Insolvency proceedings aim at the fair satisfaction of creditors and, where possible, the recovery of the debtor company's business. Such proceedings may be commenced even for insolvent companies that are in the process of liquidation.
Grounds for Commencing Insolvency Proceedings
Under the Commerce Act, there are two main criteria for the opening of insolvency proceedings – a state of insolvency or over-indebtedness of the company.
Insolvency
A state of insolvency arises where the company is unable to meet:
- a monetary obligation arising from a commercial transaction or its consequences,
- a public-law obligation to the State or the municipality arising in connection with its commercial activity,
- an obligation under a private State receivable,
- or an obligation to pay wages to at least one third of the workers and employees, which has remained unfulfilled for a period of more than two months.
If the trader has not published the annual financial statements (ГФО) for the last three years in the Commercial Register before filing the insolvency petition, the law presumes that it is in a state of insolvency. A suspension of payments or partial payment of particular creditors may also serve as evidence of insolvency.
A state of insolvency is also presumed where enforcement proceedings have been instituted and the obligation remains unpaid, in whole or in part, within six months of receipt of the invitation to voluntary performance. It is important that the obligation is due and that the company genuinely has no funds to cover it.
Over-Indebtedness
Over-indebtedness exists where the company's assets are less than its liabilities. This is a specific ground for insolvency and applies only to capital companies (OOD, AD, KDA). In the case of insolvent sole traders or companies with unlimited liability, creditors may seek satisfaction from the personal property of the owners.
Procedure for Opening Insolvency Proceedings
Most often the proceedings are initiated by a petition of the debtor company or one of its creditors. The National Revenue Agency (НАП) may also file a petition where there are unpaid public-law obligations connected with the debtor's commercial activity. The Executive Agency "General Labour Inspectorate" may likewise request proceedings where wages to at least one third of the employees have remained unpaid for more than two months.
The petition to open insolvency proceedings is filed with the regional court for the company's registered seat. If the petition is filed by the debtor company, it is also announced in the Commercial Register.
If the proceedings are not commenced within 30 days of the grounds arising, the persons obliged to initiate the process bear joint and several liability for damage caused by the delay. Moreover, failure to notify insolvency is an offence under Article 227б of the Criminal Code.
A petition filed by a creditor is examined in camera by the court, which takes a decision within 14 days of filing, with both the debtor and the petitioner being heard.
If the court confirms the insolvency or over-indebtedness, it issues a decision by which it determines the starting date of that state, opens the insolvency proceedings, appoints an interim insolvency administrator and permits attachment, injunction or other interim security measures.
Filing of Claims by Creditors
After the court decision to open the insolvency is entered in the Commercial Register, creditors have one month to file their claims with the insolvency court. In their application, creditors must state the grounds and amount of their claims, any preferences and security, and submit documents to prove their claims.
The final deadline for filing claims that arose up to the date of opening of the insolvency proceedings is no later than two months after the initial one-month period. The interim insolvency administrator draws up lists of the accepted and rejected claims of the creditors, which are announced in the Commercial Register. The debtor and the creditors have a 7-day period to object to the lists.
Recovery Plan
Within one month of the approval of the list of accepted claims, the debtor or the creditors may propose a plan for the recovery of the company, aimed at restoring its activity and meeting its obligations. The plan may include deferral, rescheduling or even partial forgiveness of debts, as well as a reorganisation of the company.
If the court declares the company insolvent, a recovery plan may no longer be proposed. In such cases, the only possible solution is an out-of-court settlement between the debtor and the creditors.
Realisation of the Property
By the decision declaring insolvency, the court imposes an attachment over the debtor's property and terminates its management powers. This is followed by the realisation of the assets – the sale of the debtor's property and the distribution of the proceeds among the creditors with accepted claims.
Payments to creditors are not made proportionately; instead, a special order of distribution provided for by law is followed. The distribution begins with payment of:
- secured claims,
- the costs of the insolvency,
- claims arising from employment relationships,
- public-law claims and other obligations according to the order laid down by law.
Closure of the Proceedings and Consequences for Unfiled Claims
After the distribution of the realised property is completed and the claims are paid, the insolvency proceedings are terminated and the company is struck off the Commercial Register.
Claims not filed and rights not exercised by creditors within the insolvency proceedings are deemed extinguished. Claims that were not satisfied during the proceedings are also extinguished definitively.
Should you require advice and assistance in connection with insolvency proceedings, please contact us on tel.: 0887550706 or by e-mail: [email protected]
