Croatia's debt workout scheme threatened with write-off

By bne IntelliNews March 6, 2014

Guy Norton in Zagreb -

According to the oft-paraphrased line by Scottish poet Roberts Burns, "The best-laid plans of mice and men / Often go awry". Those immortal lines could easily be applied to the growing furore surrounding the predstečajne nagodbe (pre-bankruptcy settlement) legislation introduced in October 2012 by the current centre-left government in Croatia, which was aimed at addressing the alarming rise in illiquidity in the country's shrinking economy.

At the time of its introduction, there was widespread hope that the new law would deliver some much-needed relief to cash-strapped banks, companies, workers and suppliers, whose collective fortunes were being squeezed by the drying up of liquidity in Croatia's financial system and which had resulted in over HRK5bn (€6.6bn) worth of overdue claims. Almost 18 months later and there's now equally widespread disillusionment about the legislation that was adopted, with a wide range of accusations levelled against it.

For example, at a roundtable discussion organised by Croatian financial magazine Banka, titled "Pre-Bankruptcy Settlement: From Great Expectations to Great Disappointmen", Nevenka Marković, a High Commercial Court judge, said that legal backdrop to the pre-bankruptcy settlement process was far less transparent compared to bankruptcy proceedings. "In bankruptcy, all claims are accurately identified, but in pre-bankruptcy settlement proceedings they are not," said Marković, adding that there are no legal sanctions for debtors that declare false information.

Others believe that the legislation is so full of loopholes that it has enabled unscrupulous entrepreneurs to effectively walk away from their obligations, leaving their lenders, employees and business partners in the lurch. In a series of excoriating articles, the leading online news portal has been particularly critical of the shortcomings of the legislation, which it claims has led to "Pljacka Stoljeca" (Robbery of the Century).

According to, the whole process is highly politicised, with the portal claiming that some companies owned by entrepreneurs which are supportive of the government have been offered generous write-offs on their debts to the state, while others owned by political opponents have been forced into bankruptcy after the government refused to sanction any reduction in their liabilities.

Indeed, matters have come to such a head that in February the country's finance minister, Slavko Linic, was forced to justify his endorsement of the legislation during a four-hour session of the Croatian parliament's anti-corruption committee, consisting of politicians, legal and financial experts.

In his defence, Linic contended that the new regulations he had championed represented a vast improvement over the preceding inefficient legislation which had resulted in a massive backlog of cases in the commercial court system and had led to some cases dragging on for years, more often than not resulting in bankruptcy rather than a solution whereby the companies were saved from liquidation and continued to operate.

Linic cited the example of Gradski Banka from the Slavonian city of Osijek, which was eventually wound up after bankruptcy proceedings that lasted more than 15 years. Linic added it was highly unlikely Croatia would return to positive economic growth - it has been mired in recession since 2009 - without any resolution to the problem whereby 71,900 companies have had their bank accounts frozen due to their inability to service their outstanding debts.

Furthermore he argued rather that the pre-bankruptcy settlement legislation represented far more than just a simple mechanism for writing off debts. "We are dealing with a real corporate restructuring, rather than writing off debts and our goal is to save jobs."

According to Ministry of Finance data, the 1,560 settlements which have so far been approved have resulted in the saving of over 21,000 jobs. In reply to criticism that the government had allegedly been a soft touch when it came to writing off its claims, Linic countered that in the cases that had been resolved so far the state had only written off 13% of its claims, while private sector creditors, principally banks and suppliers, had conceded to write off 30% of their claims.

Finally, Linic also claimed that the International Monetary Fund had expressed "disgust" at the possibility that the pre-bankruptcy settlement legislation could be abolished.

Inflated claims

However, Linic's claims in defence of the law he has championed failed to convince many of those on the anti-corruption committee, who expressed doubts about both the ethicacy and efficacy of the legislation.

Jasnica Garašić, a professor at the legal faculty at Zagreb University, claimed that the inability of creditors to legally question the veracity or volume of the claims declared by debtors could easily lead to fake or inflated claims which could damage all creditors.

Also, under the current legislation any debt write-offs need to be approved by creditors whose financial claims total at least two-thirds of the outstanding debt. This, claimed Garašić, means that in practice a small number of creditors, especially the government and large foreign banks, which are often the largest creditors but can more easily afford to write-off their debts, can dictate terms at the expense of smaller creditors which are often not in a financial position to simply write off debts. "It would be good to find out the number of jobs lost in small businesses due to the fact that big players have imposed rules on small players," said Garašić, who is in favour of abolishing the law.

Frano Matusic, a member of parliament for the HDZ rightwing opposition party, called the pre-bankruptcy settlement legislation "an open invitation to corruption and non-payment of debts", while his party colleague and a former finance minister, Martina Dalic, said that the laws should be urgently revised to allow for greater involvement from the commercial courts and less involvement from civil servants.

As for those in the wider business community, there's a palpable sense of regret over a missed opportunity. "Pre-bankruptcy settlement is a procedure that is clearly needed in Croatia. It's in everyone's interest, including foreign investors', that the problem of illiquidity is solved. The law that was introduced was a very good idea in theory, but it has not been as well executed as it needs to be in practice," says Michael Glazer, a Zagreb-based consultant for business advisory firm Wyn River.

In the wake of the rising tide of criticism, Linic has conceded that there will be revisions to the pre-bankruptcy settlement legislation, but it remains a possibility that the mounting number of scandals surrounding the laws could lead to its abolishment.

If that's the case, then Linic's career as finance minister could be the next thing to be written off.

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