, in relation to claims affected by the pre-insolvency proceedings, are suspended. Moreover, the initiation of new enforcement or security proceedings against the debtor is prohibited during this period (Article 68(2) IA).

The automatic stay initially lasts for 120 days. However, before this period expires, the court may extend the stay twice, each time for an additional 90 days. These extensions are granted upon the request of the debtor, a creditor, or the practitioner, provided substantial progress has been made in negotiations over the restructuring plan, and the extension is deemed necessary to facilitate the restructuring (Article 68(2) IA). To obtain an extension, the request must be submitted at least 15 days before the current stay expires (Article 68(2) IA).

The stay applies uniformly to all affected creditors and cannot be selectively lifted for individual creditors. It may only be lifted entirely if it becomes evident that a sufficient number of creditors, who could block the adoption of the restructuring plan, no longer support the continuation of negotiations. In such cases, the court will terminate the stay and discontinue the pre-insolvency proceedings (Article 68(2) IA).

While the stay is intended to provide the debtor and creditors with the necessary time and space to negotiate a restructuring plan, it has been observed that, due to procedural requirements - such as the submission of claims by creditors and the statutory deadlines - nearly 100 days are often required merely to determine which claims will be included in the restructuring plan. Consequently, the stay, along with the entire pre-insolvency proceedings, typically extends to the maximum allowable duration of 300 days.

The PRD 2019 limits the maximum duration of the stay on individual enforcement actions to four months when the debtor's centre of main interests (COMI) has been relocated from another Member State within three months prior to filing for preventive restructuring that does not meet the conditions for notification under Annex A to the EIR (Article 6(8)(2) PRD 2019). This provision is designed to prevent "forum shopping" and to protect creditors from abrupt changes in the applicable legal framework. Regrettably, the Croatian IA does not incorporate this mandatory requirement.^[39]

Even during the stay, enforcement actions may proceed without restriction for claims that are not affected by the pre-insolvency proceedings.^[40] However, for certain claims, prior approval from the practitioner is required (Article 69(1)-(3) IA). During the pre-insolvency proceedings, a stay also applies to litigation and arbitration proceedings, alongside a prohibition on initiating new litigation or arbitration against the debtor in relation to claims affected by the pre-insolvency proceedings (Article 68(1) IA). However, drawing an analogy with insolvency proceedings is not entirely appropriate here. Moreover, there is no provision addressing the impact of pre-insolvency proceedings on administrative procedures and administrative disputes.^[41] It is explicitly stated that pre-insolvency proceedings do not affect security measures in criminal proceedings, tax procedures for determining abuse of rights, or administrative procedures for the determination of tax liabilities (Article 68a IA).

Once pre-insolvency proceedings have commenced, the initiation of insolvency proceedings is suspended until the pre-insolvency proceedings are concluded (Article 15(2) IA). Should the pre-insolvency proceedings fail, the court will automatically proceed as though a petition for insolvency has been filed, unless it is established that the debtor is solvent and has met all obligations to creditors (Article 64(2) IA).

4.6 The plan

As previously highlighted, the debtor retains the exclusive authority to initiate pre-insolvency proceedings and propose a restructuring plan (Articles 25 and 26a IA). Although the debtor may submit the restructuring plan concurrently with the petition to commence pre-insolvency proceedings, this is seldom the case. In practice, most restructuring plans are formulated only after the decision regarding admitted and denied claims has become final (Article 26(2) IA). The practitioner plays a crucial role in assisting the debtor with drafting the plan (Article 24(7) IA).

In the Croatian pre-insolvency procedure, the submission, admission, and denial of claims closely mirror the processes found in formal insolvency proceedings. This resemblance extends beyond procedural similarities; in many respects, the pre-insolvency proceedings function more as a full-scale insolvency procedure rather than as a platform for negotiation with creditors, which ought to be its primary focus if the objective is to facilitate the restructuring of the company.

The restructuring plan must clearly identify the debtor and specify the identity of any restructuring practitioner involved. It is required to provide a thorough overview of the debtor's assets and liabilities, including a detailed valuation of assets, an assessment of the debtor's economic condition, and the status of workers. Additionally, the plan should offer a clear account of the causes and extent of the debtor's financial difficulties. The plan must also identify all parties affected by the restructuring, detailing any classes into which these parties have been grouped, along with the respective values of claims and interests within each class. Where relevant, the plan should identify parties not affected by the restructuring and provide reasoned explanations for their exclusion.

Moreover, the proposed restructuring measures, including their duration and arrangements for consulting employees, must be clearly articulated, with particular attention to any potential impacts on employment, such as dismissals. The plan should also include projections of financial flows and any anticipated new financing, with justifications for its necessity. Finally, a statement of reasons must be included to explain why the restructuring plan is expected to avert the debtor's insolvency and secure the ongoing viability of the business (Article 27, points 1 to 17 IA).

In accordance with the PRD 2019, the IA mandates that information regarding the content and drafting of restructuring plans, particularly those concerning SMEs, be made accessible on the Courts' e-Bulletin Board in both Croatian and English (Article 7a(5) IA). However, despite this requirement, such information has yet to be made available online in either language.

The rules governing the classification of participants in a restructuring plan mirror those applied in insolvency plans, as outlined in Article 308 of the IA (Article 27, points 12; 59(1) IA^[42]). This classification for restructuring plan should incorporate the following essential categories:

1. Secured creditors, if the restructuring plan affects their rights.
2. Ordinary unsecured creditors, who would not be subordinated in an insolvency proceeding.
3. Subordinated creditors, especially if the restructuring plan deviates from the principle that their claims are extinguished upon the plan's adoption.
4. Shareholders, equity holders, and holders of other founding rights, if the restructuring plan affects their rights.

While workers form a distinct group in insolvency plans (Article 308(3) IA), they do not form such a group in restructuring plans because pre-insolvency proceedings do not affect their claims (Article 66(1) IA). Nevertheless, Article 27, point 15 of the IA mandates that all categories of claims not affected by the restructuring plan must also be specified in the plan.

Creditors of the same legal standing may be classified into groups based on the homogeneity of their economic interests, provided such classification is based on valid reasons clearly stated in the restructuring plan (Article 308(2) IA). Creditors with small claims may be classified into a separate group within the restructuring plan (Article 308(4) IA). All creditors within the same group must be afforded equal rights and are satisfied proportionally to their claims (Article 59(1) IA). A vague new provision requires the court to pay special attention to the protection of vulnerable creditors, such as small suppliers, when forming groups (Article 308(5) IA). It is clear that small suppliers could be grouped as creditors with small claims, thereby protecting their interests.^[43]

However, if the effects of the restructuring plan are uniform across all creditors, they are not classified into separate groups (Article 308(6) IA), which is often the case in practice. This provision extends beyond the PRD 2019, which allows such grouping only for micro, small, or medium-sized enterprises (MSMEs) (Article 9(4) PRD 2019).

The IA lacks a specific provision authorising the court to examine the content of a restructuring plan and the formation of participant groups before the plan is submitted to the creditors for discussion and adoption, unlike the explicit provision available for insolvency plans (Article 317 IA). However, before confirming a restructuring plan, the court is obligated to assess whether the groups of participants in the restructuring plan have been formed in accordance with the law and whether the provisions regarding voting rights on the restructuring plan have been duly observed (Article 61(3) IA).^[44]

4.7 Adoption and Confirmation of the Plan

Before voting on a restructuring plan, the court compiles a list of creditors and their respective voting rights (Article 57 IA). This process follows the rules governing voting rights in insolvency plans (Article 323 IA), which refer back to the provisions applicable to insolvency creditors (Article 106 IA). In principle, only creditors with duly admitted claims are entitled to vote. However, creditors with denied claims may still exercise voting rights under certain conditions. A creditor is deemed to have voting rights if they can demonstrate their claim with an enforceable document, unless the termination of the claim is proven by a public document. Similarly, if a claim is secured by a right of separation (security right) recorded in a public register, the creditor retains voting rights unless the debtor proves the claim’s termination with a public document. Secured creditors enjoy voting rights equivalent to those of insolvency creditors only if the debtor is personally liable and they either waive their right to separate satisfaction or are not fully satisfied through separate satisfaction (Article 323(2) IA). In cases where denied claims do not meet any of these criteria, voting rights may still be granted if the practitioner and present creditors with voting rights agree on this at the creditors’ meeting. If no agreement is reached, the court decides the matter during the hearing, and its decision is final, with no option for appeal. Creditors with subordinated claims do not possess voting rights unless their claims are admitted (Article 106 IA). Creditors whose claims are not affected by the restructuring plan are not granted voting rights.

There have been instances of abuse under these rules, tarnishing the reputation of the pre-insolvency procedure and leaving it scarcely more favourable in public opinion than the pre-insolvency settlement it replaced. In Croatia, enforceable titles are not confined to final court judgments; they also encompass the executory debenture (zadužnica), a unilateral declaration by the debtor, notarised and permitting enforcement up to a specified amount. A creditor closely aligned with the debtor, armed with such an enforceable title, can submit a fictitious claim, thereby securing voting rights on the restructuring plan. This manipulation allows for the adoption of a plan that aligns with the debtor’s interests but significantly diminishes the legitimate claims of other creditors. It is in our view regrettable that a rule excluding any claims of a related party of the debtor or the debtor's business with a conflict of interest under national law (Article 9(3)(c) PRD 2019) was not incorporated into the current framework.

Creditors cast their votes in writing using a prescribed voting form (Article 58(1) IA). However, this does not preclude the possibility of voting during the hearing, despite the law’s ambiguity on this point. Creditors are organised into classes, with each class voting separately on the restructuring plan (Article 59(1) IA). Previously, if creditors did not submit their voting form by the start of the hearing, the law presumed they voted against the plan. The new framework reverses this presumption, now treating creditors who fail to submit a form as having voted in favour of the plan (Article 58(1) IA). This change aims to increase the number of confirmed restructuring plans by assuming creditor consent in cases of inactivity.^[45]

If creditors are not organised into separate classes (Article 308(6) IA) and the plan does not affect the rights of secured creditors, the plan is deemed adopted if a majority of the voting creditors (by number) support the plan, and the total value of claims of creditors that voted in favour outweighs those that voted against the plan (Article 330(3) IA). However, when creditors are organised into separate classes, the restructuring plan is adopted if a majority of creditors in each class votes in favour and the aggregate value of their claims exceeds twice the value of the creditors that voted against the plan (Article 59(2) IA).

Even if a particular class of creditors does not achieve the required majority, the plan may still be considered approved by that class. This is facilitated by the incorporation of the minimum standards for a cross-class cram-down, as set out in Article 11(1) PRD 2019, into Article 59a IA. These provisions allow the court to confirm the restructuring plan despite opposition from a dissenting class, provided specific conditions are satisfied: (i) the majority of creditor classes, excluding those consisting of equity holders or subordinated creditors, have accepted the plan; (ii) the creditors in the dissenting class are not placed in a worse position than they would have been without the plan (best-interest-of-creditors test); and (iii) they are ensured an appropriate share of the value that is distributed under the plan. This means that no creditor will receive more than 100% of their claim; the debtor or equity holder will not receive any financial benefit; and dissenting voting classes of affected creditors must be treated at least as favourably as any other class of the same rank, and more favourably than any junior class.

These provisions clearly demonstrate the integration of the best-interest-of-creditors test into Croatian law. A court must refuse confirmation of a restructuring plan if an objecting participant would be placed in a worse position under the plan than they would be without it, provided that the participant lodged their formal objection no later than during the hearing (Article 61(4) IA).

All restructuring plans require court confirmation. Notably, the requirement for debtor consent to the plan's confirmation in all cases (Article 61(1) IA) seems somewhat redundant, given that the debtor is the sole party authorised to propose the restructuring plan.

The court is obliged to refuse confirmation of a restructuring plan on its own motion if, among other reasons, the debtor is solvent with no imminent threat of insolvency, if there have been significant breaches in the plan's content or adoption process, or if the plan was accepted through improper means, such as unduly favouring certain creditors. Refusal may also occur if the plan fails to ensure payment to creditors for denied claims, proposes converting creditor claims into equity without the necessary corporate approval, involves new financing that unjustifiably harms creditors, or lacks reasonable prospects of preventing insolvency or ensuring business sustainability (Article 61(3) IA).

4.8 Possibilities for a Debt-for-equity Swap in the Restructuring Plan

A debt-for-equity swap is a mechanism that allows one or more creditors to convert their claims into equity in the debtor company. Such a swap requires the approval of the company’s shareholders, in accordance with the rules for increasing share capital as outlined in the Croatian Companies Act.^[46] Indeed, the court is obliged to refuse confirmation of the restructuring plan if the shareholders fail to provide the requisite approval in accordance with the Companies Act (Article 61(3)(5) IA).

It appears that the company law requirements in Croatia have been assessed as not compromising the effectiveness of the restructuring process. Consequently, no deviation from the existing company law is deemed necessary, including any derogations from the requirements set out in Directive (EU) 2017/1132,^[47] as the legal framework is considered robust enough to prevent equity holders from unreasonably obstructing or hindering the implementation of a restructuring plan.^[48]

A distinct regulatory framework governs credit institutions engaged in debt-for-equity swaps. When a restructuring plan proposes converting a credit institution’s claim into equity that results in a significant stake (20% or more) in the debtor or grants a controlling interest, the institution must obtain prior approval from the Croatian National Bank before the voting hearing (Article 53 IA). Notably, this approval does not obligate the credit institution to any particular course of action during the voting process (Article 64(1)(5) IA).

4.9 Existing Executory Contracts

Within the framework of the Croatian IA, executory contracts are defined as bilateral contracts wherein neither party, whether debtor or creditor, has fully performed their respective obligations.^[49] Importantly, after the commencement of pre-insolvency proceedings, a creditor under such a contract, entered into prior to the initiation of these proceedings, is not entitled to modify the terms (e.g., withhold performance, terminate, accelerate, or take similar actions) to the detriment of the debtor merely on the grounds that the debtor has failed to settle their debt (Article 67a(1) IA). This provision directly results from the implementation of the PRD 2019. However, it appears that the adjective ‘essential’ was omitted in the final drafting of the law, leading to ambiguity regarding whether the provision applies to all executory contracts or only to essential ones. It seems more logical that the provision was intended to apply only to essential executory contracts, as it would otherwise be nonsensical to define ’essential’ within the same provision without any practical effect.^[50] This ambiguity is significant because Article 7(4) PRD 2019 permits these provisions to apply to both essential and non-essential executory contracts.^[51]

Similarly, after the opening of pre-insolvency proceedings, a creditor cannot modify executory contracts (both essential and non-essential) concluded prior to the commencement of these proceedings to the debtor's detriment by invoking a so-called ipso facto clauses. These clauses, which typically allow for termination or modification of contracts upon the occurrence of certain events, cannot be used merely because of a request for the opening of pre-insolvency proceedings, the opening of such proceedings, a request for the stay of individual enforcement actions, or the granting of such a stay (Article 67a(3) IA).^[52]

Any provision or action that contravenes these stipulations regarding executory contracts is rendered legally void and without effect (Articles 67a(2) and 67a(4) IA). However, these restrictions do not apply to financial futures transactions or qualified financial contracts with a specified term (Articles 67a(5), 66(2)^[53], and 182 IA). This exemption likely stems from the implementation of Articles 7(6) and 31(1) PRD 2019.

4.10 EIR 2015 Compliance

The Croatian pre-insolvency procedure was already included in Annex A of the EIR 2015.^[54] By incorporating the PRD 2019’s rules into the existing pre-insolvency framework, Croatia avoided the necessity of introducing a new preventive restructuring proceedings. This integration ensured that there was no need to amend Annex A of the EIR with regard to Croatia.^[55]

5. Outlook on Refining Croatia's Preventive Restructuring Framework

The implementation of the PRD 2019 within Croatia’s legal framework presents significant challenges and requires further refinement. Although elements of the Directive have been transposed into Croatian law, this is not without critique. More specifcally,the more pressing issue lies in the practical application of these provisions. Many of the concepts introduced by the Directive are novel, and their articulation within the IA does little to facilitate comprehension or effective implementation.

Furthermore, the pre-insolvency procedure, into which elements of the PRD 2019 have been grafted, is ill-suited for negotiations with creditors and, ultimately, for successful restructuring. The tendency for proceedings to extend to the maximum duration permitted by law underscores the procedural burdens inherent in the system. This rigidity risks deterring businesses from engaging in preventive restructuring at an earlier, more opportune stage, thereby undermining the Directive’s fundamental objective.

Moreover, ambiguity surrounds the treatment of claims that creditors fail to submit on time, as well as the rules governing secured and exclusionary creditors. These areas require clarification to prevent future disputes and ensure equitable outcomes. The framework’s roots in earlier pre-insolvency settlements means it still carries some of the limitations and negative perceptions associated with its predecessors. Addressing this gap may require a more substantial departure from past practices, potentially through the introduction of a standalone restructuring law.

While the Croatian implementation of the PRD 2019 generally aligns with the Directive, there are areas where the national framework falls short of full compliance. For example, the failure to incorporate specific provisions against 'forum shopping', as mandated by the PRD 2019, and the absence of clear guidelines on early warning tools, highlight areas needing further amendments. Moving forward, it is crucial to ensure that the procedure not only complies with the formal requirements of the PRD 2019 but also functions effectively within the Croatian legal and economic context. Proactively addressing these issues will be essential to creating a framework that not only meets the Directive’s formal requirements but also offers genuine restructuring opportunities that benefit all stakeholders involved.

There is a growing consensus that Croatia must transcend the limitations of its existing pre-insolvency framework. Developing a new, modern preventive restructuring procedure with a more logical structure and greater flexibility that could better incentivise debtors to initiate proceedings at an earlier stage. Such a procedure must balance protecting creditors' interests with providing adequate tools for debtors to restructure successfully. Consideration should also be given to detaching the preventive restructuring procedure from the IA and regulating it under a distinct legal framework. This separation could offer greater clarity and allow the restructuring framework to evolve independently from traditional insolvency procedures, often viewed with scepticism due to their association with liquidation.

6. Conclusion

The implementation of the PRD 2019 within Croatia's legal framework represents a missed opportunity for meaningful reform. The Directive, inherently complex, appears to have been incorporated into Croatian law with insufficient rigour. The 2022 amendments to the Insolvency Act (IA), ostensibly designed to give effect to the PRD 2019, fall short of establishing a robust and effective preventive restructuring regime.

Croatia's current pre-insolvency proceedings resemble a "mini-insolvency" proceedings, encumbered by procedural formalities and tainted by negative connotations. The very term "pre-insolvency" suggests a mechanism intended for debtors on the brink of bankruptcy, rather than a proactive tool for businesses facing temporary liquidity issues but still possessing the potential for recovery. This misalignment between purpose and perception may deter early engagement, thereby undermining the fundamental objective of preventive restructuring: fostering meaningful negotiations between debtors and creditors to avert insolvency.

The effectiveness of the framework is further compromised by ambiguities in critical areas, such as the treatment of creditor claims and the application of enforcement stays. These uncertainties not only detract from the clarity and efficiency of the process but also risk eroding its credibility. A more nuanced and flexible approach - potentially detached from the traditional IA and rebranded to more accurately reflect its preventive nature - could significantly enhance the efficacy of preventive restructuring in Croatia.

The essence of preventive restructuring lies in its ability to enable businesses to address financial difficulties through constructive dialogue with creditors. However, the current Croatian framework falls short of fulfilling this aim. A more strategic and rigorous implementation of the PRD 2019, with genuine emphasis on early intervention and negotiation, is imperative. Should the existing system continue to fail in achieving these objectives, it may necessitate a fundamental rethinking of its design and guiding principles. Without such reconsideration, pre-insolvency proceedings in Croatia risk becoming a mere façade, offering the semblance of restructuring without delivering substantive outcomes.

Acknowledgements: The authors would like to thank Judge Igor Periša (Supreme Court of the Republic of Croatia), Judge Željko Šimić (High Commercial Court of the Republic of Croatia), Judge Katarina Franković (Commercial Court in Dubrovnik), and Ms. Vinka Ilak (Financial Agency) for their insights and comments. The views expressed in this article are solely those of the authors and do not necessarily reflect the opinions or positions of the judges or institutions acknowledged. This article reflects the state of affairs as of 11 November 2024.

^[1] See M. Bratković, ‘Predstečajni postupak i zabrana ovrhe’ [Pre-Insolvency Proceedings and the Stay of Enforcement], in: J. Barbić (ed), Novìne u predstečajnom postupku [New Developments in the Pre-Insolvnecy Procedure], HAZU: Zagreb, 2024, p. 123.

^[2] See Recital 2 EU PRD 2019.

^[3] See Ch.G. Paulus, ´Introduction´, in: Ch.G. Paulus & R. Dammann (eds), European Preventive Restructuring. An Article-by-Article Commentary, Beck-Hart-Nomos: München, 2021, p. 4; V. Rotaru, The Restructuring Directive: A Functional Law and Economics Analysis from a French Law Perspective (September 30, 2019), p. 1. Available at SSRN: https://ssrn.com/abstract=3461716 or http://dx.doi.org/10.2139/ssrn.3461716.

^[4] See M. Bratković, above note 1, p. 147.

^[5] A more comprehensive historical overview of the development of insolvency law in Croatia is provided by M. Dika in M. Dika, Insolvencijsko pravo [Insolvency Law], Pravni fakultet Sveučilišta u Zagrebu: Zagreb, 1998, p. 1–2.

^[6] Zakon o financijskom poslovanju [The Financial Operations Act], Official Gazette of the SFRY, 10/89, 26/89, 35/89, 58/89, 79/89.

^[7] Zakon o prisilnoj nagodbi, stečaju i likvidaciji [Law on Compulsory Settlement, Bankruptcy, and Liquidation], Official Gazette of the SFRY, 84/89.

^[8] See Dika, above note 5, p. 2.

^[9] Ibid., p. 4.

^[10] Stečajni zakon [Insolvency Act], Narodne novine (Official Gazette), 44/96, 161/98, 29/99, 129/00, 123/03, 197/03, 187/04, 82/06, 116/10, 25/12, 133/12, 45/13, 71/15.

^[11] See Dika, above note 5, p. 5.

^[12] In Germany, the law was passed in 1994 but came into effect on January 1, 1999.

^[13] See in English: M. Bratković, ʻIn Search of Efficiency: Court Structure and Case Management in Croatiaʻ, in: P. Chan & C.H. van Rhee (eds), Civil Case Management in the Twenty-First Century: Court Structures Still Matter, Springer International, 2021, p. 169-191.

^[14] Zakon o financijskom poslovanju i predstečajnoj nagodbi [Act on Financial Operations and Pre-Insolvency Settlement], Narodne novine (Official Gazette), 108/12, 144/12, 81/13, 112/13, 121/13, 78/15, 71/15, 114/22.

^[15] Among its responsibilities, Fina is tasked with enforcing account seizures and blocking bank accounts, a role supported by its management of the unified bank account register of all legal entities in Croatia. Established in January 2002, Fina traces its historical roots to the Payment Operations Institute (ZAP) and the former Social Accounting Service (SDK).

^[16] These figures are drawn from the Explanatory Notes of the Final Draft of the Law, available at: sabor.hr/sites/default/files/uploads/sabor/2019-01-18/080412/PZE_138.pdf (last viewed 5 August 2024).

^[17] See V. Ilak, ʻNovosti u postupku predstečajne nagodbe - Uredbaʻ [The Latest Developments in Pre-Insolvency Settlement Proceedings – Government Decree], Računovodstvo, revizija i financije, 2013, 23(1), p. 48–56; V. Ilak, ʻPredstečajna nagodbaʻ [Pre-Insolvency Settlement], Financije, pravo i porezi, 2012, 11, p. 17-27.

^[18] Stečajni zakon [Insolvency Act], Narodne novine (Official Gazette), 71/15, 104/17, 36/22, 27/24. Hereafter referred to as "IA," this abbreviation will be used throughout the text to refer specifically to the current version of the Act as amended in 2024.

^[19] Data obtained from FINA with the assistance of Ms. Vinka Ilak.

^[20] Zakon o postupku izvanredne uprave u trgovačkim društvima od sistemskog značaja za Republiku Hrvatsku [Act on the Procedure of Extraordinary Administration in Companies of Systemic Importance to the Republic of Croatia], Narodne novine (Official Gazette), 32/17.

^[21] See Regulation (EU) 2018/946 of the European Parliament and of the Council of 4 July 2018 replacing Annexes A and B to Regulation (EU) 2015/848 on insolvency proceedings, [2018] OJ L 171/1.

^[22] Rješenje Ustavnog suda Republike Hrvatske broj: U-I-1694/2017 i dr. od 2. svibnja 2018. i dva izdvojena mišljenja [The Ruling of the Constitutional Court of the Republic of Croatia No. U-I-1694/2017 et al., dated 2 May 2018, along with two dissenting opinions], Narodne novine (Official Gazette), 43/18.

^[23] Accord J. Garašić, ´Najznačajnije novine u predstečajnom postupku uvedene Novelom Stečajnog zakona iz 2022. godine´ [The Most Significant Changes in the Pre-Insolvency Procedure Introduced by the 2022 Amendment to the Insolvency Act], in: J. Barbić (ed), Novìne u predstečajnom postupku [New Developments in the Pre-Insolvnecy Procedure], HAZU: Zagreb, 2024, p. 103.

^[24] Nor has the necessary secondary legislation been enacted to provide detailed regulation in these areas, despite the deadline for its adoption having passed on 30th April 2022 (Article 7a(7) IA).

^[25] Although the relevant secondary legislation has been enacted (Pravilnik o načinu prikupljanja podataka o postupcima koji se odnose na restrukturiranje, nesolventnost i otpust duga [Regulation on the Procedure for Collecting Data on Restructuring, Insolvency, and Debt Discharge Processes], Narodne novine (Official Gazette), 40/22), it is not being effectively implemented.

^[26] For a detailed discussion, see J. Garašić, Izmijenjene pretpostavke odnosno uvjeti za obavljanje službe stečajnog upravitelja prema Noveli hrvatskog Stečajnog zakona iz 2022. godine [Amended Conditions for Performing the Role of Insolvency Practitioner according to the 2022 Amendment to the Croatian Insolvency Act], in: L. Prkačin (ed), Dani hrvatskoga insolvencijskog i ovršnog prava [Croatian Insolvency and Enforcement Law Days], Zagreb, 19 January 2023, Ius-Info, Lexpera: Zagreb, 2023, pp. 79-99.

^[27] See Bratković, above note 1, p. 134.

^[28] The court must make a decision on the petition within eight days of its submission (Article 31(1) IA). However, if the petition is incomplete, this provisional regime will continue until all necessary information is provided.

^[29] Necessary payments for regular business operations include: (1) payments related to employment relationships; (2) payments covering pre-insolvency proceedings costs; (3) payments necessary for the regular operations of the business (Article 29(1) IA). The Act on Financial Operations and Pre-Insolvency Settlements (above note 14) further clarifies that necessary payments for ordinary business operations include operating expenses such as utilities like electricity and water, procurement of essential goods and services, and statutory financial obligations like value-added tax, excise duties, and other taxes and contributions. Costs related to proceedings before public authorities are also considered necessary (Article 17(2)).

^[30] Critically, see Garašić, above note 23, p. 56, who contends that such a provision is at odds with the PRD 2019. See also Bratković, p. 136, who questions the rationale behind this provision. The submission of a petition to open pre-insolvency proceedings against a debtor could incite certain creditors to expedite enforcement actions, potentially complicating rather than facilitating restructuring negotiations.

^[31] If the debtor violates these regulations, the court has the authority to terminate the pre-insolvency proceedings and proceed as if a insolvency petition had been filed (Articles 64(1.2) and 64(2) IA).

^[32] See generally on new and interim financing in preventive restructuring A. Bilić & M. Bratković, ʻDistressed financing under the Preventive Restructuring Directive – privileging all or just a few?ʻ, in: E. Vaccari & E. Ghio (eds), The Perpetual Renewal of European Insolvency Law. Papers from the INSOL Europe Academic Forum Conference, Amsterdam, 11-12 October 2023.

^[33] Uredba o kriterijima i načinu obračuna i plaćanja nagrade stečajnim upraviteljima [The Regulation on the Criteria, Calculation, and Payment of Insolvency Practitioners' Remuneration], Narodne novine (Official Gazette), 105/15.

^[34] Accord Garašić, above note 23, p. 36.

^[35] It appears that the Croatian legislator intended to align domestic law with the provisions set out in Article 7(6) of the PRD 2019.

^[36] If insolvency proceedings are initiated against the debtor's assets before the restructuring plan has been fully implemented, any deferral of payment or discharge of claims provided in the restructuring plan shall cease to be effective with respect to all creditors (Article 341(2) IA, in conjunction with Article 62(4) IA).

^[37] Accord Garašić, above note 23, p. 93.

^[38] Accord Garašić, above note 23, para. II.14.b.

^[39] Ibid.

^[40] See above 4.3.5.

^[41] See Garašić, above note 23, p. 69.

^[42] The wording of the second sentence in Article 59(1) of the IA is notably ambiguous. This provision is intended to ensure that the rules governing the classification of participants in an insolvency plan also apply, with necessary modifications, to the classification of participants in a restructuring plan. See Garašić, above note 23, p. 75.

^[43] Accord Garašić, above note 23, p. 76.

^[44] See Garašić, above note 23, p. 78.

^[45] See Garašić, above note 23, p. 82.

^[46] Zakon o trgovačkim društvima [Companies Act], Narodne novine (Official Gazette), 111/93, 34/99, 121/99, 52/00, 118/03, 107/07, 146/08, 137/09, 152/11, 111/12, 125/11, 68/13, 110/15, 40/19, 34/22, 114/22, 18/23, 130/23.

^[47] Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law (codification) addresses obligations such as convening a general meeting and offering shares on a pre-emptive basis to existing shareholders. See Recital 96 and Article 12 of the PRD 2019 for further guidance on these provisions.

^[48] Accord Garašić, above note 23, p. 81.

^[49] The designation of these contracts appears not only in the legal context of pre-insolvency proceedings (Article 67a IA) but also in the description of the legal consequences of insolvency proceedings (Article 181 IA). In the latter case, the insolvency practitioner is granted the discretion to choose whether to fulfil the contract or to reject its performance. For practical application, it would have been beneficial to explicitly specify that executory contracts pertain to essential supplies such as gas, electricity, water, telecommunications, and card payment services, and also extend to include lease and license agreements, long-term supply contracts, and franchise agreements, as suggested in Recital 41 PRD 2019.

^[50] Accord Garašić, above note 23, p. 54.

^[51] Ibid.

^[52] The provision's reference to the filing of a request for the stay of individual enforcement actions and its granting is likely the result of a drafting error. Under Croatian law, the stay is granted ex lege at the moment the pre-insolvency proceedings are opened (see section 4.4. above).

^[53] Nomotechnically, it is problematic that the exception for qualified financial contracts is not explicitly mentioned in Article 67a IA; instead, it must be inferred from the fact that pre-insolvency proceedings do not affect these contracts at all (Article 66(2) IA). Accord Garašić, above note 23, p. 56.

^[54] Croatian pre-insolvency proceedings were included in the list by Regulation (EU) 2018/946 of the European Parliament and of the Council of 4 July 2018 replacing Annexes A and B to Regulation (EU) 2015/848 on insolvency proceedings, [2018] OJ L 171/1.

^[55] See also Garašić, above note 23, p. 19.