Pre-Insolvency Proceedings in Croatian Law – Concept and Initiation

Pre-insolvency proceedings (or “pre-bankruptcy proceedings”) are a special type of non-litigation procedure with dual purposes: the first is to regulate the debtor’s legal position with the aim of preserving their business activity and avoiding bankruptcy proceedings; the second purpose is to regulate the debtor’s relationship with creditors, seeking to create more favorable conditions for the settlement of their claims than those that would apply in the event of initiating bankruptcy proceedings against the debtor. Thus, it can be concluded that in pre-insolvency proceedings, the interests and positions of both the business entity and its creditors who are unable to satisfy their claims are equally important.

The prerequisite for initiating pre-insolvency proceedings is the existence of imminent insolvency, which exists when the court is convinced that the debtor will be unable to meet its obligations when due. This is evidenced by a certificate from the Financial Agency and a calculation of unpaid wages.

Initiating Pre-Insolvency Proceedings

A proposal for initiating pre-insolvency proceedings is submitted to the court on the appropriate form by the debtor, together with financial statements in accordance with the Accounting Act, which must not be older than three months, a statement regarding the number of employees as of the last day of the month preceding the submission of the proposal, and a proposal for a restructuring plan, which is the key document. The financial restructuring plan must include an offer to creditors detailing the method, terms, and deadlines for the settlement of claims, as well as a deadline for voluntary fulfillment.

Additionally, the applicant is required to pay an advance for the costs of the pre-insolvency proceedings, amounting to 660.00 EUR.

From the moment the proposal is submitted until the court issues a decision to open pre-insolvency proceedings, the debtor may only make payments necessary for regular business operations. Such payments include: necessary payments related to employment relationships, including gross wages for employees and former employees whose claims became due prior to the opening of the pre-insolvency proceedings, severance pay up to the amount prescribed by law and collective agreements, claims for damages due to work-related injuries or occupational diseases, wages for employees increased by the amount of contributions, and other material rights of employees in accordance with employment contracts and collective agreements that became due after the submission of the proposal to initiate pre-insolvency proceedings, payments for the costs of the pre-insolvency proceedings, and other payments necessary for regular business operations prescribed by specific legislation. During this period, the debtor may not transfer or encumber their assets.

The court is obligated to decide on the proposal for initiation within 8 days from the submission of the complete proposal. The court will reject the proposal in the following cases:

1. If pre-insolvency proceedings are already ongoing based on a previously submitted proposal;
2. If two years have not passed since the fulfillment of obligations under a previously confirmed restructuring plan;
3. If the proposal was not submitted by an authorized party;
4. If a procedure is pending before a court or public authority in which the debtor is a party, and the debtor failed to disclose this procedure in the list of assets and liabilities, despite knowing or being reasonably expected to know about its existence;
5. In other cases prescribed by the Bankruptcy Act.

If the court determines that the conditions for initiating pre-insolvency proceedings are met, it will issue a decision to initiate the proceedings and appoint a trustee (or “administrator”).