In any period of the company’s activity, an unforeseen circumstance may occur that will turn the well-coordinated work of the enterprise upside down. In difficult stages of development, the company loses its solvency and one day there comes a moment when the amount of external debt becomes much larger than its financial capabilities. We are talking about the concept of "bankruptcy." Signs of insolvency of entities, features of the bankruptcy procedure and other important issues will be covered in this article.
It is interesting that, in addition to commercial and banking companies, an ordinary citizen can declare his insecurity. Not so long ago, individuals have the right to classify themselves as bankrupt and receive official confirmation of their own insolvency. This system has been operating for a little over three years since the entry into force of the relevant federal act.
The term "bankruptcy" in the law
Insolvency refers to the actual impossibility of repaying a debt by a borrower and satisfying creditors' claims for their obligations. In simple words, if a person has nothing to cover accounts, the concept of bankruptcy (insolvency) can be applied to him. A sign of bankruptcy is primarily the insolvency of a person.
Interestingly, the term “bankruptcy” itself came from the phrase banca rotta, which is translated from Italian as “broken bench”. A few centuries ago in the territory of modern Italy there was no such developed banking system. The role of the credit organization was played by a simple bench on which moneylenders sat for days waiting for customers. If the lender went bankrupt, lost all his money, he broke a bench and declared himself a bankrupt person.
The official recognition of a condition in which expenses significantly exceed financial profit and the available monetary assets are insufficient to fulfill existing debt obligations entails serious legal consequences. To recognize a company or citizen insolvent, just the concept and signs of bankruptcy are not enough. The lender can start the insolvency procedure immediately after the borrower ceases to pay bills for a three-month period.
No individual entrepreneur, large joint-stock company or ordinary citizen is insured against ruin. Any entity that does not have the material ability to pay debts and close its obligations to lenders can face financial difficulties.
Bankruptcy History
Since ancient times, people have realized the need to adopt official bankruptcy procedure rules. The concept and signs of insolvency of the debtor were and remain obvious. It turns out that in the time of Ancient Greece, the institution of bankruptcy worked in full force: if a man was recognized as moneyless and ruined, then not only he, but all members of his family, including his wife, children, and servants, were in debt slavery. It was necessary to leave the bankrupt Greek in this status for five years, while the creditor guaranteed safety and physical integrity to all members of his family. After that, the debtors were released again.
In ancient Rome, the creditor of the insolvent debtor had the right to do otherwise: if the borrower did not repay the debt, all of his property went to the lender. A bankrupt could return his belongings only in case of repayment of the debt to the creditor in full.
As trade relations developed, the provisions on the insolvency of business entities underwent fundamental changes. Today, legislation in the field of the institution of bankruptcy is in force in every modern state, and the Russian Federation is no exception.
Regulatory framework
In our country, court cases on declaring a subject insolvent are regulated by the Federal Law of 2002, supplemented and amended in 2015-2016. This is a complex legal act, in which even a person with a legal education is sometimes beyond the power to understand. This is one of the reasons why individuals and enterprises apply for the provision of specialized lawyer services, where they will be introduced in detail to the concept of bankruptcy (insolvency), signs of bankruptcy and help find a way out of this situation.
In order to achieve recognition of an entity as insolvent, it is necessary to prove that the enterprise or citizen does not really have the possibilities and methods of paying off debt. The creditor and the borrower are entitled to submit an application to the arbitration court for recognizing the debtor as such. From the moment the application is submitted, the official procedure starts. An individual or company representative will be able to familiarize himself with the concept and signs of insolvency (bankruptcy) during a hearing in an arbitration court.
What could be bankruptcy?
In order to start legal proceedings in order to declare a subject bankrupt, a good reason is needed. In most cases, it is non-payment of debt for 3 months or more. The minimum amount of debt for an individual is 500 thousand rubles, and for legal - 300 thousand rubles. If a citizen or an enterprise is declared bankrupt, data on him will be entered in a single federal register.
The most important thing to understand: declaring bankrupt does not exempt from paying debt. In this sense, the official financial insolvency of the borrower is more correctly perceived as an opportunity to fulfill existing obligations in a different way than the system of phased debt repayment by making payments. The bankrupt will have to pay the creditor until the property is in his possession. To a greater extent, this rule applies to legal entities. The list of personal property that may be alienated for debts is limited to citizens. For example, nobody has the right to take away his only housing from an individual.
Bankruptcy of companies may be:
- Real, which implies the inability of the company to return to the proper level of solvency due to significant financial damage. At the same time, the lack of assets does not allow continuing business operations.
- Temporary, representing an increase in the organization’s assets and a decrease in liabilities. In case of temporary bankruptcy, the organization may decide to purchase finished products, which will reduce a large amount of receivables. By carrying out a set of procedures, the company's solvency can be restored.
- Intentionally, to which the owners of the enterprise intentionally lead. Typically, such goals are pursued for personal reasons. Third parties may be interested in recognizing the financial insolvency of the company. Leading to deliberate bankruptcy is charged as an economic crime, and therefore prosecuted by law.
- False, that is, fictitious.The intention to plead a false bankrupt, withholding assets and manipulating financial status, also threatens criminal liability. In most cases, companies decide to declare their own insolvency in order to deceive the lenders and obtain from them privileges to pay debts.
Now about the types, signs and concept of bankruptcy (insolvency) of an individual. The procedure can be started at the request of the debtor. The insolvency of the subject may be real or false. If, as a rule, no questions arise with the first type of bankruptcy, then fictitious insolvency is an illegal attempt by a citizen to recognize himself financially unsecured in order to achieve debt restructuring or force creditors to make concessions to pay off debt.
Bankruptcy Evaluation Criteria
The concept of bankruptcy and signs of bankruptcy are two interrelated elements. Suspect the subject of economic activity in ruin can be for several characteristic features. Financiers identify direct and indirect signs of bankruptcy. The criteria for the concept of insolvency are also called formal and informal. In the first case we are talking about the inability to make the necessary payments and close debts within the next three months, in the second - there are no real signs of bankruptcy, but many factors indicate the alleged insolvency in the future.
Lenders, shareholders, business partners, hired employees of the company, customers are interested in obtaining an objective assessment of the financial status of an enterprise or citizen.
Informal (indirect) signs may indicate the likelihood that a person will soon have to deal with the concept of bankruptcy (insolvency). Signs of bankruptcy, in particular potential, include:
- errors and errors in accounting calculations;
- lack of part of the financial workflow;
- change of indicators of the external balance of the company;
- reduction in liquid capital;
- increase in receivables (increase in customer debt);
- inability to pay salaries to employees;
- delays in payments to investors and shareholders;
- undemocratic pricing policy.
The main stages of declaring a person bankrupt
Persons with an interest in obtaining objective information about the financial status of an enterprise are authorized to file a lawsuit to consider a bankruptcy case of a subject. The law provides for the right to begin the process of recognizing the insolvency of a debtor by creditors or their authorized representatives.
The concept and signs of bankruptcy (insolvency) alone are not enough to declare a company or individual insolvent. This is a complex process that begins with the fact of filing an application with the arbitral tribunal. The claim indicates a request to recognize the debtor as financially insolvent.
Since the concept and signs of insolvency (bankruptcy) can be used by an unscrupulous borrower in order to evade its obligations, it is important to establish precisely whether bankruptcy is fictitious. In this context, the task of the arbitral tribunal is a thorough trial in all the subtleties and nuances of the court case, an adequate assessment of all subjective and objective signs of insolvency. It is important not to mislead creditors or other interested parties.
After the application submitted to the court is registered, pre-trial verification of the debtor for actual ruin will begin. Only after this can you declare the opening of bankruptcy proceedings.
Stage of observation and non-intervention
This measure is most often carried out in relation to legal entities and large economic and financial entities (banks, holdings, factories, factories). According to the Federal Law “On Insolvency (Bankruptcy)”, supervision is carried out by an interim manager. The responsible person is appointed by court order. Most often, the functions of the interim manager are assumed by the trustee of the creditor. Monitoring is necessary in order to preserve the property of the debtor and analyze the real situation of the financial affairs of the enterprise. In fact, it is at this stage that the future of the company is determined.
The fictitious signs of insolvency (bankruptcy) of organizations and citizens (the concept of false insolvency was mentioned above) cannot be hidden when appointing a new manager, temporarily acting as manager. The proxy of the creditor has the right to occupy this position for no more than 7 months. During this period, the manager must give answers to the following questions:
- whether the subject has a theoretical opportunity to repay the debt;
- are there any chances of restoring the solvency of the enterprise;
- if the firm has enough assets to cover legal costs;
- whether the business entity is able to pay wage arrears to employees.
At this stage, a meeting of creditors is necessarily held, at which a decision is made on the further course of the bankruptcy procedure and the advisability of using the concept of bankruptcy (insolvency) with respect to an entrepreneur. With signs of insolvency of the company, the question arises as to whether it is possible to conclude a peace agreement with the debtor or if more effective, but at the same time radical, procedures are required - reorganization, change of management, bankruptcy proceedings. The decision is made by open vote of creditors.
"Prevention" of bankruptcy of an enterprise
This stage is also called the stage of rehabilitation or rehabilitation. The objective of this period is to restore the solvency of the company. Management of the company at this stage is returned to the previous owners, but with some restrictions in authority. For example, management is prohibited from deciding on transactions relating to the disposal of share capital.
In the Civil Code, the concept of insolvency and the legal regulation of bankruptcy has its own characteristics. A sign of a citizen's insolvency is the presence of unfulfilled obligations in the amount of at least 500 thousand rubles, while a debt of 300 thousand rubles is enough to start a bankruptcy procedure for a legal entity. Debt restructuring, which involves changing the terms of a debt obligation and paying off a debt with the consent of a creditor, can be called an analogue of the rehabilitation stage for citizens.
Restoring the solvency and financial health of companies is a complex and lengthy process. Sometimes the reorganization of firms lasts several months, but its maximum duration can reach two years. The concept and signs of insolvency (bankruptcy) of legal entities remain fundamentally important at this stage. If upon its completion the requirements of the lender remain unsatisfied, a repeated meeting of creditors is held. After the stage of reorganization, the debtor may be sued by the arbitration court in order to bring him to justice and take additional measures of legal enforcement.
The reins
The introduction of external management at the enterprise cannot be called one of the mandatory measures in relation to a potential bankrupt. The decision to conduct the procedure can be taken by the arbitration court in the event that it is considered that a change of managerial link will restore the solvency of the company.
Legal relations arising between the creditor and the debtor are regulated by a number of federal laws, the Civil Code (CC) and the Arbitration Procedure Code (APC). Signs of bankruptcy of organizations and citizens (the concept of "insolvency" in the law is considered identical to the concept of "bankruptcy") are described in detail in the Federal Law "On Insolvency (Bankruptcy)". If the arbitral tribunal considers it insufficiently good reason for declaring a person bankrupt, the debtor will be given the last chance to solve the problem by external management.
The duration of this period averages no more than one and a half years. At this stage of the bankruptcy procedure, the head of the company is removed from the position, and the duties of managing the company are assigned to the trustee of the creditor, who temporarily holds the position of TOP manager. In addition, significant restrictions will affect the activities of the meeting of shareholders, the board of directors - their main powers will be transferred to the interim manager.
The most pleasant consequence for the debtor of this stage is the introduction of a moratorium on the fulfillment of credit obligations. Throughout the period of external management, the company is exempted from paying debt. Neither penalties, nor fines, nor forfeits are counted. This measure is designed to improve the financial status of the company.
Liquidation of an enterprise
This measure can be applied both to representatives of large businesses, and to individual entrepreneurs. According to the concept and signs of bankruptcy (insolvency), there is no chance to restore the solvency of the debtor. If no settlement is reached between him and the creditor, the company is liquidated as follows:
- The court appoints a special person called to administer the property in order to satisfy the requirements of the lenders.
- 12 months are allotted for the sale of property of the enterprise, and if necessary, the period is extended by the court for another 6 months.
Similar actions are carried out in relation to the property of an individual entrepreneur with signs of bankruptcy. The concept of insolvency of individuals implies subsequently the seizure of property, which will be sold at open auction, and the proceeds will be returned to the creditor.
Settlement agreement
In practice, if there are at least two of the 3 signs of insolvency (bankruptcy), the concept of which can be found at the very beginning of the article, the debtor is not given a chance to restore solvency. However, at any stage of the bankruptcy procedure, the creditor has the right to make a decision on a settlement, which confirms that the two sides managed to reach a compromise. Often, this document is concluded by individuals and legal entities with credit organizations.
The concept and signs of bankruptcy (insolvency) indicate how difficult the procedure for recognizing insolvency is. On the one hand, bankruptcy makes life easier, allowing you to shed unbearable debt stones, but on the other hand, it leads to the liquidation of the business and the deprivation of capital.