The insolvency process is aimed at the fair satisfaction of the creditors of a commercial company, as well as at affording an opportunity for the rehabilitation of the debtor’s enterprise. Even in cases where a commercial company is in liquidation, insolvency proceedings may be opened if it is established that the company is unable to meet its obligations.

Grounds for the opening of insolvency proceedings

Under the legislation in force, and more specifically the Commerce Act, insolvency proceedings may be opened on the basis of two principal grounds: illiquidity and over-indebtedness.

Illiquidity

The illiquidity of a company arises where it is unable to discharge a due and payable obligation. Such obligations may arise from:

  • A commercial transaction, including matters relating to the validity, performance, termination or annulment of that transaction.
  • An obligation to the State or the municipalities that is directly connected with the trader’s activity.
  • A private State receivable.
  • Unpaid remuneration to at least one third of the workers or employees, where these obligations have remained unpaid for more than two months.

Where these conditions are present and if the company has not declared its annual financial statements for the last three years in the Commercial Register, the law permits a presumption that this company is illiquid. This is why it is important for traders to publish their financial statements diligently in order to avoid such consequences.

Furthermore, the law treats as an indication of illiquidity the situation in which a company has ceased making its payments or has chosen to pay only certain creditors. This means that payments must be made systematically and to all creditors in order to avoid additional risks.

Another situation in which illiquidity may be established is where enforcement proceedings have been instituted against the company and, within six months of receipt of the invitation for voluntary performance, the obligations have remained unsatisfied. Regardless of the amount of the obligation, if it has fallen due, it constitutes grounds for the opening of insolvency proceedings.

Over-indebtedness

Over-indebtedness is the other ground for the opening of insolvency proceedings and applies only to capital companies, such as the OOD, AD and KDA (partnership limited by shares). In cases of over-indebtedness, the company’s assets are insufficient to cover its obligations. Unlike other forms of trader, in capital companies the liability of the partners is limited to their company shares and they are not liable with their personal property.

In order to establish over-indebtedness, a valuation of the company’s property must be carried out, including the bank accounts, the movable and immovable assets and the receivables. If the value of the assets is lower than the obligations, this means that the company is over-indebted and is subject to insolvency proceedings.

Procedure for the opening of insolvency proceedings

Most often, insolvency proceedings are commenced upon an application by the debtor company itself or by one of its creditors. In certain cases, the National Revenue Agency may also initiate such proceedings where there are outstanding obligations to the State or the municipalities arising from the company’s commercial activity.

Another body that may file a request for insolvency proceedings is the Executive Agency „General Labour Inspectorate“, if the company has unpaid remuneration for more than two months to at least one third of its employees.

The request for the opening of insolvency proceedings is filed with the regional court at the company’s location. If this request is filed by the debtor company itself, it must be published in the Commercial Register.

The law requires debtor companies to file an application for insolvency within 30 days of the onset of illiquidity or over-indebtedness. If this time limit is not observed, the responsible persons may bear joint and several liability for the damage arising as a result of the delay. Moreover, if the company’s managers fail to declare the insolvency in time, this may give rise to criminal liability under Article 227б of the Criminal Code.

Where the application for the opening of proceedings is filed by a creditor, the court must examine it in a closed session within 14 days, summoning the debtor and the creditor who filed the application.

Insolvency proceedings – measures and actions

Once the court establishes that grounds exist for the opening of insolvency proceedings, it declares the illiquidity or over-indebtedness and opens the proceedings. The court appoints a temporary trustee in insolvency, permits interim security measures such as attachments and injunctions on immovable property, and schedules a first meeting of creditors within one month.

In the event that the company’s property does not cover the initial costs, the court may require advance payment of these costs from the creditors who filed the insolvency application. If this does not occur, the court may declare the cessation of the company’s activity and terminate the proceedings, allowing a period of one year for payment of the initial costs. If the costs are not paid within this period, the company is struck off.

Rehabilitation of the company

Within one month of the approval of the list of accepted claims, the debtor or the creditors may propose a rehabilitation plan. The purpose of the rehabilitation plan is for the company to restore its activity and to pay off its obligations. The plan may include measures such as the deferral or rescheduling of debts, partial remission, or even the reorganisation of the company.

When a rehabilitation plan is submitted, it must be discussed and adopted at a meeting of creditors, and the court confirms the plan adopted by a majority of the creditors.

Realisation of the property

Upon the declaration of insolvency, the court orders injunctions and attachments over the debtor’s property, terminates the powers of its bodies and commences the process of realising the property. Following the sale of the assets, the funds are distributed among the creditors in accordance with the order provided for by law.

The funds are distributed in order of priority, beginning with those holding security such as pledges and mortgages, followed by other creditors, including workers, tax obligations and, finally, the unsecured receivables.

In the event that you require advice and assistance in connection with insolvency proceedings, contact us by telephone: 0887550706 or by e-mail: [email protected]