Bankruptcy and Restructuring Act

What it means

The Bankruptcy and Restructuring Act is Act No. 7/2005, which governs the resolution of a debtor's insolvency. It contains rules for bankruptcy, in which the debtor's assets are realised to satisfy creditors, for restructuring, which aims to preserve the business, and for debt discharge of individuals.

The act defines insolvency as inability to pay or over-indebtedness. A debtor is unable to pay if it cannot meet debts as they fall due, and over-indebted if it is required to keep accounts and its liabilities exceed its assets. Insolvency triggers specific duties for directors.

Alongside this act there is a separate act on resolving impending insolvency, which provides for preventive restructuring and a public preventive procedure. It allows companies to deal with financial problems early, before they become insolvent.

How it works in practice

One of the most important duties is the director's obligation to file for bankruptcy within the statutory period once they learned or could have learned that the company is over-indebted. Breaching this duty can lead to personal liability for the director and a fine.

For creditors, the act governs the filing of claims, voting at the creditors' meeting, the order of satisfaction and the position of secured creditors. Smaller debtors can use a simplified small bankruptcy, which is quicker and cheaper.

Restructuring can be the right path for a business with a viable operation but unsustainable debts. It requires a trustee's report and a restructuring plan approved by creditors that sets out what share of the claims the debtor will pay.

What to watch out for

The act also contains rules on voidable transactions, allowing the trustee to challenge the debtor's acts before bankruptcy, such as preferring certain creditors or gratuitous transfers. Directors in a crisis should therefore act carefully and document their decisions.

The act is amended and supplemented by related legislation, for example on impending insolvency. When financial problems arise, it is important to consult an insolvency law specialist early, as the timing of steps can decide both whether the business is saved and whether directors face personal liability.