Major amendments have been introduced to the Insolvency Law. Although initially the plan was that  these  would  enter  into  force  on 1 January next year, currently a draft law is before the Parliament to postpone the effective date to 1 March 2015. This newsflash deals with the main innovations.

Obligation to file for insolvency

The management board of a company will be required to file for insolvency if the company has not settled its due debts for more than two months. This means that potentially it will be easier to impose an administrative penalty on management board members for failure to file for insolvency. Likewise management board members may be liable for a reduction in company assets as of the moment when the management board should have filed for insolvency (see below on liability of management board members).

In addition, the management board loses its opportunity to justify non-submission of an insolvency application by a planned application for legal protection proceedings (LPP).

Liability of management board members

Management board members will have special liability for non-submission of documents, and the amount of this liability will be determined. That is, if an insolvency administrator does not receive the debtor's accounting documents or the documents do not provide a clear image of the debtor's transactions and the condition of its assets during the three years before announcement of insolvency proceedings, then the management board members will be jointly and severally liable for losses to the debtor. Losses in this case means creditors' claims recognised during the debtor's insolvency proceedings that cannot be covered during those proceedings and reduction in assets as of the moment when the debtor should have filed for insolvency.

At the same time, the court may decrease compensation for loss for which a management board member is liable by taking into account the effect on these circumstances, as well as the period when the management board member occupied their position and when the debtor incurred the losses.

As before, an insolvency administrator will be entitled to bring a claim on behalf of the debtor against a management board member. However, there is an innovation – creditors will be able to join a claim brought by the administrator with third-party rights. In addition, if the administrator has not brought a claim, each creditor will be entitled to bring a claim against the management board member within a year after completion of the insolvency proceedings. The amount of that claim will be limited to the amount of that creditor’s claim that was not satisfied in the insolvency proceedings.

Creditors' claims

A creditor without claim rights against the debtor but with claim rights against a third party secured by a pledge over the debtor's property will be regarded as a secured creditor in insolvency proceedings of the debtor. Previously, this issue was not regulated directly and by sale of the pledged object the creditors in the insolvency process lost the security without gaining any satisfaction from the sale.

The insolvency administrator can now refuse to recognise creditors' claims that depend on conditions of substantial doubt as to when the condition would occur.

To combat false creditors, the plan is that if a creditor's claim is substantiated by a court decision in so-called simplified court proceedings – eg forced performance of liabilities or forced performance of liabilities under a warning procedure, then the creditor will have to produce to the administrator  a copy of the court decision as well as other documentary proof. In addition, the administrator will be able to dispute the claim in court, eg by asking the court to remove the creditor's voting rights. Until now, fraudulent creditor claims created via simplified court proceedings sometimes allowed a debtor's related creditors to participate in the insolvency proceedings, to adopt decisions at the creditors' meeting and wrongfully obtain funds recovered during the insolvency proceedings.

LPP

A norm with the aim of combating false creditors has also been introduced in relation to LPP. The administrator will now be entitled to express an opinion about prima facie lack of grounds of any creditors' claims included in the LPP plan of action. In this case, the creditor or the debtor must provide evidence to the court that the creditor's claim really exists. As in insolvency proceedings, artificial creditor claims are used rather often in LPP allowing false creditors to approve the LPP plan of action, to allow the debtor to partially discharge all the creditor's claims and the like.

On the other hand, the main novelty in LPP is change of administrators: if a debtor's LPP are terminated and insolvency proceedings are announced, the administrator who performed duties under the LPP withdraws and the next administrator on the list is chosen for the debtor. Until now, debtors often used the circumstance that the same administrator who performed duties under the LPP kept performing duties in the insolvency proceedings as well if the LPP had not been successful. So LPP were initiated artificially and used from time to time as a means of choosing a favoured administrator before insolvency proceedings.

Non-recourse loans in personal bankruptcy proceedings

After sale of real estate that served as security the creditor will lose its claim rights and the debtor's remaining liabilities will be discharged upon approval of the auction deed. This innovation applies only to the house sale of a debtor who is a natural person. This norm has caused vast discussion, and it should be indicated  that the laws of EU member states do not provide an analogous norm.

Discharge of natural person's liabilities

The length of discharge proceedings will still be linked to the amount of the debtor's liabilities and the debtor's options to cover these, though will now be shorter. In most cases duration of liability settlement should be one year (at present – two years), which also leads to shorter overall personal bankruptcy proceedings for natural persons.

Reform of insolvency administrator status

Insolvency administrators will be considered as public officials. This means being subject to the Law On Prevention of Conflict of Interest in Activities of Public Officials and the prohibitions and restrictions it imposes on public officials, as well as the need to produce a public official's declaration. Grant of the status of a public official likewise means that insolvency administrators will be supervised by the Corruption Prevention and Combating Bureau KNAB (including ongoing insolvency proceedings). The new regulation can in fact be expected to apply to insolvency administrators from 1 July next year. Practice will show whether the new regulation really helps to control corruption risk in administration operations.