Insolvency

Insolvency proceedings

In insolvency proceedings, claims filed by creditors are, based on a declaration of insolvency, satisfied principally on a proportionate basis from the sale of debtors’ property, while unsatisfied claims or any parts thereof do not cease to exist. In other words, the insolvency administrator sells all the debtor’s assets, and the proceeds from the secured assets belong to the secured creditors; the proceeds from the sale of the unsecured assets are distributed on a proportionate basis among the unsecured creditors. After the termination of the insolvency proceedings, creditors may recover their unsatisfied claims again individually through distrainment.

Debt discharge

Debt discharge (i.e. personal bankruptcy) is a method for dealing with insolvency, the objective of which is to satisfy the claims of creditors in the amount of 30% to 100% of their claims, depending on the value of the debtor’s assets or income, while the debtor is discharged from the remaining debts. Within debt discharge, the debtor offers creditors the choice of either all of their assets except for wage income or their wage and other income for a period of five years, with the debtor retaining their assets. The condition for the debt discharge is that the claims of unsecured creditors will be satisfied at no less than 30% (though typically higher). The secured creditors can always request the sale of the collateral and the satisfaction of their claims from the proceeds of the sale. The debtor is usually motivated to work properly and fulfil all other obligations under the Insolvency Act. This motivation of debtors may ultimately be beneficial to creditors, as it eliminates cases in which debtors cease to work officially or otherwise conceal their true income.

Reorganisation

Reorganisation is a method for handling a debtor’s insolvency in which the debtor can keep running their business, though only within the limits of the so-called reorganisation plan, which primarily pursues the recovery of the debtor’s business and the arrangement of mutual relationships between the debtor and its creditors. Although reorganisation is primarily designed for large corporations, under certain circumstances it may also be used by smaller business entities and even self-employed persons. The underlying assumption is that the insolvent debtor is able to convince a majority of its creditors (calculated according to the amount of their claims) that it will be more profitable for them to deal with the debtor’s insolvency through its reorganisation than through insolvency proceedings (i.e. usually through the sale of the debtor’s assets). Specifically, the debtor must prepare a reorganisation plan that outlines how it intends to deal with the insolvency. When drawing up the reorganisation plan, the debtor closely cooperates with selected creditors and has a wide range of options to offer to them. As part of the reorganisation plan, for example, the debtor undertakes to reduce in a specific way the costs of running its business and to repay creditors some of their claims within a certain time limit. The reorganisation can also include investment or loans from third parties, who will then have a preferential right to the repayment of their investment (as opposed to the satisfaction of the claims of other creditors). The fulfilment of the reorganisation plan terminates the rights of all creditors towards the debtor and third party rights to assets that have not been taken into account in the plan. In essence, the debtor is relieved from all its remaining outstanding debts.