REALWorld Law

Will a clause in a security document making a foreign law apply be recognized and applied by the local courts? Does local law always apply in certain circumstances?

The most common form of security over real estate is a mortgage. A 'fiduciary transfer' of ownership may also be granted as security over real estate.

Last modified 22 Mar 2024

Will a clause in a security document making a foreign law apply be recognized and applied by the local courts? Does local law always apply in certain circumstances?

Security can be granted over plots of land, which are registered at the Land Registry, and rights to build, which are separate real estate interests.

Last modified 22 Mar 2024

Will a clause in a security document making a foreign law apply be recognized and applied by the local courts? Does local law always apply in certain circumstances?

The concept of a trust or a split between legal and beneficial ownership is not recognised in Croatia.

Last modified 22 Mar 2024

Will a clause in a security document making a foreign law apply be recognized and applied by the local courts? Does local law always apply in certain circumstances?

A lender's rights in relation to secured debt may be readily transferred. The key issue is the ability of the party to which the debt is transferred to enforce its rights pursuant to the instrument creating the security.

It is generally advisable that the transfer is made by way of a notarised statement of assignment, either of the lender's rights under the loan agreement or of the entire contractual agreement. The approval of the borrower will be required for the assignment of the entire contractual agreement.

If there is an uninterrupted chain of transfers by way of notarised statements of assignment, a party will be able to enforce the security even though it was not a party to the original security document.

Last modified 22 Mar 2024

Will a clause in a security document making a foreign law apply be recognized and applied by the local courts? Does local law always apply in certain circumstances?

The same restrictions apply to the fiduciary transfer of ownership to foreigners as to any transfer of ownership of real estate to foreigners. The purchase of real estate in Croatia by foreign investors other than EU citizens or companies with their registered seat in the EU is permitted only if Croatian citizens may acquire real estate in the investor's home country, and is subject to written consent from the Ministry of Justice. The process of obtaining such consent is slow and complex, usually taking approximately a year (or more in some cases), but can be avoided if the foreign investor incorporates a Croatian company.

Last modified 22 Mar 2024

Will a clause in a security document making a foreign law apply be recognized and applied by the local courts? Does local law always apply in certain circumstances?

An agreement for the creation of security must made be in the form of a notarial deed. The size of the notary's fee depends on the value of the secured obligation. However, due to the large amounts which are generally secured, these fees usually reach the maximum level of notaries fees permitted by law (HRK 20,000) (approximately €2,700) plus VAT).

No Land Registry registration fee is payable for the registration of a mortgage or the registration of fiduciary ownership based on a security document in the form of a notarial deed.

Last modified 22 Mar 2024

Will a clause in a security document making a foreign law apply be recognized and applied by the local courts? Does local law always apply in certain circumstances?

As a general rule, any transaction in which a public limited liability company provides another party with an advance payment, a loan or security for the purpose of acquiring shares in that company is null and void.

The one exception to this rule is that a financial institution may, in certain specified circumstances, make advance payments or loans or provide security to its employees or an affiliated company if it is deemed to be in the best interests of that company. However, such transactions will be null and void even in relation to financial institutions if, in the acquisition of its own shares, the company is not able to create the required reserves for these shares without reducing its share capital or the reserves dictated by the company's articles of association.

No such rules apply to limited liability companies. However, a limited liability company must not effect payments or benefits to its shareholders (including “providing security for liabilities of shareholders") which affect its share capital, unless there is a corporate benefit for the company.

Last modified 22 Mar 2024

Will a clause in a security document making a foreign law apply be recognized and applied by the local courts? Does local law always apply in certain circumstances?

Interest on loans by foreign banks or other financial institutions is paid gross, ie free of withholding tax.

If the lender is not a bank or financial institution, a local company will be required to pay withholding tax unless it obtains a certificate for the avoidance of double taxation.

Last modified 22 Mar 2024

Will a clause in a security document making a foreign law apply be recognized and applied by the local courts? Does local law always apply in certain circumstances?

It is only possible for existing secured debt to be postponed to lower ranking newly created debt with the agreement of both the security holders themselves and the owner of the secured asset.

Last modified 22 Mar 2024

Will a clause in a security document making a foreign law apply be recognized and applied by the local courts? Does local law always apply in certain circumstances?

Events of default must be specified in the security document. When an event of default occurs, the lender may ask the public notary to issue an enforceability confirmation in relation to the security document. When such confirmation is issued in relation to a mortgage the lender will submit an enforcement proposal to the court. In relation to a fiduciary transfer of ownership ,the lender will ask the public notary to enforce the security.

A lender may only sell property secured by a mortgage following an event of default by following the court foreclosure procedure, which takes the form of a public auction.

At the first public auction, the property may not be sold unless it achieves two thirds of its market value. At the second public auction (if required), the property must achieve one third of its market value. If such a price is not achieved at the second auction, the lender may propose further auctions, and the lender's mortgage ranking will remain undamaged.

If the property is secured by a fiduciary transfer of ownership to the lender, security is generally enforced by the public notary. If the public notary fails to sell the real estate within three months, the lender will become the owner of the real estate in the amount of the secured debt plus interest, costs and taxes.

Last modified 22 Mar 2024

Will a clause in a security document making a foreign law apply be recognized and applied by the local courts? Does local law always apply in certain circumstances?

Under the Insolvency Act (Official Gazette no. 71/15, 104/17) the debtor company may opt to initiate pre-insolvency proceedings for the purpose of restructuring. In the course of such proceedings the debtor company puts a (financial and operational) restructuring plan to its creditors and if the plan is adopted by the creditors a settlement in the form of an enforceable court settlement is executed between the debtor company and its creditors. If no such settlement can be reached, the debtor company enters into insolvency proceedings (liquidation).

Lenders with a security (creditors with separate settlement rights) may participate in the restructuring process. If they choose to participate they must waive their rights to a separate settlement during the proceedings and – once the settlement is executed – for as long as the debtor company fulfils its obligations as set out in the settlement. In such a case these creditors are granted voting rights in respect of the restructuring plan and they will be bound by the plan and the settlement (their claims usually being restructured, e.g. partially written off or converted into equity), however, their securities either not being affected by the settlement or being partially affected – to the extent set out in the settlement. These lenders may choose not to participate in the restructuring proceedings, in which case they will not be bound by the settlement and they retain their security in full and may initiate settlement proceedings to enforce their security (foreclosure).

A separate law has been adopted for companies of strategic importance for Croatia, the Act on Extraordinary Administration for Companies of Systemic Importance for the Republic of Croatia (Official Gazette No. 32/17), the “Lex Agrokor”. It applies to Agrokor and its affiliates (at present) and it provides for restructuring proceedings (scheme of arrangement) under the management of an administrator appointed by the government. As regards the rights of secured lenders, the same rules as in case of a standard insolvency apply.

Last modified 22 Mar 2024

Will a clause in a security document making a foreign law apply be recognized and applied by the local courts? Does local law always apply in certain circumstances?

Secured creditors of an insolvent debtor (razlučni vjerovnici), have the right to commence enforcement proceedings over the secured asset to recover the debt.

Certain actions in relation to a debtor's assets may, in a bankruptcy situation, be contested by a creditor or the trustee in bankruptcy, even if they have taken place prior to the commencement of bankruptcy proceedings. Such actions, referred to as 'contestable legal actions', can be contested if the action is seen as favourable to certain creditors.

Last modified 22 Mar 2024

Will a clause in a security document making a foreign law apply be recognized and applied by the local courts? Does local law always apply in certain circumstances?

Secured creditors of an insolvent debtor (razlučni vjerovnici), have the right to commence enforcement proceedings over the secured asset to recover the debt. Secured creditors are paid in the order corresponding to the ranking of their security over the property.

Last modified 22 Mar 2024