Ministarstvo pravosuđa RH

Table of contents:

1. What are the aims of bankruptcy proceedings under Croatian law?

2. What are the conditions for initiating bankruptcy proceedings?

3. What is the role of participants in bankruptcy proceedings?

4. What are the consequences of initiating bankruptcy proceedings?

5. What specific rules are laid down for certain categories of claims?

6. How can legal actions of the debtor be challenged?

7. What are the conditions for reporting claims in bankruptcy proceedings?

8. What rules apply to compulsory settlement?

9. What rules apply to the wind-up proceedings?

10. What are the conditions for the closure of proceedings?
      Do bankruptcy proceedings leave a “stain” on the debtor’s name?
      May the debtor start a new business activity?
      Penalties related to bankruptcy proceedings.

1. What are the aims of bankruptcy proceedings under Croatian law?
Bankruptcy proceedings are instituted in order to jointly satisfy the creditors’ claims by the realization of the debtor’s assets and their distribution among the creditors.

2. What are the conditions for initiating bankruptcy proceedings?
Bankruptcy proceedings may be initiated only if the existence of reasons for bankruptcy stipulated by law is established. The reasons for bankruptcy are: insolvency and over-indebtedness.

A debtor will be considered insolvent if it is not able to pay its monetary obligations as they become due. The fact that a debtor has paid, or is able to pay, partially or in full, claims of certain creditors does not by itself mean that the debtor is solvent. A debtor will be considered insolvent if it has unsettled liabilities with the bank that carries out payment transactions for it in the period exceeding 60 days, and such liabilities should have been settled, based on a valid basis, from any of the debtor's accounts and without the debtor's consent. The fact that the debtor had funds in its other accounts in this period that could have been used for settling those debts does not mean it is solvent.

A debtor may propose the initiation of bankruptcy proceedings if it shows that it is probable that it will not be able to pay the existing obligations when they become due (threat of insolvency).
Pursuant to Article 4, Paragraph 8 of the Bankruptcy Act, bankruptcy proceedings will be instituted against a legal entity in case of its over-indebtedness. A debtor will be considered insolvent (overburdened) if its assets are insufficient to settle its existing obligations. It will not be deemed that a debtor is overburdened by debt, if according to the particular circumstances of the case (development plan, available resources, type of assets, acquired insurance, etc.), it could be reasonably assumed that by continuance of operations the debtor will regularly meet its obligations when they become due.

If a company is insolvent or overburdened by debt, the management is bound to file a petition for initiating bankruptcy proceedings without delay, or at the latest 21 days after the insolvency or overburdening has occurred.

3. What is the role of participants in bankruptcy proceedings?
Participants in bankruptcy proceedings are as follows: person who initiated the proceedings, persons whose rights or legal interests are decided upon within the proceedings and the body authorized by law.
A petitioner is a participant in the bankruptcy proceedings authorized to initiate the proceedings. A petitioner may be a creditor or the very debtor.

The Banking Act (Official Gazette 84/2002, 141/06) and the Insurance Act (Official Gazette 151/05, 87/08 and 82/09) provide authority to third persons who are neither the creditor nor the debtor to initiate bankruptcy proceedings against the debtor. The Croatian National Bank and the Croatian Agency for Supervision of Financial Services may file a bankruptcy petition against the bank, i.e. insurance company, although they are not the creditors of the debtor.

Bankruptcy proceedings may be conducted against a legal person and over the assets of an individual debtor. Sole traders and craftsmen are considered individual debtors. A creditor is a person that has a monetary or non-monetary claim against the debtor.
A creditor with the right of separation is a person who, on the basis of their property or obligatory right may request that an asset (object or right) be exempt (separated) from the bankruptcy estate since it does not belong to the debtor. A creditor with the right of separation may become a creditor in bankruptcy if the debtor alienated, before the bankruptcy proceedings were initiated, the item whose separation is requested, i.e. creditor of the bankruptcy estate if the separation object was alienated by the interim, i.e. bankruptcy, trustee.

A secured creditor is a person, i.e. creditor, entitled to separate satisfaction of claims from certain parts of the bankruptcy estate.
A secured creditor differs from a creditor with the right of separation in a way that their right refers to the parts of the debtor’s assets that enter the bankruptcy estate, while the right of the creditor with the right of separation refers to the items that are not the debtor’s assets and do not form the bankruptcy estate.

A secured creditor may be a creditor in bankruptcy in regard to the remaining part of the claim that cannot be satisfied separately from the item over which it has the secured right.

A creditor of the bankruptcy estate is a person, i.e. creditor, which has a claim against the debtor related to the costs of the bankruptcy proceedings and other claims over the bankruptcy estate. Such creditors have a priority over the creditors in bankruptcy, i.e. their claims are satisfied from the bankruptcy estate left over after the claims of the secured creditor, if any, have been settled.

A bankruptcy creditor is a person, i.e. personal creditor of the debtor who has a legal-property (monetary) claim against the debtor at the time of initiating the bankruptcy proceedings. Bankruptcy creditors’ claims are settled after those of the secured creditors and the creditors of the bankruptcy estate, if any, according to the payment priority order.

The basic rule of the Bankruptcy Act is that the creditors of lower priority may be satisfied only after the higher priority creditors are satisfied in full.

Members of the debtor are the participants in the proceedings whose claims may be settled from the leftover bankruptcy estate after the following persons’ claims are satisfied: secured creditors, creditors of the bankruptcy estate and bankruptcy creditors of higher and lower priority. Those are the persons who had shares in the debtor (shareholders, members of a limited liability company, sole debtor, etc.) but their right over the share (right to profit and right to vote) was denied during the bankruptcy because the trustee in bankruptcy took over the rights of the bankruptcy debtor’s bodies.

4. What are the consequences of initiating bankruptcy proceedings?
The initiation of the bankruptcy proceedings enters into force on the date of putting up the announcement on opening of bankruptcy proceedings on the notice board of the court. On that day, all rights of the bodies of the legal person will be terminated and transferred to the trustee in bankruptcy. The bank accounts of the debtor will be closed and the rights of the persons that were authorized to dispose of the debtor’s assets in such accounts will cease.

The trustee in bankruptcy will open a new bank account for the debtor and appoint persons who will be authorized to dispose of the funds in these accounts. The funds from the closed accounts will be transferred to the new accounts.
After initiating bankruptcy proceedings, the phrase “In bankruptcy” will be affixed to the company or name of the debtor, with the numbers of the debtor’s new accounts.

The debtor’s authorization referring to the assets that enter the bankruptcy estate terminate upon the opening of the bankruptcy proceedings. Disposal of properties of the bankruptcy estate by earlier representatives of the debtor after opening of the bankruptcy proceedings have no legal effect, except those disposals to which the general provisions on the protection of trust in public registers apply.

5. What specific rules are laid down for certain categories of claims?
The Bankruptcy Act defines bankruptcy estate as the entire assets of the debtor at the time of initiating the bankruptcy proceedings and the assets the debtor acquires during the bankruptcy proceedings.

The bankruptcy estate will be used for covering the costs of the bankruptcy proceedings and satisfying the claims of the creditors, i.e. the claims secured by certain rights over the debtor's assets.

The assets of the debtor, as an individual, over which enforcement against the debtor could not be conducted if he/she were not a sole trader or a craftsman, do not enter the bankruptcy estate.

Pursuant to Article 70 of the Bankruptcy Act, the creditors in bankruptcy are personal creditors of the debtor who, at the time of the opening of the bankruptcy proceedings, have legally based claims against the debtor, and are classified into priorities (ranks) according to their claims. The creditors of lower priority may be satisfied only after the higher priority creditors are satisfied in full. The creditors of the same priority will be satisfied in proportion to the amount of their claims.

The following claims have a higher priority:

claims based on the taxes, and other claims that form the revenues of the state budget, revenues of the local government and administration budgets, claims by the funds that are, based on the law, obligatory extracted from revenues, i.e. salaries of the debtor’s employees, created until the day of opening the proceedings,
claims in the bankruptcy proceedings made by the employees, as determined by the Labour Act (Official Gazette No. 149/09)
all other claims against the debtor, except those classified into lower priorities (general payment rank).

Article 72 stipulates the following order of settling the claims of lower priority (after the higher priority claims):

interest on claims of bankruptcy creditors, starting on the day of opening the proceedings,
costs incurred by the creditors during their participation in the proceedings,
monetary fines for criminal acts or infringements as well as the costs resulting from the penalty for a criminal act or infringement,
claims demanding a gratuitous action by debtor,
claims for repaying a loan used for substituting the capital of some member of the company, or similar claims.

Undue claims will be considered due on the day of opening the bankruptcy proceedings. If no interest has been paid on those claims, it will be considered that statutory interest had to be paid, and the claims will be reduced to the amount which would have corresponded to the full amount of the claim if the statutory interest had been applied for the period from the opening of the proceedings until the maturity of claims.

A person who on the basis of any of their property or personal right can prove that an object does not belong to the bankruptcy estate is not a creditor in bankruptcy. Their right to exemption of an object will be established in accordance with the rules pertaining to the realization of those rights outside the bankruptcy proceedings.

A seller who has not been paid the full purchase price may demand back the goods that were sent to the debtor from another place before the day of opening the bankruptcy proceedings and did not reach the destination, or if the debtor didn’t take it over until that day (right of return). A commission agent will also have the right of claim to the purchased goods.
If the goods that reached the destination before the day of opening of bankruptcy proceedings were taken over by the debtor for safe-keeping only, the seller will not have the right of claim but may exercise their rights in connection with those goods as a creditor with the right of separation.

Article 80 of the Bankruptcy Act stipulates that if an object that might have been exempted has been unrightfully alienated by the debtor prior to the opening of the proceedings, a creditor with the right of separation may demand that the right to a counter-action be vested in it if the counter-action has not been undertaken by that time. He/she may demand the counter-action from the bankruptcy estate if it can still be separated from the estate.

Creditors who have a lien or the right of satisfaction on an object or right recorded in a public register, (land register, register of vessels, aircraft register, register of intellectual property, etc.) will have the right to separate satisfaction according to the provisions of the enforcement regulations, while creditors who have claims secured by a lien on an object which is part of the bankruptcy estate and is not inscribed in a public register, will have the right to separate satisfaction of their claim, interest and costs from the value of the object.

The statutory lien of a lessor may not be realized, within bankruptcy proceedings, for the due and unpaid lease payments for more than one year prior to the opening of the bankruptcy proceedings, nor for claims for damages resulting from the termination of the lease by the trustee in bankruptcy. These limitations do not affect the lien of a lessor of agricultural property for the due lease.

Creditors with the right to separate satisfaction are considered creditors in bankruptcy if the debtor is personally liable to them. They are entitled to proportional satisfaction from the bankruptcy estate only if they waive the right to separate satisfaction or if they do not successfully realize the separate satisfaction.
The costs of the bankruptcy proceedings and the other obligations of the bankruptcy estate are settled first from the bankruptcy estate. The costs of the proceedings are settled before the others obligations of the bankruptcy estate, proportionally to their amount.

6. How can legal actions of the debtor be challenged?
Article 177 of the Bankruptcy Act stipulates that a claim will be considered established if, during the examination hearing, it has not been contested by the trustee or any of the creditors, or in the case that the refutation has been withdrawn. Contesting of the claim by an individual debtor will not suspend the establishing of the claims.

The bankruptcy judge will note in a separate table the extent to which each of the reported claims has been established, according to its amount and rank, and by whom it has been contested. Contesting by an individual debtor will also be noted in the table. The court clerk will note that the claim has been established on the bills of exchange or other documents of debt.
Based on this table, the bankruptcy tribunal will issue a decision on the amount and rank of an established or contested claim. By this decision, the bankruptcy tribunal will instruct the parties to initiate proceedings for the purpose of establishing or contesting a claim. This decision is put up on the notice board of the court, and, usually in the form of an excerpt, served on every creditor whose claim has been contested or directed to a separate proceeding. Creditors may file an appeal against the decision, regarding the part of their reported claim, i.e. contested claim.

At subsequent examination hearings, it will not be possible to contest claims that have been established at previous examination hearings.

Bankruptcy creditors whose claims have been established and have not been contested by the debtor at the examination hearing may initiate compulsory enforcement against the debtor, on the basis of the decision establishing their claims.

7. What are the conditions for reporting claims in bankruptcy proceedings?
By the decision on opening the bankruptcy proceedings, and in accordance with the Bankruptcy Act, the creditors will be called to report their claims to the trustee in bankruptcy within the specified time period. The time period for reporting claims may not be shorter than fifteen days or longer than a month.

By the decision on opening the bankruptcy proceedings, the creditors will be called to report to the trustee in bankruptcy, within 15 days, their separate claims on the debtor’s assets or rights, their separate claims on the debtor’s real estate that is not entered in the land registers, as well as their separate rights on the real estate which is entered in the land register if the separate rights are not registered.

The creditors are not bound to report their separate claims on movables and rights of the debtor that are entered in the respected registers (such as the register of vessels, aircraft register etc.).
The exact object in regard to which there is a secured right, as well as the method, legal basis and the amount of the secured claim, must be specified in the report. A creditor who fails to report a claim without a justified reason or who delays reporting the claim will be liable for the damage that might occur as a result.

By the decision on initiating bankruptcy proceedings over the assets of an individual debtor, the debtor’s debtors will be called to fulfil their obligations to the trustee in bankruptcy instead of directly to the debtor.

8. What rules apply to compulsory settlement?
The Bankruptcy Act regulates the satisfaction of creditors. The satisfaction of creditors may begin only after the general hearing has been held.

The satisfaction of creditors is executed as cash enters the estate. The creditors of lower priority will not be taken into consideration for partial distributions. Distributions will be made by the trustee in bankruptcy. Prior to each distribution he/she will be required to obtain the consent of the creditors’ committee, or the bankruptcy judge, if the committee has not been established.

Prior to the distribution, the trustee will make a list of claims that will be taken into consideration for the distribution. The list will be displayed for the participants in the courts administration office. The trustee is obliged to publicly announce the sum of claims and the amount that will be distributed to the creditors.

A creditor entitled to separate satisfaction should, not later than fifteen days after the public announcement, submit proof to the trustee that he/she has renounced the separate satisfaction and in what amount, or that he/she has not been separately satisfied. If he fails to submit such proof on time, his/her claim will not be taken into consideration during the partial distribution.

9. What rules apply to the wind-up proceedings?
The reasons for termination of a company are stipulated by Article 97 of the Companies Act (Official Gazette No. 111/93, 34/99, 121/99, 52/00, 118/03, 107/07, 146/08 and 137/09):

expiration of the period for which it has been founded
decision of company members
valid court decision establishing that the company's entry into the court register was illegal
company bankruptcy
death of a company member
bankruptcy proceedings against a company member
termination on the part of a company member
valid court decision

The winding-up proceedings are conducted upon the occurrence of any of the above-referenced reasons for the termination of activity.

In practice, winding-up is most often conducted when the company's authorized body renders a decision to terminate the company. Such a decision is made by the company assembly. The decision on the company termination is a notarial act delivered to the commercial court, and the company is obliged to affix the words “in liquidation” to all business documents in order to inform any third persons entering into a legal transaction with the company of its legal status.

The liquidation is conducted by the liquidators whose names are entered into the court register. They are usually the management board members, but may be other persons as well. A liquidator represents the company in liquidation, collects debts from the debtors and takes care of the settlement of the company's obligations to the creditors.

A company in liquidation does not have to cease to operate completely, but it may not start new business activities. It may complete the started ones and perform those required for the implementation of liquidation. The liquidator's duty is to bring the current activities to an end, collect debts and settle the claims, and distribute the rest of the assets, if any, among the shareholders, i.e. company members, in proportion to their share in the company's share capital.

10. What are the conditions for the closure of proceedings?
Pursuant to the Bankruptcy Act, the bankruptcy council renders a decision on the closure of the bankruptcy proceedings immediately upon the completion of the final distribution. The decision and the basis for closing the proceedings must be published in the Official Gazette, in accordance with the public information rules.

The decision is delivered to the court or any other body keeping the register of debtors of the legal person and the sole trader. Upon the deletion from the register, the bankruptcy debtor ceases to exist as a legal person, the bankruptcy debtor - sole trader loses its sole trader capacity, and the bankruptcy debtor – craftsperson loses its craftsperson capacity.

Do bankruptcy proceedings leave a “stain” on the debtor’s name? May the debtor start a new business activity?
Article 239, Paragraph 2 of the Companies Act stipulates that a person sentenced for the criminal offence of misuse of bankruptcy, misuse in the bankruptcy proceedings, favouring of creditors or violating the obligation of keeping financial records under the Criminal Code of the Republic of Croatia, may not be a management board member for the period of five years from the date on which the judgement came into force, excluding the time spent serving the sentence.

Penalties related to bankruptcy proceedings
The bankruptcy judge and the bankruptcy council supervise the work of the trustee in bankruptcy. If the trustee in bankruptcy disregards the order of the bankruptcy council, the latter may fine him/her. A single penalty may not exceed HRK 10,000.
Pursuant to Article 43 of the Bankruptcy Act, the bankruptcy judge may order the debtor and the bodies of the debtor to present, within a specified period, a written report on the financial and economic status of the debtor.

The members of the debtor’s bodies, i.e. the sole debtor, are liable for the verity and authenticity of the statements in the report.
Fines ordered in accordance with the provisions of the Bankruptcy Act that will be impossible to enforce, will be substituted with the penalty of detention, according to the relevant provisions of the criminal law (Article 336 of the Bankruptcy Act).

Pursuant to Article 107 of the Bankruptcy Act, if the court deems it necessary for the purpose of obtaining the required information, it may order the hearing of the debtor. If the debtor fails to appear at the hearing, the court may subpoena the debtor.

After the hearing, the bankruptcy judge may hold the debtor in detention in the following cases:

if he/she has, despite the court order, refused to provide the needed information or to cooperate with the trustee in bankruptcy in fulfilling his tasks,
if the debtor is avoiding, or planning to avoid the revealing of information, and especially if he/she is intending to flee despite the ban to leave,
if deemed necessary in order to prevent the debtor from undertaking such actions that would make it impossible or difficult to collect the necessary documentation and information, and especially in order to protect the bankruptcy estate.

The bankruptcy judge may order detention of up to three months. The second instance court may, at the proposal of the first instance court panel, prolong imprisonment for another two months. An appeal may be lodged against this decision, but it will not stay its execution. The Supreme Court of the Republic of Croatia decides on the appeal against the second instance court’s decision to prolong the detention.

Further information:
Bankruptcy Act (Official Gazette: 44/96, 29/99, 129/00, 123/03, 197/03, 187/04, 82/06)
Companies Act (Official Gazette: 111/93, 34/99, 121/99, 52/00, 118/03, 107/07, 146/08 and 137/09)