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Bankruptcy proceedings in 5 minutes, understandably

What is bankruptcy?

In common parlance , the terms liquidation proceedings and bankruptcy proceedings are often used interchangeably, although the two proceedings are fundamentally different.

Bankruptcy proceedings are a reorganization procedure, the purpose of which is therefore to reach an agreement between the debtor and the creditors and for the creditors to obtain their claim or, if part of the debt is waived during the settlement, to obtain part of it. To do this, the debtor receives a deferral of payment and attempts to enter into a bankruptcy settlement.

Bankruptcy proceedings, as reorganization proceedings, provide an opportunity for the debtor, in cooperation with creditors, to recover the business and thus avoid insolvency.

The purpose of bankruptcy proceedings is for the debtor to seek bankruptcy protection against his creditors, thus preventing the opening of winding-up proceedings, if the conditions are met, while giving the debtor time to agree with his creditors.

Separation of bankruptcy and liquidation proceedings

The essential and qualitative difference between the two procedures is well illustrated by the fact that a bankruptcy proceedings are intended to settle the settlement and debts, and liquidation proceedings may end with the termination of the debtor without a successor. While bankruptcy proceedings are for reorganization purposes, liquidation proceedings are for liquidation purposes.

You can find the demarcation between the two procedures in detail in this article . You can read about starting the liquidation procedure here .

Who can file for bankruptcy and how?

First of all, we must declare that the creditor cannot initiate bankruptcy proceedings.

Proceedings may be brought against the company and, as a general rule, bankruptcy proceedings may be ordered by a court having jurisdiction over the company’s registered office. In the past, in a number of cases, a company has changed its registered office and placed itself under the jurisdiction of another tribunal in order to aggravate the situation of creditors or to seek possible benefits for itself. To that end, the legislature limited the possibility of abuse by stipulating that, in the event of a transfer of the seat to a different court of registration, 180 days after its registration, bankruptcy proceedings may be instituted only before the court having jurisdiction.

bankruptcy proceedings
Bankruptcy is understandable

The company is filing for bankruptcy against itself

Initiation of bankruptcy proceedings

The head of the debtor ‘s business organization may apply to the court for bankruptcy proceedings; legal representation by the debtor is mandatory for the submission of the application.

In practice, the question has arisen as to whether a legal representative should be used only to initiate, ie to submit an application, or throughout the proceedings. Interestingly, the justification for the amending provision introducing the mandatory role of legal representative would in principle have made it mandatory only for submission, but the courts have extended this provision in their practice.

When is it not possible to file for bankruptcy?

A debtor entity may not file for bankruptcy if bankruptcy proceedings are pending against it or an application for liquidation has been filed and an order for liquidation has already been made at first instance. It is logical that bankruptcy proceedings take precedence over liquidation proceedings, but the big question is when can an order be considered to have been made? According to some, the signing of the decision can also be considered as such, but on a correct interpretation, we can at least try to serve the order.

The debtor may not file another application for bankruptcy until

(a) until the creditor’s claim existing or arising at the time of the order for the previous bankruptcy has been satisfied, and

(b) two years have not yet elapsed since the publication of the final termination of the previous insolvency proceedings, or

(c) his application for a previous insolvency proceedings has been rejected of his own motion and one year has not yet elapsed since the publication of the final order to that effect.

Which procedure takes precedence: liquidation or bankruptcy?

If an application for the opening of winding-up proceedings is received against the debtor at the same time as or after the filing of the bankruptcy application, the court shall suspend the examination of this application until the bankruptcy proceedings are ordered or the bankruptcy application is rejected. Simultaneously with the ordering of the bankruptcy proceedings, the court terminates the liquidation proceedings out of turn, ex officio, and rejects the liquidation applications submitted after the bankruptcy proceedings have been ordered. Of the two procedures, the law gives priority to the reorganization procedure . For the sake of formality alone, it is worth noting the relationship between winding -up proceedings and bankruptcy proceedings. According to the legal literature, it is not formally a precondition for the opening of bankruptcy proceedings if a company is in liquidation. The annexes to the application for bankruptcy proceedings may also be provided or obtained in the case of a company in liquidation. Bankruptcy proceedings initiated during liquidation allow insolvency to be resolved and, as a result, its final termination to take place in the context of liquidation. In terms of content and in general, bankruptcy proceedings are aimed at reorganization, and in this sense, from an economic point of view, the two proceedings are essentially mutually exclusive.

Judicial proceedings on application

At the request of the debtor, if the application is not rejected immediately, the court shall arrange for the publication of the application and the immediate, temporary deferral of payment due to the debtor in the Company Gazette, as specified in a separate legal act, within one working day . There is no separate appeal against the order. It will be published in the Company Gazette on the Website of the Company Gazette with a daily upload at 0 p.m. The debtor is entitled to a temporary deferral of payment from the date of publication.

The starting date of bankruptcy proceedings is the date of publication of the court order ordering the bankruptcy proceedings. From that date, the debtor may use his company name during the bankruptcy proceedings (“cs. A.”).

Upon formal request, the court will grant an immediate moratorium to the debtor. It is very important to note that the publication of a temporary moratorium is not the same as ordering bankruptcy proceedings . The temporary moratorium provides immediate bankruptcy protection for the debtor against its creditors and the legislature’s intention is for the debtor to receive this moratorium automatically. In practice, there has been a debate as to what shortcomings in the application preclude the granting of a temporary moratorium. In civil procedure law, the principle is that only a complete application has legal consequences of this weight, so it can be stated that a temporary moratorium can only be granted if the application is submitted in full .

If the application for insolvency proceedings is not rejected by the court, Bankruptcy proceedings are ordered within 15 days and shall immediately take measures to publish the order in the Company Gazette and in the company register in addition to the debtor’s company name in the manner specified in a separate legal act. the.” extension.

The trustee

The court appoints a trustee from the list of liquidators at the same time as ordering the bankruptcy proceedings. The trustee will classify the claims. In contrast to liquidation proceedings, in the case of bankruptcy proceedings, the senior official remains in place. This may be justified because the goal here is not the final distribution of the company’s assets, but the continued operation of the company and the satisfaction of creditors.

Moratorium in bankruptcy proceedings

A moratorium (or deferral of payment) generally means that the debtor is not obliged to meet overdue claims. However, there are a number of exceptions to this (eg wages). Some of the exceptions are called privileged claims in the legal literature. Click HERE for more information, to access the Bankruptcy Act and the details of the deferral of payment. The current bankruptcy rules distinguish between temporary, ordinary and extended moratoria. We have talked about the temporary moratorium before, now let’s see what you need to know about the regular and extended moratorium:

Deferment of payment after publication 180. the second working day following the day lasts until 0 o’clock, unless the court orders an extension of the deferral of payment on the basis of a decision countersigned by the trustee and also arranges for the publication in the Company Gazette that the deferral of payment will be extended by the deadline specified in the minutes. If the deferral of payment is not extended, the court shall, upon notification of the trustee, order the termination of the bankruptcy proceedings within 5 working days of its receipt and the extension of the deferral of payment until 0 am on the second working day following the publication of the final order ordering liquidation.

At the hearing with the creditors, the debtor may also ask the creditors to agree to an extension of the deferral of payment in such a way that the total period of the deferral of payment, including the extension, does not exceed 365 days from the commencement of the bankruptcy proceedings.

Deferment of payment may be extended for a maximum of 240 days from the commencement date of the bankruptcy proceedings if the debtor has received a majority of the affirmative votes on the claims separately from the creditors with voting rights in both the secured and uninsured creditor classes .

Deferred payment may be extended for a maximum of 365 days from the commencement date of the bankruptcy proceedings, provided that two- thirds of the votes on the claims have been received separately from the creditors with voting rights in both the secured and uninsured creditor classes .

A specified majority of creditors may make the extension of the deferral period conditional on the debtor granting the custodian a joint right to subscribe and a joint right to dispose of the current accounts .

moratorium in bankruptcy proceedings
Moratorium in bankruptcy proceedings – the company is negotiating with its creditors during the deferral of payment

The question arises as to whether or not the extended moratorium is really that long . The Bankruptcy Act stipulates that the head of the debtor’s business organization must notify the court of the result of the settlement hearing within 5 working days and, in the case of an extended deferral of payment, no later than 45 days before its expiry. This provision means that 45 days must be deducted from the 240 and 365 days respectively, as only the period of notification can be agreed, so that 195 days are available instead of 240 days instead of 365 days . Exceeding the 45-day notice period by the debtor’s manager may give rise to a fine but shall not result in a fatal error.

The other interesting question is, if the debtor can only convince a smaller proportion of creditors in the first round and the moratorium has therefore only been extended to 240 days, is it possible to raise this to 365 days by a two-thirds majority of creditors? The law does not address this, however, the purpose of the proceedings is reorganization , so no argument can be made against the fact that, based on successful negotiations, a decision to extend is now being requested for the second time with higher creditor support. In practice, it is also the case that the parties do not agree to extend the moratorium for 240 days, but to extend the extension to a specific date . There is, of course, no obstacle to this, the point being that the moratorium voted by the majority should not exceed 240 days.

Who decides on the extension of the deferral?

It is also interesting that the extension of the deferral of payment is decided by the court, the trustee approves the extension and countersigns the minutes decision.

Neither the conditions for the approval of the trustee nor the exercise of the court’s decision-making power are detailed in law. In any event, in my view, the court’s decision is a discretionary one, so the court may even reject the application for an extension. However, it is difficult to say how a judge can in fact, in such a case, justify a substantive rejection order.

Notification and registration of claims

The order for insolvency proceedings to be published must contain, in addition to the basic information:

,,an invitation to creditors to file their outstanding claims with the debtor and the trustee within 30 days of the publication of the bankruptcy order and within 8 working days after the commencement of the bankruptcy proceedings, together with a fee for the registration of the claim; to the custodian’s current bank account, (…)

and … an indication that there is no need for proof in the event of failure to comply with the time limit for lodging a claim and an indication of the legal consequences of failure to comply with the time limit for lodging a claim. ‘

The condition for the registration of the claim is also that the creditor pays 1%, but not less than HUF 5,000 and not more than HUF 100,000, as a registration fee to the current account of the trustee, who is obliged to handle the amount received separately.

Classification of receivables

The debtor and creditors shall be notified immediately of the classification and the amount of the registered claim and shall be given at least 5 working days to comment . On the subject of the remark, the trustee shall take a decision within three working days and shall do so without delay notify the creditor and the debtor as soon as it is known They can be submitted within 5 working days an objection to the court against the trustee’s measure of classification, including if the trustee does not register the claim in the amount declared by the creditor.

The court shall decide on the objection out of turn, but within a maximum of 8 working days . There is no separate appeal against the order. A claim registered as uncontested as a result of a court order does not qualify as recognition of the debt by the debtor, nor does it preclude a claim against the creditor.

The settlement hearing

The debtor company convenes the creditors within 90 days of the commencement of the bankruptcy proceedings and holds a settlement hearing. The creditors must be validly invited at least 8 working days before the hearing and sent to them, among other things, the reorganization program (which deals with the direction of the company’s continuation) as well as the settlement proposal.

In practice , debtors are concentrating on the settlement offer and neglecting to prepare an reorganization program . It is up to the creditors (and not the court) to examine this program in detail, its economic implications. Several courts have taken the position that, failing that, they will refuse to approve the settlement . Undoubtedly, the preparation of the program must be examined by the court, but in the meantime it cannot go to consider the economic part of the program, as this is the responsibility of the creditors and not the court.

It can be stated from the recent practice of the Curia that only then is the court able to approve the settlement, the debtor wants to continue the activity and this is the most important . This, in turn, requires a real reorganization program. Thus, it is not acceptable for bankruptcy proceedings to be used by debtors to obtain only a 20-30% waiver and thus to survive liquidation.

As mentioned, the first settlement hearing must be convened within 90 days of the starting date. After creditors have 30 days from the date of publication to file their claim, which the trustee must register with the debtor, there is a relatively tight time frame for the debtor and the trustee . It is therefore advisable to keep the creditors’ claims received under review and to notify the creditors accordingly.

Creditors whose claim is disputed by the trustee will most likely not be able to participate in the first settlement hearing with voting rights. This situation often occurs. By the time the court adjudicates the creditor’s claim, sometimes a settlement has already been reached or the proceedings have turned into liquidation proceedings.

Therefore, in such a case, there was a need for the debtor to withdraw the proposal of the previous settlement and make another proposal . An important rule is that the debtor and not the trustee must convene the hearing. Registered creditors must be invited directly. As the law also requires the registration of a creditor’s claim with preferential claims (eg an employee’s salary), they should in principle be invited to a creditors’ meeting, probably due to a legislative error, but this does not make sense, as their claim is not affected by the settlement, because their claim can be enforced at any time in litigation. Therefore, they can at most be informed about the decisions of other creditors.

The road to settlement and bankruptcy

Creditors may attend the settlement hearing in person or through their representative. Representatives must also certify this status to the trustee , even without a special invitation to that effect. Creditors may also decide to form a board or appoint a creditors’ representative . At the settlement hearing, the creditors decide by voting .

The debtor is obliged to prepare minutes of the hearing, which must contain the list of invited and released creditors, the classification of their claims, the number of votes held by creditors in each creditor class, the results of the votes, the creditors’ comments on the settlement proposal. Creditors’ decisions must be taken by open ballot . The minutes shall be authenticated by two persons chosen by the creditors present at the hearing and by the trustee.

At the first hearing, creditors can declare that they do not support the settlement proposal. If the debtor does not undertake to rework the settlement proposal, he closes the hearing, takes minutes and sends it to the court and the supreme body without delay. If the debtor undertakes to revise the settlement proposal within the time limit set by the creditors, several negotiations may be held with the creditors during the deferral period. The invitation and its annexes (including the revised settlement proposal) must be sent to the invitees at least 8 working days before the hearing.

It indicates the attitude of the creditors if the creditors decide to form a committee or appoint a creditors’ representative, in which case they are preparing for a longer and more trial. Neither the trustees nor the debtor have a duty to form a creditors’ committee.

It is up to the creditors to initiate and decide on the formation or commission of each other. At this stage, the legislature has placed the important rule that creditors will vote by vote in this conciliation hearing . This is true even if it does not always follow from the wording of the law. For example, there is a provision where the law says creditors may declare at the first hearing that they do not support a settlement proposal.

settlement in bankruptcy proceedings
Bankruptcy settlement – win-win situation

This statement is actually made by voting , but the debtor is not obliged to start the trial on this issue in the course of the proceedings. Creditors should initiate this vote if they do not support the debtor’s plans. The debtor is not obliged to put the question of his declaration to the vote. On the other hand, it must help ensure that voting can take place at the request of creditors. It is customary for pre-arranged ballot papers to be made available to creditors at the hearing and the result of the vote to be collected.

If the debtor undertakes to rework the settlement proposal, he may do so more than once . In this case, the agreement must be decided in repeated negotiations. There have also been examples where the debtor withdrew his settlement proposal before the first hearing and in this case, of course, creditors cannot vote and a new hearing must be scheduled. Such a method is also suitable for circumventing the tight deadline, given that in many cases a real settlement proposal cannot be put on the table in advance, but the law makes its existence an element of a regular invitation.

In the event of a renegotiation , it is advisable to decide on an extension of the deferral of payment so that the company does not miss the deadline.

If, as a result of any of the negotiations following the first hearing, the settlement proposal is supported by less than a quarter of the creditors with voting rights in the secured and unsecured creditors, the debtor shall not be entitled to revise the settlement proposal. In this case, the debtor concludes the settlement negotiations, takes minutes of this and sends it to the court and the supreme body without delay.

Settlement in bankruptcy proceedings

Under the arrangement, the debtor agrees with the creditors on the terms of settling the debt, in particular, they may agree on debt concessions and payment facilities, the waiver or takeover of certain claims, the acquisition of a share in the debtor’s business in return for the claim, a guarantee and other security for the payment of claims, the adoption of a debtor’s reorganization and loss reduction program, it is considered necessary for the preservation or restoration of the debtor’s solvency, including the duration of the settlement and the means of verifying its execution.

An agreement can be concluded if the debtor has received the majority of votes separately from the creditors with voting rights in both the insured and uninsured creditors’ classes.

The agreement must be concluded in good faith and must not contain provisions which are manifestly and gravely unfair or unfair to all creditors or to certain groups of creditors. This shall be the case, in particular, if the rate of satisfaction of the claims of all the creditors in relation to the debtor’s assets is unreasonably low or if the claims of one group of creditors are satisfied to a significantly lower proportion or on unfairly less favorable terms than other groups of creditors.

Lenders often accept this amount because they estimate that they would receive a smaller portion of their claim in a possible liquidation proceeding. Often, the debtor gets payment relief, but lenders also expect stronger collateral because of payment discounts. There may even be a scenario where creditors also acquire a stake in a debtor company in exchange for debt.

Approval of the bankruptcy settlement by the court

The court shall decide on the approval of the settlement within 15 working days of receipt of the request. You can return the application for approval of the settlement once within 3 working days to rectify the deficiencies . Failure to meet the deadline for rectification is void.

If the settlement complies with the law, the court will approve it by order and declare the bankruptcy proceedings closed. Failure to lodge an appeal against the order approving the settlement and declaring the insolvency closed is unfounded. The appeal must be considered within 30 days . There is no place for a retrial against an order approving a settlement and declaring bankruptcy closed.

If you have any questions and would like to speak to an expert lawyer, CLICK HERE .

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