The preventive restructuring of companies in difficulties

Abstract

The Republic of Croatia is facing the biggest restructuring of companies in difficulties with substantial involvement of international financial investors. Restructuring is implemented according to a newly adopted Act on extraordinary administration proceeding in companies of systemic significance for the Republic of Croatia. The latter Act was adopted in the aftermath of the business failure of the major retailer i.e. the Agrokor group. The restructuring of the group has soon become a very sensitive political issue and a topic of heated public discussions. The Act has been heavily criticized both by legal scholarship and by the public for being designed for a single group of companies in Croatia, as well as for being incoherent with constitutional principles and existing insolvency legislation. It created a type of debtor-not-in-possession in-court extraordinary administration designed for systemic significant (group of) companies in state of insolvency or pre-insolvency. Departing from this background, this paper aims to provide a wider restructuring picture by comparing three different legal models of preventive corporate restructurings for firms in difficulties: the German protective shield proceedings, the English schemes of arrangment and the Italian extraordinary administration. The authors attempt to evaluate each model’s effectiveness on the basis of relevant studies which indicate their success rate. As far as the Croatian Act is concerned, the paper provides an overview of the development of the preventive restructuring law, while questioning certain aspect of the Act, especially the concept of the company of systemic significance.

Involvement of the Management Board in Private Law Pre-Bankruptcy Relations

“…The strict objectified criteria for defining companies from systemic risk do not allow companies that do not formally meet the criteria, but meet them from an economic and practical point of view, to be subject to the law on extraordinary administration procedures, and vice versa (Čulinović-Herc, Zubović, Braut Filipović, 2018, p. 1459,1464,1465, 1466, 1469. In its Decision of May 2, 2018, on page 4, the Constitutional Court of the Republic of Croatia defined that systemic risk is defined not only through the number of employees, but also through the existence of a dominant economic position and the company's relationship with other companies (Čulinović-Herc, Zubović, Braut Filipović, 2018, p. 1452, 1461. On the other hand, strictly objectified criteria limit the possibility of the state apparatus to qualify a private law company as systemically significant, which reduces the possibility of abuse of law.…”

“…The Italian model has changed significantly over time. At first, the Prodi-bis Law allowed creditors, debtors, the public prosecutor and the court to initiate the procedure, while the Marzano Law allowed only the debtor (Panzani, 2009, p. 301-310) to initiate the procedure, and the procedure had to fit into the two-year period (Čulinović-Herc, Zubović, Braut Filipović, 2018, p. 1459,1464,1465, 1466, 1469. In accordance with Article 2497-bis of the Italian Civil Code, jurisdiction is determined according to the place of the center of basic interests of the company that exercises control over subsidiaries, and in the absence of such a center, jurisdiction is determined according to the place where the company has the largest debt according to the last financial report (Callegari, 2019 p. 547).…”

Limited Liability Companies in Croatia

“…62 However, there is only a handful of withdrawal and expulsion cases found in case law. 63 For the dissolution of the LLC, the shareholders (holding at least 10% of share capital) must also prove the existence of an important reason before the court, where the inability to reach an agreement due to the deadlock in the shareholder's meeting is considered to be one of those reasons. 64 In the authors' opinion, shareholders should be continuously encouraged to use their autonomy while drafting the articles of association, in order to provide for viable solutions in the event of the shareholders' disagreement.…”