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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?
Bankruptcy proceedings are used to liquidate an insolvent company. They may be initiated voluntarily (by the debtor) or compulsorily (by a creditor). The proceedings are based on largely mandatory provisions of law, and there is little flexibility to deviate from such provisions even where the proceedings were initiated voluntarily.
Winding up under the Companies Act (624/2006) is the other available form of liquidation proceedings. However, winding up is only possible if the company is able to satisfy its liabilities to its stakeholders. Therefore, winding up is generally not available to an insolvent company.
How are liquidation procedures formally approved?
By an order of the district court pursuant to a petition by the debtor or a creditor.
What effects do liquidation procedures have on existing contracts?
Bankruptcy does not have immediate direct impact on the continuity of contractual relationships. However, the bankruptcy estate will replace the debtor as the contractual counterparty.
In practice, a bankruptcy will often result in a termination trigger event under a contract or breach of contract. However, the bankruptcy liquidator has the right to force the continuation of agreements under certain circumstances.
What is the typical timeframe for completion of liquidation procedures?
The timeframe for the completion of bankruptcy proceedings and the distribution of net proceeds depends mostly on practical issues, such as how quickly the assets of the bankrupt company may be liquidated. Proceedings can be expected to take years, especially if the bankruptcy estate becomes involved in lawsuits.
Role of liquidator
How is the liquidator appointed and what is the extent of his or her powers and responsibilities?
The bankruptcy trustee as liquidator in a bankruptcy is appointed by the relevant district court. The court may hear the creditors and the debtor in connection with such appointment.
The trustee manages the bankrupt company (the ‘bankruptcy estate’) during the proceedings. The trustee will:
- take possession, review and maintain the assets of the bankruptcy estate;
- undertake any measures necessary to collect the receivables of the bankruptcy estate and secure the rights and terminate any redundant contracts of the bankruptcy estate;
- review any possibilities for voidability/clawback;
- issue public summons to the creditors and prepare the list of creditors;
- sell the assets of the bankruptcy estate;
- satisfy the claims of the creditors as provided by law; and
- manage the proceedings pursuant to the Bankruptcy Act (120/2004).
The liquidator may choose to continue the company’s business operations during the bankruptcy proceedings, where this is beneficial to the creditors.
What is the extent of the court’s involvement in liquidation procedures?
The court’s main tasks are to:
- agree the commencement of the bankruptcy proceedings and the appointment of a trustee;
- confirm the distribution of assets on the basis of the trustee’s proposal; and
- rule on any disputes that arise in connection with the bankruptcy proceedings.
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?
The creditors exercise oversight of the trustee’s activities at creditors’ meetings, where the trustee acts as chairman. The trustee calls the first meeting of creditors within two months after completing the inventory of assets and liabilities (and in any event within six months from the commencement of bankruptcy). The trustee must also call a meeting of creditors whenever necessary to address issues regarding the management of the bankruptcy estate. A final creditors’ meeting at the conclusion of the bankruptcy proceedings must also be held. The creditors may appoint a creditors’ committee that supervises and assists the trustee. The creditors’ committee is generally mandatory in large bankruptcies.
During bankruptcy proceedings, the general rule is that creditors cannot commence legal action against the insolvent company for repayment of debts incurred before the commencement of the bankruptcy proceedings. Accordingly, creditors are free to commence legal action to recover the payment of debts incurred by the bankruptcy estate. Further, creditors that have security over specific assets may enforce such security, subject to certain restrictions. The liquidator has the power to stay such enforcement temporarily in order to examine the validity of the creditor’s claim or to protect the interests of the bankruptcy estate.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in liquidation procedures?
Directors and shareholders are obliged to assist the trustee at the trustee’s request. Assistance is usually required in particular in the preparation of a list of assets and liabilities of the debtor company.
What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?
In order to qualify for bankruptcy proceedings, the debtor must be insolvent. The debtor may be considered as insolvent on the basis of:
- its own declaration unless there is a reason to doubt the correctness of such declaration; or
- an externally visible indicator.
Generally, such indicators are that:
- the debtor has ceased payments;
- foreclosure proceedings have been pending against the debtor for the last six months and it has become evident that the debtor is unable to satisfy the relevant claim; or
- the debtor has received a payment notice coupled with a threat to initiate bankruptcy proceedings if the claim is not satisfied and the debtor has not satisfied the claim.
Where the proceedings are initiated by a creditor, its claim must be based on an enforceable court judgment or otherwise be indisputably clear.
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