Bankruptcy Proceedings – Overview

Bankruptcy Proceedings – Detailed Overview

Bankruptcy is a special non-litigious court procedure carried out to collectively satisfy all creditors of an insolvent debtor by liquidating the debtor’s assets and distributing the proceeds to the creditors. Bankruptcy most often results in the termination of the legal existence of the insolvent debtor (except if the creditors accept a bankruptcy plan to which the debtor agrees).

Who Can Be a Debtor?

The bankrupt debtor can be a legal entity (company) or a natural person (individual), including sole proprietors subject to income tax or corporate tax.

Grounds for Bankruptcy

The grounds for bankruptcy are inability to pay debts and over-indebtedness.

  • A debtor may propose bankruptcy if it is likely that it will not be able to meet its existing obligations when due (threatened insolvency).

  • A debtor is deemed unable to pay if, for example:

    • There is at least one unpaid payment item recorded in the Payment Order Register maintained by the Financial Agency (FINA) for more than 60 days, which should have been collected from any of the debtor's accounts without the debtor's consent.

    • The debtor has failed to pay three consecutive salaries owed to employees according to employment contracts or relevant labor regulations.

  • Over-indebtedness exists if the debtor’s assets are less than its liabilities, except:

    • If, based on circumstances (development plans, available resources, asset type, collateral, etc.), it can be reasonably assumed that the debtor will continue to fulfill obligations as they come due.

    • If a company member is jointly liable for the company’s obligations and no bankruptcy proceedings have been initiated against that member.

Initiating Bankruptcy

Bankruptcy is initiated by submitting a proposal using a prescribed form to the commercially competent court based on the debtor’s registered office (for companies) or residence (for individuals).

  • If the individual debtor has no registered office, the competent court is where the individual’s residence is located.

  • Once bankruptcy proceedings start, pre-bankruptcy proceedings cannot be initiated.

  • Bankruptcy may be initiated by:

    • A creditor against a company debtor, if the creditor proves the existence of a claim and a bankruptcy reason.

    • The debtor (or authorized representatives such as board members, liquidators).

    • The individual debtor personally.

  • The Financial Agency (FINA) must file a bankruptcy proposal if a legal entity has unpaid payment items for a continuous period of 120 days in the Payment Order Register, within eight days after that period, unless conditions for a shortened bankruptcy procedure are met.

Procedure and Authorities Involved

  • Preliminary Procedure: An optional part prior to the decision to open bankruptcy, aimed at determining if the conditions for opening bankruptcy are met.

  • The court decides on initiating, conducting, and concluding bankruptcy, appoints and supervises the bankruptcy trustee and creditors’ committee, and carries out other actions to ensure proper bankruptcy implementation and creditor payment.

  • Upon opening bankruptcy, all rights held by the debtor’s management transfer to the bankruptcy trustee. The debtor’s business may continue or be suspended during bankruptcy.

  • Creditors’ Committee: Supervises the trustee’s work, assists in management, and informs the court and creditors about the bankruptcy’s progress and the estate’s status.

  • Creditors’ Assembly: Decides on matters critical to bankruptcy proceedings, such as appointing a new trustee, continuing business, or drafting a bankruptcy plan. It may also request reports from the trustee.

  • Bankruptcy Trustee: Represents the debtor, manages business if continued, and is responsible for liquidating estate assets according to creditors’ assembly and committee decisions.

Claims and Asset Distribution

  • Creditors must submit claims to the trustee within 60 days from the publication of the bankruptcy opening decision.

  • After verifying claims, assets are liquidated and proceeds distributed to creditors in proportion to their priority classes, according to the bankruptcy plan.

  • Distribution occurs as money becomes available, managed by the trustee. Final distribution takes place after all estate assets are liquidated.

  • A final hearing is scheduled no later than 18 months after the reporting hearing.

  • The court issues a decision to close the bankruptcy immediately after final distribution.

Conclusion

With the closure of bankruptcy and deletion from the register, the company ceases to exist as a legal entity.