There can be situations in the life of a business where temporary payment difficulties arise, but on the basis of the company’s operation, its client base or its business model there is still a realistic chance of reorganisation. In such cases liquidation proceedings are not necessarily the only possible route. In certain cases bankruptcy proceedings and the related bankruptcy protection may give the company the opportunity to gain time, to negotiate with its creditors and to try to reach a settlement.
The purpose of bankruptcy proceedings is not to wind up the company but to save it, or to put its operation in order. During bankruptcy proceedings the debtor obtains a payment moratorium and attempts to conclude a bankruptcy settlement. Under the definition of the Bankruptcy Act in force, bankruptcy proceedings are proceedings in which the debtor obtains a payment moratorium in order to conclude a bankruptcy settlement, and attempts to conclude such a settlement.
What does bankruptcy protection mean?
In everyday language, bankruptcy protection is the term often used for the payment moratorium to which the debtor is entitled during bankruptcy proceedings. This means that for a specified period the company is protected against the enforcement of creditors’ claims, while it has the opportunity to conduct settlement negotiations with its creditors.
According to the court’s information notice, in bankruptcy proceedings the debtor is entitled to a payment moratorium which, as a general rule, lasts until midnight on the second working day following the 120th day after publication of the order opening the bankruptcy proceedings. Subject to the appropriate conditions the moratorium may be extended, and under the Bankruptcy Act the extended moratorium may last at most 365 days from the starting date of the bankruptcy proceedings.
Bankruptcy protection is therefore not a final release from the debts, but a legally regulated period during which the company is given the opportunity to put its situation in order.
When can it make sense to initiate bankruptcy proceedings?
Bankruptcy proceedings may be a realistic solution if the company is not simply unable to operate, but is struggling with a temporary payment difficulty and there is a chance of reaching a settlement with its creditors.
The possibility of bankruptcy proceedings may arise in particular where:
- the company has an operating business activity;
- it has contracts that can be performed or revenue that can be expected;
- the payment difficulty is temporary in nature;
- a realistic settlement proposal can be worked out with the creditors;
- the management of the company recognises the problem in time;
- the company’s bookkeeping, records and financial position are transparent;
- the aim is not winding up but putting the operation in order.
At the same time, bankruptcy proceedings are not an appropriate tool in every case. If the company has no realistic operational prospects, has no expected revenue, or the chance of a settlement with the creditors is slim, bankruptcy proceedings alone will not solve the financial problem.
Why is preparation important?
One of the most important parts of bankruptcy proceedings is preparation. Before the petition is filed, the company’s debts, claims, contracts and pending matters must be reviewed, as well as what settlement offer can be made to the creditors.
The court does not automatically rescue the company. Bankruptcy proceedings can only be successful if the petition is properly prepared in legal terms, the necessary documents are available, and the company has a reorganisation concept that is also meaningful for the creditors.
In our office’s experience, a properly prepared bankruptcy petition can significantly reduce the risk of requests for further documents, of procedural delay and of unsuccessful proceedings.
What should be examined before bankruptcy proceedings?
Before initiating bankruptcy proceedings it is advisable to review at least the following questions:
- exactly who the creditors are and what the amounts of their claims are;
- whether there are disputed claims;
- whether a liquidation petition or an enforcement procedure is pending;
- what contractual obligations the company is subject to;
- whether there is a chance of revenue, financing or reorganisation;
- what settlement offer can be made to the creditors;
- whether the necessary accounting and company law documents are available;
- what obligations and liability the executive officer may face.
It is worth examining these questions together with a lawyer and with an accountant or tax adviser, because bankruptcy proceedings are at once a legal, a financial and a strategic decision.
Bankruptcy proceedings or liquidation?
The purpose of bankruptcy proceedings and of liquidation proceedings is different. Bankruptcy proceedings are essentially reorganisation proceedings: their aim is that the debtor obtains a payment moratorium and reaches a settlement with its creditors. Liquidation, by contrast, is aimed at winding up an insolvent company without a legal successor.
It is therefore important that the company does not start seeking legal assistance too late. The sooner the legal and financial review of the situation takes place, the greater the chance that the company can still find a reorganisation solution and does not have to reckon solely with the risk of liquidation.
What can a lawyer do in bankruptcy proceedings?
The involvement of a lawyer may be needed at several points of the bankruptcy proceedings. This applies in particular to:
- the legal analysis of the situation before the bankruptcy proceedings are initiated;
- preparing the petition and its annexes;
- preparing the corporate decisions and the necessary documents;
- reviewing the creditor structure;
- legal support for the settlement negotiations;
- handling creditors’ claims and disputed claims;
- keeping contact with the asset supervisor;
- developing a legal strategy for the bankruptcy settlement.
In bankruptcy proceedings speed and accuracy are particularly important. A petition prepared with gaps can result in loss of time, uncertainty or even the failure of the proceedings.
Summary
Bankruptcy proceedings are not a suitable solution for every company facing payment difficulties, but in a well-prepared case they can be of real help. Bankruptcy protection can give the company time to negotiate with its creditors, to obtain a payment moratorium and to try to put its operation in order.
For successful bankruptcy proceedings, however, simply filing the petition is not enough. Considered legal preparation, orderly documentation, a realistic settlement concept and swift legal assistance are all needed.
If your company is facing payment difficulties, or the possibility of bankruptcy proceedings, bankruptcy protection, liquidation risk or a creditors’ settlement has arisen, it is advisable to seek legal advice as soon as possible.
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