Small bankruptcy

What it means

Small bankruptcy is a simplified form of bankruptcy for a smaller debtor with few creditors and low turnover that meets statutory criteria. Proceedings are faster and cheaper because some bodies are not set up and deadlines are shorter.

The aim is to stop the cost of the proceedings from consuming most of the assets meant to satisfy creditors. For a small company, full bankruptcy with meetings and a creditors' committee could cost more than the bankruptcy estate contains.

The substance is the same as in ordinary bankruptcy. The court declares bankruptcy of an insolvent debtor and appoints a trustee, who identifies and realises the assets and distributes the proceeds to creditors in the statutory order. What changes is mainly the amount of formality and the speed of each step.

How it works in practice

Creditors must lodge their claims within the period set in the bankruptcy order, otherwise they are disregarded. The claim is filed on the prescribed form with supporting documents, and as deadlines are short, the Commercial Bulletin needs to be watched regularly.

For the debtor and its directors, obligations do not end when proceedings start. The director must hand over the accounts and documents to the trustee and cooperate. If they failed to file for bankruptcy in time although the company was insolvent, they may be liable for the damage caused to creditors.

In the books, accounts are closed as of the date bankruptcy is declared and extraordinary financial statements are prepared. The trustee then keeps the accounts during the proceedings. For creditors, the declaration also matters for tax, as it allows a bad debt allowance and later a write-off of the receivable.

What to watch out for

Small bankruptcy does not mean lighter responsibility. The trustee checks whether the debtor sold assets below value or preferred certain creditors before insolvency and can challenge such transactions. Related parties may be ordered to return what they received.

For a sole trader, debt discharge may be a more suitable route to getting rid of debts. A company in crisis must act early: restructuring or preventive solutions are only possible until the company is deeply insolvent.