A company that is unable to pay its debts on time, beyond a temporary situation, may be declared bankrupt upon application. The right to apply for bankruptcy lies with either the company itself (the debtor) or any party to whom the company owes money (the creditor).
Application for bankruptcy
If the debtor applies to declare itself bankrupt, it typically only needs to state that it cannot pay its debts. However, if the creditor applies to declare the company bankrupt, the creditor must prove that the debtor has an outstanding debt and that the inability to pay is not temporary. Applying to declare someone bankrupt is a voluntary process.
Legal consequences of bankruptcy
Bankruptcy means that a debtor in financial distress is liquidated, losing its legal capacity to act. Through the bankruptcy process, all of the debtor’s assets, including property and funds, are seized to be converted into cash to satisfy the creditors’ claims. The debtor’s assets form a bankruptcy estate, which is managed by one or more bankruptcy trustees. The bankruptcy trustee ensures that the assets of the bankruptcy estate are distributed appropriately among the creditors.
The bankruptcy estate includes all property that belonged to the debtor at the time the bankruptcy decision was made, as well as any property that accrues to the estate during the bankruptcy, provided that the property is subject to seizure.
Ranking of debts
Within the bankruptcy process, there are rules that dictate the order in which debts are to be paid. These rules are known as “priority rights,” meaning that certain debts take precedence over others. An example of a debt with priority rights is wage claims. Debts without priority rights are considered unsecured. Unsecured debts are only paid if there are sufficient funds remaining in the bankruptcy estate after all debts with priority rights have been settled. If there are not enough funds to fully pay the unsecured claims, these creditors will not receive full payment. The principle of equal treatment ensures that all unsecured claims are treated equally, meaning that all creditors without priority rights are treated in the same manner. To receive payment through bankruptcy, the debt must have arisen before the date the bankruptcy decision was made.
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