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In the Matter of Agrokor DD: Model Laws and PIK toggle loans

26 February 2018. Published by Jake Hardy, Legal Director

A recent application made by insolvency practitioner of Agrokor, a major Croatian conglomerate, resulted in recognition in England of a stay of civil proceedings against the group. The purpose of the application was to halt any proceedings in relation to Agrokor's securities and debt obligations containing English law and jurisdiction provisions, pending the restructuring in the Croatian insolvency proceedings of the affairs of the group.

The Facts

Agrokor DD is the holding company for a Croatian-headquartered food and retail enterprise with operations in Croatia, Slovenia, Serbia, Montenegro and Bosnia & Herzegovina.  The group reported revenues in 2015 of around €6.5 billion in 2015, equivalent to some 15% of Croatian GDP (estimates put Agrokor's actual contribution to GDP at 3%-4%).  As such, it is regarded as systemically important by the Croatian authorities - including supply chain relationships, its significance is even greater than those figures suggest. 

Agrokor's ascent was marked by a series of aggressive expansionary moves, and the group has a heavy debt burden of over €5 billion.  In 2014, it acquired a majority stake in a Slovenia rival, Mercator, for upwards of €500 million.  It funded this purchase with a new 4 year PIK toggle loan facility: a syndicated loan facility in which Agrokor as the issuer had rights to pay 'interest in kind' in the form of adding further indebtedness to the loan balance, rather than in cash distributions to the lenders in the normal course.  As such, this was an aggressive financing structure which, if the PIK rights were exercised, would place a heavy burden on the borrower at the end of the loan term.  Agrokor would then need to find the cash or replacement financing facilities to repay both the principal sum and all the PIK interest accrued in the period since the loan facility was drawn down.  The loan facilities were confidential private market arrangements but given the outcome it seems a reasonable assumption that the PIK rights were exercised by Agrokor.  The markets widely consider this facility to be the straw that ended up breaking the back of the company; a view reportedly shared by the insolvency practitioners now in charge of the group. 

In mid-January 2017, the prices of Agrokor securities rapidly started to tumble as the group began to report issues with obtaining financing on reasonable terms.  The company's difficulties accelerated rapidly over the following months.

On 6 April 2017, the Croatian Sabor (parliament) passed a new 'Law for the Extraordinary Administration for Companies with Systemic Importance for the Republic of Croatia' on an emergency basis.  This is informally known as the 'Agrokor Law'.  It provides a special insolvency process applicable to companies with more than 5,000 employees and in excess of €1 billion in debts.  As part of that process, a stay is imposed on any civil legal actions against the company by its creditors.  On 10 April 2017, Agrokor (with 60,000 employees, and debts of around €6.5 billion) was placed into this custom-made insolvency procedure (referred to in the judgment as the "extraordinary administration proceeding") by a Croatian court.

In the course of funding its expansion, Agrokor had engaged in numerous transactions in the international capital markets, which included issuing English law and jurisdiction debt obligations, and others which are subject to arbitration under the auspices of the LCIA.

Agrokor's owner, Ivica Todorovic, was recently arrested in London and is now fighting extradition proceedings on charges of fraud which he vigorously contests.  Many other criminal prosecutions are being brought in Croatia against senior figures in Agrokor.    

The Agrokor story, although unfortunate for those directly affected, is a remarkable one which will no doubt run and run.  The parallel which is commonly being drawn is with the infamous collapse of Parmalat.

The Application 

Agrokor's supervising insolvency practitioner asked the English courts to recognise the Croatian insolvency procedure under the Cross-Border Insolvency Regulations 2006.  These (the CBIR) are the subordinate legislation by which the UNCITRAL Model Law on Cross Border Insolvency were implemented in Great Britain. 

The application was opposed by Sberbank, which is reportedly Agrokor's single largest creditor.  The judgment notes that Sberbank had previously commenced two LCIA arbitrations against Agrokor which were stayed temporarily pending the outcome of the application.  

The Issues

Sberbank's position was that the extraordinary administration proceeding should be not be recognised on two main grounds. 

  • The first, in essence, was that for various more detailed reasons neither the 'Agrokor Law' nor the particular extraordinary administration proceeding commenced under it, fell within scope of the definition of "foreign proceedings" which can be given recognition under CIBR. 
  • The second was that even if the proceedings did fall within scope, recognition should not be granted on the basis that it would be "manifestly contrary to English legal public policy".

The Findings

The judge rejected the first line of arguments finding amongst other points that:

  • Although the extraordinary administration proceeding was a group insolvency proceeding, there was no reason why recognition could not be granted under the CIBR of the insolvency of Agrokor DD as a single company within that group.
  • The Agrokor Law was "a law relating to insolvency", notwithstanding the fact that not all the individual companies within the group which was the subject of the extraordinary administration proceeding were insolvent. 
  • The extraordinary administration proceeding was "subject to the control or supervision of the [Croatian] court".  Following the UNCITRAL Model Law, the control or supervision in question could be indirect rather than direct, and could be merely potential rather than actual.  The extraordinary administrator had direct control of the insolvency, but the judge found that as a matter of fact the Croatian courts had sufficient residual powers over the extraordinary administrator and over any settlement at the end of the process for this criterion to be satisfied.

The judge then proceeded also to dismiss the public policy objection.  It was common ground that the extraordinary administration proceedings were not required to treat all creditors pari passu, which is the general distribution principle in English insolvency law.  This was the main basis for Sberbank's public policy argument.  The judge rejected this contention.  Foreign insolvency proceedings would by definition follow different priorities than those which would be applied in the English courts.  Even in English law, the pari passu rule is not immutable, and in any case the extraordinary administrator had indicated an intention to apply the pari passu principle and there was no evidence to contradict that. 

The judge therefore granted recognition, with the result that the Croatian law moratorium on actions against Agrokor has been given effect in English law pending the outcome of the restructuring exercise being carried out within the extraordinary administration proceedings.


The English courts are naturally protective of their oversight of rights and obligations derived from English law and subject to English jurisdiction (even if the latter is one step removed through English arbitral proceedings).  That is a source of comfort for many investors and lenders into markets which are, fairly or not, seen to offer less certainty.  However, as this judgment illustrates, as cross-border finance markets have developed and matured, so too have international arrangements for cross-border recognition of insolvency protections.  If no man is an island, nor is any debt obligation: no matter how English it has painted itself to be.