Nullity of loans in Croatia



Fifteen years ago, when foreign creditors were offering loans to Croatian borrowers, they were unlikely to believe that more than a decade later the repayment of loans would be jeopardised by a controversial law passed in the Croatian parliament. But is it concern for its citizens that has motivated the government to pass such a controversial law, or is there another reason?

The number of Croatian citizens and legal persons whose bank accounts have been blocked by the Financial Agency has grown over the years. By the end of June 2018, the figures reached 324,000 citizens and 23,000 entrepreneurs.

Since Croatia has a population of around 4 million, the number of blocked persons accounts for 8.2 percent of the country’s population. When we consider that an average Croatian family has around three members, around 25 percent of Croatian citizens are either directly or indirectly affected by the Financial Agency’s enforcement procedures and blocked bank accounts. Not only does this demonstrate the poor state of the country’s economic standards, it also represents a huge opportunity at the next parliamentary election for opposition parties to gain large numbers of disgruntled voters.

Therefore, it was no surprise that faced with the increasing dissatisfaction of citizens, who are supported by a number of increasingly influential populist members of parliament, and backed by the general public, the majority ruling party decided to ease the position of overly indebted citizens and implement the Act on Nullity of Loans with an International Element Concluded in the Republic of Croatia, which entered into force on 29 July 2017.

The Act, when it was first introduced, was controversial. It was vague, ambiguous and too broad. Furthermore, critics argued that it was unconstitutional and contrary to EU law. The issues with the Act were unsurprising given that it was adopted via an urgent parliamentary procedure, without any of the usual consultations that would precede the passing of a law affecting acquired rights, and thus it potentially infringes fundamental human rights.

The Act applies to loan agreements with an international element concluded in Croatia by debtors and unauthorised creditors. It also extends the application to other legal transactions concluded in Croatia between debtors and unauthorised creditors arising as a consequence of, or based on such a loan agreement, such as mortgage agreements, for example. Under the Act, such loan agreements shall be deemed null and void as of the date of conclusion, unless fully performed by the parties.

Faced with numerous financial arrangements in which the Croatian state acted as a borrower, the Act exempts from the application certain public authorities, such as the Croatian state and local government units, publicly owned businesses, legal persons who use a state budget and legal persons that at the time of concluding the loan agreement may be classified by the Accounting Act as large or medium enterprises.

A loan agreement with an international element could mean a loan or other agreement by which an unauthorised creditor (a foreign entity which at the time the loan was granted did not meet the special requirements for granting of loans in Croatia, such as passporting rights, or did not hold the required banking licences or approvals to be issued by Croatian authorities) granted a debtor (a natural or legal person who was granted a loan based on a loan agreement with an international element including persons who participated in a transaction as a co-debtor, a pledgor, a guarantor or a co-pledgor) a certain amount of money and the debtor undertook to pay back the contractual interest and the money used at an agreed time and in an agreed manner.

Once the loan agreement is declared null and void by the court, each party will be obliged to return what it has received under the loan agreement. Under the Act, the debtor has been put in a privileged position as it will not be obliged to repay contractual interest, only the principal amount, and the creditor will not be able to enforce its claim as security documents would be declared null and void.

In order for a loan agreement to fall under the scope of application of the Act, two conditions must be met: (i) a loan agreement had to be concluded in Croatia; and (ii) at the time of the conclusion of a loan agreement an international lender was not eligible to offer loans to Croatian borrowers, for example the borrower had not obtained a licence or applied for passporting rights.

Under Croatian law, an agreement shall be deemed concluded where an international lender had a registered office at the time the offer was made. Under this rule, all loans offered by foreign lenders to Croatian citizens, unless otherwise provided for in a respective loan agreement or if the circumstances of the conclusion of the loan agreement indicates that it has been concluded in Croatia, shall be deemed to have concluded outside of Croatia and therefore will fall out of scope of the application of the Act. If the first criterion has been met, international lenders should be able to either present a licence issued by the Croatian authorities or be able to prove that they have received EU passporting rights.

One of the biggest controversies surrounding the Act is that it applies retroactively to loan agreements concluded before it came into force. This is directly contrary to the Croatian Constitution which prescribes that laws cannot have a retroactive effect but only individual provisions thereof, provided that there is a justified cause for such a retroactive application.

As, according to available information, certain foreign lenders have already challenged the constitutionality of the Act, it remains to be seen what stand will be taken by the Constitutional Court of Croatia.

The nullity of the loan agreement applying retroactively to loan agreements concluded before the Act came into force is not the only questionable provision introduced by the Act. It also introduces a number of other controversial provisions granting an advantage to debtors, such as: (i) effects on enforcement proceedings – all pending and future enforcement proceedings will be suspended during the litigation for determining the nullity of loans and dismissed if the underlying agreement is declared null and void; (ii) special inequitable rules on jurisdiction – lenders may initiate litigation proceedings in relation to these loans only before the courts of the borrower’s residence, while the borrowers may initiate litigation before the courts of the borrower’s residence and of the lender’s registered office; (iii) mandatory application of Croatian law – disputes relating to loan agreements falling under the scope of the Act shall be decided by the exclusive application of Croatian law, irrespective of the agreed governing law and rules governing conflict of laws.

It is likely that the provisions of the Act are in contradiction to the provisions of Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations and the Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters. With regard to the fact that since the application of the Act a number of contradictory court rulings have already been rendered, causing legal uncertainty, the Municipal Court in Rijeka requested a preliminary ruling from the European Court of Justice (ECJ), raising questions concerning the compatibility of the Act with the EU law. It remains to be seen how the ECJ will rule. Depending on the decision of the Croatian Constitutional Court and the ECJ, further developments are expected.


Hrvoje Vidan is a partner and founder of Vidan Law Office. He can be contacted on +385 1 48 54 070 or by email:

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Hrvoje Vidan

Vidan Law Office

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