On April 1, 2019, the signs and flags in an industrial area of Zagreb, the capital of Croatia in the South-East of Europe, turned from red to green; the old Agrokor letters on red background were replaced by the new green logo of the Fortenova Group. The date marked the successful end of a restructuring that had shaped the economic, political, and social landscape of Croatia and the surrounding region in the two years following the company’s entry into “extraordinary administration” on April 7, 2017.
Agrokor was the largest privately owned company in Croatia. The group employed about 53,000 people across 20 countries, the majority of whom were based in Croatia and neighboring states, contributing significantly to the regional economy. The group comprised more than 150 entities across the food industry in a vertically integrated, farm-to-table structure. The entities covered agriculture, food production, and retail, the latter of which included a number of market-leading supermarket chains. Because of Agrokor’s significance as a major employer and food producer/supplier/retailer, a resolution to its financial troubles was of critical importance to the Central and Eastern Europe (CEE) economy.
When it became apparent that such a systemically important company as Agrokor faced insolvency in early 2017, Croatia’s lawmakers devised and enacted an emergency law in April 2017, the Law on Extraordinary Administration Proceedings for Companies of Systemic Importance (EA law), to cater to the group’s inevitable restructuring. The EA law provided an alternative to Croatia’s bankruptcy regime, thereby enabling the group to avoid insolvency and instead to effect a holistic restructuring.
On April 8, 2017, an extraordinary administrator, a role akin to an insolvency trustee, was appointed by the Zagreb commercial court to conduct the proceedings in respect of Agrokor. Upon commencement, the EA proceedings automatically extended to all Croatian group entities in which Agrokor had a stake of 25% or more. The administrator’s mandate was to reach an agreement with the group’s creditors to restructure Agrokor’s liabilities and enable the continuing operation of the group’s businesses.
This agreement would be documented by way of a settlement plan, not dissimilar to a U.S. Chapter 11 plan of reorganization or a German law Insolvenzplan, and was to be agreed to by the group’s creditors within 18 months, failing which the group would file for insolvency proceedings. The settlement plan— which provided for a comprehensive restructuring of the secured and unsecured liabilities of the group entities subject to the EA proceedings—received the approval of an overwhelming majority of more than 80% of all admitted claims in July 2018, following which all assets were transferred to the new Fortenova Group structure. The settlement plan took effect on April 1, 2019.
The EA law, while untested, proved capable of addressing the scale and complexity of the situation across numerous legal entities. Crucially, the EA law enabled the group to meet its immediate funding needs during the restructuring. Upon entering extraordinary administration, the group’s access to cash was extremely limited. However, the EA law provided that Agrokor and other group entities subject to the EA proceedings could grant super-senior security over previously pledged assets to enable the provision of more than 500 million euros of new money in June 2017 (SPFA).
Creditors were incentivized to participate in the SPFA by allowing them to refinance their prepetition debt on a ratio of 1:1 and on a super-senior basis (similar to a Chapter 11 roll-up). This feature was unsuccessfully challenged in the Croatian courts. Crucially, as a result of the new funding, the group was able to make payments to certain prepetition creditors, the majority of which were small suppliers whose businesses’ survival relied on receiving those payments at that time and on their continued relationship with the group.
An important step to implementing the terms of the settlement plan included the transfer of the SPFA to the new Fortenova Group. This was achieved by amending and novating the SPFA, which was effected by way of an English scheme of arrangement. The scheme was approved by 99.9% of creditors voting at the scheme meeting and was sanctioned by the English court on February 28, 2019.
Other notable features of the Agrokor group restructuring included:
A key component to the successful implementation of Agrokor’s restructuring was international recognition of both the extraordinary administration proceedings and the settlement plan to minimize the risk of potential challenges to the proceedings brought outside Croatia.
Proceedings were initiated in the U.K. in 2017 to seek recognition of the extraordinary administration proceedings under the Cross-Border Insolvency Regulations 2006 (CBIR). Recognition was granted in November 2017, in the first-ever contested application for recognition under the CBIR.
One of Agrokor’s largest creditors opposed the recognition application on two main grounds:
The judge rejected both arguments and held, among other things, that:
On July 12, 2018, shortly after obtaining approval by the Croatian court of the settlement plan, Agrokor filed for recognition under Chapter 15 of the U.S. Bankruptcy Code.
After multiple hearings and months of deliberation, U.S. Bankruptcy Judge Martin Glenn of the Southern District of New York on October 24, 2018, entered an initial order recognising the Croatian proceedings as foreign main proceedings—the first time any Croatian proceeding had received Chapter 15 recognition—and reserving for further consideration the express recognition of the terms of the settlement agreement related to Agrokor’s English-law-governed debt.2
The U.S. court deferred its decision regarding Agrokor’s English debt out of initial deference to the Gibbs rule under English law, a common-law principle dating to 1890 that generally restricts recognition of the discharge or modification of debt except in accordance with the law of the underlying contract (certain of Agrokor’s debt was governed by English law). Notably, as all Agrokor’s creditors submitted to the Croatian proceedings, strictly speaking the rule in Gibbs was not engaged, as an English court would consider all creditors bound by the settlement plan in accordance with English private international law.
Ultimately, the U.S. court resolved any concerns regarding the Gibbs rule with an extended critique finding that the territorialism of the rule was incompatible with modern international insolvency law and the modified universalism favored by the UNCITRAL Model Law (as adopted by the U.S. in Chapter 15 of the Bankruptcy Code). In light of the policies underpinning the Model Law and Chapter 15, Glenn explained that the Gibbs rule offered no legitimate reason to decline to recognize Agrokor’s settlement agreement in the U.S.
While the U.S. court’s holding applied only to recognition and enforcement of Agrokor’s settlement agreement, the opinion signals that the Gibbs rule should not be an obstacle to the enforcement of foreign insolvency rulings in the U.S. The decision will be influential on other courts (both in and outside the U.S.) and provide a helpful road map to stakeholders in applying comity principles in international insolvency law.
Extraordinary administration under the EA law has since been added to Annex A of the Recast Insolvency Regulation (EU) 2015/848, in July 2018. Accordingly, any future such proceedings opened in the debtor’s center of main interests will be entitled to automatic recognition across all EU member states.
Key takeaways from the Agrokor restructuring include:
Kate Stephenson, a restructuring partner in the London office of Kirkland & Ellis International LLP, contributed to this article. Other constructive input was provided by lawyers across the involved Kirkland & Ellis offices in the U.S., London, and Munich.