Insolvency - Information needed to eliminate such a risk

Many firms end up going into insolvency or closing their doors, which means you should know all the ins and outs of this. It should also be noted that insolvency is not desirable for either the employee or the employer. Insolvency occurs when a company can no longer pay its debts. Specialists point out that it should not be confused with bankruptcy, because bankruptcy is basically the last part of insolvency, when the company is unable to pay at all, even within the period laid down by law.

Publication date: 5 January 2023

In the article below you will discover what insolvency is, what the law is in this area and what the principles of insolvency are, how this state is reached, you will find out what the insolvency procedure is, its effects, how and who can open it, when the company can file for insolvency, what insolvency means for employees and you will find some solutions you could use to avoid such a problem.

 Contents:

1. What is insolvency?

1.1. Insolvency law

1.2. Principles of insolvency

1.3. Reasons for insolvency

2. Insolvency proceedings

2.1. Effects of opening insolvency

2.2. How and who can open insolvency proceedings?

2.3. Insolvency for employees

3. Ways to avoid becoming insolvent

1. What is insolvency?

Insolvency refers to the situation in which a company is unable to pay its debts to creditors, financial institutions, employees or business partners, i.e. it refers to the fact that the assets do not have sufficient value to pay the debts that are certain, liquid and due. Entrepreneurs should be aware that the occurrence of insolvency creates an image of mistrust towards the company, so they will consider some solutions to get out of this situation.

1.1. Insolvency law

The legislation defines it as the state of a debtor's assets characterised by insufficient funds to pay debts and states that the debtor's insolvency is a presumption when he fails to pay what he owes 60 days after the due date. It also states that there is the possibility of enforcement in this case. It is also the law that specifies which companies can enter into insolvency: independent companies, professionals and all those who operate a commercial enterprise, and also mentions where insolvency proceedings cannot be triggered (liberal professions, educational institutions, state-owned research institutes).  

 1.2. Principles of insolvency

The principles of insolvency are as follows:

• increase the degree of asset recovery and debt recovery;
• debtors are given the opportunity to turn their business around;
• to ensure that the procedure is efficient and cost-effective, while always taking account of objectivity and impartiality;
• equal treatment of creditors of the same level is ensured;
• the procedure must be transparent and predictable;
• the order of priority of claims is respected (the rules are clear and there are rights for creditors);
• credit and systemic risk is limited;
• the possibility of finding the necessary sums during the period of insolvency prevention is ensured;
• the reorganisation plan is approved (by a vote, accepting the majority decision) and the other creditors are offered payments equal to or higher than those they would receive if bankruptcy were declared;
• negotiation of claims is allowed during the proceedings;
• the assets are realised in a timely and efficient manner;
• if there is a group of companies, then consideration will be given to coordinating insolvency proceedings to deal with them in an integrated way;
• prevention and insolvency proceedings must be administered by specialised practitioners, with the court controlling their conduct.

1.3. Reasons for insolvency

There are several reasons why companies can become insolvent, the main ones being administrative and economic. This is because the company in question no longer has the necessary income to pay its creditors, and this is a huge danger for its future.

Another possibility of insolvency is when the company has taken out various loans that it cannot pay back at the right time, or perhaps it has had certain activities that have turned out not to be profitable at all.

There are also some other reasons why a business may become insolvent: it fails to pay its debts to the taxman and employees, but also to the contracts it holds, its monthly income fails to cover its current expenses, or there may be theft or embezzlement of funds.

2. Insolvency proceedings

Insolvency proceedings are not actually one, but two proceedings. The first is the general insolvency procedure, which involves judicial reorganisation and an attempt to turn the company around in some way, and the second is the simplified insolvency procedure, which basically announces direct bankruptcy, subject to certain conditions. The application of insolvency proceedings requires an efficient procedure, limitation of credit and systemic risk, approval of the reorganisation plan on clear principles, efficient asset recovery, etc.

The general procedure has several stages: observation (from the opening of proceedings until the recovery plan is confirmed or bankruptcy is entered into), judicial reorganisation (debt rescheduling, financial restructuring, curtailment of activity, sale of assets) and bankruptcy (liquidation of the debtor's assets in order to pay debts to creditors, with no further activity on the part of the debtor but only of the judicial liquidator).

2.1. Effects of opening insolvency

The opening of insolvency requires the existence of certain situations, taking into account that the entrepreneur must recognise what is happening and how serious it is. They also need to consider finding ways to save the business or to walk away if nothing can be done. Thus, the following situations can be identified:

• the debtor chooses insolvency and proposes a plan to recover financially, choosing after 3 years to enter bankruptcy if it does not achieve its proposed goal;
• the debtor chooses insolvency, proposes a recovery plan and saves his business;
• the debtor chooses bankruptcy, but can no longer change the final outcome.

2.2. How and who can open insolvency proceedings

Insolvency proceedings for a company can be requested by the debtor, creditors or employees (for example, when they do not receive their salaries), but most of the time it is the creditors who request it because the debtors are unable to pay their accumulated debts even after 60 days have passed.

The procedure can only be applied by state institutions such as:

• courts;
• the syndic judge;
• the judicial administrator;
• the liquidator.

The opening of insolvency proceedings at the debtor's request must be made with the help of documentary evidence. The application must be made within 30 days of the insolvency having arisen and must be accompanied by proof of notification to the competent tax authority. It should be noted that any debtor may make such an application, which guarantees that he will not be enforced and that he will not accumulate any further penalties that are difficult to pay. The most important documents to be attached are:

• the last balance sheet;
• a list of assets in the company's possession;
• a list of the names of companies to which the contractor owes debts;
• the plan for the recovery of the company's financial situation.

If you choose the insolvency option, the company will have several advantages: it is not subject to compulsory execution, it does not have to pay penalties, it can be saved if the recovery plan is good and realistic, and bankruptcy is postponed. There are also some disadvantages in this situation, such as: the company can no longer participate in public tenders, it is financially blocked for the whole period, the recovery plan will not last more than three years, it loses credibility with potential new partners.

Creditors can only open insolvency proceedings if they are entitled to do so, i.e. if they have had a claim on the debtor's assets for more than 60 days. The amount owed to the creditor must also reach a certain threshold according to the law, otherwise the proceedings cannot be opened. The law makes a distinction between the creditor entitled to request the procedure and the creditor entitled to participate. It is the court that is obliged to send the debtor a copy of the creditor's request within 48 hours. Within 10 days the debtor may contest or acknowledge the condition. There is a problem in this situation, namely, if the appeal is rejected the debtor will no longer have the right to apply for judicial reorganisation.

 2.3. Insolvency for employees

If the company becomes insolvent, the question arises as to what the employees will do. What is certain is that they will have the same rights and the same wages, and the employer will not be able to drastically reduce wages or dismiss employees. If, however, he does have employees who are made redundant, they must be rewarded with social measures to lessen the impact of the opening of the insolvency of the business.

Even employees can file for insolvency, for example when they have not been paid for a longer period of time. Employees in this situation will become creditors of the company. Debts owed to an insolvent company are paid to employees only after they have been paid to the tax authorities and creditor companies. If there is no money available to receive what they are owed, they can apply to the Guarantee Fund for the Payment of Wage Claims.

More information on what happens to employees of insolvent companies could be helpful, for example:

• Dismissals can be made during insolvency, but only on the basis of the Labour Code;
• Employees with creditor status do not have to file claims in person;
• At creditors' meetings they will be represented by a delegate chosen from among themselves;
• If they apply to the Guarantee Fund for the Payment of Wage Claims, they can receive up to three gross average wages per employee.

3. Ways to avoid firms becoming insolvent

The procedures for avoiding insolvency proceedings are mentioned in the legislation, they refer to the ad hoc mandate and the arrangement with creditors. The ad hoc mandate avoids the possibility of insolvency being triggered by allowing a settlement between the debtor and the creditor. The debtor makes a special application, which is submitted to the President of the Court, requesting the appointment of a trustee. If the situation is not resolved within 90 days, insolvency is opened. Composition with creditors refers to the signing of a contract between the debtor and the creditor, including a financial recovery plan.

For those who wonder when a company's insolvency proceedings are not accepted, the answer is very simple: if the company has already benefited from an arrangement with creditors in the last three years, if the plan has not led to a solution to the problem, if it is already bankrupt or if the entrepreneurs have convictions for economic offences.

To avoid the inevitable, businesses need to find ways to get back on their feet and pay their debts. An important role in this is played by companies, which give any business the possibility to have good financial control and avoid various risks, including insolvency. Running a company comes with many demands and an increasing need for attention to the smallest details, so outsourcing various services would be the best idea, with companies being able to benefit from:

• audit & assurance services (helping to build a sustainable business for the benefit of the company);
• financial advisory (personalised, practical, technical advice is given to overcome the difficult moments the company is going through);
• business management services (strategy development, business management, risk and governance, software programmes, etc.);
• independent business analysis (can be a turning point for a business facing problems, provides an accurate picture of financial information, recommends solutions and strategies to overcome difficulties).

In conclusion, opening company insolvency proceedings may seem rather unpleasant at first glance, but it is not exactly hopeless. With the help of a recovery plan, realistic and effective measures, all such problems can become history.

*This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.