Lex Agrokor – behind the scenes

The hottest topic in Croatia right now is the Agrokor situation and the newly enacted Act on Compulsory Administration Procedure in Companies of Systemic Importance for the Republic of Croatia (Zakon o postupku izvanredne uprave u trgovačkim društvima od sistemskog značaja za Republiku Hrvatsku; the “Act“). The Act was immediately nicknamed “Lex Agrokor” because of what appears to be its main purpose.

Besides pre-bankruptcy and bankruptcy procedures, the Act implemented a third new special reorganisation regime for a distressed Croatian company of systemic importance (the “Debtor“), ie a joint stock company (together with its Croatian affiliates where it holds more than 25 %) employing more than 5,000 employees and with balance sheet obligations exceeding some EUR 1 billion.

Lex Agrokor – at a glance

  • A quick and efficient voluntary procedure of preventive restructuring with a government’s compulsory administration in charge (the “Procedure“).
  • The aim is to safeguard Croatia’s economic, social and financial stability through a single procedure that captures the Debtor and all of its affiliates domiciled in Croatia.
  • The trustee, nominated by the Croatian government, replaces the management and the supervisory board of the Debtor and assumes its shareholder rights in its subsidiaries regardless of their financial status [NB: suspension of all shareholders’ rights in the Debtor and its subsidiaries kicks in].
  • Managements of subsidiaries are not to be replaced; however, their work is closely monitored by the trustee.
  • During the Procedure there is a moratorium on liquidation, pre-bankruptcy, bankruptcy, litigation, arbitration and enforcement proceedings (apart from labour proceedings) [NB: it seems that the moratorium does not automatically roll over outside Croatia].
  • The main tasks of the trustee are to keep the ordinary business of the Debtor going and to reach a settlement with creditors.
  • Personal creditors, holding a claim against the Debtor and/or its affiliates at the time when the Procedure is opened need to file their claims within 60 days from the opening of the Procedure. The claims could be recognised or contested by the trustee or other creditors [NB: the claims are forcedly converted into Croatian kunas within the Procedure; also, it seems that lenders under the PIK facilities should not report their claims; however, PIK lenders should consider informing the trustee of their security interests].
  • Novelty: the trustee may take on new financing in order to mitigate systemic risk, continue business operations, preserve existing assets or make payments in the ordinary course of business; such new debt will rank super senior to other creditor’s claims (as a creditor of the bankruptcy estate) in future bankruptcy procedures over the Debtor or any of its subsidiaries [NB: at this stage it is very difficult to foresee the real advantage of such super seniority ranking in the Agrokor case, since nobody knows the real volume of Agrokor’s bankruptcy estate (that is not already collateralised)].
  • No clear wording on how the creditors are grouped in the creditors’ council, which may lead to over-voting of majority shareholders.
  • Subsidiary application of the Insolvency Act, including provisions on clawback and trustee’s liability [NB: the trustee may choose which legal actions to challenge].
  • The pari passu principle regarding “old” debt is in favour of suppliers whose “old” debt may be paid out during the Procedure, while there is an express prohibition on payment of any “old” financial debt.
  • The trustee shall appoint an internationally renowned restructuring advisor to assist with the restructuring and the settlement.
  • The Ministry of Economy appoints the members of the advisory committee; the advisory committee provides opinions on decisions of the trustee.
  • Up to nine creditors’ representatives are appointed to the creditors’ council. The creditors’ council (i) assists the trustee in drawing up the settlement; (ii) consents to disposing property of the debtor with a value of more than HRK 3.5 million; (iii) consents to new (super seniority) lending; (iv) consents to paying claims due before the opening of the Procedure, etc.
  • The trustee must propose a settlement with the creditors within 12 months after the opening of the Procedure (the court may grant an additional three months); [NB: the entire Procedure needs to be finalised within that period].
  • A settlement has to be accepted by the majority (in number) of all creditors. In addition, (i) the claims of the consenting creditors must exceed the claims of the dissenting creditors in each group, or (ii) the claims of the consenting creditors must exceed two-thirds of the total claims (regardless of creditor groups) [NB: the settlement also will be effective vis-à-vis creditors who have not participated in the proceedings].
  • Acquirers of shares in the Debtor or its affiliates do not have to make a takeover bid [NB: it seems this does not apply when enforcing share pledges (eg shares in Agrokor d.d.)].

Could somebody answer these questions on Lex Agrokor, please?

  • What exactly is a systemic risk?
  • Is the recourse factoring of bills of exchange by the suppliers really the concern of the trustee and is it acceptable to classify claims by factoring companies originating from suppliers as the “old” debt of suppliers (which may be repaid from operations after the opening of the Procedure)?
  • Why is the trustee entitled to group the creditors in the creditors’ council and what is the purpose of having two different suppliers’ representatives (“small” and “large”) in the creditors’ council?
  • Why is payment of OpCos’s due debt possible without the approval of the creditors’ council and is it legitimate to pay “old” debt before all claims are reported?
  • How could one representative in the creditors’ council collect 50 % of PoAs from creditors it represents within such a deadline?
  • Are cross-guarantees of OpCos going to be challenged by the trustee?
  • Does distortion of the pari passu principle represent expropriation under the BITs?
  • How can Agrokor’s assets be protected outside Croatia?
  • How are the interests of minority shareholders in OpCos protected?
  • Who interprets Lex Agrokor during the Procedure?

Summary: Since the situation with Agrokor “suddenly” erupted and there was a real threat of Agrokor ending up in “uncontrolled” bankruptcy, the government needed to swiftly adopt a legal framework to allow some kind of forced standstill agreement between all interested parties.

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The original press release can be found here on the Schoenherr website.