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What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?
The liquidation is the insolvency procedure that may be applied to liquidate an insolvent company.
Liquidation starts with declaration of the debtor’s bankruptcy. This stage involves the appointment by the court of a liquidator in order to sell the assets of the debtor and thus satisfy its debts in accordance with the statutory order of priority. The liquidation of the company is managed by the liquidation manager, who replaces the existing management of the debtor and assumes the powers of the owners of the debtor’s assets.
The difference between the voluntary liquidation and compulsory liquidation lies in the handling procedure. The voluntary liquidation is initiated by the company itself and is handled without court involvement, whereas the compulsory liquidation is made on the application of other persons (eg, legal entities and state bodies) with the initiation of the bankruptcy proceedings and court involvement. The voluntary liquidation procedure may be used if a company has enough assets to settle the claims of its creditors. If the company lacks the assets to settle creditors’ claims, the compulsory liquidation procedure is applied.
How are liquidation procedures formally approved?
The court initiates liquidation where the debtor shows signs of bankruptcy and there are no grounds on which to transfer to another stage of bankruptcy proceedings, approve a settlement agreement or terminate the bankruptcy proceedings. A court ruling is required to terminate one stage of bankruptcy proceedings and commence another. Generally, the court issues its ruling based on the decision of the creditors’ meeting.
What effects do liquidation procedures have on existing contracts?
During liquidation, the bankruptcy manager may terminate the debtor’s contracts if:
- the contract impedes restoration of the debtor’s solvency; or
- the debtor incurs losses from performance in comparison to similar transactions concluded in comparable circumstances.
Abandonment of performance of the debtor’s transactions can be declared only in respect of transactions that have not been fully or partially performed. Such transactions are considered to be terminated from the date on which all parties to the transaction receive the bankruptcy manager’s declaration of abandonment of its performance.
What is the typical timeframe for completion of liquidation procedures?
Liquidation can last up to six months and can be extended by a further six months. Upon a motion of the parties to the case, the court may extend the liquidation procedure more than once if it finds the grounds for extension of the procedure.
Role of liquidator
How is the liquidator appointed and what is the extent of his or her powers and responsibilities?
In a liquidation procedure, the court approves the liquidator, who replaces the management of the company. The debtor’s shareholders’ rights are also terminated. The liquidator is entitled to:
- manage the debtor’s property;
- dismiss the debtor’s employees;
- make a declaration of refusal to perform the debtor’s contracts; and
- file claims to invalidate transactions entered into by the debtor.
The liquidator must recover damages to the debtor, creditors and other persons, if their losses were caused by non-performance or undue performance of his or her obligations in terms of the debtor’s bankruptcy.
A bankruptcy manager is also appointed during other stages of bankruptcy proceedings, but has different levels of power during the proceedings.
What is the extent of the court’s involvement in liquidation procedures?
All bankruptcy procedures are supervised by the court, including liquidation.
The court exercises the following powers, among others:
- initiates, completes and terminates the liquidation procedure;
- approves a bankruptcy manager;
- applies interim measures;
- invalidates transactions of the debtor;
- prohibits the debtor from entering into transactions without the bankruptcy manager’s consent; and
- approves the settlement agreement.
What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?
Creditors recognised by the court must form the creditors' committee. Creditors included in this committee in terms of the liquidation procedure have the power to:
- apply to the court to initiate the liquidation procedure;
- stipulate additional requirements for bankruptcy manager candidates;
- exercise control over the activities of the bankruptcy manager; and
- raise claims under obligations with a later maturity date, but which fell due on initiation of the bankruptcy procedure.
The creditors are prohibited from:
- raising claims against the debtor outside the bankruptcy procedure;
- claiming for penalties, interest or other financial sanctions for the period starting from the initiation of the bankruptcy procedure;
- foreclosing the debtor’s assets; and
- taking any other actions against the debtor outside the bankruptcy procedure.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in liquidation procedures?
On commencement of external administration, the managing bodies are discharged from performing their duties. In the liquidation procedure their powers are assumed by the bankruptcy manager. The shares of the company remain as the property of the shareholders until the moment of their liquidation, but the shareholders cannot make any decisions relating to the debtor.
What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?
A company can be placed into liquidation if the following applies:
- the court determines that the solvency of the debtor cannot be restored and there are no grounds to initiate one of the other rescue procedures or terminate bankruptcy proceedings or dismiss a bankruptcy petition; and
- the creditors’ meeting has requested the court to make the debtor bankrupt and commence the liquidation.
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