Signs That Your Company Needs Pre-Bankruptcy Proceedings

Why Acting Early Decides the Future of a Company

Most companies that end up in bankruptcy with liquidation did not fail in a single day. They had been failing for months, and often years, before the court formally opened the proceedings. The difference between a company that survives and one that disappears most often lies in the timing of the response, not in the depth of the crisis.

Academic research on crisis management distinguishes several stages of crisis. Only the first stage, the potential crisis, is the stage in which symptoms are only beginning to appear and the room for manoeuvre is still significant. At that stage, pre-bankruptcy proceedings are most effective because the company still has assets, customers, revenue and negotiating power with creditors.

Pre-bankruptcy proceedings in Croatia are not a procedure for companies that are already beyond recovery. They are regulated by the Bankruptcy Act (Official Gazette 71/15, 104/17, 36/22, 27/24), which clearly provides that proceedings may be opened as early as the stage of imminent inability to pay - in other words, before the company has actually collapsed. The later you react, the fewer options you have.

More information on the legal framework and the difference between pre-bankruptcy and bankruptcy proceedings can also be found in the official materials of the Ministry of Justice.

The following nine signs are the most common early warning signals our team sees in practice. If you recognise two or more of them, it is time for a professional assessment.

9  Specific Signs That It Is Time for Pre-Bankruptcy Proceedings

1. Increasingly Frequent Late Payments to Suppliers

This is a classic early warning signal. In normal operations, a company pays its invoices within agreed deadlines. When you begin exceeding payment terms by 30, 60 or 90 days - and not with one supplier, but systematically with several - this is no longer a random operational error, but a structural cash-flow problem.

At this stage, suppliers are still willing to negotiate, extend deadlines and accept instalment payments. Once they see that the account is blocked, those negotiations become much harder.

2. Using an Overdraft as a Permanent State, Not an Exception

Approved overdrafts and revolving loans are intended as short-term bridge facilities to cover seasonal fluctuations. When you use them as a permanent source of financing, when the account is practically always in overdraft and the overdraft is never cleared, that is a signal that operating cash flow no longer covers the costs of doing business.

Interest on that type of debt continuously erodes margins, accelerating the downward spiral.

3. Kašnjenje plaća i poreza

This is one of the clearest signs of imminent inability to pay. When a company is late for the first time with employee salaries, salary contributions or VAT, it crosses an important psychological and legal line.

The consequences begin to accumulate quickly. The Tax Administration moves toward regular collection mechanisms. Under Croatian labour law, employees may initiate proceedings themselves if salaries are not paid. The company's management also enters the zone of personal liability for failures to pay public charges.

4. The First Payment Orders Appear in Fina's Register

The Financial Agency (Fina) maintains the public Register of the Order of Payment Priorities - a register of unpaid enforcement orders, bills of exchange and other payment grounds awaiting execution from a company's account.

The appearance of the first unpaid items in that register is not just a formality. It is the first publicly visible signal seen by your banks, suppliers and potential partners. Credit rating agencies immediately register a downgrade. Banks activate stricter lending conditions. Suppliers request advance payment.

Under the Bankruptcy Act, unpaid payment grounds over an uninterrupted period exceeding 60 days enter the zone of inability to pay as a bankruptcy ground. A period of 120 days obliges Fina to automatically file a petition to open bankruptcy proceedings.

5. The Balance Sheet Shows a Loss Greater Than Half of the Share Capital

This is an accounting signal that is often ignored because it is "not cash-based". That is a mistake. Accumulated losses exceeding half of the share capital legally trigger management obligations under the Companies Act and show that the business model is no longer generating enough value to cover costs.

This sign is particularly dangerous because it can exist for months without operations "feeling" anything - until the first more serious liquidity problem appears and it becomes clear that there is no reserve.

6. The Bank Requests Additional Collateral or Refuses Refinancing

Banks usually see problem signals early through their internal credit rating systems. When your relationship banker suddenly requests additional collateral, a personal guarantee from the owner, or the bank refuses to extend existing loans under the same terms as before, it signals that your company's rating has fallen into a problematic category.

At this stage, banks behave rationally: they protect their exposure. For you, however, this means that the main source of liquidity - bank financing - is becoming increasingly expensive and difficult to access.

7. Systematic Loss of Key Customers or Suppliers

This operational signal is often overlooked because it happens "below the radar". When major customers suddenly reduce orders or move to competitors, or when key suppliers change terms (shorter payment periods, advance payment, no more deferred delivery), it indicates that the market senses your problem and is adjusting.

The loss of customers affects revenue, while changes in supplier terms affect the cash conversion cycle. Together, both effects accelerate the depletion of liquidity.

8. Using Money from One Project to Cover Another

"Move money from account A to account B." "The payment from this customer will cover last month's invoice." "The next loan tranche will solve the salary problem." If these sentences have become routine in day-to-day cash management, your company is in the stage of "patching holes" - and that is not sustainable.

This stage is dangerous because it can continue for quite some time before it completely breaks. Owners often think they still have time, while in reality they are only accumulating structural problems that will surface as soon as the next cash tranche disappears.

9. Management's Subjective Feeling: "We Are Only Working to Pay Debts"

This is the least "technical" sign, but in practice it is often the most accurate. When you feel that the company is no longer working for growth, product development or profit, but solely to service obligations, it is a clear indication that a structural crisis is already present.

This is not a marketing phrase. Academic literature on crisis management and research on early crisis detection show that managerial intuition is one of the best early warning signals, often before financial statements formally confirm it.

What Separates Imminent Inability to Pay from Full Insolvency

Hrvatski Stečajni zakon razlikuje tri stupnja problema s likvidnošću, i to razlikovanje izravno određuje koje opcije imate:

The key difference: pre-bankruptcy proceedings are a preventive tool. They do not wait for the company to collapse completely. Under the Bankruptcy Act, it is sufficient for the court to find it likely that the debtor will be unable to meet its obligations as they fall due, and the proceedings may be opened.

That is the difference between a situation in which you still have a choice and one in which the system chooses for you. The Croatian legal framework has been upgraded by EU Directive 2019/1023 on preventive restructuring precisely to give companies a real tool for early action.

What to Do If You Recognise Several Signs

If you recognise two or more of the signs above in your company, the next few steps can mean the difference between a preserved business and proceedings in which the system chooses on your behalf.

First: perform a quick financial diagnosis. You do not need a three-month audit - you need an honest review of the balance sheet, profit and loss account, a list of all due and undue liabilities, and a cash-flow projection for the next three to six months. Our financial analysis team prepares this type of diagnosis within a few working days.

Second: assess your options before you initiate anything. Pre-bankruptcy proceedings are not the only solution; there may also be an out-of-court settlement, operational restructuring, sale of non-active assets or a combined approach. But every option has its timing; the best option today may be impossible three months from now.

Third: speak with key creditors before they speak with a lawyer. Banks, suppliers and the Tax Administration much prefer working with a company that proactively seeks a solution than with a company they are forced to sue. Negotiations conducted from a position of controlled circumstances almost always result in a better outcome.

Fourth: do not make decisions under pressure. The worst decisions in a crisis are made when there is one day left until a deadline. If you need to buy time for a quality analysis, pre-bankruptcy proceedings can provide that as well - from the moment the proceedings are opened, accounts are unblocked and enforcement actions are suspended.

Contact our team for a free initial assessment. Within a few working days, you will receive a clear overview of your options.

Common Mistakes Owners Make at This Stage

Practice shows that serious mistakes are often made precisely when the signals are already visible, while the owner still believes the situation will "resolve itself".

Mistake 1: Denial. "It is only temporarily difficult." "The next quarter will be better." Crisis psychology clearly describes denial as the first reaction to shock. The problem is that, in a business crisis, time is the most important variable, and denial consumes exactly that time.

Mistake 2: Hiding from the bank and suppliers. Many owners avoid talking to key creditors, hoping the problem will not be noticed. That is an illusion; banks and major suppliers have their own monitoring systems. Silence only worsens their reaction when the truth eventually becomes clear.

Mistake 3: Borrowing to cover losses. Taking a new loan to pay salaries or settle old supplier debts rarely solves the structural problem; it only prolongs and makes it more expensive. Interest compounds the problem while the structural cause of the crisis remains untouched.

Mistake 4: Selling assets "below value" under pressure. When enforcement is already at the door, business real estate, equipment and inventory are sold at prices far below their true market value. In pre-bankruptcy proceedings, assets remain within the company, which is one of the key advantages of the procedure.

Mistake 5: Waiting for someone else to initiate proceedings. If the debtor does not initiate pre-bankruptcy proceedings, a bankruptcy petition may be filed by a creditor, the Tax Administration or Fina. Once the system begins acting ex officio, your room for manoeuvre is drastically reduced and you lose control over the process and your negotiating position with creditors. At that point, the available option most often becomes bankruptcy proceedings, with significantly less scope for preserving the company.

Frequently Asked Questions