Croatia: Intervention measures regarding insolvency and enforcement proceedings

Introduction

On 23 April 2020 the Croatian Government adopted a Proposal for an Act on Intervention Measures in Enforcement and Insolvency Proceedings During Special Circumstances (the "Draft Intervention Act"). The Draft Intervention Act states that its purpose is to alleviate the position of citizens subject to the enforcement proceedings, to help companies which may be facing bankruptcy during the special circumstances, as well as to help the recipients of national and/or EU grants and recipients of the governmental aid due during the special circumstances.

Special circumstances

The special circumstances are defined as an event or state which could not have been predicted or prevented, and which event or state endangers the life and health of citizens, assets of greater value, significantly damages the environment, distorts economic activity or causes significant economic damage. This definition is superfluous as the Draft Intervention Act clearly states that it is to be enacted in order to implement special measures in enforcement and insolvency proceedings during the special circumstances caused by the COVID-19 epidemic.

Duration of special circumstances (3+3 months)

The Draft Intervention Act states that the special circumstances commence on the day of the enactment of the Intervention Act and that they last for an initial 3 (three) months. The Government may prolong the duration of the special circumstances for an additional 3 (three) months.

Suspension of enforcement proceedings

Enforcement proceedings are suspended during the special circumstances with the exception of the enforcement of child-support, employee claims and interim measures under the criminal procedure law.

A judge may decide to continue with the enforcement proceedings if there is a need to conduct the proceedings expediently notwithstanding the special circumstances. The judge would need to provide detailed reasoning for the decision to proceed with the enforcement.

During the special circumstances, employers and the state pension fund will not withhold the salary/pension for the benefit of creditors (which is a common method for enforcement against individuals). Naturally, the exceptions to this rule are the enforcement of child-support, employee claims and interim measures under criminal procedure law.

New enforcement requests for direct payment from the employer/state pension fund may be filed and they will be recorded in the system, but no withholding of funds will take place during the special circumstances.

Enforcement ban over the grants

The Draft Intervention Act expressly stipulates that the enforcement is not allowed over the special purpose funds from the EU or national grants, as well as over the funds paid as government aid due to the special circumstances.

Even if a judge would allow the enforcement by a reasoned decision, this special funds would remain off limits to the creditors.

Restriction to the initiation of the bankruptcy proceedings

Reasons to initiate bankruptcy, that occur during the special circumstances, are not valid for the motion to initiate the bankruptcy proceedings. The triggers for the initiation of bankruptcy are insolvency and over-indebtedness, but none of these triggers are applicable if they occur during the special circumstances.

It will still be possible for the debtor to initiate bankruptcy proceedings as a result of the exception granted in the Draft Intervention Act which raises further questions vis-à-vis liability of the management board members in case they do not act upon the occurrence of the bankruptcy trigger.

Additionally, the creditors and the Financial Agency may request the initiation of the bankruptcy proceedings for the protection of interest and safety of the Republic of Croatia, the nature, the human environment and the health of citizens. It is difficult to imagine a company which would currently fall under this exception save for larger entities which have importance for the functioning of the economy.

The Draft Intervention Act does not amend the obligation of the management board to initiate bankruptcy proceedings within 21 days as of the occurrence of reasons for bankruptcy. The issue of the liability of the management board will be left for the interpretation by the courts in the future, but each member of the management board should consult regarding her/his duties in case of the occurrence of the insolvency and/or over-indebtedness during the special circumstances.

The halt on accrual of statutory default interests

In Article 7 to the Draft Intervention Act, it is stated that for the duration of special circumstances, statutory default interest will not accrue. It is not specified whether this provision applies exclusively to the ongoing enforcement and insolvency proceedings or to all statutory default interest. As Article 1 of the Draft Intervention Act states that the act applies to the intervention in the enforcement and insolvency proceedings due to COVID-19, it may be interpreted that the intention was not likely to expand the halt on accrual of statutory default interest to all claims, but rather only to the claims which are subject to the ongoing enforcement and/or insolvency proceedings.

However, if the halt to the accrual of statutory default interest were applicable to all claims (and there is a room for such broad interpretation), the payment of the outstanding debt may become optional during the special circumstances (3+3 months). The current wording of Article 7 of the Draft Intervention Act should be amended in order to be more precise on this issue of great importance.

Conclusion

The Draft Intervention Act follows the recent developments in other CEE countries in terms of special regulations as a result of COVID-19, but it introduces negative incentives for debtors. If the halt to the accrual of statutory default interest is interpreted to be applied to all claims, i.e. not exclusively to the claims which are subject to ongoing enforcement and/or insolvency proceedings, then the debtors may in fact benefit from skipping the payments on the due date. Under this scenario debtors may choose to keep their cash without fear of court action and without the accrual of the statutory default interest. The current wording of the Article 7 Draft Intervention Act is broad and not sufficiently precise, therefore it requires amendments in order to exclude the misinterpretation and abuse.

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