In April 2017, the Croatian government adopted the Act on Extraordinary Administration Proceedings in Companies of Systemic Importance for the Republic of Croatia (“EA Act”), which sets out a framework for an extraordinary, pre-insolvency restructuring proceeding for companies that are deemed to be of systemic relevance for the Croatian economy as a whole.
The adoption of the EA Act was in reaction to the severe financial difficulties of the Agrokor group (“Agrokor”) which materialised at the start of 2017, and which have led to criminal charges against its former CEO and shareholder Ivica Todoric for manipulating Agrokor’s financial statements. Agrokor operates in the food-to-retail sector and is by far Croatia’s largest group, employing approx. 60,000 people within Croatia as well as in Bosnia-Herzegovina, Serbia, Slovenia and Montenegro. Agrokor’s 2015 turnover amounted to approx. 16% of Croatia’s GDP, and its debt amounts to over EUR 6 billion.
Scope of the EA Act and Course of the Extraordinary Administration Proceedings
Scope of Application:
The EA Act applies to “companies of systemic importance”, being joint stock companies that are established under the laws of Croatia and which, together with their affiliates, employ over 5,000 employees and whose balance sheet liabilities exceed HRK 7.5 billion (approx. EUR 1 billion). As Agrokor is currently the only Croatian group of companies which meets these criteria, the EA Act has also been dubbed “Lex Agrokor”. The application of the EA Act requires that grounds for bankruptcy or pre-bankruptcy under the Croatian Bankruptcy Act exist.
Course of the Extraordinary Administration Proceedings:
The following are the most relevant procedural requirements and other steps that are taken in the course of the proceedings under the EA Act (“EA Proceedings”):
- The management of the debtor (or a creditor with the debtor’s consent) files a request for the activation of the EA Act. Agrokor’s management filed this request on 7 April 2017 with the competent Commercial Court in Zagreb.
- An individual is appointed by the Commercial Court in Zagreb upon the proposal of the Croatian government to act as extraordinary administrator (“EA”). The EA, as an independent organ, represents the debtor, manages the debtor’s business operations and performs the rights and obligations conferred on him by the EA Act. For certain material actions, the EA is required to obtain the approval of the creditors’ committee.
- The EA files a table of verified and contested claims, rights for separate recovery and secured rights with the Zagreb Commercial Court. The Commercial Court decides on the table of claims and refers contested claims to litigation. Creditors are entitled to appeal such court ruling.
- A creditors committee (“CC”) is formed (either an interim creditors committee or a permanent creditors committee), which assists the EA in the preparation of a Settlement Plan (see below for details) and approves certain actions taken by the EA. The members of the interim CC are approved by the court, based on a proposal put to it by the EA. In the case of Agrokor, the creditors were classified into five groups and accordingly, the interim CC consists of five members, each member falling into one of the five groups.
- Once the court ruling on the verified and contested claims has become final and binding, the creditors are then asked to elect members to a permanent CC, with the relevant permanent CC member representing the creditors in the class which appointed it.
- The restructuring of the company is implemented by means of a settlement plan, the terms of which are negotiated by the CC members and the EA (“Settlement Plan”). As in the case of Agrokor, the Settlement Plan can provide for a restructuring by way of a transfer of assets and shares to a new group, the issuance of new debt and equity instruments in the new group to certain creditors, and the incurrence or reinstatement of certain debt.
- The CC members need to approve the submission of the proposed Settlement Plan to creditors for voting. Once approval is given, the EA submits the Settlement Plan to the Commercial Court, which will publish the proposal. In the case of Agrokor, the CC approved the submission of a Settlement Plan for a creditor vote on 19 June 2018.
- Thereafter, the Commercial Court schedules a hearing at which the creditors vote on the adoption of the Settlement Plan. Creditors will be put into classes for voting purposes. In general, the adoption of the plan requires that the majority of creditors who are entitled to vote at the meeting, vote in favour of the plan and that in each class the aggregate amount of claims of creditors who vote for the Settlement Plan exceeds the aggregate amount of claims of the creditors who vote against it. In the event that this voting threshold is not met, the Settlement Plan will also be approved if the aggregate amount of claims of the creditors who vote in favour of the Settlement Plan amounts to at least two thirds of the total claims.
- If the Settlement Plan has been accepted by the required majority as described above, the Commercial Court will sanction the plan. It will only refuse to sanction the plan in limited circumstances, e.g. if the provisions governing the content of the plan and the EA Proceedings have been materially violated. The sanctioned Settlement Plan is legally binding on all affected creditors, including those that voted against it.
- Finally, the Settlement Plan will need to be implemented within a further specified implementation period.
Until the completion of the EA Proceedings, bankruptcy proceedings (including regular pre-bankruptcy proceedings) and out-of-court settlement proceedings are inadmissible.
Constitutional Challenges and Annex A Recognition
Various constitutional challenges were submitted against the EA Act by individuals and legal entities. The constitutional challenges were based on the argument that the EA Act would violate the principles of free market and the equal treatment of all companies guaranteed by the Croatian constitution. Mr. Todoric even alleged that the application of the EA Act would be in violation of his human rights. The Croatian Constitutional Court has rejected these challenges and has confirmed that the EA Act complies with the Croatian constitution. In particular, the Constitutional Court found that, considering the circumstances, the adoption of the EA Act as an extraordinary measure was necessary to prevent the expected severe impact of the Agrokor situation on the overall economic system in Croatia.
In addition, the EA Proceedings have meanwhile been listed as an insolvency proceeding under Annex A of the EU Insolvency Regulation (2015/848/EU). The listing of the EA Proceedings in Annex A leads to automatic recognition of these proceedings in all EU member states, except where a member state refuses recognition based on public policy grounds, which, broadly speaking, can only be claimed if the recognition would be “manifestly contrary” to that member state’s legal order.
The EA Act evidences that alternative restructuring instruments have become increasingly important, and it can be expected that similar measures will be introduced in other jurisdictions – not necessarily restricted to the restructuring of systemically relevant companies, but in a broader sense. The first-time application of these instruments demands skilled legal expertise and deep experience in large cross-border restructurings. Going forward, it will be interesting to see how the legal landscape will change and adapt to the necessity for alternative means of pre-insolvency restructuring.