Bankruptcy

Application for bankruptcy

If the debtor applies to declare itself as bankrupt, it typically only needs to state that it cannot pay its debts. However, if the creditor applies to declare the company bankrupt, the creditor must prove that the debtor has an outstanding debt and that the inability to pay is not temporary. Applying to declare someone bankrupt is a voluntary process. 

Legal consequences of bankruptcy

Bankruptcy means that a debtor in financial distress is liquidated, losing its legal capacity to act. Through the bankruptcy process, all of the debtor’s assets, including property and funds, are seized to be converted into cash to satisfy the creditors’ claims. The debtor’s assets form a bankruptcy estate, which is managed by one or more bankruptcy trustees. The bankruptcy trustee ensures that the assets of the bankruptcy estate are distributed appropriately among the creditors.

The bankruptcy estate includes all property that belonged to the debtor at the time the bankruptcy decision was made, as well as any property that accrues to the estate during the bankruptcy, provided that the property is subject to seizure.

Ranking of debts

The bankruptcy process comes with a certain set of rules that stipulate the sequence the debts should be paid in. Known as “priority rights,” these rules prioritize certain debts over others. Wage claims is one such debt that has priority over other debts.

Any debt that does not come with priority rights is deemed as ‘unsecure.’ One can only pay off the unsecured debts if there are enough funds in the bankruptcy estate once all the other debts with priority rights have been paid off. In case, there is a shortage of funds to pay off the unsecured claims, the respective creditors might not receive the complete payment. 

There exists a principle that makes sure all the claims including the unsecured ones receive equal and fair treatment. It is known as the ‘principle of equal treatment.’ It requires that every creditor who does not get priority rights still must receive fair treatment. In order to get payment in the case of bankruptcy, it is crucial that the debt must have taken place prior to when the bankruptcy decision took place.

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At Advantage law firm, we take pride in our extensive experience pertaining to insolvency issues. We’d be happy to assist you regarding any queries and issues.

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