If a company receives a liquidation petition, this is one of the most urgent legal situations a business can face. In such cases it is not enough to wait and see what happens, nor is it necessarily sufficient for the company to dispute the claim in general terms after the fact.
The purpose of liquidation proceedings is to wind up an insolvent debtor without a legal successor, during which creditors may be satisfied in the manner laid down by law. If a liquidation petition is filed against a company, it must therefore be handled seriously and quickly.
The most important first step: review immediately what claim the liquidation petition is based on, whether there was an earlier payment notice, whether the claim was disputed, and what deadline applies to the response.
What does a liquidation petition mean?
A liquidation petition is a request to open non-contentious court proceedings in which the creditor asks the court to establish the debtor’s insolvency and order its liquidation.
This is not the same as a simple payment notice. If the court orders liquidation, this can have serious consequences for the company’s operation, management, contracts, bank accounts, business relationships and reputation.
Under the Act on bankruptcy proceedings and liquidation proceedings, bankruptcy and liquidation proceedings are non-contentious proceedings falling within the competence and exclusive jurisdiction of the regional court of the debtor’s registered seat.
After a liquidation petition is received, the first thing to examine is whether the claim relied on by the creditor actually exists.
The first question: does the debt actually exist?
In this context it is necessary to review, for example:
- whether there is a contractual relationship between the parties;
- whether performance took place;
- whether a certificate of completion was issued;
- whether an invoice was issued;
- whether the invoice has fallen due;
- whether partial payment was made;
- whether there is any objection as to quality, quantity or breach of contract;
- whether the claim has become time-barred;
- whether there is a counterclaim that can be set off;
- whether the company disputed the claim earlier.
Liquidation proceedings are not intended for the court to decide a complex contractual dispute between the parties in its entirety. It is therefore a key question whether, from the point of view of liquidation law, the claim qualifies as a disputed or an undisputed claim.
When can the situation be regarded as particularly dangerous?
The situation is particularly risky if the creditor relies on an overdue, contract-based claim that the debtor did not dispute earlier and did not pay following the payment notice either.
According to the court’s guidance, a liquidation petition may be submitted if the debtor has failed to pay or to dispute its contract-based, undisputed or acknowledged debt within 20 days of the due date, and has not paid following the subsequent written creditor’s payment notice either.
It therefore matters a great deal when and with what content the company replied to the earlier notices. A late, general or vaguely worded dispute in many cases no longer provides adequate protection.
Disputing the claim: the timing and the manner both matter
In liquidation cases one of the most important questions is whether the debtor disputed the claim in due time. If the company only starts to dispute the debt after receiving the liquidation petition, that may in many cases be too late.
According to the practice of the Curia, disputing a creditor’s claim may be relevant if it was done in writing, at the latest on the day before the creditor’s payment notice was received. The Curia also held that substantively questioning the due date of the claim may in itself be sufficient to establish a dispute, provided it was made in due time and in writing.
In practice this means that companies should not delay their reply to disputed invoices or notices. If the legal basis, the amount, the due date or the performance of the claim is disputed, this must be indicated in good time, in writing and with substantive content.
What can a company do if it has received a liquidation petition?
The possible steps always depend on the specific circumstances of the case. There is no general template applicable to every situation, because a different strategy is needed where the debt genuinely exists and where the claim can be disputed.
The most common options:
1. Urgent review of the claim and the documents
As a first step, the liquidation petition, the documents attached by the creditor, the payment notice, the invoices, the contract and the earlier correspondence must be reviewed.
It is particularly important to examine:
- exactly what the creditor bases the petition on;
- whether the amount and the legal title of the claim are properly evidenced;
- whether the claim was disputed earlier;
- whether the payment notice complied with the statutory requirements;
- whether service of the notice can be evidenced;
- whether there is any possibility of set-off, performance or another defence.
The payment notice on which a liquidation petition is based is subject to formal and content requirements, which are also regulated by a separate decree of the Minister of Justice.
2. Statement to the court
If a company receives a liquidation petition, a statement to the court is usually required. In it the debtor must set out whether it acknowledges or disputes the claim, and on what grounds the conditions for establishing insolvency are not met.
The content of the statement is extremely important. It is not advisable to submit a general, unsupported or inaccurate statement, because in liquidation proceedings the earlier documents, deadlines and statements may be decisive.
3. Examining the possibility of payment or settlement
If the claim genuinely exists, it is advisable to examine quickly whether there is any possibility of settling the debt, of partial payment, of a settlement agreement or of the withdrawal of the liquidation petition.
Under the Bankruptcy Act, the court may at the debtor’s request grant a deadline of up to 45 days for settling the debt. This is not automatic, however: it must be requested, and whether it is worth relying on depends on the circumstances of the case.
It is important that the legal consequences of payment or settlement are also considered, particularly where the company owes debts to several creditors, or where payment may affect the interests of other creditors.
4. Examining whether there is a reorganisation option
If the company’s payment difficulty is not permanent but temporary, and there is a realistic chance of putting operations in order, then in certain cases bankruptcy proceedings or another reorganisation step may be considered.
The purpose of bankruptcy proceedings differs from liquidation: in bankruptcy proceedings the debtor obtains a payment moratorium and attempts to conclude a bankruptcy settlement. This, however, can only be a real solution in a properly prepared situation.
5. Reviewing the aspects of managing director liability
Where there is a risk of liquidation, not only the company’s position but also that of the management must be reviewed. In a situation threatening insolvency, the decisions of the executive officer may later be examined, so it is particularly important that company management takes documented, considered and legally thought-through steps.
In such cases it is advisable to avoid hasty decisions that may later be assessed as prejudicial to creditors’ interests or as an evasion of assets.
What should be avoided?
In the case of a liquidation petition, the following are particularly inadvisable:
- ignoring the court document;
- negotiating with the creditor without any deadline;
- disputing the claim afterwards and in general terms;
- making statements without evidence;
- hastily rearranging the company’s assets;
- paying while disregarding the position of other creditors;
- submitting a statement to the court without legal review.
In liquidation proceedings the timing and the content of the earlier documents are often decisive. A poorly worded reply, a missed deadline or a claim that was not properly disputed can significantly worsen the debtor’s position.
Liquidation or litigation?
It is a frequent situation that there is in fact a contractual dispute between the parties: for example, the debtor relies on defective performance, non-performance, set-off or another objection.
In such cases it must be examined whether the dispute is genuinely capable of excluding a finding of insolvency, or whether the creditor’s petition may nevertheless be well founded in form and in substance.
If the claim is substantively disputed, the creditor may have to enforce its claim not in liquidation proceedings but through court litigation. The reply to a liquidation petition therefore often requires litigation-oriented legal thinking as well.
How can a lawyer help?
In the case of a liquidation petition the role of the lawyer is not merely to draft a submission. The most important task is the quick and accurate assessment of the legal situation, and deciding what strategy is appropriate in the given case.
Legal assistance may be needed in particular for:
- reviewing the liquidation petition and its annexes;
- assessing the earlier payment notices and replies;
- examining whether the claim was disputed;
- preparing the statement to the court;
- weighing a payment deadline or a settlement option;
- legal support for negotiations with the creditor;
- reviewing bankruptcy proceedings or reorganisation options;
- handling related litigation or company law questions.
Summary
If a company receives a liquidation petition, a quick and considered legal response is needed. The first thing to clarify is whether the claim exists, whether it was disputed earlier, whether the payment notice was adequate, and whether the statutory conditions for establishing insolvency are met.
A liquidation petition does not necessarily mean that the liquidation of the company is unavoidable. At the same time, the deadlines, the earlier statements and the content of the documents may be decisive. In such a situation it is therefore advisable to seek legal assistance as soon as possible.
If your company has received a liquidation petition, or a legal question has arisen in connection with liquidation proceedings, Dobrocsi Law Office can assist with the preliminary review of the situation, with the preparation of the necessary statement to the court, and with the handling of related settlement, litigation or company law matters.
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