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Novelties in the Croatian Companies Act and Court Registry Act – Another Half-Reform Missing the Opportunity To Make Things Truly Simpler for Entrepreneurs

Novelties in the Croatian Companies Act and Court Registry Act

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On the 9th of March 2022, the Croatian Parliament adopted the amendments to two crucial Croatian laws – the Companies Act (ZTD) and Court Registry Act (ZSR). Most of the amendments to the ZSR entered into force on the 24th of March; two articles will be entering into force on the 1st of August 2022, and another one on the 1st of August 2023. Amendments to the ZTD are still to come into force, some on the 1st of June 2022, and others (the most significant ones) only on the 1st of August 2023.

As is usual in the past 15 years, the amendments were initiated to harmonize the national laws with the European regulation. This time it was the Directive (EU) 2019/1151 regarding updating the rules on the application of digital tools and processes in the company law. How successful was the implementation? Almost - taking into account that some of the crucial changes related to fundamental processes were removed between the drafts, and the whole plan was diluted into several basic process changes. Moreover, those exact amendments are the ones entering into force in more than a year’s time. Due to that, this text focuses on the remaining amendments – those that have already entered into force or will enter come the 1st of June 2022.

1. Ability to give “On my mother's, I don't owe anything“ statement via proxy

Anyone forming a company in Croatia or acquiring a share in one certainly remembers giving the famous notarized statement: “I swear, neither I nor any business venture in which I hold no less than 5% of stake owe any salaries or taxes or contributions.“ Foreign investors and entrepreneurs especially remember that statement since it couldn't have been signed by proxy, only strictly personally. It led to complications where large multinational investors that wanted to form a subsidiary in Croatia or to acquire shares in another company had to organize one or more of the board or c-suite members to either (a) come to Croatia personally to sign the said statement, or (b) to translate the statement in their official language, to sign and notarize it in their country of residence, to obtain an apostille on that statement, and then to translate the entire thing back to Croatian, and have it in Croatia in front of the notary signing off the formation documents, all in 30 days or less. The punchline was that the statement was relevant only for potential debts towards employees in Croatia or Croatian, which meant it was common to get an empty notarized statement merely to satisfy the form. Once the statement was received, the proxy could execute all other actions in the company formation process in front of the Croatian public notary.

However, thanks to the active participation of Porobija & Špoljarić in the amendment drafting process, at least a partial victory was achieved. Even though the obligation on providing such a statement has not been removed, and the investors from, e.g., USA or Hong Kong, will still need to state not owing taxes in Croatia, a proxy authorized to execute the company formation documents will also be authorized to give the said statement on behalf of the founder/acquirer. Even though it does not sound as much, it is a significant step towards expediting the company formation and share acquisition in practice.

2. Procurators will have to provide a written appointment acceptance

One of the glaring loopholes created after the lawmakers revoked the obligation to deposit the appointed company representatives' signatures in the registry was the one where the procurators were registered in the court registry solely based on the appointment decision. Because of that, it was entirely possible to legally register someone as a company procurator without that person being aware of their appointment. Naturally, such a “procurator” had a remedy to request the deletion of the registration on account of never giving consent for the appointment, but that was a process that didn't happen overnight, and the whole false appointment could damage that person's reputation.

Procurators were the only registered company function that didn't require proof of consent or acceptance. Both the directors and the supervisory board members have been obligated to provide a written acceptance statement ever since the Companies Act was enacted in 1993. Even though the procurators don't have such authority and much less liability as, e.g., directors, it is still not optimal for any vital company function to be registered without any evidence of the actual will to accept such appointment.

A new provision of Art. 45 Par. 2 of ZTD sets the obligation to deliver the written statement of acceptance of the appointed procurator to remove any doubt in mutual interest for appointment and acceptance of the procurator role.

3. Additional reasons for the ban on directorship appointment and introduction of the register of persons banned from being company directors

Rules and conditions regulating when a person cannot be a company director have always been in force. However, they always focused on local, i.e., the reasons for the ban had to have occurred in the Republic of Croatia. If e.g., a person had a white-collar crime verdict in Austria, it didn't affect their right to be an appointed director in Croatia. Considering the general globalization of business and especially Croatia’s EU membership (freedom of establishment), the directorship ban rules are being widened to cases when they exist in other countries.

Additionally, even though the conditions defining the (in)ability to be a company director were clear, it was almost impossible to check the truthfulness of the newly appointed director's statement on the inexistence of potential exclusion reasons in practice. The only way to determine if the law was breached by the appointment of a director who did not satisfy the conditions for the appointment was by someone filing a report based on personal findings of facts.

From now on, the Croatian Ministry of Justice and Administration will, in cooperation with the court registry, form and manage a register of persons banned from directorship appointments. It will be possible to use that register at the moment of the person's appointment or the moment of registration at the latest. Therefore, if you have been banned from being a director in Croatia or some other country, consider the possibility that your name will flash on the screen of the public notary or the registrar, and your dreams of being a Croatian entrepreneur will be shattered.

4. Where do we archive the books and records of dissolved businesses, vol. 455

After many years in which it was expected from the courts to be warehouses and to archive books and records of companies that ceased to exist (and where the courts justifiably rejected to fulfill the said obligation as they had no physical capacity to store such amounts of documents), and then the unsuccessful attempt to give that task to the Croatian Chamber of Commerce (which never came to life), the new „guardians of the archive“ should become „persons providing services of archiving business books and records.“ That implies the archiving is being moved from the public into the private sector. Moreover, it is now explicitly mentioned that the archive can be kept digitally, as that is the most prevalent way of archiving historical documents in this day and age. It appears we finally found a solution, doesn't it? It does – until we arrive at the payment issues of the service. As it goes, the costs should be borne by the entity being dissolved. So, what happens if that entity has no funds to cover the fee? We honestly doubt that private service providers will be willing to archive books and records of a company that doesn’t have the money to pay, nor will it ever have. As there is no real penalty for dissolved companies not archiving in accordance with the law, we believe this saga will have its tom No. four hundred fifty-six published in the near future.

Conclusion

The current (and yet another in the sequence) mini-reform of the company law is merely a cosmetic at this moment. At the same time, the fundamental changes are expected to happen when the remaining amendments enter into force in August 2023. Those amendments will enable the remote formation of limited liability companies through a digital platform and via proxy. Also, the notaries will be able to form companies via video link. Still, a lot of time will pass until then, and that period will show us how effective will the changes coming into force this June be.

By Marko Porobija, Managing Partner, Porobija & Spoljaric

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