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07 November 2017

DIP (supersenior) Financing in Croatian Insolvency

Reasoning behind the changes

In the two years that the "new" bankruptcy regime – the Bankruptcy Act of September 2015 (Stečajni zakon; the "BA") – has been in place, the number of pre-bankruptcy procedures initiated in Croatia has plummeted to only 273, with 58 restructuring plans being accepted. By comparison, under the previous pre-bankruptcy regime from 2012 to 2015, 8,262 pre-bankruptcy procedures were initiated, with 2,224 restructuring plans being reached.

These numbers have convinced the government that the provisions of the new pre-bankruptcy regime lacked sufficient incentives for debtors, and that the procedure was too rigid and difficult to enforce. The proposed amendments should encourage debtors to initiate pre-bankruptcy proceedings and make the procedure more debtor-friendly. The amendments came into force on 2 November 2017.  

Conceptual change of the BA

By far the biggest change of the BA is the introduction of DIP financing during the pre-bankruptcy stage, which so far was not envisaged in Croatian insolvency.

The rules for taking on new monetary debt for temporary financing necessary to continue business activities throughout pre-bankruptcy proceedings (DIP financing) are a novelty in Croatian insolvency, and are as follows:

  • prior approval of creditors representing two-thirds of all recognised claims is required;
  • the court needs to confirm creditors' approval, amounts, terms and conditions and deadlines for payment of claims from the new indebtedness;
  • new debt will have supersenior status in bankruptcy, but not before higher priority creditors' claims (eg employees' claims);
  • DIP financing and security granted for such financing will not be subject to avoidance if bankruptcy proceedings are subsequently opened over a debtor; and
  • in all pending pre-bankruptcy proceedings initiated after 1 September 2015, DIP financing will be possible unless a hearing for voting on restructuring plans was held.

Other not-so-minor changes to the BA

Some of the most relevant changes to pre-bankruptcy are:

  • lowering level of certainty for existence of pre-bankruptcy reason when opening pre-bankruptcy proceedings – previously: the court needed to be convinced of the pre-bankruptcy reason; now: the applicant needs to make a pre-bankruptcy reason probable without an obligation of the court to be convinced in the existence of the pre-bankruptcy reason;
  • changes in definition of pre-bankruptcy reason (imminent threat of insolvency) – previously: imminent threat was considered to exist, inter alia, if the circumstances due to which the debtor would be considered to have become insolvent had not occurred; now: imminent threat is considered to exist if the circumstances due to which the debtor would be considered permanently insolvent have not occurred at the time the proposal to open pre-bankruptcy proceedings was submitted;
  • the pre-bankruptcy proposal can now be withdrawn until the court's decision on opening of the procedure is passed;
  • changes of documentation that need to be enclosed in the proposal to open of pre-bankruptcy proceedings;
  • if the proposal to open pre-bankruptcy proceedings has been submitted but the court found that conditions for opening bankruptcy proceedings were satisfied, the court may no longer continue the bankruptcy proceedings;
  • the deadline for creditors to report claims in pre-bankruptcy proceedings has been prolonged from 15 to 21 days, and the deadline for making objections to claims has been prolonged from 8 to 15 days;
  • the deadline for the debtor or trustee to object to claims has also been prolonged from 8 to 30 days;
  • the possibility for creditors to dispose of their claims after initiating pre-bankruptcy proceedings is now clearly regulated;
  • the possibility of secured creditors to also act as pre-bankruptcy creditors in pre-bankruptcy proceedings has been introduced, and is now regulated in the same way as in bankruptcy proceedings;
  • secured creditors can now change their minds about whether they want to satisfy their claims separately within pre-bankruptcy proceedings;
  • the deadline for submitting a revised restructuring plan has been prolonged from 8 to 21 days;
  • the duration of pre-bankruptcy proceedings has been prolonged from 220 to 360 days in total;
  • the reasons for terminating pre-bankruptcy proceedings have been changed.

The most relevant changes to bankruptcy are:

  • a new bankruptcy reason has been introduced – imminent threat of insolvency (the very same as the pre-bankruptcy reason);
  • a bankruptcy proposal can now be withdrawn until the court's decision on opening the procedure is passed; and
  • joint bankruptcy proceedings against affiliated companies are no longer possible.