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Croatia: Restructuring or Bankruptcy? That is the Question.

Croatia: Restructuring or Bankruptcy? That is the Question.

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It is now more than obvious how much the COVID-19 pandemic has shaken up both global and national economies. Although various measures have already been undertaken to support businesses during this COVID-19 crisis, financial distress of many companies is inevitable, which will ultimately, for many of them, result in bankruptcy or restructuring.

In order to mitigate the adverse effect of the COVID-19 pandemic on the Croatian economy, a number of urgent measures have been introduced in fiscal, monetary, and financial policy, along with the provision of aid for preserving jobs in affected sectors. One of the actions taken was enacting a law putting a standstill on most enforcement procedures and providing temporary bankruptcy protection. However, as they will remain in force only until mid-October, these measures are not a long-term solution for debtors. After the ban is lifted, it is expected that more than 300,000 enforcement procedures will be initiated, which will, together with the unfavorable economic situation, result in significant financial problems for many Croatian companies. Consequently, a number of them will become insolvent or over-indebted. Predictions are that Croatia is facing a worse recession than it did during the 2008 global financial crisis.

Under these circumstances, financially distressed companies will have two options: reach an agreement with creditors via out-of-court restructuring or file for bankruptcy. Although out-of-court restructuring provides a flexible, swift, and cost-efficient means for restoring companies’ financial stability, it implies consensus of the affected creditors, who are usually reluctant to enter into settlements with debtors. If the creditors are unwilling to cooperate with the companies to solve their financial problems, the companies will be forced into in-court bankruptcy, the main purpose of which is to liquidate assets and “kill” the debtor. In this formal procedure, the bargaining position of creditors is generally weakened as the proceedings are subject to the authority of the bankruptcy court and are conducted in line with the strict set of rules of the Bankruptcy Act.

However, even during the in-court bankruptcy procedure, a light at the end of the tunnel for the debtors might be a restructuring plan to reorganize and resolve the debtor under court supervision. This option, although provided for by the Croatian Bankruptcy Act, is rarely preferred by major creditors in practice. In fact, only a few bankruptcy debtors have undergone formal restructuring so far. Maybe now, in these uncertain times for business, creditors will recognize the benefits of restructuring for the companies that have the potential to continue operating.

Provided there is a basis for it, restructuring certainly has more effective consequences than liquidation for the distressed companies - the company’s business continues, the jobs and value of the debtor’s assets are preserved, the business generates income for employees and their families, and state and local budget continue to be funded. All the consequences would surely positively affect not only the debtors but also the national economy, consequently influencing and speeding up the country’s economic recovery.

In a time of recession and economic crisis, restructuring may be a lifesaver for many companies. It is to be seen whether creditors in Croatia will opt for saving the debtors and continuing their business or deem that settling claims via in-court bankruptcy procedure is more suitable. The COVID-19 pandemic may certainly be a great opportunity for the rise of restructuring.

By Ana-Marija Grubisic Cabraja, Partner, and Marija Gojevic Sparavec, Attorney, Divjak, Topic, Bahtijarevic & Krka

This Article was originally published in Issue 7.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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Čipčić-Bragadin Mesić & Associates is one of the leading law firms in Croatia that serve companies, credit & financial institutions and public entities. We have been recommended and recognized as the legal experts and service leaders by many leading international legal guides for more than 15 consecutive years. With roots dating from 1928. we now probably have more tradition, experience and market presence than almost any other law firm in Croatia. We work closely with the leading international law firms and consultants so we’re able to manage complex, cross-border projects and deals seamlessly and successfully. Around 85% of our clients are international enterprises doing business in Croatia. List of our clients include some of the world-renowned companies such as Amazon Europe Core, China Machinery Engineering Corporation, Tate & Lyle, Nafta a.s., Unilever Croatia, Unilever Hungary, Lenovo, Innoenergy CE, Flixmobility, Flixbus CEE South, Okoenergie Group, CTC Holding, Bunge Limited, Chipita, Rolls-Royce, Canvas Holidays, Vacalianselect, Redgate Software, Red gate Investment, Yahoo!, Aston Martin Lagonda, Domino Printing UK, Domino Printing Sciences, Goldman Sachs, Deutsche Bank, Barclays Bank, HSBC, State Street Bank, Citigroup Global Markets, Credit Suisse, Bank of America Merill Lynch, Standard Chartered, Och-Ziff Capital Management, Amundi Asset Management, Altima International, Red Arc Global Investments, SMBC Nikko Capital Partners, Royal Bank of Scotland, Morgan Stanley International, J.P. Morgan group, Allianz Global Investors, Schroders, Macquarie Bank, Digital Finance International, Winton Capital Management, Citibank, Invesco Asset Management Österreich, Croatian Pension Investment Company, Unicredit Bank AG etc. We enjoy learning about our clients’ businesses and want to understand them completely so we can provide the best possible and complete service.

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