Pre-bankruptcy proceedings: what entrepreneurs need to know about taxes, deadlines, and liability
Pre-bankruptcy proceedings allow a company threatened with insolvency to agree a restructuring plan with its creditors under court supervision and continue operating. For entrepreneurs, this has two sides: it imposes obligations and personal liability on the management of a company in difficulty, and it raises questions of collection, VAT, and corporate income tax for a creditor whose customer is in pre-bankruptcy.
What pre-bankruptcy is and who can initiate it
Under the Bankruptcy Act, pre-bankruptcy proceedings are conducted to regulate the debtor’s legal position and its relationship with creditors, to prevent insolvency, and to maintain its business operations. A restructuring plan may also provide for writing off part of the claims or converting them into the debtor’s share capital.
Proceedings can be opened if there is imminent insolvency: the debtor is not yet permanently insolvent, but has a blocked account, is more than 30 days late paying wages, or fails to pay payroll taxes and contributions within 30 days. Only the debtor can file the proposal; since the 2022 amendments to the law, a creditor can no longer do so.
The proposal must be accompanied by a list of assets and liabilities and financial statements no older than three months. The applicant pays an advance for proceeding costs of €660.00, and from 1 June 2026 also a court fee of €280.00. Pre-bankruptcy is not permitted during liquidation. The proceedings must conclude within 120 days of opening, with a possible extension of up to 180 days.
Obligations and personal liability of management
Initiating pre-bankruptcy proceedings is the debtor’s right, not an obligation. Nevertheless, directors/management are required, where insolvency is likely to occur, to take creditors’ interests into account, to take measures to avoid insolvency, and to avoid actions that intentionally or through gross negligence jeopardize the viability of the business.
Once a bankruptcy ground arises, the person authorized to represent the company must file a bankruptcy petition within 21 days at the latest. A debtor is deemed insolvent if its account has been blocked for more than 60 days or if it has failed to pay three consecutive wage payments. At that point pre-bankruptcy is no longer possible, since the existence of a bankruptcy ground excludes the pre-bankruptcy ground.
If management misses the deadline:
- the court orders it to pay the advance for bankruptcy proceeding costs from its own funds,
- under the Companies Act, members of management are jointly and severally liable to the company for damages and must repay amounts paid out after the bankruptcy ground arose, and failing to file for bankruptcy is a criminal offense,
- courts have held that persons authorized to represent the company are personally liable to creditors for damages caused by missing the deadline.
If the court discontinues an opened pre-bankruptcy proceeding, for example because creditors do not accept the plan, it continues the proceedings as bankruptcy proceedings, unless the debtor is solvent and has fulfilled all its obligations to creditors.
If your customer is in pre-bankruptcy
In pre-bankruptcy proceedings, restitution to a prior state cannot be sought, so a missed deadline cannot be made up. Documents are not sent by post but published on the courts’ e-Notice Board, and service is deemed completed upon expiry of the eighth day after publication.
File your claim with FINA within 21 days. The court rejects a late filing, and a claim is not considered filed merely because the debtor listed it in the proposal. An unfiled claim can only be settled by the creditor in the manner and under the conditions provided by the plan. FINA’s filing fee is 2% of the claim, capped at €25; it is paid by the creditor if the claim was listed in the proposal and is contested, and by the debtor if it was not listed and is not contested.
Check other parties’ claims and, if necessary, contest them within 15 days of service of the debtor’s and the trustee’s statements.
Vote. Voting is done in writing before the hearing begins, and anyone who does not submit the form is counted as voting for the plan. The plan is accepted if, in each class, a majority of creditors voted for it and the sum of their claims exceeds twice the sum of the claims of those who voted against. A creditor with a right of separate satisfaction must, within 21 days of service of the plan, declare consent to postponing settlement from the collateral.
Object if the plan is prejudicial to you. The court will not confirm the plan if a creditor objected no later than at the hearing and made it plausible that they are placed in a worse position than they would be without the plan. The court also will not confirm a plan whose acceptance was achieved in an impermissible manner, particularly by placing individual creditors in a more favorable position. An appeal against confirmation of the plan costs a court fee of €560.00 from 1 June 2026.
Upon opening of the proceedings, interest stops accruing, the statute of limitations is interrupted by filing the claim, and enforcement is prohibited for 120 days, with the possibility of two extensions of 90 days each. You may not terminate a contract with the debtor that neither party has performed, nor withhold performance, on account of unpaid old debt. These restrictions do not apply to claims arising after the proceedings were opened. Pre-bankruptcy does not affect employees’ claims, severance pay up to the statutory amount, claims for workplace injury, claims arising from intentional unlawful acts, fines, or maintenance (alimony) claims.
Tax aspects for the creditor
VAT on uncollected invoices
Under the amendments to the VAT Act effective 1 January 2024, a supplier may reduce the tax base and VAT liability if a due claim has not been collected for more than a year. The rule applies to invoices issued from 1 January 2024. The conditions are:
- the supplier must have evidence that it took collection action, in particular enforcement, a lawsuit, a settlement with an unrelated debtor, or other evidence that it demanded payment,
- the reduction is carried out within six months of the right to the reduction arising, and the customer is notified of it,
- a PDV-ispravak (VAT correction) form is submitted together with the VAT return via ePorezna.
If the claim is nevertheless later collected, the tax base must be increased accordingly.
Corporate income tax
Under the Corporate Income Tax Act, a value adjustment of receivables from customers is recognized for tax purposes if more than 60 days have passed from the due date to the end of the tax period, and the receivable has not been collected by the 15th day before the tax return is filed. In addition, the receivable must be recorded as income, and all actions to secure collection must have been carried out with the diligence of a prudent businessperson. If this is not done before the statute of limitations expires, the amount of the adjustment is reversed back into income.
Once the restructuring plan is confirmed, the amount of the claim that the creditor writes off under the plan is recognized as a tax-deductible expense.
Tax aspects for the debtor
Input VAT correction. When a supplier reduces VAT due to inability to collect, the customer (debtor) must correct its input VAT deduction in the period in which it received the notification. If it fails to do so, the Tax Administration charges it that amount by decision.
Income from debt write-off. A debtor whose obligations were written off under a confirmed plan, and who thereby realized income, is required to retain that income until the deadline for fulfilling all obligations under the plan has expired.
Conclusion
Pre-bankruptcy is only possible until a bankruptcy ground arises; from that point, management has 21 days to file a bankruptcy petition, and missing that deadline triggers personal liability. For a creditor, the key points are the 21-day deadline for filing a claim and voting on the plan. On the tax side, a creditor can reduce VAT on invoices issued from 2024 that have been uncollected for more than a year, and can recognize value adjustments and write-offs under a confirmed plan, while the debtor must correct its input VAT and retain income from the write-off.
If you are a creditor of a company that has opened pre-bankruptcy proceedings, or if your own company is facing liquidity difficulties, CONEO Croatia’s experts can help you assess the tax and financial consequences and prepare the necessary documentation. Contact us
