Petition for declaration of bankruptcy of a company
Thanks to bankruptcy proceedings creditors do not have to fight with each other over the debtor's assets in order to carry out individual enforcements. The order of satisfaction of claims prescribed by law means that the claims of the weakest creditors, i.e. employees, are paid first. Subsequently, the claims of contractors and the tax office are repaid. Only at the end are the claims of the shareholders paid off.
When insolvency of a company occurs (and shareholders do not inject additional cash), a management board has two options:
- either to submit an application for opening of restructuring proceedings - if there is still a chance for an arrangement with creditors,
- or to file for bankruptcy in order to initiate a process under which creditors are repaid in the order prescribed by law with funds obtained from the sale of the company's assets.
Insolvency is defined in two ways.
Firstly, a company is insolvent when its debts exceed the value of assets, and this state of affairs persists for an uninterrupted period exceeding 24 months. However, in this case “debts” do not include: (i) future liabilities (which includes liabilities subject to a condition precedent) and (ii) liabilities to a shareholder for a loan (or delivery of goods with deferred payment) made within 5 years prior to bankruptcy. It should be underlined, that bankruptcy petitions filed solely on basis of “excess of liabilities over assets” are rather rarely encountered in practice.
Secondly, a company is insolvent when it is no longer able to pay debts as they fall due. If the delay in performance of monetary obligations exceeds 3 months, it is presumed that the loss of this capacity has occurred. This presumption serves creditors.
We will now examine the following example: a company borrowed from a bank to build an office building. After the expiry of a lease, the main lessee left the office building. Another lessee could not be found for rent that would permit the repayment of the loan and pay the costs of maintaining the property. Shareholders cannot or do not want to subsidize the company. As a consequence, the company loses the ability to repay: monthly loan instalments, and bills for electricity, gas, water, and security. The company is insolvent from the time it was unable to pay the next instalment due on the loan. Immediately after that the management board can and must (!) file for bankruptcy. However, after 3 months, the presumption becomes effective. Then the company creditors will easily prove insolvency. It is enough that they justify a petition for bankruptcy by the fact that the company has not paid debts for over 3 months.
What needs to be highlighted, a court will dismiss the petition filed by a creditor if the debtor proves that the claim is entirely disputed and the dispute arose between the parties before the petition was filed. This rule is intended to discourage usage of insolvency proceedings to obtain payment of disputed claims.
Bankruptcy proceedings certainly generate costs (remuneration of a receiver, advertisements in the media about the sale of assets, etc.) that have to be paid from a bankruptcy estate. It is recommended to secure in the company at least the equivalent of 25,000 EUR for these costs. The above is reasoned by the fact that a court will dismiss a petition if the assets are not sufficient to pay the costs of the proceedings. In such a case, the dismissal of the bankruptcy petition creates the risk that the creditors will demand the repayment of the company's debts by the board members, on the grounds that the board members have led to a situation in which the company is "too poor to be able to afford bankruptcy proceedings".
A debtor must file a petition for bankruptcy in a court no later than 30 days from the date on which the cause for bankruptcy arose, i.e. insolvency. However, if the basis for declaring a debtor to be bankrupt arose during the term of the COVID-19 epidemic, and the state of insolvency arose because of COVID-19, the deadline for submitting an application does not start, and the one that has started is interrupted. Only after that time will the period commence anew.
The obligation to file a petition for bankruptcy on time is on each of the management board members individually, even if joint representation is stipulated in a deed of incorporation (i.e. together with another management board member or with a proxy).
The petition that is submitted by a creditor is quite simple: an unsatisfied claim must be proven. On the other hand, an application submitted by a debtor is rather complicated because in order to prove its insolvency, it must submit to the court, among other things:
- an up-to-date inventory of the property and an estimated valuation of its components;
- a balance sheet for a date falling within 30 days prior to the date of submission of the petition;
- a list of creditors and a list of the security they have over company assets; and
- a list of company debtors.
Along with a petition for bankruptcy, a debtor can file an application for approval of the terms of sale (for a specific price and to a specific buyer) of: a debtor's entire business, or an organizational part of it, or significant asset (for example, real estate). Such a sale (called “pre-pack”) accelerates the liquidation of assets, which results in faster satisfaction of creditors. The application should be accompanied by a valuation of the component that is the subject of the application. It would have to be drafted by a person entered on the list of court experts.
As regards the costs, a court fee must be paid on a petition for bankruptcy. It is currently the equivalent of approximately 220 EUR. In addition, an advance payment must be made for expenses (currently equivalent of approximately 1,150 EUR).
When it comes to the procedure, cases for a declaration of bankruptcy are heard by a bankruptcy court composed of 3 judges and, as a rule, a case is heard in chambers. However, a court can hear a debtor and creditors. It will do so when it becomes necessary to resolve a dispute. For instance, when a debtor challenges the reason for insolvency in reply to a petition filed by a creditor. The public, which includes company employees, can attend a hearing. A court should consider a petition for bankruptcy within 2 months.
The above is in accordance with the legal status that will come into force on December 2021.
Konrad Grotowski, attorney-at-law, Restructuring & Bankruptcy practice, Wardyński & Partners
The content of this article is a part of Episode 8 of the programme News from Poland – Business & Law. You can watch the episode here >>>
