Understanding Bankruptcy

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Bankruptcy is colloquially the insolvency of a person, company or government (national bankruptcy). That is, the situation when a natural or legal person is no longer able to cover outstanding invoices and current expenditure with own capital and cash receipts. Normally, at such a stage the possibility of a loan will be completely out of the question.

A company that is unable to pay its debts shall, within forty-five days issue a declaration of default in the court of commerce unless it calls for the opening of a conciliation procedure. Once the termination is declared, a legal officer awaits an invitation to the tribunal hearing usually in a period of between eight and fifteen days.

Depending on the accounting documents presented with the official statement and explanation by the officer in charge, the court generally opens receivership proceedings, including a period of observation.

This period of three to six months, is subject to the possible appointment (threshold set by decree) of a receiver to oversee issues of management, to assess the liabilities and assets of the company. The director assists during this period but the officer remains in charge of daily operations of the business.

Three cases may occur after (or during) the period of observation: The company appears viable, the default is regarded as temporary (late payment of a large customer, loss of premises). The Commercial Court may decide, upon proposal of the director and executive officer in relation to continuing with company activities.

If the company is not viable and a buyer is interested in acquiring all or part of it, this is referred to as the assignment of activity. And when the company is not viable and no credible buyer is interested – this leads to liquidation.

The notion of default gives rise to a certain degree of discretion, because it is designed to be judicial but not clearly described and explained in the law. In practice, there are still differences of treatment related to the assessment of insolvency.

Bankruptcies could be nullified before the passing of the usual three year period in the event that all debts are cleared in full. In some cases a bankrupt entity could be in a position to gather sufficient funds to effect an Offer of Composition to creditors, thus clearing the debt. Should the creditors consent with the offer, the bankruptcy is nullified after the money is obtained.

Following the annulment of bankruptcy, the bankrupt’s credit report status will be presented as discharged bankrupt for a period of time. The number of years differs on account of the company releasing the report.

One of the positionshe which makes it possible to estimate the situation of insolvency involves the existing assets being unable to cope with current liabilities. Many interpretations can modulate this rule: A company that has problems but expects a big settlement or a large contract may validly consider that it is not in a situation of insolvency.

In the same vein, the prospect of a sale of significant assets (land, plant,etc) with the negotiations in earnest, can justify the postponement of a decision to declare insolvency.



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