According to the results of a survey conducted by the European Bank for Reconstruction and Development (EBRD) in 2003, Croatia's national Bankruptcy Law of 1997 (amended 2000) has a high overall degree of compliance with international standards, particularly in the categories of "commencement and effect of proceedings," "assets of estate," and "creditors' treatment and involvement." This assessment only looks at the content of insolvency law, and does not assess its practical implementation. A 2005 EBRD assessment, however, notes that Croatia has a large "effectiveness" gap between the terms of the legislation and its practical application. This underscores the need for further reforms, particularly with regard to the courts and other support institutions dealing with insolvency in Croatia. Both debtors and creditors seeking to commence insolvency proceedings in Croatia find it is relatively easy to determine which court to make application to, and the courts are generally adept at dealing with bankruptcy matters. The process, however, is seen as far too expensive, slow and unduly complicated to be truly effective.

General Overview

Writing for the European Bank for Reconstruction and Development (EBRD) in 2004, Harmer and Cooper found that Croatia's national legislation has a high overall degree of compliance with the international standards of a number of international organizations, including the World Bank, the Asian Development Bank and the United Nations Commission on International Trade Law (UNCITRAL). The EBRD employs a 5-point compliance assessment scale, as follows: (1) very high; (2) high; (3) medium; (4) low; and (5) very low. For the categories "commencement and effect of proceedings," "assets of estate," and "creditors' treatment and involvement," Croatia is rated as high compliance. The EBRD only assesses the content of the insolvency laws, and does not evaluate the implementation or practical effectiveness of the legislation.

The Bankruptcy Law of the Republic of Croatia (as amended in 2000) deals with both general insolvency proceedings and measures by which pre-bankruptcy transactions are to be avoided. The 2003 EBRD report found these to be quite detailed and clear in defining the type of pre-bankruptcy transactions that may be challenged. The provisions of the law that deal with cross-border cases are also judged to be clear and adequately extensive. The law also elaborates a reorganization process that the EBRD found to be sound. In addition, the EBRD assessment commended Croatian law for providing the capability of prioritizing "urgent" cases to be brought before the courts. However, the EBRD did identify areas in which improvements might be made. In particular, the report noted that the current legislation lacked (1) evidentiary provisions that would permit creditors to establish the presumption of insolvency on the part of a debtor; (2) "a clear and unambiguous provision that would subject secured creditors (and owners of property used, occupied or in the possession of the debtor) to the stay/suspension of enforcement action, pending a possible reorganization of the debtor" (p. 1); and (3) provisions requiring debtors to deliver assets to the insolvency trustee. In addition, the EBRD noted that the reorganization process is deficient in that there is no clear statement of management powers, no obligation to secure an independent review of the reorganization plan, no specific provisions for the continued financing of the reorganizing entity, and no way to control "insider voting" during the reorganization process.

In 2005, the EBRD published a follow-up assessment that reiterated Croatia's poor performance in the restructuring process, and specifically cited the lack of independent plan review as a contributory cause, along with insufficient consideration of ongoing financing needs and a lack of "stay" provisions during the pre-reorganization period. The report also found that the law still lacked the evidentiary provisions that were found to be lacking in the 2003 report. According to the EBRD follow-up, this impairs both the transparency and predictability of an insolvency system. The 2005 EBRD report further found that Croatian law still did not explicitly require debtors to deliver assets or essential documentation to the insolvency trustee. Finally, and most problematic in the opinion of the EBRD follow-up report, is the termination requirement that applies when there are not enough assets to pay the costs of the insolvency proceedings. This violates the international standard which holds that all insolvent estates must be resolved, regardless of the ability to cover costs.

The 2005 EBRD report also looked at the way that Croatia's insolvency regime functions in practice. Here it was determined that there is a large gap separating the quality of insolvency law and its practical effectiveness when implemented. Because of this gap, the EBRD report suggested that much work remains to be done. The report did find that both debtors and creditors find it easy to determine where they must file initiation proceedings, and that such courts are likely to be appropriately skilled in handling cases. However, both the EBRD and outside observers still deem the process to be "too expensive, slow, and unduly complicated to be truly effective" (p. 59)

The EBRD's 2004 Legal Indicator Survey ranked Croatia as falling between 52 and 53 (on a scale of 1 to 100) for effectiveness in both debtor-initiated and creditor-initiated regimes. Regarding speed, efficiency, predictability, and transparency, the survey rated the creditor-initiated regime (on a scale of 1 to 100) as follows: 35 for speed, 52 for efficiency, and nearly 60 for predictability/transparency. From the perspective of the debtor-initiated regime, the ratings were 25 for speed, 59 for efficiency, and nearly 59 for predictability and transparency.

According to the World Bank, in 2006, the time and cost required to resolve bankruptcies in Croatia was 3.1 years and 14.5% (of the estate) respectively in Croatia compared with a regional average of 3.5 years and 14.3% and an OECD average of 1.4 years and 7.1%. The recovery rate in Croatia was 28.9, compared with the regional average of 29.5 and OECD average of 74.0. The Recovery Rate measures the efficiency of foreclosure or bankruptcy procedures, expressed in terms of how many cents on the dollar claimants recover from the insolvent firm. (WB 2006)