The amendments to the Financial Operations and Pre-Bankruptcy Settlement Act
Lexology, October 10, 2013
The disadvantages and ambiguous interpretations that have frequently occurred in the implementation of the pre-bankruptcy settlement procedures preventing the achievement of the primary goal of the Financial Operations and Pre-Bankruptcy Settlement Act (“the Act”) - the establishment of liquidity and solvency of business entities – have provoked a need for detailed amendments to the Act. The second amendments to the Act which were published in the Official Gazette No. 63/13 entered into force on 7 July 2013 whereas immediately after this, the Government adopted the third changes of the Act in a form of the Ordinance on Amendments of the Act which entered into force on 6 September 2013 (“the Amendments”). As the Amendments show to be rather comprehensive, in that they cannot be in more details analysed in a summarised overview, we will not elaborate on particular provisions but rather give a brief overview of the practical impact of the law.
Until today, 650 pre-bankruptcy settlements were concluded and 84 settlements were confirmed by the commercial courts. Because of a number of provisions of the Act which are believed to put creditors in an unequal position, in August 2013 a judge of the Commercial Court in Zagreb found appropriate to file to the Constitutional Court a request for a review of the constitutionality of the Act. Even though the Constitutional Court has still not rendered a decision in the said case, it is needless to say that three extensive changes of the recently (in September 2012) adopted Act within just one year since the enactment indicate great legal uncertainty both, on the side of the creditors, but also in respect to debtors. Moreover, it has been noted that the completely new institute such as the pre-bankruptcy procedure has been used to affect some other institutes that have for decades been defined in special laws and by-laws, such as interest rate, rules of procedure in litigation and procedures of realisation of claims in other court procedures such as enforcements and bankruptcies.
The consequence is that certain legal instruments have been entirely set out of force by completely changing the creditor’s rights and the way of realisation of the claims. Even though the Government stresses positive outcomes of the pre-bankruptcy settlement procedures in terms of decreased illiquidity which represents one of the conditions for the recovery of the broken Croatian economy which is in the recession for the fifth consecutive year, in every democratic state it should be clear that no move may be rendered to the detriment of the human rights and the equality principle. This especially when in the public there has been prevailing opinion that the pre-bankruptcies have been introduced for the exclusive purpose of saving particular companies with financial issues from going bankrupt and thus putting them into privileged position towards creditors and other competitors on the market.