A company in crisis - What should be considered before the year-end

Do you have liabilities overdue more than 30 days? Then this legislation applies to you

Dear ladies and gentlemen,

A new significant amendment to the Commercial Code have come into effect on 1 January 2016. The amendment defines situations when a commercial company is in crisis. In accordance with the new Commercial Code, any breach by a company of the provisions of the Commercial Code has a direct effect on the statutory representatives who bear personal liability and can be subject to a lawsuit. The amendment relates to companies that are insolvent, have a low ratio of equity and liabilities, or have negative equity. If a company is in crisis at the end of a year, it may be required to disclose this in its statutory financial statements.

A commercial company is in crisis if (1) it is bankrupt (2) or is threatened by bankruptcy

(1)   A company is bankrupt if it has negative equity or is insolvent.

a)     A company has negative equity if it has more than one creditor and the amount of its liabilities exceeds the amount of its assets (it has negative equity). The bankruptcy of a company due to negative equity results in an obligation of the statutory representative to file a petition in bankruptcy, or company restructuring.

b)    A company is insolvent if it is unable to settle at least two monetary liabilities which are overdue by more than 30 days, to more than one creditor. If bankruptcy is caused by insolvency, the company faces an immediate risk that a bankruptcy petition will be filed by its unsatisfied creditors.

(2)   A company is threatened by bankruptcy if the ratio of its equity and liabilities is less than 4 to 100. For 2017, a ratio of 6 to 100 will apply and from 2018 a ratio of 8 to 100.

It is critical that the statutory representative review the financial statements regularly and with due care and that he is able to distinguish between actual bankruptcy and the threat of bankruptcy. In both cases, the statutory representative must take all measures to eliminate the crisis, for example, by considering payment of all monetary liabilities that are overdue by more than 30 days prior to the year-end.

The threat of bankruptcy is not connected with the immediate threat of bankruptcy, or a restructuring proceeding, but is connected with the following consequences:

a)     all payments received from shareholders, statutory representatives and related parties, which the company received during its crises cannot be returned to these parties before it overcomes the crisis. Moreover, even by potential settlement of liabilities the company cannot get into crisis again. The payments received during the crisis are considered to be payments replacing the company’s own sources;

b)    if, in breach of the law, a company returns a payment that replaces its own sources (mutual set-off is also considered to be the return of a payment), such a payment must be returned to the company and the statutory representatives must collect such payments. The liability of all statutory representatives who held this position at the time of the provision of the payment in breach of the law and the statutory representatives who held this position in the period when the company failed to claim a return of the payment, is joint and several.

c)     if a person whose payment can be considered to be a payment replacing own sources is also a guarantor, or provided guarantee or securement for the payment of the liabilities of the company, the creditors may be satisfied using such a guarantee or securement without first claiming its right with the company.

The interpretation and application of legal regulations governing the operations of a company in crisis is difficult and requires complex consideration of the legal and accounting implications. If this issue relates to your company, or you want to know how to avoid financial difficulties at your company, please contact our specialists in the following areas: