European Polytechnic Institute Ltd., Kunovice
Study Branch: Management and Marketing of Foreign Trade
THE ISSUE OF BANKRUPTCY OF A COMPANY IN RELATION TO INSOLVENCY PROCEEDINGS
(Bachelor Thesis)
Author: Aleš Luža
Supervisor: JUDr. Karel Šabata
Kunovice, August 2010
I hereby declare I wrote the bachelor thesis by myself under the supervision of JUDr. Karel Šabata and used all the literary and professional sources listed in the bibliography.
Kunovice, August 2010
I would like to thank to JUDr. Karel Šabata for the help that he provided to me during the work on my bachelor thesis.
Kunovice, August 2010
Aleš Luţa
CONTENT
Since the 1st of January 2008 the new insolvency law has been valid as the final modification of which was preceded by a long development of bankruptcy law. By becoming valid the insolvency law cancelled the current law no. 328/1991 of Collection on bankruptcy and settlement the regulation of which was not sufficient for usage in the legal practices in the Czech Republic.
The main aim of the bachelor thesis is to introduce its users, e.g. the employees of the Police of the Czech Republic, the Territorial Branch of the Service of the Criminal Police and investigation – Branch of economical criminality in Uherské Hradiště to the new regulation of the insolvency law in a for, which will simplify the basic orientation in the issue of this law, the regulation of which is not very transparent, but is very extensive. So that the given issue is understood well, it was necessary to connect it to a general knowledge of basic terms from accounting and property structure of company so that the user gains a wholesome and fast image of this issue and without a complicated search in the appropriate literature and laws. A part of my work is also a couple of practical examples of bankruptcy from the accounting point of view which is a big advantage for the creation of a practical image also for those users, who in their professional activity do not deal with concrete data from accounting of legal entities or individuals - businessmen.
The bachelor thesis is divided into chapters that are their partial aims and the synopsis of a work. The first chapter specifies the property structure of a company, elaborates the way of bookkeeping, its nature and purpose, also characterizes the term company, its property and capital, accounting analysis, results of economy and examples of bankruptcy of a company. The partial aim of this chapter is the theoretical analysis of the given terms, the knowledge of which has to be revived or newly acquired to understand another partial chapter. The second chapter deals with the entire issue, characteristics and course of insolvency proceedings with all key terms for which the introduction of the chapter elaborates the history and development of insolvency law. In the third chapter the issue of solution of bankruptcy of a company in the insolvency proceedings in a form of bankrupt, the aim of which is to specify the most important terms of the solution of the bankruptcy in this most common form of it is elaborated. In the third chapter the selected bankruptcy crimes with brief examples from the practical life are elaborated.
I firmly believe that my work will serve its purpose and will be a practical and useful tool for the usage in the practical life for the policemen who focus on the verification and investigation of economical criminality and for the improvement of quality and extension of their knowledge in the introduction of a new legal regulation.
A necessity for securing the managing, producing or economical activities of all business subjects is the obtainment of updated information on a state of these activities, while one of the key sources for their obtainment is the accounting. The accounting serves not only to the businessman himself, or his managing elements, but it provides the necessary information to another subjects, which may be mainly the customers, suppliers, banks and financial offices.
Manly all of the legal entities are obliged to have an accounting since the day of their creation, also all individuals – businessmen who are registered in the trade register and another individuals and subjects listed in the regulation of § 1 of law no. 563/1991 of Collection on the accounting. The individuals, who are not obliged to have accounting, have simplified tax evidence.
The subject of accounting is delimitated in § 2 of law no. 563/1991 of Collection on accounting, the subject of accounting is the accounting on a state and movement of property and other assets, obligations and another obligations and also the accounting on costs and gains or expenses, incomes and economical results. A set system of accounts is used for accounting on which the records are made in the form of double entries. [3, p. 6]
It is necessary to note that up until 2004 the simple and double-entry accounting was used for accounting, while nowadays we only meet with the term accounting that is done in a form of double entries, like the double-entry accounting used to in the past. The subjects, which are not obliged to have accounting, nowadays use the simplified tax evidence to which the law on accounting is not related.
The characteristic features of accounting are the depiction of real state and movement of property and obligations and determination of the actual results of economy, the accounting evidence from the point of view of time, which is the accounting period, then
the accounting in the system of accounting records and evidence of accounting records through accounting document, accounting books, accounting notes and final accounts and last but not lest the characteristic feature of accounting is that it is continuous, full, truthful, right and conclusive. The accounting creates a system that is regulated by already mentioned law no. 563/1991 of Collection on accounting.
The business accounting is divided into:
If we analyze the role of the financial accounting in more detail, it is clear that the tax accounting is based on it, which in accordance with tax regulations, divides all expenses of a company into tax acceptable, which are mainly the expenses for obtainment and sustenance of incomes and the expense based on the division of a profit, which are not included in the tax base.
The regulation of § 5 of paragraph 1 of law no. 513/1991 of Collection, the Commercial Code, characterizes a company as a set of both material and personal and intangible elements of business and also names things that belong to the businessman – things, rights and other proprietary values, which belong to the businessman and serve for the business conduct of a company or due to their nature are supposed to serve for that purpose. [2, p. 8]
The Commercial Code takes a company as a thing in legal sense of the word, precisely a collective thing that includes all that the businessman created with his will for the purposes of his business making, when in this sense these are both tangible and intangible things, proprietary rights or another values, but also intangible assets such as good name on the market (goodwill, know-how of the clients) and personal elements of the business making (qualification and experience of the businessman and his employees), by a company we mean a living working economical organism. All of the above listed elements determine the total value of a company, which may be subjected to sale and purchase, lease or can be used as an input of a companion into a business company.
The company is legally obliged in accordance with the law on accounting to exhibit the state of property and capital in the accounting statement, which is called BALANCE SHEET. The balance sheet has its unified form and it is the obligation of all business subjects who are accounting to create the balance sheet. The balance sheet is for the increased transparency of property of a company in a form of certain configuration, in which the assets and liabilities of a company are registered by certain day, which is called the balance sheet day.
A company is being founded with certain business intent, which is for example a production of certain goods, provision of services or execution of some business activity related to a purchase and sale of goods. For the execution of these activities, it is necessary
for a company to have certain property (in accordance with the Commercial Code “the business property”). In accounting the arrangement of property by its composition is called ASSETS. Out of the concrete asset items we may call for example money, goods, material in a stock, machinery and building to be assets of the company. The assets are thus the expression of what the company owns. The property is divided by its form and function into:
The term “long-term” property means such property that serves to the company for a long time and its period of usage is longer than one year. The long term property is a significant part of the proprietary structure of a company. The long term property is further divided into:
Under the term circulatory property which circulates constantly in the company, it is a short-term property that can be specified as entry material which is processed during the production process up to the final finished product, which is sold and by customer, these thus are stock of material on the stock, unfinished production, finished products, finished money in the cash register or on accounts in banks and claims. In the balance sheet it is called circulatory assets. The circulatory property is divided into:
Generally we can sum up that the circulatory property of a company is constantly changing in a way that its individual forms change into another forms and it is constantly in circulation. As a simple example we can list the fact that a company purchases entry materials for its own finances that are processed into the individual parts of unfinished production, then these parts are completed into the finished products that are shipped and then invoiced to the customer while due to the time difference between the invoicing and the period of maturity, there are claims occurring, which are at the time of their payment changed into money (either cash in cash registers or on the bank accounts of a company).
c) Capital and its division
Every certain kind of property has its origin and it is necessary to depict in the accounting where does this property come from, what is its source of coverage and from what sources was it obtained. In the accounting we design the total value of property arranged by the sources of coverage by the terms DEBTS. Out of the concrete items of debts, we may for example call the basic capital, gains, credits and any obligations the debts. From the point of view of coverage of property, we divide the capital of the company into:
We further divide the own sources into:
Strange sources are a debt of company that may be a source of coverage of its property. We may differentiate them for example by the period, up until which they have to be paid and they are long-term, mid-term and short-term. W divide the strange sources into:
For the accounting evidence the most important material are the accounting books into which we execute the accounting records. Among the most important accounting books are:
These accounts are in the main book, they are the overall total evidence of property of a company, sources of its coverage and accounts of the economical operation. The overall state is always listed in here, for example the obligations towards all suppliers, the individual suppliers and the individual values of obligations towards them are not differentiated here.
It is a more detailed breakdown of synthetic accounts, e.g. the evidence where we have for example the individual suppliers and the individual calculated obligations towards them divided separately.
Synthetic and analytic accounts must be in mutual harmony, e.g. the starting and final state of turnovers must be equal.
The balance of accounts and book closing of company secure the fullness, demonstrativeness and rightness of accounting, it also includes activities such as closing of accounting books by the accounting records, calculation of tax base and income tax, creation of annual book closing and opening of new accounting books for the next accounting period. The accounting book closing is an inseparable thing consisting of obligatory balance sheet, evidence of profit and loss and appendix. The obligation to create balance of accounts and book closing is given to the business subjects by the law on accounting.
Accounting analysis gives important accounting information, which are base on the accounting statements and serve for the monitoring of development of economy of a company. Through the accounting analysis it is possible to find the facts on the future economical viability of the company by monitoring not only the strong parts that secure the prosperity of the company, but also by discovering the weak elements that could cause economical problems in the future.
For the internal needs of the company, the basic necessity is the assessment of financial situation of a company through a method of financial analysis, e.g. execution of deeper elaboration of accounting data in a form of statement of balances. The issue of analysis of the accounting data is in the practical life very excessive and very complicated in its details, thus for its general understanding it suffices to say that in the economical praxis these methods of analysis are being used:
In order for us to be able to further analyze the entire economical situation of the company and direct it towards the economical result, which is one of the most important indicators, it is necessary to further elaborate the issue of costs and revenues.
We express the costs of the of the company in monetary units, these are financial values that the company invests into the creation of its revenues. The difference between costs and revenues is the economical result of the company. The costs of a company are registered in the financial accounting, designed for external users and in the intra-company accounting , which is used by the managers of the company. We differentiate these costs of the company:
In accordance with the economical theory the costs are defined as financially expressed consumption of all production factors with the inclusion of another expenses caused by the creation of company gains. From the accounting point of view this theory can be expressed like this: we consider the costs to be the consumption of values in certain accounting period which we register in the financial accounting.
An important accounting information is however that the costs must be differentiated from the monetary expenses, which are the decreases of states of finances on the bank accounts of the company with no regard to their usage. An example of this may be a purchase of machinery which is being depreciated in accounting for a certain period of time. This means that the purchase of the machine itself is not a cost, but monetary expense. The costs are the depreciations of the machinery. The total value of machinery is thus gradually in a form of depreciations being transferred into costs that are no longer financial expenses in this form.
We express the revenues of the company in the monetary units, these are monetary incomes of companies that occurred as a result of the economical activity of the company in certain accounting period. The revenue of a company is also when certain financial value is taken in certain accounting period. The key revenues of a company may be for example earnings from the sale of own products and services and the business range (it concerns the business companies and it is a range between the purchase and sale price). We distinguish these kinds of revenues of a company:
As it was state already the main earnings of the company are predominantly earnings from sales. If the company sells its products or services in certain period, it gains financial values for them, which are the decisive element of earnings and the main financial source of a company. We will determine the concrete elements of earnings from the statement o incomes and losses –statement of income.
The most important element of earnings – earnings from the sale of products – is influenced by several indicators, which are the sum of own production, prices of products, assortment of products or monetary exchange rate. Another influences, that are objected in earnings may for example be the development of market, demand or production capacity of the company.
The information on earning, costs and economical results are given to us by the statement of profits and losses, called the statement of income. The subtotals in the statement of income divide the economical results into operational, financial and exceptional. The expenses and profits are stated in the current and previous accounting period.
The accounting result, or the economical results are determined for the entire finished accounting period, if these results concern a proper statement of accounts, or in another case for the otherwise determined period of time if these economical results concern an exceptional statement of accounts. We have 6 economical results:
The most important of the above listed results of economy is before taxation and for the accounting period.
The economical results of the company are the difference between the total gains and total expenses of the company. If the gains exceed the expenses, we speak of the profit, in other cases there is a loss. From the point of view of profit, which is an important indicator of the economical situation of a company, we may for example monitor the profitability of a company, profitability of won capital, profitability of gains and profitability of expenses.
Generally speaking we may specify the economical results in this way:
For the obtainment of economical profitability of company it is necessary to constantly create conditions for the obtainment of profit and the ability to pay the obligations. It is an indicator that depicts the real movement of finances in the course of the accounting period. Within the statement of accounts the Cash Flow evidence, which provides for the company the information on incomes and expenses and thus on the overall financial situation of the company and its payment promptness. For complex economical activity of the company it is important fro the incomes to exceed the expenses and thus for the cash flow to be in positive numbers.
We divide the gains and decreases of finances of the company into these areas:
For the evaluation of the financial flow it is necessary to know the facts on how many finances did the company have at its disposal in the beginning of the accounting period and how many it has in its end, then it is necessary to know how many finances has the company created and how many of it has used, who created these finances and how were they used. We then use these data to monitor two indicators, which are the incomes of
finances, which are a positive indicator and expenses of finances, which are a negative indicator. The result of difference of these indicators is the cash flow.
Example No. 1
The company named A, Ltd. sells and purchases goods. In Tab. No. 1, a statement that the company balance sheet.
Line of balance sheet | Number of line of the balance sheet | Value in thousands of CZK |
PROPERTY |
|
|
Long-term tangible investment property | 13 | 1.556 |
Stocks | 32 | 5.652 |
Short-term claims | 48 | 8.527 |
Financial property | 58 | 3.405 |
TOTAL |
| 19.140 |
|
|
|
OBLIGATIONS |
|
|
Long-term obligations | 91 | 3.526 |
Short-term obligations | 102 | 10.200 |
Credits | 114 | 0 |
TOTAL |
| 13.726 |
Net business property (NBP) |
| 5.414 |
Share of NBP on the property in % |
| 28,29 |
Share of strange sources on the property in % |
| 71,71 |
Tab. No. 1: Balance sheet
Source: own
The balance sheet clearly states the value of NBP in the value of thousands of CZK to be 5414 and it is 28,29 % of share on the property of the company. A part of obligations (all obligations are obligations before the period of maturity) may be paid by the company immediately by a financial property, a part of the short-term claims (the company has no claims after the period of maturity).
If we use the liquidity indicators we get the following values:
We may perceive the company to be economically healthy, it does not keep high amounts of cash and it is able to pay its obligations.
Example No. 2
Company B deals with the processing of sea fish. The data by the day of entry of the B company into the bankruptcy proceedings are listed in Tab. No. 2.
Line of the balance sheet | Number of line of the balance sheet | Value in thousands of CZK |
PROPERTY |
|
|
Long-term tangible investment property | 13 | 225 |
Stocks | 32 | 0 |
Short-term claims | 48 | 13 |
Financial property | 58 | 11 |
TOTAL |
| 249 |
|
|
|
OBLIGATIONS |
|
|
Long-term obligations | 91 | 6.975 |
Short-term obligations | 102 | 1.722 |
Credits | 114 | 129 |
TOTAL |
| 8.826 |
Net business property (NBP) |
| -8.577 |
Share of NBP on the property in % |
|
|
Share of strange source on the property in % |
|
|
Tab. No. 2: Balance sheet
Source: own
The balance sheet has in the comparison of property and obligations clearly demonstrated the fact that the obligations exceed the property by 8.577 thousands of CZK. The negative business property shows the heavy indebtness of a company.
The total property of the company is lower than its obligations.
The indicator of total liquidity is used for common orientation on the payment promptness. The total liquidity = circulatory assets (total property) / short-term obligations = 0,0282. The value lower than 1 shows the fact that the company is absolutely not liquid.
The company has more creditors (OSSZ, VZP, FO, employees, suppliers of food and energies), is heavily indebted and is not capable of fulfilling its obligations towards its creditors.
Example No. 3
A company C dealing with the execution of construction works. In Tab. No. 3, a statement that the company balance sheet.
Lines of balance sheet | Number of line of the balance sheet | Value in thousands of CZK |
PROPERTY |
|
|
Long-term tangible investment property | 13 | 0 |
Stocks | 32 | 0 |
Short-term claims | 48 | 10.324 |
Financial property | 58 | 240 |
TOTAL |
| 10.564 |
|
|
|
OBLIGATIONS |
|
|
Long-term obligations | 91 | 0 |
Short-term obligations | 102 | 6.687 |
Credits | 114 | 0 |
TOTAL |
| 6.687 |
Net business property (NBP) |
| 3.877 |
Share of NBP on property in % |
| 36,70 |
Share of strange sources on property in % |
| 63,30 |
Tab. No. 3: Balance sheet
Source: own
The balance sheet clearly shows that the company has positive NBP, the share of which on the property is 36,70 % and it covers 63,30 % of the strange sources (short-term obligations). Thus the company is not heavily indebted.
The presented lists of claims and obligations show the fact that 50 % of the total claims is after the date of maturity and the company has 60 % of the total obligations after the date of maturity. The value of financial property in relation to the short-term obligations is very low, it has the value of 3,59 %.
The company has thus not been able to pay for its obligations for an “extended period of time” (at least three and more months after the date of maturity of obligations and got into the bankruptcy in a form of insolvency.
The basic element of each market economy is a free competition of business subjects. The level of market economy can be assessed not only by the successful subjects, but also by the way those, who failed in the environment of the economical competition, are treated. Each market economy thus has to have clear rules of treatment of unsuccessful participants of the economical competition to protect not only the basic rights of these bankrupts, but also the creditors, who bear the consequences of their debtors. The term used for economical collapse in our legal system is bankruptcy and settlement.
The term bankruptcy is derived from Latin term “concursus creditorium”. It expresses a fact, that it is a concourse of creditors, which occurs in a form of enrolment of claims, so that their satisfaction is achieved from the assets in bankruptcy. The word “bankruptcy” expresses the fact that it is a proceeding, but also expresses the sense and nature of this proceeding. Sometimes there is another term used for it in the Czech language –úpadek. This term was to become a part of official legal regulation of the first republic. Due to the deep-rooted term “bankruptcy” this did not happen. Furthermore the term “úpadek” characterizes only the economical state of the debtor, which is the impulse for the announcement of bankruptcy and settlement. In the past the term “bankruptcy” was not used and instead of it there was a foreign word “krida” being used. The significance possibilities of these terms are limited, such as in case of the word “úpadek”. The current regulation of the Czech bankruptcy law calls the debtor “a bankrupt”. The terms derived from foreign words such as “kridatář” did not become used in the Czech Republic.
Law no. 328/1991 of Collection also uses the term “settlement”. This term was introduced in the Czech lands already by law no. 64/1931 of Collection and replaced the term “rectification”. The newer term “settlement” is not so precise from the language point of view, because it may case the impression that all of the obligations of the debtor are paid without anything left. The reality is that the unpaid obligations of the debtor are abolished.
The first bankruptcy order in our land was created already in the 18th century and was gradually updated. In 1763 also the Austrian-Czech exchange order became valid. This norm contained some parts of the bankruptcy law and unified Czech and Austrian law. In the course of 18th and 19th century the bankruptcy law was novelized several times. These modifications resulted in the second half of the 19th century in the acceptance of bankruptcy order no 1/1869. This bankruptcy order did not regulate the out-of-court settlement. That was introduced in Austria as far as in 1859 and 1862, but it ill acquitted itself. In the course of 1913 and 1914 a new regulation of the bankruptcy order was created along with the proposal of law on the forced out-of-court settlement.
The newly created Czechoslovak Republic took over the Austrian bankruptcy order from 1914 with Hungarian bankruptcy order by law no. 11/1918 of Collection. This law was a part of the Czechoslovak legal order up to 1931. In this year the law no. 64/1931 of Collection became valid. By this law the bankruptcy, settlement and adversary order were emitted. The aim of new law was to remove the double legal regulation in the area of the Czechoslovak Republic. That was because in the Czechoslovak Republic up to that point the emperor’s order from 1914 was still valid in Bohemia, Moravia and Silesia, but in the are of the Slovakia and Sub-Carpathian Russia the Bankruptcy law from 1881 along with the independent settlement order from 1915 were valid. The new legal regulation mainly removed the differences in the length of the bankruptcy proceedings in the Czech lands and in the area of former Hungary. In the Czech lands the bankruptcy proceedings was significantly shorter than in Slovakia and Sub-Carpathian Russia. In there the length of the proceedings in 50 % of cases exceeded three years. In the Czech lands even the division of the earnings of the assets in bankruptcy was significantly more favorable for the creditors.
The issue of new law no. 64/1931 of Collection was preceded by a careful preparation. The proposal was assessed by all institutions and professionals in 1927 already and in 1930 it was given by the government to the senate of the National gathering .The final version of the law was accepted by this institution on 27th of March 1931 and in its period it was very modern and progressive. In 1951 the further development of this law was forcefully discontinued and cancelled by law no. 142/1950 of Collection which introduced the institute of bankruptcy liquidation, where all of the property of the debtor was sold. In
1963 this institute regarding the liquidation of the property was cancelled due to the synchronization with foreign norms in the solution of bankruptcies abroad.
The reintroduction of the bankruptcy law in the Czech lands occurred after more than forty years by law no. 328/1991 of Collection. The text of this law was based on the legal regulation of law no. 64/1931 of Collection. Even though this law was in its time a modern legal regulation, in the beginning of the 90’s of the 20th century, it was already outdated and very little efficient. After law no. 328/1991 of Collection became valid on 1. 10. 1991 its regulation replaced § 352 to 354 of law no. 99/1963 of Collection of the Civil Procedure Act, which was the only legal regulation of the bankruptcy proceedings in the Czechoslovak legal order up until 1991. Due to the 40 years of ceased development of the bankruptcy law the new version of the law went through a lot of changes in a form of updates and changes carried out on the basis of findings of the Constitutional Court of the Czech Republic. These changes were executed on the basis of practical experiences in the execution of the bankruptcy law.
In 2002 on the basis of the incentive of the Ministry of Justice of the Czech Republic, a twenty member commission was established that started to prepare the conception of new legal regulation of the bankruptcy proceedings. The extensive proposals for the new law went through public discussion. The works on finishing of this new proposal of law were however postponed due to the political situation of that time.
Another incentive to create complex legal regulation came from the former Minister of Justice, JUDr. Němec and the vice chairman of government for economy, Martin Jahn. On the basis of long political discussion a halfway proposal on bankruptcy and its solutions was accepted under no. 182/2006, which became effective on 1. 7. 2007.
However even before it became valid, the law was updated so that the condition for the execution of the function of the insolvency manager was strictly determined to be college education of legal or economical nature. Other regulations concerning the system of insolvency register and preparations of computer processing of the functioning of the insolvency register. These modifications were the purpose of the delay of the effectivity of the insolvency law to 1.1. 2008. But also in the situation when the courts were not
sufficiently ready in the hardware and software sense for the operation of the insolvency register, the participants of the insolvency proceedings had different approach to information on the course of the proceedings.
Characteristics, purpose and breakdown of basic regulations of the insolvency law
The issue of bankruptcy and its solution was up until 2007 regulated by law no. 328/1991 of Collection on bankruptcy and settlement. This law however proved to be imperfect in the practical usage, because it led to lengthy proceedings, insufficient satisfaction of creditors, liquidation of bankrupts and had another shortcomings. Thus it was replaced by new law no. 182/2006 on bankruptcy and the ways of its settlement (insolvency law), which became valid on 1st January 2008 and was supposed to be a reform of the bankruptcy law.
We cannot forget to mention that an important reform of the bankruptcy law is the insolvency register, which is a system of public administration managed by the Ministry of Justice. The insolvency register publicly informs on the insolvency proceedings, contains state wide list of debtors, insolvency managers, insolvency files and other documents related to the insolvency proceedings. The insolvency register is publicly accessible and everyone has the right to look in it or make copes or abbreviatures of it.
In the course of 90’s of the 20th century the recodification works on the regulation of the bankruptcy proceedings started on the basis of findings of economical and legal praxis related to the usage of law no. 328/1991 of Collection on bankruptcy and settlement. “The basic theses of the new legal regulation are based mainly on:
Among the basic sources of the new legal regulation was the regulation of bankruptcy law of Germany (Insolvenzordnung) and USA (Bankruptcy Law).” [8, p. 19]
New insolvency law is divided into three areas, out of which he first area regulates:
In the second part we meet with the ways of solution of bankruptcy, regulation of bankruptcy proceedings, reorganization and discharge of bankruptcy. The third part contains the common provisions, insolvency register, relation to states of the European Union and final provisions.
The regulation of insolvency law is very thorough and detailed, which is a huge advantage for this issue, because unlike in the last regulation, there is no room for different interpretations that are in conflict with this law. A disadvantage is that the new regulation is very complex and thus hard to acquire.
The insolvency law has yet to go through long period of practical usage, but on the basis of its regulation, it is even today clear, that the proceedings based on it may be faster, more economical and with the biggest possible satisfaction of creditors, whom it gives equal possibilities and protects their rights.
The characteristics of the insolvency law is based on the basic regulations of head I (§ 1-8) and on the object of the regulation of this law regulated in § 1, where this law “deals with the issue of bankruptcy and impending bankruptcy of debtor through court proceedings and in relation to certain legal way of solution in the insolvency proceedings so that the mutual proprietary relations between the debtor and his creditors are settled and thus the satisfaction of all creditors of the debtor is achieved in the same ratio and at the same time the debtor is discharged of bankruptcy.
The purpose of this law is the possibility to solve the bankruptcy and impending bankruptcy with the help of this law and to maximal possible extent settle the proprietary
relations towards people, the property of whom is influenced by the bankruptcy of debtor and achieve the biggest possible appreciation of the property of the debtor.” [1, p. 9-10]
Bankruptcy is defined by § 3 of insolvency law. The forms of bankruptcy are insolvency and heavy indebtness. By bankruptcy we mean an inconclusive proprietary situation of the debtor, who is neither able, nor entitled to solve it by himself. The bankruptcy of a debtor is the inability to fulfill his obligations towards creditors due to the lack of his own finances, which can not be mistaken for example for the lack of willingness of the debtor to pay his debatable obligations, for the stand of payments of the debtor for another reasons, or by the creation of payment disability due to illegal actions of a third person.
Any debtor, e.g. any individual who is not a businessman and any legal entity is in bankruptcy if it has more creditors and it is unable to fulfill its obligations for an extended period of time.
One of the signs of bankruptcy is the multitude of debtors, e.g. the fact that the debtor has at leas two creditors while a creditor is a creditor wit a claim after the date of maturity.
Another sign is the inability of the debtor to fulfill his obligations, which means that the debtor does not have sufficient finances to pay his due obligations. The due obligation is an obligation the period of maturity of which has already passed and if the debtor does not have this obligation accounted. In this case it is not at all important, whether the debtor became insolvent by his own fault or as a result of insolvency of his debtors.
Another sign of bankruptcy can be the fact that the inability to pay for the mature obligations lasts for an extended period of time. The extended period of time is we consider at least 3 months.
If the circumstances suggest the presumption that the debtor is in such economical situation, that he will be unable to fulfill his financial obligations, it is an impending
bankruptcy. The impending bankruptcy is also defined in the regulation of § 3 of insolvency law.
b) Bankruptcy in a form of insolvency
When it comes to the insolvency, the law in this case creates objective viewpoint and subjective viewpoint, while the objective viewpoint is the plurality of creditors and the maturity of financial claims – debts, which are 30 days past their period of maturity. The subjective viewpoint is the inability to fulfill these claims. The insolvency law determines the suppositions of insolvency. The supposition of insolvency occurs when the debtor ceases a significant part of his payments, is in delay longer than 3 months after the date of maturity, also if the inability of execution or the execution of the decision occurs and if he does not provide the list of property, claims and employees.
c) Bankruptcy in a form of heavy indebtness
The heavy indebtness as a form of bankruptcy has a lower significance in a sense of the law, that the insolvency, because it may only be related to legal entities and individuals – businessmen. If we speak of the sum of all obligations, not only those that are mature, these must exceed the value of property, where the expected development of the company is taken into consideration. Even the opinions, that the heavy indebtness de lege ferenda will not be a form of bankruptcy at all.
The heavy indebtness occurs if the mature obligations of the debtor are higher than his property into which the expected gains from the expected continuous business activity are included. The bankruptcy in a form of indebtness concerns only such person, which is a businessman and any legal entity even if it was not founded for the purpose of business making.
One of the sings of bankruptcy in a form of heavy indebtness is the multitude of creditors with a claim that is mature and the mature obligations of the debtor must be higher than his entire property. Similarly even in this case it must be an obligation, the period of maturity of which has already passed, even though the debtor did not account the obligation.
The condition for the beginning of the insolvency proceedings is the bankruptcy of the debtor. The ways of solution are based on the regulation of § 4 of the insolvency law where four ways of the solution of insolvency by bankruptcy, reorganization, discharge of bankruptcy and special ways of solution of bankruptcy for certain subjects or cases.
The insolvency court decides in the individual cases on the ways of solution of bankruptcy either by decision on the announcement of bankruptcy, decision on acceptance of reorganization or decision on the acceptance of discharge of bankruptcy. With the decision on the bankruptcy it is usually also decided at the same time on the way of solution of bankruptcy. When it comes to bankruptcy, its issue stays conceptually on the same principles as in the law on bankruptcy and settlement. A new legal institute becomes the reorganization, which is in its principle based on the process of restoration of health and revitalization of the debtor, another new legal institute is the discharge of bankruptcy which mainly concerns the non-business subjects, in which under certain conditions it is expected to discharge their obligations and the last case that the insolvency law deals with is the special way of settlement of bankruptcy, which concerns for example banks and insurance companies, when in case of their bankruptcy it is not suitable to use the bankruptcy by a bankrupt.
Among the basic principles of the insolvency proceedings is the abolishment of advantaging and damaging, the economy of the proceedings, equal treatment, abolishment of the damage of rights gained in good will, abolishment of satisfaction outside of the proceedings and the common interest of creditors.
The principles of the insolvency proceedings support the already mentioned aim and purpose of the insolvency law related to the satisfaction of the persons influenced by the bankruptcy of the debtor. The regulation of § 5 of the insolvency law states that the “insolvency proceedings must be led in a way, so that none of the participants is unjustly damaged or illegally advantaged and so that the fast, economical and highest possible satisfaction of creditors is achieved.” [1, p. 10] The given regulation also states that “the
creditors who have similar or same position by principle, have equal possibilities in the insolvency proceedings” [1, p. 10], so the equality of the creditors and their relative satisfaction is pursued here.
Another principles of the insolvency law state that unless the law says otherwise, the rights of the creditor gained in good will can not be restricted before the beginning of the insolvency proceedings by the decision of the insolvency court, nor by the actions of the insolvency managers, while
Subjects of the insolvency proceedings
Regulation of § 9 calculates the process subjects, which are through the means of insolvency law participating on the insolvency proceedings. Among these subjects are:
Participants of the proceedings
The participants of the insolvency proceedings are only debtor and creditors who use their right towards the debtor. As a participant of the proceeding, the debtor must be a legal subject and it is not acceptable to exchange the participants of the proceedings. The participants of the proceedings are contained in the definition of § 14.
If there is an incident conflict during the insolvency proceedings, the participants are also the accuser and accused, while one of them usually is the insolvency manager. The participants of the incident conflict are contained in the definition of § 16.
Insolvency manager, preliminary insolvency manager
The person of the insolvency manager, the execution of his function and other facts related to this function are defined by the regulations of § 21 to § 44. The insolvency manager for example executes the measures for the determination of the property of the debtor, verifies the accounting of the debtor, gives the debtor an agreement to handle the assets, or accepts fulfillments from persons, who have obligations towards the debtor. The insolvency manager is not a participant of the insolvency proceedings his position is absolutely independent both towards creditors and the debtor, e.g. he is not their representative and thus the public intervention into the settlement of the proprietary relations is restricted in the course of the insolvency proceedings. The execution of his function is not a business making nor business, while the selection of the concrete person for this function is given to the head of the insolvency court, who selects this person from the list of insolvency managers. An important fact however is that the creditors have the possibility to influence the selection of the insolvency manager or his exchange. The creditors however can not control the person of the manager for the purpose of enforcement of their own interests. The insolvency manager is appointed at the latest in the decision on bankruptcy.
Before the decision on bankruptcy the insolvency manger can be appointed as a preliminary manager, which is regulated in § 27. If this preliminary manager is appointed, he becomes after the issue of the decision on bankruptcy the insolvency
manager with his full activity. This person is also determined by the head of insolvency court from the list of insolvency managers. The rights and obligations of the preliminary insolvency manager can not be wider than the rights and obligations of the insolvency manager.
The insolvency manager and the preliminary insolvency manager have the obligation to stay silent in relation to the business secret of the company of the debtor related to the execution of his function. The insolvency manager may be freed from this silence by the debtor and in some cases also by the creditor.
Organs of the creditors
The organs of creditors and their activity are regulated by § 46 to § 48. The highest organ is the meeting of creditors, while another creditor organs are appointed by the number of creditors, when it is either a committee, which is appointed in case of more than fifty applied creditors, or it is a representative of creditors which is appointed in case of lower number of creditors.
The regulations on the insolvency proceedings
These regulations are elaborated in head III of the insolvency law and it specifically regulates the ways of delivery, sanctions, order of preliminary measures, inadmissibility of cease of the insolvency proceedings, also the proceedings, argumentation and decision with subsequent legal remedies.
The delivery is regulated in § 71 to 80, when these are cases of various ways of deliveries of the decision of the insolvency court and another documents delivered in the framework of the insolvency proceedings. The given regulations also specify another ways of delivery, terms for deliveries, effects of deliveries, deliveries into own hands, personally, through postal service with delivery note or into the own hands of the addressee and also deliveries through insolvency court or insolvency manager. One of the most significant and important decisions is the delivery by public notice, which is being published also in the insolvency register. In the publication of concrete document on the public board a specific date of its publication is written on it and after the passage of the period of its publication, it has to be taken out and the date of this is given on the document. On a day when certain document is published on the public board, it is considered to be delivered. Similar case is the publication in the insolvency register, however the difference in this case that the time of publication in the insolvency register is the day, hour and minute of publication, which is significant for example in bankruptcy proceedings.
For a better and more purposeful informedness of the creditors, even print, radio, television or internet may be used, but with the difference that such delivery is not connected to any process causes.
Sanctions in the insolvency proceedings are regulated by § 81. This regulation states the possibility to penalize the insolvency manager by disciplinary fine, even repeatedly. Due to the practical life up until now, these sanctions towards the insolvency manager were introduced due to his functional significance in relation to all participants and the sanctions would thus be used in case if the insolvency manager does not carry out his function in a way determined by law. If even after getting the disciplinary fine the insolvency manager does not carry out his function in accordance with law, he would have to be relieve from his function.
The proceeding, argumentation and decision of the insolvency court are based on the regulation of § 85 to 90, when the principle is that the insolvency court orders the proceedings in the cases determined by law and in cases when it is necessary. The court however does have to deal also with another facts during the proceedings, which were based on the ongoing insolvency proceedings and which were not possible to be obtained during the court proceedings.
The argumentation has a high significance in the insolvency proceedings, while “the court has in the argumentation the obligation to present all evidence necessary for the verification of the bankruptcy of the debtor or his impending bankruptcy before they were proposed by the participants.“ [7, p. 7] That suggests that the court has to properly examine all facts so that the bankruptcy of the debtor is determined without a doubt. Before the emission of decision in the insolvency proceedings, an important step in the court proceedings is the hearing of debtor, who may comment all facts determined in the argumentation. The law also regulates the fact of long-time absence of the debtor, in which the delay and the repulse of the purpose and aims of the insolvency proceedings could occur. In such case it is possible to hear out a representative of the debtor or a person close to the debtor.
After documentation of all facts important for the decision, the insolvency court decides in a form of decree. The decree has certain requirements regulated in § 88 paragraph 2 and in § 169 and § 157 paragraph 2 and 4 of the Civil Procedure Act. The decision of the insolvency court becomes valid in the moment of its publication in the insolvency register and this decision if effective for all of the participants of the insolvency proceedings.
Legal remedies may be used against the decision of the insolvency court which are regulated in § 91 to 96. An important fact that is based on these regulations is the effort to achieve the maximal possible speed of the proceedings in the court of appeal and these regulations also state the responsibilities of the court of appeal in the appeal, which is acceptable. The higher promptitude of the decision of the court is helped by the fact that the insolvency proceedings may not be assaulted with an effort to renew it. The effort to renew the insolvency proceedings is not acceptable and must not be allowed by court.
For the purposes of this law the insolvency proceedings are unified court proceedings which regulate the bankruptcy of a debtor or impending bankruptcy and decides upon its solution. All of the rights and obligations of the participants of the insolvency proceedings are decided upon by court.
The insolvency proceedings is carried out in three basic steps which are:
For the beginning of the insolvency proceedings the insolvency suggestion is always necessary, which may be made by both debtor and creditor in a written or electronic form. The insolvency suggestion in written form has to have officially authenticated signature and the insolvency suggestion made in the electronic form has to have electronic signature. The insolvency proceedings is started in a moment, when the appropriate court obtains the insolvency suggestion. In case that it is an impending bankruptcy of the debtor, the insolvency suggestion is only made by the debtor, because he must know his economical situation that signalizes the impeding bankruptcy the best.
A debtor as a legal entity or individual – businessman, or their legal representative, statutory organs or liquidator are obliged to make the insolvency suggestion in a time when they learned about the bankruptcy. This mostly happens during the creation of the final accounts or closing of books, but due to the economical situation of the company and the inability to satisfy the obligations towards the creditors and another facts that signalize the bankruptcy, they should learn abut it even sooner.
The debtor or his representatives are responsible for the causes and damages caused related to the failure to make the insolvency suggestion or its delay. If the creditor got damaged by the failure to make the insolvency suggestion, the court may order upon the suggestion of entitled creditor a preliminary measure by which the debtor is ordered to pay this damage by deposition of the determined finances into the custody of the court.
The insolvency proceedings start by the announcement that is made by the appropriate court which a the same time sends it in a written form to the debtor and proposer, if they are not one, and the court has the obligation to inform on the beginning of the insolvency proceedings the institutions listed in § 102, which are for example financial office, customs office or the Bureau of Labor. “For the determination of a moment of the beginning of the
insolvency proceedings the general regulation given in § 82 paragraph 1 of the Civil Procedure Act is given that is related to § 97 paragraph 1 of the insolvency law.” [7, p. 127] Appeals against the announcement are not possible.
The insolvency suggestion must contain certain required elements which are regulated in § 103 to 108. These requirements almost exactly copy § 79 of the Civil Procedure Act, while the regulation given by the insolvency law has a priority. The insolvency suggestion can be made by proposer and only in case when there really is a mature claim and he is persuaded on the bankruptcy of the debtor, which must be attested in the insolvency suggestion. The law specifically regulates the requirements of the insolvency suggestion for both the proposer – debtor or creditor, which are mutually different, when in case of the proposer – creditor it is upon him to prove that he is entitled to make the suggestion. In the failure to satisfy all of the requirements related to the suggestion of both debtor and creditor, this suggestion may not be accepted.
There are certain effects connected to the beginning of the insolvency proceedings, which are based on the regulation of the insolvency law. One of these effects is the satisfaction of claims of the debtors only in the insolvency proceedings, which the creditors must announce to the court. If the creditor already has his claim secured with the debtor by his property for example by mortgage law, he has to announce this fact to the court, because after the publication of the public notice no further security can be used.
If the creditor is entitled to suggest an execution of a decision and execution of the property of the debtor, it is possible to suggest it, but their execution will occur at the time of the end of the insolvency proceedings. By this measure the property is protected, which is to be a part of the assets out of which all of the creditors are to be satisfied.
„The effects of the insolvency proceedings will occur by the moment of publication of the public notice on the beginning of the insolvency proceedings in the insolvency register and last up until the end of the insolvency proceedings.“ [19, p. 63] The court will then ask the creditors to announce their claims, while the creditors may announce their claims even before being asked by the court and they may announce them up until the moment of
decision on bankruptcy. The creditor may only announce an obligation by an application in a period of 30 days since the decision of the insolvency court on the bankruptcy while it is necessary to stress that the later announced claims will not be taken into consideration and these will not be satisfied within the insolvency proceedings, furthermore the usage of the institute of the Civil Procedure Act on the return of a term is banned by the insolvency law. This states that it is necessary to constantly watch the insolvency register.
As soon as the effects of the beginning of the insolvency proceedings occur, the debtor is restricted in his disposal with assets, when he must not have inadequate expenses and the law forbids him to make certain obligations related to his assets. If a situation occurs or a circumstance, when it is immediately necessary to secure the preservation of the range of the assets, for example due to a suspicion of illegal activities of the debtor that aims the malversation, or for example when the debtor does not respect the orders of the court, the court will appoint a preliminary manager, who will within the framework of this situation carry out the corresponding acts for the securing of assets, while these acts are subsequently followed by the activity of the insolvency manager, which may even be the same person as the preliminary manager. The law also regulates the situation when the debtor has his debtors, who are fulfilling their obligations towards him that occurred in the course of the business activity. These debtors of the debtor must fulfill their obligations after the beginning of the insolvency proceedings towards the preliminary manager so that this fulfillment gets into assets and thus can not be executed outside of them, which may be in many cases caused by the dishonest actions of the bankrupt. In case of willing fulfillment of such obligation outside of the assets, this fulfillment is not considered to be a fulfillment of obligation and the debt towards the assets remains.
The institute of moratorium is contained in § 115 to 127. This institute may be considered to be one of the possible solutions of the impending bankruptcy or bankruptcy without the bankruptcy being dealt with in the insolvency proceedings. The moratorium is basically a certain protection of the debtor and it gives him the opportunity to make some order in his proprietary structure before the decision on bankruptcy, and in case that he succeeds, it gives him the opportunity to settle his obligations even before the beginning of the insolvency proceedings. It is practically a chance for the creditors to agree with the debtor, while in this period nobody is allowed to influence the property o the debtor. The
moratorium has two forms – before the bankruptcy and the bankruptcy moratorium. The proposal of moratorium may be made only by debtor in the period determined by law after the beginning of the insolvency proceedings. An important condition in this case for the permission of moratorium is among other requirements determined by the law to present the last closings of books of the debtor for the determination of his economical situation and written proclamations of most creditors with the respect to the value of their claims.
By the way of adherence to the given obligatory requirements the court decides on the proposal for the announcement of moratorium practically immediately, unless it was already decided on the insolvency proceedings, while the moratorium is effective since the moment of publication on its announcement in the insolvency register. The moratorium must last up to three months, but upon the suggestion of the debtor it may be extended by thirty days, so it may last up to four months.
As it was said before the moratorium is a certain protection of the debtor and for the period of its course the decision on bankruptcy may not be made, but the approval or disapproval of the insolvency suggestion may occur and the moratorium is abolished in such case. The moratorium is also abolished not only in the given cases, but it may be abolished also on the basis of independent decision of the court r decision of court upon the suggestion of creditors.
The debtor is left with one more important advantage for the possibility of settlement of his proprietary situation which is the possibility of suggestion of moratorium even before the beginning of the insolvency proceedings, when this proceeding is carried out by without the publication of information on its course, however this proceedings must not be abused for example by dishonest actions of the debtor that aim the decrease of assets. The debtor is fully responsible for the results of such actions.
This issue is elaborated in § 128 to § 135. The main requirement for the insolvency suggestion by debtor or creditor is its perfect form in the sense of content, because its rightness is verified by the court. If the insolvency suggestion “does not contain all elements of content required by law, it is inapprehensible or indeterminate“ [1, p. 31], and from the point of view of these faults it prevents the continuation of the proceedings, the
court will refuse it by decision by seven days since it was made, while the insolvency proceedings can not be continued. If the insolvency suggestion of either creditor or debtor is refused for some of the given reasons, the decision on the refusal by the public notice is recommended, which is published on public board of the insolvency court and also the public notice is published in the insolvency register. This decision is also delivered to the insolvency proposer and debtor. It is possible to make an appeal against the decision on the refusal of the insolvency suggestion but only by the proposer. The proposer also has the right to take the insolvency suggestion back, it is however effective only up until the point of decision on the bankruptcy or another decision of the court. In case that there is more proposers on the side of the creditors, the suggestion may be refused by each of them individually. The proceedings is however not stopped entirely, but only in relation to the proposer who took the suggestion back, while the proceedings with the other proposers continue.
The insolvency law determines terms that it should adhere to for the purpose of increase of speed of the proceedings. These terms are contained in the regulation of § 134.
The decision on bankruptcy is elaborated by regulation of § 136 to § 147. It is an independent decision of court, which it delivers to the participants of the insolvency proceedings who are given in § 138. The court also announces the decision on bankruptcy to the designed state institutions given in § 139, which supports the effort to prevent possible dishonest actions of the debtor related to unqualified handling of assets. “The court issues the decision on bankruptcy if the verification or argumentation determined that the debtor is in bankruptcy or that he is in danger of bankruptcy.” [1, p. 32] The decision on bankruptcy must have its legal requirements, which are given in § 136 paragraph 2 and they are the presentation of facts on the demonstrable determination of bankruptcy, designation of who is the insolvency manager, when do the effects of the decision occur, notification of creditors on that they are to announce their claims, notification of subjects that have obligations towards the debtor on their fulfillment towards the insolvency manager, appeal to creditors to announce their securing rights to the property of the debtor, information on the meeting of creditors, notification of debtor on his obligations related to the decision on the bankruptcy and the way of publication of the decision of the court.
By up to two months the court calls the meeting of creditors and determines the term of the check up meeting, which must be stated in the decision on bankruptcy.
In he ongoing insolvency proceedings and even in case that it has already been decided on the bankruptcy, the effects of the preliminary measure may still be in place and under certain conditions given in § 140 there may be the mutual inclusion of claims of the debtor and creditor. An appeal against the decision on bankruptcy may only be made by debtor in case that the insolvency suggestion was made by the creditor. The appeal must be purposeful, otherwise the court does not take it into consideration.
These decisions are mentioned in § 142 to § 145 and they deal with cases of end of proceedings if there is no decision on the bankruptcy. Such ending of the proceedings may for example be “the refusal of the insolvency suggestion due to its faults“ [1, p. 34], which is similar to process for suggesting insolvency, also the “cease of proceedings due to the lack of condition of management, which may be removed or which was not successfully removed or taking back the insolvency suggestion, refusal of the insolvency suggestion“, where it is the failure to document the existence of mature claim, then the “refusal of the insolvency suggestion due to the lack of property of the debtor“, which however must be based on conditions given in § 144.
The insolvency suggestion is being refused in situation when the bankruptcy of the debtor is not clearly determined, if the existence of mature claims was not verified or if the debtor got into the insolvency on the basis of illegal actions of another person who failed to pay him under the arranged conditions his own claims. The proceedings must be ended even when the state higher autonomous unit takes over the debts of the debtor.
§ 147 deals with the situation, when as a result of faulty or unrightfully suggestion of the insolvency and subsequent beginning of the insolvency proceedings, the debtor and even another creditor of the debtor is damaged, which was caused by the person who suggested the insolvency and on the basis of suggestion made in this way it was subsequently refused and the proceedings had to be stopped. We meet with the term “chicanic insolvency suggestion”, which is in this case a form of annoyance of subjects by making purposeful
insolvency suggestion. So the law deals with this situation and provides the possibility of certain penalty and thus forces the people suggesting the insolvency to properly make the insolvency suggestion and full responsibility for the results that may occur by a faulty insolvency suggestion. For the reimbursement of damages or another loss, the debtor or another creditor of the debtor must sue in general court the person who made the insolvency suggestion, because it is not an incident conflict resolved by the insolvency court.
If it was already decided on the bankruptcy of the debtor, the court must decide after the end of the meeting of creditors under the conditions given in § 149 on the way of its solution. In the meeting of creditors all creditors may state their opinion on the bankruptcy of the debtor, for which a resolve may be accepted if it is adhered to the conditions given in § 150 and § 151. If the resolve is accepted, the court will use it to decide on the way of solution of the bankruptcy, otherwise the court decides independently. To strengthen the influence of the creditors on the proceedings, the meeting of creditors is given the possibility to decide on the designation of the expert for the assessment of the assets. The activity of the expert is important mainly for the securing of the creditor. Also the meeting of creditors is given the possibility to sell the assets by one contract. If the meeting of creditors does not agree upon the concrete person of the expert, it will be appointed by a court or the meeting of creditors appoints a new expert.
The expert elaborates the expert opinion for the purpose of appreciation of the assets, which he presents to the court. The expert opinion is published in the insolvency register and is discussed on the meeting of creditors, where under the conditions given in § 155 be accepted in a form of decree. If the expert opinion is accepted, the decree is issued on the price of the assets.
After the decision on the bankruptcy of the debtor the situation may be that subsequently the fact that the debtor is not in bankruptcy is discovered. That means that new not yet known facts appeared based for example on passive activity of the debtor, who subsequently does not object to the facts provided by the creditor, or none of the creditors entered the proceedings with his claim. This situation is solved in § 158 when the court decides on that the debtor is not in bankruptcy and the insolvency proceedings ends.
In the course of the insolvency proceedings there may be various conflicts, the list of which is given in § 159 paragraph 1. These conflicts are only related to the insolvency proceedings, its participants and the insolvency manager, while the results of he conflicts are only usable in the insolvency proceedings on the basis of decision of the insolvency court. The valid judgment of the court is related to all participants of the incident conflict.
The regulation of § 159 paragraph 2 then regulates the cases when the insolvency manager is the participant of the conflict. Such conflicts are not considered to be incident conflict and the matter must be dealt with in an independent proceedings by the Civil Procedure Act.
The regulations of § 165 to § 204 define the rights and obligations of the insolvency creditor in the assertion of his rights for the fulfillment of obligations by the debtor by the application into the insolvency proceedings and also specify the process related to the assertion of the claims of the creditor.
For the discussion of the claims of the creditors in the insolvency proceedings by a court, all of the registered creditors must in a period determined by the decree on the bankruptcy register their claims. If the bankruptcy of the debtor is solved by a bankrupt, the claims will be satisfied on the basis of legitimate schedule decree, in the solution of bankruptcy of a debtor by reorganization, the claims are satisfied on the basis of rules determined by the reorganization plan and in case of the solution of bankruptcy of a debtor by the discharge of bankruptcy, the claims are satisfied on the basis of the way of discharge of claims accepted by the creditors.
For the securing of creditor, they have the priority right of satisfaction in a range of their security, in a time order by the period of creation of security in the full value of the secured claim.
The claims towards assets are claims in § 168 and claims equalized to them, which are contained in § 169, which were created after the beginning of the insolvency proceedings or after the establishment of moratorium.
The process of registration of claims and their verification is regulated in § 173 to § 189. As soon as the creditor registers his claims in the insolvency court in the period since the beginning of the insolvency proceedings up until the passage of the period for the registration of claims, he becomes a participant of the insolvency proceedings. If the application is made after this period, it can not be taken into consideration in this period and to satisfy it. The application must have its legal requirements given in § 174 to 177, while it must be expressed only in the financial value and Czech currency. In case that the claim is calculated in foreign currency, it must be recalculated in accordance with § 175. Similarly also non-financial or other claim, which do not have financial value must be assessed in financial value.
An important regulation of the insolvency law is its activity on the creditor from the point of view of application of overpriced claims, where the creditor is fully responsible for such overpriced claims and when this happens and in the reassessment a lower value of the claim than 50 % of the registered value is determined, this claim is not taken into consideration and the creditor ceases to be the participant of the insolvency proceedings. The court subsequently uses sanction towards such creditor to pay the value of difference between the registered and actually determined value of claim. This value is paid in favor of assets. Similarly in case of secured claims where the creditor listed higher range of security than the real security, where however the sanction in the value of difference between the registered and determined security is paid in favor of secured creditors.
The registered claims are verified by the insolvency manager from the point of view of their faults, incompleteness, rightness, value and order. If such faults and incompleteness is determined, the creditor must remove these faults upon the request of the insolvency manager. If it does not happen, the validity of the registration is decided upon by a court, which will say whether the application is taken into consideration or not. If the application is all right, or if the faults are removed, it is included in the list of registered claims which is created by the insolvency manager. After that the verification of the registered claims in the verification proceedings ordered by court is carried out.
Since this moment the authenticity or the order of the registered claims may be commented upon only by the insolvency manager and debtor. The authenticity of a claim can be denied if the claim did not occur or was abolished or is outdated, the value of the claim can be denied if it is objected that the claim has an unfavorable position in relation to the real state.
The rightness, value or order of the claim is independent upon one another in that sense, that for example the denial of the value of claim does not have an influence on its order. The claim can be also denied by the debtor, this denial however does not have such effects as the denial of the claim by the insolvency manager.
The concept and range of the assets
The assets are the entire property of a debtor designed for the satisfaction of the creditors of the debtor, where it is a property owned by the debtor by the first day of the beginning of the insolvency proceedings, if the debtor made the insolvency suggestion or at the time of order of the preliminary measure. The insolvency law regulates the assets in § 205 to § 230. In relation to the content of the assets it is necessary to differentiate whether the insolvency suggestion was made by debtor or creditor. If the insolvency suggestion was made by the debtor, then such property of the debtor belongs to assets, which the debtor had at his disposal at the time of order of preliminary measure by the court, then in the period of decision on bankruptcy of the debtor by court and the property which the debtor gained during the course of the insolvency proceedings. Also the share of property of which the debtor is the co-owner is a part of the assets along with the property of another person determined by the insolvency law.
The insolvency law specifies the list of content of assets where these mainly are:
The insolvency law also specifies which property belongs in the assets, and when they are for example things of personal nature for the debtor and things, which the debtor necessarily needs for the securing of the needs of himself and his family, also the purpose endowments, returnable financial helps, irrecoverable claims and another things given in § 207 and § 208.
Determination of assets
The content of the assets is to be determined immediately after the beginning of the insolvency proceedings. Once again it is necessary to say that the debtor does not have to always have honest intentions in case of the insolvency suggestion being made by creditors and in relation to this, the effort of such debtor may aim the unjust removal of property from the assets.
The content of the assets is determined by the insolvency manager or the preliminary manager, while he is obliged to follow the directions of the insolvency court. The information on the property that belongs into assets may be obtained mainly from the debtor himself, then the organs of state such as Land Register Offices, organs registering motor vehicles, administrative offices, notaries and executors, organs registering equities, financial institutions, insurance companies, telecommunication services, postal services, publishers of print, transporters and possibly even other subjects.
The debtor is obliged to provide cooperation with the insolvency manager, e.g. he must for example enable him to access all premises of the company or the premises where the
property that belongs to assets is located. Another obligation of the debtor is the presentation of the list of his property, which is a basic part for the determination of assets. The list of property must contain information that are in accordance with § 215, where the main thing concerned are mainly the accounts, buildings and the company with all of its parts. The law even in this case strengthens the position of the insolvency manager, even in case that the debtor prevents the access to his property and it will be necessary to force such debtor to cooperate. The insolvency manager may include for the access to the premises belonging to the debtor a representative of a village and upon the order of the insolvency court he may carry out a control of all other premises where the property of a debtor could be placed, which belongs into the assets. The obligation to report facts on the property of the debtor is also related to any person, who has such property at himself or herself. The failure to provide cooperation to the insolvency manager may result in the fine or full responsibility for the damage caused by such actions.
List of assets
For the property determined in assets the insolvency manager created on the basis of directions of the insolvency court and in cooperation with the committee of creditors the list of assets. The individual items on the list are appreciated in the financial value, by which we determine the approximate value of the property in the assets.
The appreciation has to be executed in accordance with principles given in law no. 151/1997 of Collection on the appreciation of property and in law no. 563/1991 of Collection on accounting.
The insolvency manager must in the list of assets give the reasons for the inclusion of the individual elements. The validity of the inclusion of things into the list of assets may the insolvency manager ask the debtor for a written confirmation. This written confirmation of debtor also confirms that there are no things included on the list, that can not be included there.
The insolvency manager is obliged to inform the persons, who are the owners of a property or claim it in a written form on the inclusion of property into the list of assets. The exclusive sue can be made against the inclusion of a property into the assets, which must
be delivered to the insolvency court, which can decide on the exclusion of such property from the assets.
Handling of assets
The insolvency manager may as an entitled person for the handling of assets carry out these activities:
Head VII. of the insolvency law deals with the invalidity and inefficiency of legal actions created in the course of the insolvency proceedings and regulates the rights and obligations and legal relations of the participants of the insolvency proceedings in their solution and the decision upon them.
For this chapter we can generally say that the invalidity of the legal actions related to property or obligations of the debtor must be assessed only by the decision of the insolvency court in the insolvency proceedings. This does not apply If the invalidity of the legal act was determined by the insolvency court even before the beginning of the insolvency proceedings.
The ineffective legal acts are considered to be such acts by which „the debtor shortens the possibility of satisfaction of creditors, or advantages some creditors to the prejudice of others. The legal action is also considered to be the neglect of the debtor.” [1, p. 50]
The way of settlement of bankruptcy in a form of bankrupt is the most common form of solution of bankruptcy, when it is most likely that in the penal proceedings, we will be meeting in the most cases the subjects, the bankruptcy of which is solved by the bankrupt, which is actually a certain liquidating form of solution of bankruptcy of debtor with the company being unable to be economically saved and this situation can not be solved in any other way in the insolvency proceedings.
The insolvency law, its idea and principle are created as a certain kind of help to the debtor to solve the bankruptcy in a non-liquidatory form, e.g. discharge of bankruptcy or reorganization, we must however bear on mind the practical experience, which more than clearly suggest that most of the cases of the bankruptcy will be solved by bankrupt.
The aim of the bankrupt is the satisfaction of the creditors of the debtor from the profit of sales of the assets. In the moment, when the decision on the announcement of the bankruptcy is published in the insolvency register, by a day, hour and minute of publication, the effects of the announcement of the bankruptcy occur while a significant effect is the dispositional entitlement to the insolvency manager to handle the assets.
The obligation of the insolvency manager is to inform on the announcement of the bankruptcy the Czech National Bank through public data network and in the insolvency register, if the debtor is a participant of the system of payments and settlement system listed on the list of the Czech National Bank. [1, p. 52]
The insolvency manager not only gets the entitlement to handle the assets but also another rights and obligations such as the obligation of the employer towards the employees of the debtor and last but not least the accounting, tax obligations and securing of the operations
of the company of the debtor either by himself or in cooperation with the management of the company.
It is interesting to note that if the debtor, who can no longer dispose with the assets, carried out a legal act aiming the multiplication of the assets after the announcement of the bankruptcy, this act is considered to be effective. The possibility to multiply the assets is helped to even by the entitlement of the insolvency manager to prevent such actions of debtor who refuses the acceptance of gifts of inheritance, which could be contained in assets.
The previous chapters listed situations in which the debtor is also a creditor towards another subjects or persons or has his property secured in another subjects and this property is also related to the multiplication of the assets. It is natural that after the announcement of the bankruptcy, these claims are being enforced by the insolvency manager.
After the announcement of the bankruptcy the debtor looses the dispositions to the assets and his entitlements and full powers are abolished. The legal actions are then taken over by the insolvency manager who deals with the fulfillment of the already arranged contracts which were not fulfilled either from the side of creditors or debtor, or decides upon the withdrawal from these contracts with regard to the necessity of preservation of assets and preservation of the possible operation of the company of the debtor, in relation to steps that aim the sales of the assets. It is natural that the insolvency manager decides after the announcement of the bankruptcy also on the return of loans, withdrawal from contracts on lease, rent and leasing contracts. After the announcement of bankruptcy also some proceedings that started before the announcement of the bankruptcy are ceased, which could negatively influence the assets and which can be continued only under certain conditions, while the terms of these proceedings start to run again after their possible continuation.
After the announcement of bankruptcy, the insolvency law also regulates the common property of a debtor and a spouse. The insolvency manager must carry out a settlement, which is abolished as a result of the announcement of the bankruptcy. Here we again meet with examples when the insolvency law protects the assets from the point of view of the
arranged contracts among the husband and wife after the insolvency suggestion, the fulfillment of which could in some way damage the assets.
After the announcement of bankruptcy the insolvency manager secures the execution of process acts aiming to sell the assets, which are mainly the elaboration of report on the economical situation of the company of debtor by the day of announcement of the bankruptcy, which is important for another meetings of the meeting of creditors and for the selection of the ways of sales of the assets.
The essence of solution of bankruptcy in a form of bankrupt is the change of assets into finances that are then used to satisfy the claims of the creditors. The sales of the assets can begin after the announcement of the bankruptcy is legally valid and after the execution of the first meeting of creditors. The committee of creditors then gives an agreement on the basis of which the insolvency manager decides on the way of sales. For the sales of the assets there are these possible ways of sales:
As we can see on the course of the entire insolvency proceedings, the entire process goes through complicated, but precise and exact legal regulation, which however due to the experience from the practical life is necessary for the achievement of desired results of the insolvency proceedings and for the fulfillment of principles of the insolvency law. In this
chapter we are getting to the final and most expected operations within the entire proceedings, which is the solution of final and concrete payment of claims to the creditors. The principle remains to be that the payments are paid from the profit of sales. With this also the settlement of claims of secured creditors is related, whose secured claims are satisfied preferably in the curse of the bankruptcy. The other unsecured claims are then satisfied by the schedule, which we will mention in the next chapter.
The key obligation of the insolvency manager, so that the legality of the proceedings is secured, is the continuous provision of information to the insolvency court and committee of creditors on the sales of assets and also on the handling of the profit of sales. It is clear that the committee of creditors will have a maximal activity in this phase of proceedings.
Even the name of this chapter makes it clear that we are getting into the finish of the insolvency proceedings and the solution of bankruptcy through bankrupt. The elaboration of the final report and the schedule are important signals on the execution of the sales of the assets. It means that the insolvency manager presents personally to the insolvency court a detailed report in which he thoroughly describes all his activity within the framework of the insolvency proceedings and provides information on the economical state of management regarding mainly the overview and state of claims towards the assets no matter whether or not they were satisfied. The final result of the final report is a concrete financial value that will be available for the satisfaction of creditors and the assessment of share of each creditor, what sum of money will be used to satisfy him, if the finances will not be sufficient for the fulfillment of obligation in its entire value.
From the practical life it is known that in vast majority of cases the creditors are only satisfied from the assets partially, that is why it is important for the report to contain the already mentioned calculation of shares of the individual creditors. Often a situation occurs when the finances from the assets are not only insufficient to satisfy the creditors, but also to satisfy the secured creditors, claims towards the assets and claims on the same level as these. It is necessary to note that in these cases the costs of the proceedings are preferably paid in these cases along with the reward of the insolvency manager.
In this matter we must also not forget to mention the accounting aspect, because a company in bankruptcy is still an accounting unit in which the accounting must be carried out in accordance with the appropriate laws, while the insolvency manager must on the day of elaboration of the final report carry out the final accounts. The final report must be commented by the insolvency court which will, after possible necessary corrections or new elaboration of the final report, publish this report in the insolvency register. After that the final report is discussed in the insolvency court with the other participants of the insolvency proceedings. If there are no objections, the final report is accepted and published on the public desk of the insolvency court.
In this phase there are no obstacles that would prevent the insolvency manager to suggest the schedule decision to the insolvency court. In this moment, the assets may not contain things, rights or claims that can not be used to satisfy the creditors, with the already mentioned claims towards assets being preferably satisfied along with claims that are equal to them and the secured claims. The other claims are subjected to the schedule. The insolvency manager is then given a period by the insolvency court to pay the sums to creditors by the schedule decree.
The schedule decree is published on the public board of the insolvency court and in the insolvency register. It must also be delivered to the debtor, insolvency manager, creditors, committee of creditors and another participants. In the event of creation of common claims or otherwise conditioned claims, these are being paid after the settlement of conflicts related to them if they are not excluded from the schedule by the insolvency court.
The last chapter of the given issue is the cancellation of the bankrupt. The insolvency court decides in the final part of the insolvency proceedings on the cancellation of the bankrupt and it must do so in case that the bankruptcy of the debtor is not verified, if major part of the assets was not sold , then in case when there is no creditor and all claims are satisfied and after getting the news from the insolvency manager on the fulfillment of the schedule decision and in case of insufficient property of the debtor. The insolvency court decides on the cancellation of the bankrupt also upon the suggestion of the debtor, if the debtor joined
a document to this suggestion in which all the creditors and the insolvency manager agree with the cancellation of the bankruptcy. The signatures of people on this document must naturally be officially verified. [1, p. 63]
The insolvency law also deals with cases when the debtor dies in the course of the insolvency proceedings and the proceedings is entered by heirs or state, if the debtor does not have any heirs. The sales of assets are then stopped and the insolvency manager elaborates the final report with the stated results of the proceedings up until now, on the basis of which the insolvency court then cancels the bankruptcy.
The decision on cancellation of bankruptcy in any given case is delivered and published by the insolvency manager in the usual way. The cancellation of the bankruptcy means at the same time the cancellation of the debtor if he is a legal entity after the fulfillment of the schedule or due to the lack of property or in case that the debtor dies and has no heirs. In this moment all of the unsatisfied claims are abolished with the exclusion of those that are secured by still existing securing. The insolvency manager has the obligation to carry out the book closings by the day of cancellation of the bankruptcy with all of the works related to it and give the accounting evidence and the remaining property to the debtor. After the execution of the given activities the insolvency manager is relieved of his function and after the legitimate decision, by which the bankrupt is cancelled, the insolvency proceedings practically end.
In relation to the penal law the bankruptcy plays a significant role in the position of the legal responsibility of organs of state or other responsible representatives of the legal entities or individuals in the purposeful actions that aim to cause the bankruptcy of a company and causing damage to the creditors.
When it comes to the bankruptcy crimes, it is necessary to mention the auxiliary role of the penal repression in here, when the law is used as an extreme means for the solution of faults (so called ultima ratio). In the new Penal Code no. 40/2009 of Collection this principle of subsidiarity of the penal repression is contained in the regulation of § 12, paragraph 2, while the regulation in the penal law is connected to the regulation outside of the penal law, mainly the Civil Code, Business Code, law on bankruptcy and settlement and insolvency law.
In this chapter the basic characteristics of the selected bankruptcy crimes is given by the penal law no. 140/1961 of Collection with that the new Penal Code no. 40/2009 of Collection valid since 1. 1. 2001 almost copies the bankruptcy crimes characterized here. It is mainly the crime of breach of the obligation in the proceedings on bankruptcy by § 126 of the penal law, the crime of damaging of the creditor by § 256 of the penal law and favoritism of creditor by § 256 a of the penal law and finally the crime of heavy indebtness by § 256c of the penal law. In here it is necessary to stress that since 01.01.2008 it is not illegal to not make the suggestion of the insolvency proceedings.
In accordance with the new Penal Code, form 01.01.2010 onwards all bankruptcy delicts will be listed among the proprietary crimes (§ 222 to § 227 of Penal Code), while not suggesting the insolvency proceedings is not illegal anymore, also the new alternatives of damaging the creditor are given in the new Penal Code (burdening or lease of a thing, pretending that the obligation was fulfilled, pretending bankruptcy).
Preference of a creditor and causing the bankruptcy is related to any bankruptcy state. For the damaging and preference of a creditor, at least a “not small” damage is required to be caused (§ 222 paragraph 1, § 223 paragraph 1 of Penal Code). The breach of obligation to make a statement of own property is an individual factum (§ 227 of the Penal Code) – this
however does not concern the insolvency proceedings – it is a former crime by § 256 paragraph 1 letter d) of the Penal Code. New circumstances that are conditions for higher punishment are given (obtainment of benefit, causing bankruptcy to others).
For the breakdown of the selected bankruptcy crimes:
.
The aim of this bachelor thesis was to create practical and well-arranged work and study material for the employees of the Police of the Czech Republic, the Territorial Branch of Service of the Service of the Criminal Police and Investigation – the Branch of Economical Crimes in Uherské Hradiště focused on the analysis and characteristics of the proprietary structure of the company, bankruptcy of a company, also on the characteristics of the insolvency law and insolvency proceedings and solution of bankruptcy of company in a form of a bankrupt.
The most important base for the elaboration of the work was the execution of the theoretical and practical findings on a platform of laws and legal regulations, which are contained in each individual part or chapter. First I focused on complex economical angle characterizing mainly the cash flow of the company and specification of the proprietary structure of the company with general breakdown of the accounting and its role in the monitoring of economical situation of the company, which are important for the determination of positions for the decision making in relation to legality of any business making in relation to solution of bankruptcy state of a company in the insolvency proceedings and the way of solution of this state with that the new regulation of the insolvency law, which is valid only since 01.01. 2008 is not yet sufficiently adopted, even with regard to its complexity and lack of transparency. In the final chapter I focused on the breakdown of selected bankruptcy crimes, where I briefly described some cases from the practical life as well, when the bankruptcy may be caused by illegal actions of the responsible persons.
This bachelor thesis, if it will be taken as work or study material, may to a large extent help my colleagues and also another people, who deal with the issue of bankruptcy of business subjects in the practical life or otherwise, for its better acquainting and understanding, but mainly for its utilization in their daily life.
I am glad to express my conviction on that the aim of the bachelor thesis was fulfilled, so that this bachelor thesis will be a contribution for a wide range of usage in the professional practices of the employees of the named part of the Police of the Czech Republic.
LUŢA, A. The issue of bankruptcy of a company in relation to insolvency proceedings. Kunovice 2010. Bachelor thesis. European Polytechnic institute, Ltd.
Supervisor: JUDr. Karel Šabata
Keywords: accounting, assets, settlement, insolvency law, insolvency proceedings, bankruptcy.
The bachelor thesis is devoted to the issue of bankruptcy of a company in relation to the insolvency proceedings with the aim to elaborate this issue in a form of practical and useful work and study material for the usage by policemen who focus on the verification and investigation of the economical criminality and also for the improvement of quality and extension of their knowledge during the introduction of the new legal regulation of the insolvency law.
The work is structured so that its individual part are independent characteristics of the individual presented issues, the knowledge of which is necessary for complex understanding of the new regulation of the insolvency law and the solution of bankruptcy of a company in a form of a bankrupt.
The first part of the work specifies the proprietary structure of the company and characterizes the basic principle of the accounting system, its nature and significance, also characterizes the term company, its property and capital, accounting analysis, economical results and gives practical examples of bankruptcy of a company from the accounting point of view.
The second, analytic, part of the work deals with the entire issue, characteristics and course of the insolvency proceedings with all of its key terms, for which the history and development of the bankruptcy law is described in the beginning of this chapter.
The third part elaborates the issue of solution of bankruptcy of the company in the insolvency proceedings in a form of bankrupt, the aim of which is the specification of the
most important terms of the solution of bankruptcy of the company in this form which is the most common one for it.
In the fourth part the bankruptcy of a company is analyzed in a sense of penal law, e.g. in relation to the auxiliary role of the penal repression as an extreme means in the solution of imperfections in the ongoing insolvency proceedings. For this some bankruptcy delicts are elaborated in this part and given brief examples from the practical life.
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