We have
previously
introduced bankruptcy as a potential tactic to enable collection on a court judgment. We have also discussed the additional procedures and authority of the bankruptcy proceeding which allow for much more thorough investigations by the bankruptcy court in determining what assets the debtor company may have, or has attempted to hide. In addition we have reviewed the authority of the bankruptcy proceeding Administrator to reverse some actions by the debtor company or its personnel which have reduced the assets of the debtor company.
Here we will discuss some of the consequences of a final declaration of bankruptcy on the debtor company and for the creditor.
After bankruptcy has been officially declared, the target company will have its Business License revoked. The Business License represents the formal approval of the government to operate as a business, when this has been revoked, the company may no longer operate legally.
Directors, Supervisors or Officers of a company which has been declared bankrupt will face a determination on whether or not they have violated their legal responsibilities of loyalty to the company and of due diligence in the performance of their duties. Those found to have violated these responsibilities may be held civilly liable to the company, or its creditors. Further, these individuals will be restricted from serving as the Director, Supervisor, or Officer of any other enterprise for three years from the date of the end of bankruptcy proceeding. In severe situations, the individual will be subject to criminal investigation and potentially prosecution.
While the creditor is not directly involved in the majority of the bankruptcy process, there are some important considerations. The creditor making application to the court to initiate bankruptcy will be required to provide documentation and evidence of the debt and the failure to pay. As discussed previously, this may be in the form of a court judgment and finding by a court enforcement procedure that no assets are available to collect against the judgment.
It may be difficult to know whether there are any other creditors waiting to collect from the debtor company. After the bankruptcy proceeding is publicized and any other creditors come forward, all creditors will be required to meet and decide on a way forward. It may be that the claims of other creditors overshadow the claim of the initial bankruptcy applicant.
Additionally, the creditor, or creditor’s meeting may appoint legal counsel to liaise with the Administrator during the investigation procedure. This may be helpful in arguing whether certain assets or property should be considered part of the company’s assets, or whether certain transactions should be considered suspect.
While the court’s Administrator has broad authority in recovering assets of the debtor company, some of the proceedings to recover such property may be time consuming and ultimately costly, adding to the expense of the bankruptcy proceeding. This is a consideration which should be in the minds of both the administrator and the Creditor.
Once a determination of bankruptcy has been made and assets have been recovered and are ready for distribution, who gets first priority? Unfortunately, the answer is the court.
Assets of the debtor company will be distributed in the following order of priority:
- Bankruptcy expenses will be disbursed to the court;
- “Common Benefits” will be disbursed. Common Benefits include: salaries, medical and disability subsidies, pensions and insurance for employees;
- Social Security payments, and Taxes owed will be disbursed to appropriate government bureaus;
- Remaining funds are disbursed to Creditors.
As Creditors will be paid last, there is a risk that the creditor may never see the funds which inspired the application for bankruptcy. Of all of the three priority payments before the Creditors, the bankruptcy expenses for the proceeding itself are likely to be the most costly.
Pursuing bankruptcy to collect on an unpaid court judgment will therefore not be appropriate in every situation. However, those with a substantial judgment or other unpaid debt may seriously consider pursuing bankruptcy proceedings against a debtor.