The Constitutional Court of the Republic of Croatia (“Constitutional Court”) is already in the process of reviewing the constitutionality of the Lex Agrokor. Critics of this statute rely primarily on Article 49 of the Constitution of the Republic of Croatia, which, among others, guarantees the free market and states that the rights acquired through the investment of capital cannot be diminished by another statute or legal act. However, since the Constitution of the RC also protects rights such as the interest and security of the RC, the Constitutional Court will have to assess whether it was really necessary to adopt the Lex Agrokor in order to protect these other rights.
The Constitutional Court does not have a time limit for reaching a decision, which effectively means that the judgement in this case could be reached in the following months or years. If the Constitutional Court decides that Lex Agrokor is unconstitutional, Agrokor will be subject to statutes which apply to all the other companies, including the Croatian Insolvency Act. Application of this Insolvency Act would cause a disturbance within the whole Agrokor group in Croatia and beyond.
Additionally, Agrokor’s creditors will have the power to force Agrokor, (dubbed “the Lehman Brothers of Croatia” by Bloomberg), and/or members of the Agrokor Group in the RC, into insolvency proceedings, which could have consequences for the whole Agrokor group. This, surely, includes Agrokor’s affiliated companies operating in the Republic of Serbia (RS), such as Dijamant a.d., Frikom d.o.o., Mercator – S d.o.o. and others.
Possibility of opening insolvency proceedings over the Agrokor`s assets in RS
In case of opening of insolvency proceedings over the members of the Agrokor Group in RC, Serbian courts would be obliged to allow initiation of an international insolvency proceeding in regards to the assets of these insolvent Croatian companies in the RS. Practically speaking, insolvency proceedings pertaining to these assets would be conducted before a Serbian court, but the court would be obliged to, to the most extent, apply Croatian law.
Also, the Serbian court might prohibit an enforcement proceeding over the assets which members of the Agrokor group from the RC possess in the RS, and might grant special powers to a foreign representative who would, inter alia, be entrusted with the management of these assets – including a part of the management rights in Agrokor Group companies in Serbia.
Inability of opening insolvency proceedings over the assets of Serbian companies from Agrokor Group
In case of opening of insolvency proceedings over the members of the Agrokor Group in RC, the creditors will have the right to collect from assets of these companies (including the assets they possess in RS) consisting of shares in affiliated companies in RS, but not from the assets owned by Agrokor Group`s companies in RS. In other words, the creditors of the insolvent members of the Agrokor Group will not be able to directly go for the assets of the companies registered in the RS (e.g. Mercator – S d.o.o.) and thus jeopardize their business operations.
Furthermore, the Serbian Foreign Currency Exchange Act is very restrictive when it comes to the power of domestic companies to provide warrants, guarantees and other forms of security instruments for foreign members of the group—which means, that it is unlikely that the creditors of the insolvent members of the Agrokor group could hope that by using these security instruments, they could recover their claims faster. Nevertheless, if the affiliated companies of Agrokor in the RS succeeded in some legitimate manner to provide warrants, pledges or other security instruments for the members of the Agrokor group for which insolvency proceeding was initiated, the creditors of those insolvent debtors could collect their claims from the members of the Agrokor Group in RS or from their assets, which could certainly have a significant impact on the business operations of these companies.
Claims and debts between affiliated companies
Synergy is one of the main reasons the Agrokor Group exists, i.e. companies within the group work closely together and cooperate to a significant extent. This leads to the possible existence of a large number of mutual claims, which will be all affected by the potential opening of insolvency proceedings.
Accordingly, potential claims against Serbian companies from the insolvent members of the Agrokor group will continue to mature as agreed, although the collection itself will be taken over by the Agrokor’s insolvency administrator – who is expected to be diligent in these matters. In this regard, it should be taken into consideration that intercompany debts are often settled independently from the agreed commercial conditions and fixed maturity dates, i.e. according to the needs and capabilities of creditors and debtors, and without charging the default interest on matured and unpaid debts. Such debts are often settled by various legal and financial maneuvers such as conversion of debt into equity, settlement in goods, transfer of claims, etc. In other words, intercompany debts are “placed last” in terms of cash flow financial planning and are generally not considered debts affecting the operational business of the debtor. However, by opening of insolvency proceedings, the insolvency administrator takes over management of the insolvent group members and consequently such practices would be abandoned if it were taking place within the Agrokor Group. Hence, Agrokor’s companies in RS that are potentially indebted to the Agrokor Group members would be obliged to settle their debts within agreed deadlines, in cash payments to insolvent companies, and to pay the default interest on matured debts. Under these circumstances, such scenario could negatively affect the planned cash flow and lead the Agrokor’s companies in RS to serious financial problems.
On the other hand, the potential claims that Serbian companies have against the insolvent members of the Agrokor group will be considered matured as of the opening of the insolvency proceeding, but Serbian companies will only be able to collect them within that insolvency procedure. This practically means that the collection of any debts will come much later, and it is questionable to what extent it would be possible to collect those debts. As stated above, due to the particular intercompany business operations (that may have been applied within the Agrokor Group’s business), the opening of insolvency proceeding in regards to the members of the Agrokor Group in the RC would prevent the potentially planned inflow of funds from these companies into the companies in RS, which could also disrupt the operations of Agrokor’s companies in RS.
Restructuring plan and insolvency plan
The role of a restructuring plan or an insolvency plan in Croatian law, is to continue operations of a company that has, at least in part, a “healthy” business model, so that the creditors can settle their claims from its future profit. If, in the case of Agrokor, one of these two plans is adopted, the consequences for Serbian companies would be less severe, as they would simply continue to carry out their business as usual. However, the restructuring plan would definitely limit the possibility of further intercompany financing, which could make an impact on the operations of Agrokor Group companies registered in the RS, especially if such financing was part of their planned cash flow.
Also, in the restructuring plans or insolvency plans, it is possible to include certain measures to increase the profitability of the insolvent company, or for easier collection of creditors, including corporate restructuring. In the context of such restructuring, it is possible that the shares in the Serbian companies would be disposed and their ownership structure changed.
Only time will tell, to what extent Agrokor’s companies in the RS are independent of the members of the Agrokor Group in the RS and how much they can operate without financial support from the RC—specifically, how would they respond to possible financial pressures arising from a potential insolvency of Agrokor Group companies, if indeed the current state of affairs in the RC results in the opening of insolvency proceedings over the Agrokor Group companies.
