In the course of business operations, companies frequently encounter financial difficulties that require shareholders and owners to seek appropriate legal solutions resulting in the termination of the company’s existence. In practice, special-purpose project companies are often established for specific ventures that ultimately fail to achieve their intended objectives, making it necessary to regulate their dissolution through appropriate legal procedures.
For example, in the Republic of Croatia, a large number of companies are established for the purpose of implementing construction and real estate development projects. Certain projects have pre-arranged purchasers who commit to buying properties within the development. However, developers often encounter various difficulties that prolong project implementation, including administrative obstacles, bureaucratic delays, and lengthy procedures for obtaining building permits and other regulatory approvals.
At the same time, prolonged project implementation increases costs. Construction costs have risen significantly in recent years, affecting the overall financial viability of projects, many of which ultimately result in financial losses. In order to mitigate future losses and eliminate uncertainty, shareholders frequently decide to terminate the company, commonly referred to as “closing the company.”
In this article, we analyze the above legal mechanisms, supported by practical examples, with particular emphasis on the legal position of company owners and shareholders, as well as their rights and obligations within the company.
The Croatian Companies Act provides for several methods by which a company may cease to exist.
Pursuant to Article 113 of the Companies Act, once grounds for dissolution arise, the company enters into liquidation unless the shareholders agree upon another method of settlement and distribution of assets or bankruptcy proceedings are initiated.
In a liquidation procedure, once creditors have been fully satisfied, the liquidators are required to distribute the remaining assets among the shareholders in proportion to their respective shareholdings in the company’s capital, as determined on the basis of the final financial statements.
During the liquidation process, cash assets that are not required for the settlement of creditors may be distributed temporarily. However, sufficient amounts must be retained to cover obligations that are not yet due, disputed claims, and the amounts required for the final distribution to shareholders.
The liquidation process is conducted under court supervision through appointed liquidators, who are most commonly shareholders of the company or individuals who were previously authorized to represent the company.
Upon completion of the liquidation procedure, the liquidators must file an application with the court requesting the deletion of the company from the court register. The company ceases to exist upon its removal from the register.
Following the completion of liquidation, the company no longer exists. Consequently, the shareholders and individuals previously authorized to represent the company—often the same persons—are generally no longer liable for potential obligations that may arise from the company’s prior business activities. Such obligations may include liability for damages arising from the company’s operations, contractual liabilities, or other obligations that were not known at the time when contractual relationships were performed.
For example, in construction and real estate sales projects, defects in workmanship frequently emerge after completion and may become the subject of legal proceedings seeking the rectification of such defects. If the company has been deleted from the court register following liquidation, such proceedings are generally no longer possible against the company because it no longer exists, nor can proceedings generally be pursued against the company’s shareholders solely on the basis of their former ownership status.
The Croatian Bankruptcy Act also provides for pre-bankruptcy and bankruptcy proceedings as mechanisms through which companies experiencing financial difficulties may restructure their liabilities and continue operating or, in the case of bankruptcy, cease to exist following the settlement of creditors from the company’s assets.
Pre-bankruptcy proceedings may be initiated when a company’s bank accounts have been blocked for a period exceeding 21 days. In such proceedings, the debtor company proposes to its creditors a restructuring arrangement involving installment payments and partial write-offs of principal debt and accrued interest, while continuing to carry out its business activities.
The implementation of a pre-bankruptcy restructuring plan requires the approval of a majority of creditors measured by the total amount of claims. If such approval is not obtained, bankruptcy proceedings may follow.
Bankruptcy proceedings are generally initiated when a company’s bank accounts have been blocked for more than sixty days or when the company’s liabilities exceed its assets. As a rule, bankruptcy proceedings involve the realization of the company’s assets and the distribution of proceeds among creditors.
During bankruptcy proceedings, the law provides for the possibility of proposing and implementing a bankruptcy plan through which the company may continue its operations. However, such a plan requires approval by a majority of creditors based on the total amount of recognized claims, and in practice such approval is relatively rare.
The appropriateness of each of the above procedures depends on the specific legal and economic circumstances of the company concerned.
In a recent case before the courts, we successfully implemented a merger of a company into another legal entity, resulting in a favorable outcome for the merged company. A company that was facing bankruptcy due to the existence of statutory bankruptcy grounds was merged into another company, after which we successfully conducted pre-bankruptcy proceedings. As a result, the company continued its operations and successfully completed existing and future projects. Following the completion of the pre-bankruptcy process, the company fulfilled its obligations and returned to profitability.
If your company is experiencing financial difficulties, an appropriate legal strategy tailored to the specific circumstances can help you make the right decision regarding future actions. Professional legal assistance is often crucial in identifying and implementing the most suitable solution.
