The bankruptcy procedure of a legal entity is regulated by Law No. 127-FZ “On Insolvency”. It consists of numerous stages, upon completion of which the company gets rid of claims from creditors, counterparties, budget, employees. The essence of the bankruptcy procedure is that the legal entity is excluded from the Unified State Register of Legal Entities, the responsibility of the founders is completely removed.
Signs of financial insolvency
The decision on the introduction of bankruptcy procedure is made by the arbitration court on the basis of claims from creditors or at the request of the debtor himself. Obligations include: transaction debts, tax arrears, mandatory payments to off-budget funds. A number of measures are being carried out during the implementation of the bankruptcy procedure. Their purpose is to assess the financial situation of the enterprise, fulfill debt obligations and optimize economic activity.
The main criteria and signs of the bankruptcy procedure of a legal entity are provided for by Federal Law No. 127, Article 3. The volume of overdue payments and deadlines are taken into account. If one of the conditions is not met, the company will not be recognized as financially insolvent.
The bankruptcy procedure of a legal entity is initiated in the presence of a number of signs (paragraph 2 of Article 6 of Federal Law No. 127):
- debt obligations – more than 300 thousand rubles;
- The delay period is from 3 months.
The debtor, the creditor, the Federal Tax Service, extra-budgetary funds, and other authorities have the right to initiate the bankruptcy procedure of a legal entity. Together with the application, documents confirming the existence of delays are submitted. Based on the information provided, the court decides to initiate the bankruptcy procedure of a legal entity with debts and move to the observation stage (paragraph 1 of Article 62 of Federal Law No. 127).
The bankruptcy procedure of a legal entity — the main stages
The bankruptcy procedure of a legal entity will help to pay off debts or restore the financial situation of the company.
Although in practice in the Russian Federation bankruptcy in most cases ends with the termination of business. Therefore, in the future, the Legislator plans to reduce the stages of the bankruptcy procedure.
Federal Law No. 127 provides for how the bankruptcy procedure takes place:
- Observation. An analysis of the financial situation is carried out, the safety of property is ensured, a list of counterparty claims is drawn up, a creditors’ meeting is held (Chapter 4).
- Financial rehabilitation. The bankruptcy procedure in respect of legal entities involves the restoration of the solvency of the company, the fulfillment of debt obligations (Chapter 5).
- External management. It is used to restore the solvency of a legal entity (Chapter 6).
- Bankruptcy proceedings. It is applied to a legal entity recognized as financially insolvent, in order to repay debts to creditors (Chapter 7).
Another stage is the settlement agreement. It serves as a reason for termination of the bankruptcy procedure of a legal entity. It is used at any stage by reaching an agreement between the counterparties and the debtor (Chapter 8).
Bankruptcy procedure of a legal entity: stage No. 1 – supervision
The bankruptcy procedure of a legal entity is clearly regulated by the Law of the Russian Federation No. 127-FZ of 2002. The regulatory legal act approves the sequence of stages. One of the most significant and first stages is observation.
Based on its results, a decision is made to launch the bankruptcy procedure of a debtor who is a legal entity or to refuse to initiate a case. In this situation, it is assumed that the company will be able to restore its solvency and pay off its debts.
The application is made in writing (Article 7 of the Law):
- details of the debtor, INN, OGRN, name, legal address and address for sending correspondence;
- name of the court to which the claim is filed;
- the amount of all debts;
- reason for delays;
- debt structure, breakdown by claims, taxes, fines and penalties;
- certificates confirming the existence of debt;
- information about the company’s assets;
- information about court proceedings;
- other important information.
The transition to supervision assumes that the company meets the signs of financial insolvency, there are obligations that have not been fulfilled for more than 3 months (paragraph 2 of Article 3 of this Law).
All interested persons can file a claim. The term of its consideration is 1 month. Based on the results of the audit, the court decides whether the bankruptcy procedure of a legal entity is possible or not.
The total observation period is 7 months (clause 3 of Article 62 of Federal Law No. 127). The stage is completed taking into account Article 51, which regulates the general period of recognition of the company as financially insolvent. An arbitration manager is appointed.
Monitoring objectives:
- safety of property, assets of the enterprise;
- financial condition analysis, debt calculation, determination of business opportunities;
- compilation of a list of counterparty claims – identification of the total amount of debt, validity and nature;
- holding a creditors’ meeting.
The consequences of supervision in the bankruptcy procedure – come from the moment the court makes a ruling:
- creditors can only submit claims if the established procedure is followed;
- property penalties, debt repayment is suspended – the arrest is removed from accounts, restrictions are canceled;
- the allocation of a share in the Management Company is suspended upon the founder’s exit, the payment of dividends;
- it is prohibited to withdraw one’s own property;
- the accrual of fines for delay is suspended.
The court, represented by the manager, informs the counterparties about the introduction of surveillance by posting information in the Unified Federal Bankruptcy Register (UFBR), Bulletin. In accordance with Article 28 of Federal Law No. 127 – the data are freely available.
If, according to the results of observation, the financial insolvency of the enterprise is confirmed. They move on to the next stages. How long the bankruptcy procedure of a legal entity lasts depends on the measures that will be applied to the organization.
The maximum duration of all stages is 5 years and 1 month from the date of filing the claim until the end of the bankruptcy proceedings. With a simplified bankruptcy procedure, the term will be shortened.
If the owner intentionally declares himself insolvent, he faces subsidiary liability.
Bankruptcy procedure of a legal entity: stage No. 2 — financial rehabilitation
The court makes a decision only after the creditors’ meeting (Article 75). The bankruptcy procedure of a legal entity involves a transition to the stage of financial recovery, or the company is recognized as financially insolvent and bankruptcy proceedings are appointed. It is possible to conclude a settlement agreement.
Rehabilitation is introduced on the basis of an application of the creditors’ meeting (clause 1 of Article 80) or on the initiative of the arbitration court (clause 2.3 of Article 75). This stage is aimed at restoring the solvency of a legal entity to repay debt obligations, and a financial manager is selected.
Rehabilitation is introduced for the period stipulated by the definition of the courts, together with the payment schedule. Based on clause 6 of Article 80 of Federal Law No. 127, the maximum period of financial recovery is 24 months.
The consequences for creditors and the debtor are regulated by Article 81. Cancellation of security measures: prohibition of seizure of property, payment of dividends, distribution of profits received, allocation of shares.
Bankruptcy procedure of a legal entity: stage No. 3 — external management
Taking into account the requirements of Article 93-123 of Federal Law No. 127, the following measure is introduced based on the results of financial rehabilitation if it is impossible to restore solvency. Or it is used as an alternative in the absence of resources for further financial and economic activities.
The external control scheme is developed by an expert, includes:
- cancellation of unprofitable destinations;
- change of strategy and re-profiling of production;
- sale of property;
- collection of accounts receivable;
- receiving investments, increasing the contributions of the founders;
- issue of shares to fight on the stock market;
- inventory of assets, search for internal reserves.
The plan may include the following measures: dismissal of employees, suspension of production, involvement of experts.
The bankruptcy procedure of a legal entity at this stage takes up to 18 months. If there are no results, the debts could not be repaid, the court decides on the sale of the company’s assets.
Bankruptcy procedure of a legal entity: stage No. 4 — bankruptcy proceedings
The last stage of the bankruptcy procedure of an individual. It is carried out in accordance with the regulations (Articles 124-129 of Federal Law No. 127). At this stage, as well as at others, it is possible to conclude a peace agreement.
The goal is to repay creditors’ claims to the maximum by selling the assets of the enterprise.
The procedure is managed by the bankruptcy trustee, whose duties include:
- inventory to compile a list of property, value;
- formation of the competitive mass;
- acceptance of claims from creditors for an auction in order to adequately repay debts.
At the end of the bankruptcy proceedings, due to a lack of property to repay all obligations, the remaining debt remains unsatisfied, the legal entity is liquidated. Based on a court decision, the tax inspectorate makes an entry in the Unified State Register of Legal Entities, the company’s activities are terminated.
The term of the bankruptcy procedure of a legal entity at this stage is 12 months. It can be reduced if the property is sold earlier or an agreement is reached.
Settlement agreement
By mutual consent, the contract is drawn up at any stage. A creditor or debtor can make an offer, but he will start acting if everyone agrees to it. If the initiators are counterparties. The decision is made at the meeting. The signing of the contract terminates the procedure for recognizing the company as financially insolvent.
The consent states:
- payment procedure;
- format of repayment of obligations;
- terms, percentages.
Additionally, other conditions that do not go against the law may be included. Other investors often take part in signing the contract. Violation of the terms of the settlement agreement by the debtor company will be the reason for the bankruptcy procedure of the legal entity to be initiated anew.
Simplified bankruptcy procedure of a legal entity
The stage of financial recovery can be skipped. To do this, the bankruptcy procedure was simplified. In this situation, the legal entity must:
- make a decision on the liquidation of the company and inform the Federal Tax Service about this;
- have debt obligations that cannot be covered after the sale of the entire property of the enterprise.
In the simplified bankruptcy procedure of a legal entity, after the creditors’ claim, the manager will immediately proceed to bankruptcy proceedings. The organization will be canceled in a shorter time.
Consequences of bankruptcy for a legal entity
Legal entities that have passed the bankruptcy procedure are given the opportunity to restore their financial situation, pay off debts and sell assets. The organization is under the protection of state bodies, the requirements of counterparties are limited, recovery measures are suspended.
During the procedure, financial rehabilitation is applied to restore the solvency of the enterprise, repay current debt obligations and return to conventional financial and economic activity.
Consequences of recognition of a legal entity as financially insolvent:
- proportionate repayment of counterparty claims;
- debt cancellation in the absence of money to fulfill debt obligations;
- exclusion of a company from the Unified State Register of Legal Entities.
According to Russian law, former participants of a bankrupt enterprise are not restricted in their rights to conduct other activities. They can open new organizations, register as individual entrepreneurs for the development of another business.
From a legal perspective, the bankruptcy procedure of a legal entity is a rather lengthy and complex process. Yet, sometimes only this event makes it possible to prevent criminal or administrative liability in the form of penalties and prosecution under the law, up to arrest. The main thing is to strictly follow the Federal Law No. 127 “On the Insolvency of Legal Entities”.
In the autumn of 2021, Russia expects a change in bankruptcy for legal entities. So far, draft Law No. 1172553-7 prepared by the Government is under consideration.
Разрабатываем Стратегии для собственников бизнеса в целях оптимизации группы компаний, решения нестандартных задач и продажи активов. Оказываем услуги по сопровождению сделок M&A, управлению непрофильными активами и проектами в целом.
