Intentional bankruptcy - when can (or can't) the court terminate such a case?

Another case I have won!

When, where a bankruptcy is being conducted out of court, can an application be made to the court for it to be declared intentional? On what and when must creditors vote? What are the consequences of a bankruptcy being declared intentional? Must the court rely exclusively on the position of the shareholder and creditors in the case and believe it?

Let me remind you that intentional bankruptcy, as is well known, has extremely significant substantive and procedural legal consequences:

1. the prosecutor is informed with a view to opening a pre-trial investigation (Article 71(4) of the Law on Insolvency of Legal Entities);
2. a special regime for challenging transactions applies (Article 72 of the Law on Insolvency of Legal Entities);
3. it becomes possible to bring a direct personal claim against managers;
4. in establishing the grounds for intentional bankruptcy, the company's commercial activities before the start of the bankruptcy proceedings, the fulfilment of financial reporting obligations and the lawfulness of transactions must be assessed in detail.

In case law, such disputes often require a thorough investigation of the company's activities or even an expert examination. So when my client (the company's former CEO) asked me to represent him in the case and defend him, I had to look for a “legal hook – a pearl” to make that happen.

And I succeeded. I filed a motion with the court to terminate the case without even examining it any further (already after the first court hearing had been held). The court granted the motion.

How did I manage to do it? The arguments are below:

1. Since the definition of the conditions under which an activity is regarded as intentional bankruptcy, and the establishment of presumptions of unlawful conduct, are substantive legal provisions to which the exception of retroactive effect does not apply, the substantive rules governing the declaration of a bankruptcy as intentional that were in force at the time of the actions and (or) omissions under assessment must be applied in the case under examination. Therefore, in deciding whether to declare the bankruptcy of the private limited company intentional, the Law on Enterprise Bankruptcy in force until 31 December 2019 must be applied – and that is hugely important!
2. Articles 12–13 of the Law on Enterprise Bankruptcy enshrined the possibility of conducting and completing the bankruptcy procedures of an insolvent company out of court. Article 13(1) of the Law on Enterprise Bankruptcy provides that out-of-court bankruptcy procedures are conducted in accordance with the Law on Enterprise Bankruptcy, and that matters falling within the competence of the court are considered and decided by the meeting of creditors. Although Article 20 of the Law on Enterprise Bankruptcy states that (only) the court may declare a bankruptcy intentional, it should be noted that Article 20 of the Law on Enterprise Bankruptcy, which governs intentional bankruptcy, is a general rule of that Law, whereas Article 13(1) of the Law is a special rule governing out-of-court bankruptcy proceedings and providing that matters assigned to the competence of the court are considered and decided by the meeting of creditors;
3. Since out-of-court bankruptcy is conducted by common agreement between the company and its creditors, and all matters are decided at the meeting of creditors, it makes sense to speak of conducting bankruptcy procedures out of court when the creditors and the company agree that they can carry out the bankruptcy procedures themselves, i.e. when there is mutual trust between the creditors and the debtor company and confidence that they do not need the court's assistance and intervention in conducting the bankruptcy procedures;
4. The question of whether a company was intentionally driven into bankruptcy must first and foremost be examined at the meeting of creditors, and only if they disagree with the meeting of creditors' resolution declaring the bankruptcy intentional or refusing to declare it intentional do interested persons have the right to appeal against such a resolution of the meeting of creditors to the court.

So what happened in this case? Only when ordered by the court did the insolvency administrator manage to submit, together with a written voting ballot, a request to initiate intentional bankruptcy proceedings. But that is far from equivalent to a decision to declare the bankruptcy intentional. What is more, the request clearly reflected the shareholder's wish to initiate pre-trial investigations against managers concerning company funds that had allegedly been squandered or misappropriated, but this has nothing to do with court proceedings, and the court cannot protect exclusively the interests of a shareholder just because he so wishes.

The court terminated the case, and this is an excellent example of how careful insight into procedural aspects can help defend one's clients in a wide variety of cases.

LAWYER