Back in the 2000s, the conditions for getting a loan from a Croatian bank were quite strict and complicated. Beside a good credit rating, the banks were asking for a number of securities: mortgages, guarantors, etc. Recognizing that as a good business opportunity, many foreign financial institutions (primarily banks and leasing companies, but also financial cooperatives) decided to enter Croatian market.
They offered relatively affordable and simple financing solutions for both Croatian companies and citizens. However, although it was required by law, many of those lenders decided not to establish subsidiaries in Croatia or to seek approval from the competent authorities for their local activities. At that time, the only consequence for this non-compliance would have been misdemeanor fines for the financial institutions and their local representatives.
Since such fines by the Croatian authorities against the foreign financial institutions without presence in Croatia were almost impossible to enforce, and as the activities of the local representatives were below the radar for the Croatian authorities, foreign financial institutions were almost completely undisturbed in their financing activities in Croatia.
Now, ten years later, those foreign financial institutions might be facing serious difficulties because of their decision to proceed on that basis, as, following a substantial number of non-performing loans, pending enforcement proceedings and political pressure, the Croatian Parliament has recently enacted a new Law on Nullity of Loan Agreements with International Character.
According to the Parliament, the purpose of the new law is to prevent further enforcement proceedings initiated by foreign lenders which were not registered in the Republic of Croatia when the relevant loan agreement was executed.
The new law provides that such loan agreements, including any security documents, are to be proclaimed null and void, retroactively, and without any time limitation. In order to get the loan agreement annulled, the borrower merely has to file a claim, as the new law explicitly stipulates that the Croatian courts are competent for such claims. Thus, even if the loan agreement provided for the competence of a foreign legal venue, the borrower is entitled to file the claim in Croatia.
The new law is very short und unfortunately quite unclear: it affects loan/credit products and is to be applied on borrowers and guarantors alike, as domestic consumers and/or legal entities. It applies to every kind of agreement, disregarding applicable law, if the agreement has been executed in the territory of Croatia and the lender (at the moment of execution) is not registered with the Croatian Court Registry, has not held a banking license from the Croatian National Bank, and/or has not satisfied conditions for doing business in Croatia in general.
The problem for the foreign lenders lies not only in the fact that their loan agreements could be annulled, but also in the fact that this annulment would trigger the annulment of security documents like mortgages and guarantees. In other words, the already registered mortgages would be deleted and the guarantors released of their obligations.
Since the court decisions would have retroactive effect (a loan agreement would be proclaimed null and void from the moment of its execution), the parties will be obliged to return to each other all of the received proceeds: the borrower to return the lender the principal amount without interest, and the lender to return to the borrower the interest back to the borrower. In practice, the best case scenario for the foreign lender would be to retain the principal amount without interest; in the worst case scenario (if the borrower has not repaid the loan, partially or completely), the lender would have to initiate a new court procedure against the borrower, without having any security instrument of the borrower.
Despite its harsh provisions, the new law cannot be applied on already repaid loans. Also, it does not affect borrowers which are State-owned entities or medium or large entrepreneurs pursuant to the rules of the Croatian Accounting Act.
Although there is still no relevant court practice at the moment of writing this article, the new law will obviously have significant impact on the Croatian judiciary system, in particular with regard to a possible non-constitutional effect due to its retroactive effects.
By Branimir Ivekovic, Ivekovic Law Offices
This Article was originally published in Issue 5.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.