Twitter Logo Youtube Circle Icon LinkedIn Icon

Publishing firms

Legal Developments worldwide

MANAGING DIRECTOR LIABILITY AND INSOLVENCY IN CROATIA

August 2009 - Corporate & Commercial. Legal Developments by Wolf Theiss.

More articles by this firm.

In times of crisis, it is particularly important for the managing director of a limited liability company to meet all legally prescribed obligations regarding auditing and notification in a timely manner in order to avoid any possible (personal) liability. In Croatia, countless companies ("društvo s ograničenom odgovornošću" or abbreviated "d.o.o.") exist in which foreigners act as managing directors. Thus, knowledge of and attention to legal distinctions are of significant importance.

Declaration of bankruptcy in Croatia within 21 days

In accordance with Croatian bankruptcy law, the members of a company's Board of Directors, upon the occurrence of conditions leading to the initiation of bankruptcy proceedings, are obligated to notify the competent court immediately, but at the latest within 21 days after the beginning of the insolvency or over-indebtedness period. Forced settlement procedures ("postupak prisilne nagodbe") are no longer used in Croatia. In contrast to this, in accordance with Section 69 of the Austrian Bankruptcy Code, the debtor (thus the company through its representative), upon the occurrence of the respective requirements, is obligated to file a request for the commencement of bankruptcy proceedings "without culpable hesitation".

With regard to serious restructuring measures, the notice period may be extended to a maximum of 60 days.

Requirements

In Austria as well as in Croatia either insolvency or over-indebtedness is a requirement for initiating bankruptcy proceedings. However, both in Austria and Croatia it is hard to draw a distinction between a persistent lack of funds and an "insignificant", temporary shortage of funds, as well as to assess this undoubtedly central issue. It is a remarkable rule that the Croatian bankruptcy law refers to the debtor's account movements, whereby insolvency is assumed when due payments have not been made within 60 days and, at the same time, the bank would have been obligated to fulfil the debtor's payment obligations without such debtor's consent thereto. Such rule does not apply in cases where the debtor settles all debts in the course of the commencement of bankruptcy proceedings ("prethodni postupak").

Over-indebtedness is assumed when the debtor's funds do not cover existing obligations; over-indebtedness is however not assumed if the assumption can be made that the debtor will be able to settle all obligations in the course of its continued business operations.

Breach of duty of care and resulting consequences

Pursuant to Article 252 in connection with Article 430 of the Croatian Act on Trading Companies, the members of the board of directors of a limited liability company are obligated to employ the diligence of a prudent businessperson.

Such diligence comprises, inter alia, the obligation not to make payments once insolvency, or over-indebtedness respectively, has materialised. Article 251 of the Croatian Law on Trading Companies further stipulates the obligation of the board of directors to file a request for bankruptcy proceedings in a timely manner as well as to immediately convene the general assembly in case of a pending loss of half of the share capital.

Managing directors failing to observe their duty to act with due care are held jointly liable towards the company for any damage caused by their violation of such duty. The company may waive its right to hold the managing directors liable by means of a shareholders' resolution, however only to a limited extent. The (sole) consent of a possibly existing supervisory board does not exonerate the directors from liability.

If a creditor's claim is irrecoverable only because of a serious violation of duties on the part of one member of the board of managing directors, creditors may file a claim for damages against the board of managing directors directly. During the bankruptcy proceedings, claims for damages may only be filed against the managing directors by the company (represented by the liquidator).

According to the express provision of Article 39 of the Croatian Bankruptcy Act, managing directors are personally liable towards the creditors for any damage caused by the belated initiation of bankruptcy proceedings. Joint liability in the case of several managing directors is currently being discussed in legal literature. Also, criminal prosecution is possible if the obligations to timely initiate bankruptcy proceedings or to convene the general assembly in case of a pending loss of half of the share capital have been violated.

Pursuant to Article 626 of the Law on Trading Companies, criminal prosecution is possible if a request for the commencement of bankruptcy proceedings has not been filed. At the latest six years after the offence was committed, criminal prosecution becomes statute-barred. In Austria, however, a belated filing for the commencement of bankruptcy proceedings is no longer subject to criminal prosecution, ever since Section 159 of the Austrian Criminal Code was amended.

Prudence and reliable information provide protection

In Croatia, there have been only a few proceedings on the liability of managing directors; therefore, no generally accepted legal practice has been established. There is, however, a tendency for the obligations of managing directors to be construed rather rigidly along the lines of the respective legal provisions. As a consequence, and especially in times of crisis, it is imperative that foreign managing directors not only be acutely aware of their responsibilities, but also of the differences between the laws in each respective country.

 

This article was first published in Wirtschaftsblatt.

 

For further information, please contact Alexander Fruehmann, Wolf Theiss, Tel. +43 1 51510-5800, alexander.fruehmann@wolftheiss.com

www.wolftheiss.com