Changes to the Enforcement Act

Lexology, December 11, 2013

1. Introduction

The last enacted version of the Enforcement Act entered into force on 15 October 2012 (Official Gazette 112/12). Since then the application of the law in practice revealed certain deficiencies, which are thought to may be prevailed by introducing additional legal mechanisms in the enforcement law. The Croatian Ministry of Justice presented the draft of the newly planned amendments to the Enforcement Act (“the Draft”), which is at this moment subject to public debate, after which procedure it shall be presented to the Croatian Parliament for further adoption.

The purpose of intended changes is redefining and eliminating those legal institutes that are slowing down the implementation of the enforcement procedures in practice and introducing certain new solutions aiming at enhancement of procedural effectiveness. Paying attention to the omnipresent impact of the economic crisis to the living standard of Croatian households, the legislator predicted a number of novelties, purpose of which aims at protecting the dignity and position of debtors in the enforcement procedure.

The Draft provoked numerous reactions of legal experts and practitioners and thus attracted the interest of Croatian public. In this summary presentation, we outline some of the most significant changes in the enforcement procedure and try to evaluate their possible impact on two conflicted parties, creditor and debtor.

2. Costs

The exaggerating procedural costs compared to the value of the enforced claim have been most frequently addressed objection in respect to practical implementation of enforcement and its impact on financial position of debtors. Paying attention to the “social component”, the legislator acknowledged this objection and introduced institute separating so called “apportioned” and “foreseeable” costs of enforcement. If the debtor settles the entire debt within the time limits set out for voluntary payment (regularly 8 days, in cheque and promissory note disputes 3 days), he/she shall be obligated to pay only realised (apportioned) costs of the enforcement procedure. If the debtor fails to meet payment within the prescribed deadline, he/she shall bear additional (predictable) costs.

The decision on enforcement shall contain warning prescribing that the creditor shall be authorised to charge these additional costs in case of failure of payment within voluntary time limits. The Draft stimulates the debtor to fulfil the claim to the creditor within voluntary time limits by reducing the costs of the procedure, what represents a continuation of the trend protecting the debtor’s rights. Furthermore, in extrajudicial enforcement instigated on the basis of so called credible deed (e.g. invoice), creditors shall be entitled to reimbursement for only limited amount of actions performed by attorneys what may due to Croatian Bar Tariff rules cause additional non refundable costs on the side of creditors.

3. Decision on Enforcement

Besides warning issued to a debtor regarding the obligation of carrying additional predictable costs in case of payment failure, the decision on enforcement shall contain an instruction in that the debtor’s complaint filed against the decision on enforcement shall provide sufficient explanation. If the complaint is not sufficiently explained, it shall be considered incomplete and rejected by the court. In case of collection of monetary receivables on the basis of enforcement decision through the Financial Agency (“FINA”), the mandatory content of the decision on enforcement is an instruction ordering the debtor the notification of FINA on all the types of income received that are to be exempted from enforcement (e.g. alimony, welfare, unemployment payments).

4. Real Estate

In case of enforcement procedure on the real estate, FINA is entrusted with the role of the court bailiff. The sale of the real estate shall be performed by electronic public auction carried out by FINA. The invitation for the participation in the public auction, which contains information on the conditions of the sale, time and ending of the auction, time for the examination of the real estate as well as other necessary data, is published on the FINA’s web site. Since the day of publication of the invitation on the FINA’s website until the day of the beginning of bids collection shall pass at least 60 days. The electronic auction may be performed even if only one bidder decides to participate.

At the first electronic auction the real estate may not be sold at a price which is lower than 4/5 of its estimated value (currently 2/3), and at the second electronic auction the real estate may not be sold at a price which is lower than 3/5 of its estimated value (currently 1/2). If the real estate fails to be sold at both electronic auctions, FINA shall notify the court of the failure and the court shall discontinue the enforcement. In case of successful electronic auction FINA shall notify the court on the conducted procedure and collected bids and the court shall determine the best bidder offering the greatest price. The decision on the award of a real estate shall be published on the court notice board and on the FINA’s website.

If the sold real estate is used by the debtor for residing purposes and if it is necessary for satisfaction of the debtor’s and the supporting persons’ basic residential needs, the debtor shall be entitled to further usage of the real estate as the tenant for the next period of six months during which period the debtor shall be obligated to pay a rent.

5. Enforcement on a Different Object

One of the novelties is the right of the debtor to request change of the object of enforcement if the enforcement is implemented on the real estate used for debtor’s residing purposes and which is necessary for satisfying basic residential needs. Along with the request, the debtor shall determine another object suitable for enforcement. The court shall accept the application if the newly proposed object is suitable for settlement of the creditor’s claim and if such a change would not result in significant prolongation and difficulties in implementation of enforcement.

In case the object of enforcement is a real estate subject to a mortgage registered in favour of creditor, the change of the enforcement object is subject to the creditor’s approval. If the newly proposed object of enforcement is a monetary claim, such application of the debtor shall be accepted only if the court estimates that the claim may be settled within period of 1 year at latest.

6. Conclusion

One of the goals of the enforcement procedures should be achieving appropriate balance between the right of the creditor to collect claim and the right of the debtor to realise basic needs. The last proposed amendments of the Enforcement Act clearly favour debtors which may cause further deteriorations in claim collection efficiency thus creating additional legal uncertainty on the side of the creditor’s safety.

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