Insolvency is a situation where a natural or legal person (the debtor) is unable to pay their debts. An estate can also be insolvent. Bankruptcy is the insolvency declared regarding a debtor by a court order.
Insolvency of a natural person
If a person is unable to meet their obligations for an extended period of time, they can submit an insolvency petition with the court, either
- to declare bankruptcy or
- to declare bankruptcy and initiate proceedings for the release from obligations or
- to restructure their debts.
Debtor spouses or registered partners can submit a joint insolvency petition.
An insolvency petition can also be submitted by a creditor to whom the debtor is indebted. A creditor can submit an insolvency petition against a debtor under the conditions set out in legislation. A creditor may submit an insolvency petition against a debtor either
- to declare bankruptcy or
- to restructure their debts.
An insolvency petition of a debtor, a joint insolvency petition of spouses or registered partners and an insolvency petition of a creditor must be submitted on the prescribed form. The forms are available on the websites of the Ministry of Justice and the court.
When accepting an insolvency petition, the court appoints a trusted practitioner for the debtor. The task of the trusted practitioner is to identify the financial situation of the debtor and the reasons for the payment difficulties or insolvency.
When bankruptcy is declared, the court appoints a trustee in bankruptcy for the debtor. Among other obligations, the trustee in bankruptcy determines the claims of the creditors, administers the bankruptcy estate, and organises its formation and sale and the satisfaction of the claims of the creditors out of the bankruptcy estate.
When declaring bankruptcy and initiating proceedings for the release from obligations, the court also appoints a trustee in bankruptcy. After the bankruptcy proceedings are terminated, the proceedings for the release from obligations continue under the supervision of the competent trusted practitioner. The court generally decides after three years whether or not to release the debtor from the outstanding obligations in the bankruptcy proceedings.
When initiating debt restructuring proceedings, the court appoints a trusted practitioner. The trusted practitioner draws up a debt restructuring plan, under which the debtor will start to pay their debts. The plan must be approved by the court. Compliance with the plan is monitored by the trusted practitioner.
Insolvency of a legal person
If the debtor fails to meet their obligations for a prolonged period of time, or if such a failure is foreseeable in the future, they must submit a bankruptcy petition without delay (but no later than after 20 days) to protect the interests of creditors.
A creditor may submit a bankruptcy petition against a debtor under the conditions set out in legislation. When a bankruptcy petition is accepted, the creditor must generally pay a deposit to cover the fees and costs of the interim trustee in bankruptcy. If the creditor fails to pay the deposit, the court does not appoint an interim trustee in bankruptcy and the proceedings are terminated. In such a situation, the employee creditor is entitled to an insolvency benefit.
After the bankruptcy petition has been accepted and the creditor has paid the deposit, the court appoints an interim trustee in bankruptcy. The role of the interim trustee in bankruptcy is to identify the financial situation of the debtor and the reasons for the insolvency.
If the debtor does not have the funds to carry out the bankruptcy proceedings, the creditors will have to finance the bankruptcy proceedings. If the debtor has sufficient funds to carry out the bankruptcy proceedings (among other things, the creditors have paid the amount needed to carry out the bankruptcy proceedings into the deposit of the court), the court will declare the debtor bankrupt and appoint a trustee in bankruptcy. If there are no funds available or the bankruptcy proceedings are not conducted as a public investigation, the bankruptcy proceedings are terminated by abatement. Bankruptcy proceedings are also terminated by abatement under the same conditions after the declaration of bankruptcy.
In the event of the employer’s insolvency, the application to the Unemployment Insurance Fund for the insolvency benefit is submitted by the interim trustee in bankruptcy or the trustee in bankruptcy.
Insolvency Division
The Insolvency Division is responsible for ensuring the transparency, legality and efficiency of bankruptcy proceedings. The division monitors the activities of the debtor and persons connected with it to identify illegal acts that have caused their insolvency or aggravated payment difficulties. To this end, it conducts special audits, organises public inquiries into bankruptcy proceedings and makes proposals to the trustee in bankruptcy to improve the conduct of the proceedings. In addition, the division supervises the activities of trustees in bankruptcy to ensure the legality of the proceedings and the appropriateness of costs. Such supervision helps prevent infringements, ensures fair proceedings and supports the development of uniform and effective insolvency practices.
Reorganisation of a company
A legal person at risk of insolvency can apply to the court for reorganisation. A reorganisation application can also be filed by a creditor of the company. Restructuring can help a business to recover from a financial crisis and regain economic viability. However, if the company fails to achieve financial stability in the reorganisation proceedings, the court will terminate the proceedings. The court can declare a company bankrupt if a bankruptcy petition is filed.
Laws
- Bankruptcy Act
- Reorganisation Act
- Natural Person Insolvency Act
- State-funded Legal Aid Act
- Commercial Code