No Drama with Bankruptcies, Companies Have Proven More Resilient to Crises Than Expected

We have experienced that day when we can say that we have a law that is better than in other EU member states, such as Germany and Austria. This is the Bankruptcy Act that was adopted in 2015, and the global health and geopolitical crisis, along with the earthquake that occurred in Zagreb and its surroundings, only briefly shook the already established order of bankruptcies in Croatia.

Renowned lawyer Mićo Ljubenko points out that there has recently been a noticeable increase in the number of bankruptcies in Germany (Germany is, by the way, the country with the most bankruptcies, which is a common, less dramatic process there). He praises the changes that occurred in 2015 when the Bankruptcy Act was passed, i.e., when a radical change was made compared to the first twenty-five years of establishing a market economy.

Two basic rules were introduced: the first is that anyone who wanted (of course, and met the conditions) had a legal framework for saving the company from bankruptcy – pre-bankruptcy. In other words, they could do this at the beginning of the account blockage, while the company had not yet suffered damage, and this was done in court, without involving Fina in the bankruptcy process.

Perhaps even more importantly, at least it seems so to us, the second rule – automatic bankruptcy. Namely, Fina was introduced as a key player in the bankruptcy process, which automatically initiates bankruptcy proceedings at the commercial court after 120 days of the company’s account being blocked. In other words, this process does not depend on a person, but on an algorithm.

– This second rule exists only in Croatia within the entire European Union, which is why we could not copy it, for example, from Germany or wait for a European directive. We needed such a solution because there is no longer that agony where workers, for example, have not received fifteen or twenty salaries, go to protest in front of the Parliament, and the media have a topic because of that. This is proof that a good law can bring order – notes Ljubenko.

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In other words, there is no longer any avoiding bankruptcy. That the situation with bankruptcies began to normalize a few years after the mentioned legal changes is confirmed by data from the Ministry of Justice and Administration from almost three years ago when we (in December 2020) wrote about bankruptcies. Namely, the number of bankruptcies began to decline before the corona crisis, with 7396 bankruptcies initiated in 2018, 7167 the following year, and by 2020, that number drastically fell to 5554 (this is the latest data from the Ministry).

The decline in the number of bankruptcies at that time indicated that the Croatian economy was slowly standing on healthy legs, that its structure was being cleansed of unhealthy companies, and that we were reaching an annual level of initiated bankruptcies that should be stable – between six and seven thousand.

However, the drastic decline in the year of lockdown (compared to the more normal decline of previous years) could also be a symptom that things would indeed start to improve in the coming years. Because such a decline could have been the result not only of the efficiency of the Bankruptcy Act but also of the slowdown in the work of the courts (both due to the pandemic and the earthquake in Zagreb and its surroundings), the moratorium on loan repayments, and other factors that could have prolonged the initiation of bankruptcy.

That is why we wrote almost three years ago about a possible increase in the number of bankruptcies after it had been declining in previous years. We spoke then with our leading experts, who did not rule out that possibility even though they believed in the efficiency of the Bankruptcy Act. And indeed, after years of decline, i.e., cleaning the economy of unhealthy companies, in 2021, the number of initiated bankruptcies (as reported by the Ministry) rose to a high of 8879, which is 3325 or 59.9 percent more than the previous year.

This was concerning and again drastic. Last year, there was a new decline to 7487 bankruptcies, and from January 1 to August 31 of this year, 4591 bankruptcies were recorded. Given that we do not have data for the last quarter of the year (as it is ongoing), we can assume that there will be around seven thousand this year.

– And that’s it. There will be no drastic changes in either the decline or the growth of bankruptcy proceedings; the number may drop to six thousand. However, regarding such a number of bankruptcies, there is really no need to dramatize. On the contrary, bankruptcies are an integral part of economic activity in which some leave, and others come – notes Ljubenko.

You can read the entire topic about bankruptcies in the new printed and digital edition of Lider.