Pre-bankruptcy: Excessive Formalism in Claim Submission Violates Right to Access to Court

Written by: Stjepan Lović, attorney, Law Firm Grubišić & Lović & Lalić

The pre-bankruptcy procedure is an opportunity for the rehabilitation of business and financial problems as it allows for debt restructuring and finding sustainable solutions for meeting obligations. Therefore, the goal of pre-bankruptcy, as prescribed by the provisions of the Bankruptcy Act, is to maintain the company’s operations. The legal regulations regarding the submission of creditor claims are strict and clear, and the deadlines are short. Creditors must submit their claims to Fina within 21 days after the announcement of the decision to open pre-bankruptcy on the e-Notice Board, including those for which they are already in court proceedings. This is a preclusive deadline, so the court will reject any claim submitted after the deadline for submission, and in the proceedings related to the unreported claim, it will dismiss the lawsuit.

European Court Ruling

In this context, a recent ruling by the European Court of Human Rights (hereinafter: the Court) published on January 21, 2025, in the case ‘Merčep v. Croatia’ is interesting. Namely, in that ruling, the Court took the legal view that the dismissal of a lawsuit solely due to the late submission of a claim in pre-bankruptcy represented excessive formalism, thereby violating the right to access to court, as one of the fundamental human rights.

The applicant was conducting civil proceedings for damages against a media company in relation to which pre-bankruptcy was initiated during the proceedings. Since civil proceedings are interrupted upon the opening of pre-bankruptcy, the proceedings led by the applicant were interrupted. The pre-bankruptcy was initiated in 2013, when it was regulated by the rules of the then applicable Financial Operations and Pre-bankruptcy Settlement Act, where the deadline for submitting claims was thirty days, and the consequence of not submitting a claim is identical to the current one – creditors lose the right to satisfaction of their claims. At the same time, the debtor is obliged to report all its obligations to creditors and inform them about ongoing proceedings.

This legal provision sets a clear framework that, although its goal is to expedite the process and ensure a balance between the debtor and creditors, simultaneously poses certain obstacles to creditors who may not be aware that a pre-bankruptcy procedure has been opened or cannot submit their claims on time, thus facing legal consequences that may jeopardize the realization of their rights. In the case before the Court, this procedural element played a crucial role. Namely, the applicant did not submit his claim on time for which he was conducting the lawsuit, thus losing the right to subsequently initiate proceedings for the collection of the claim.

Obstacle to ‘Fair Trial’

In this case, the Court identified a key element related to excessive formalism in proceedings, which arises when courts excessively emphasize procedural rules, neglecting the broader context of an individual’s right to a fair trial. In doing so, it particularly valued the circumstance that a dispute regarding the late submitted claim was already being conducted before the opening of pre-bankruptcy, whereby it was likely that the debtor would contest such a claim and that if it had been submitted on time, the same court would ultimately decide on the validity of the claim. Although the legal norms regulating pre-bankruptcy are strict and clearly defined, courts have been called upon to reconsider their application in situations that jeopardize the right to access to court and to a fair trial.

The Court emphasized in its reasoning that a formalistic approach, such as dismissing a lawsuit due to a formal defect in the claim submission, can result in an unjust limitation of access to court. The importance of ‘proportionality’ in the application of legal norms was highlighted in the proceedings, which should take into account the circumstances of each individual case and ensure that formalities do not result in unjust denial of justice.

Establishing Balance

Although this court ruling rightly warns of the need for balance between strict legal rules and the protection of human rights, it is necessary to assess the applicability of its conclusions to the current provisions of the Bankruptcy Act. Namely, in pre-bankruptcy, creditors are classified into payment ranks and are satisfied according to the accepted restructuring plan. Regarding a creditor’s claim that has not been submitted nor is part of the restructuring plan, the question arises as to how such a claim would be satisfied considering that the dispute regarding it was conducted before the opening of pre-bankruptcy, so it could not be considered to have arisen after the opening of pre-bankruptcy.

The answer to the posed question is provided by Article 62 of the Bankruptcy Act, which stipulates that the claim of a creditor who has not submitted their claim in pre-bankruptcy, although duly informed of its opening, can only be satisfied in the manner, within the deadlines, and under the conditions provided by the restructuring plan for the claims of the group of creditors to which the respective creditor would belong if they had submitted their claim. Amendments to the Bankruptcy Act in 2022 recognized the issue of excessive formalism, thus establishing a greater balance between achieving the goal of pre-bankruptcy and the right to a fair trial, so that creditors who did not submit their claims on time could also satisfy their claims.