A company in crisis is inevitably approaching bankruptcy. The procedure for declaring bankruptcy is quite complex and requires compliance with all legally regulated stages. One of them is the appointment of an external manager, who helps to satisfy the interests of creditors as much as possible while the organization has not yet been declared insolvent. To do this, the manager must draw up a special plan, the nuances of the structure and approval of which we will talk about in this article.
When is external management introduced in the event of bankruptcy of a legal entity?
At the stage of external management, all powers are completely transferred to the external manager.
Management is introduced by a decision of the arbitration court if a meeting of creditors or the debtor himself filed an application with the court. The rationale for introducing external management is the potential ability of the enterprise to restore its financial position.
The introduction of this procedure has advantages for creditors. Lenders have a better chance of getting their funds back, since when the stage of bankruptcy proceedings begins and the property is sold at auction, the money received may not be enough to fully repay the entire debt.
Signs of bankruptcy
The main sign of the insolvency of a company or individual is insolvency: a person cannot pay his credit bills and has debts on loans. There is a clear lack of financial resources, and expenses exceed income.
These are formal signs of bankruptcy.
There are also informal symptoms of ruin that can be noticed before the onset of real financial insolvency.
These include the following facts:
- there are many inaccuracies in accounting documents;
- reporting papers are submitted late;
- the external balance of the enterprise changes;
- employee wage debts are growing;
- payments to the company's investors are delayed or stopped;
- pricing policy is changing.
Persons interested in clarifying the financial condition of a company can initiate bankruptcy proceedings in court if they receive the appropriate authority to do so.
There is a separate article on the website about bankruptcy of legal entities.
How is external management carried out?
The stage of bankruptcy of a legal entity, called “external management,” begins with the transfer of all powers of the manager to a new arbitration manager. The external manager accepts all documentation from the debtor and begins to manage the enterprise. The arbitration office has the right to cancel previously taken measures to resume debt payments and completely change the production strategy.
For your information
External administration is not a mandatory stage of bankruptcy. Rehabilitation measures are carried out only if their feasibility is justified. If the new management does not restore the solvent status of the organization, then after the stage of external management the company immediately enters the final stage of bankruptcy - bankruptcy proceedings, when the property of a legal entity is sold at auction. The proceeds from the sale of assets are used to pay off the company's debt obligations.
While the debtor is under external management, a moratorium on debt payments is introduced. This way the company will be able to improve its financial affairs and operate without constant pressure from creditors.
Purposes and types of bankruptcy
I’ll say right away that bankruptcy as a fact does not relieve you from debts. Financial insolvency of companies and individuals is an opportunity to fulfill debt obligations in alternative ways and at least partially free themselves from pressure from creditors.
As long as the debtor owns real and movable property, he will continue to pay off his debts until he pays them off in full. Another thing is that the form of debt repayment will be fundamentally different.
For businesses, the long-term goal of bankruptcy is to either close down or radically reorganize the business. Individuals initiate insolvency proceedings in order to stop the progressive growth of loan debts.
Currently, there is a massive credit default - people who at one time took out consumer and mortgage loans are experiencing difficulties paying off their debts during the crisis.
In simple terms, incomes have fallen, the cost of living has risen, and debt obligations have become difficult to meet.
Things have not improved for legal entities either: the crisis of recent years has led to the ruin of many companies, especially in the field of small and medium-sized businesses.
As an ordinary citizen, I personally observe an almost quarterly change of signs in an office building opposite the windows of my own apartment - enterprises move into new premises and within a few months wind down their activities due to bankruptcy.
There are several types of bankruptcy:
- Real bankruptcy is when companies cannot restore their solvency on their own as a result of financial losses. Enterprises simply do not have the capital to operate fully.
- Temporary bankruptcy (also conditional) - when the assets of an enterprise increase, and liabilities vice versa. This happens if, for example, the company has accumulated a surplus of unsold products.
- False bankruptcy. Intentionally declaring one's insolvency in order to mislead creditors or obtain relief and benefits from them. This type of activity is criminal and is fraught with criminal liability.
- Deliberate bankruptcy is another type of illegal act. Intentional bankruptcy is carried out by company owners for the purpose of personal gain or for the benefit of others.
The task of the judicial authorities is precisely to understand what type of bankruptcy they are dealing with and initiate the appropriate legal procedure.
Event plan
The responsibilities of the external manager include drawing up a work plan, which is approved by the arbitration court. The manager must develop an action plan no later than one month after taking office.
The external management management plan must provide for a number of measures to restore the solvency of the debtor company, as well as the procedure for implementing these measures. The document also provides for the costs of carrying out the necessary procedures to return the organization to normal operations. The debtor's solvency is considered restored if there are no signs of bankruptcy of a legal entity regulated by law.
The external management plan in case of bankruptcy must:
- provide for a time period during which the organization will restore solvency;
- have a justification for the possibility of restoring the company’s solvency within the agreed period;
- comply with the requirements established by law.
Important
The manager, at the request of the meeting of creditors, is obliged to report on the implementation of the approved plan and the general financial situation of the debtor.
Creditors' requirements
Creditors can present their claims against the debtor at any time during external management. The specified requirements are sent to the arbitration court and the external manager with the attachment of a judicial act or other documents confirming the validity of the specified requirements.
The external manager is obliged to include information on receipt of the creditor's claims into the Unified Federal Register of Bankruptcy Information within five days from the date of receipt of the creditor's claims.
Claims of creditors for which no objections have been received are considered by the arbitration court to verify their validity and the existence of grounds for inclusion in the register of creditors' claims. Based on the results of the consideration, the arbitration court issues a ruling on inclusion or refusal to include creditors' claims in the register of creditors' claims.
External manager in insolvency proceedings
An external manager is appointed by a decision of the arbitration court. He has a fairly extensive list of powers. He has the right to dispose of all the property of the debtor company. The founders and the manager themselves cannot make decisions or influence the actions of the external manager. This person performs the functions of the head of the company and, according to the approved plan, carries out the necessary rehabilitation measures to restore normal activity and solvency of the organization. Also, the responsibilities of the external manager include developing measures to collect debts from debtors, opening a register of creditors’ claims and a number of other activities.
Information
Immediately after appointment, the arbitration manager begins to manage the organization. Within three days, the governing bodies transfer all accounting and other documentation, stamps, seals, and material assets to the manager. At the same time, he is obliged to accept all available property, conduct an inventory of it, open special bank accounts for financial transactions and draw up reports on all actions.
Stages
The total duration of the external management procedure can be one and a half years.
After this period, it can be extended for another six months if the council of creditors comes up with the appropriate initiative.
This stage can also be shortened if requested by an external manager or credit institutions.
As part of the implementation of the procedure, several stages can be distinguished:
- appointment of an external manager;
- preparation of a plan to improve the financial position of the company;
- implementation of the plan;
- repayment of debts of a potential bankrupt to all creditors.
Duration of the external administration procedure in case of bankruptcy of a legal entity
External control cannot last indefinitely. Its maximum period should not exceed six months. However, under certain conditions, the period can be extended to one and a half years.
Some organizations have broader time frames. These are city-forming enterprises, the liquidation of which will result in negative socio-economic consequences for the region. The management period of such enterprises can be extended up to 2.5 years with an application from local governments.
In addition to city-forming enterprises, farms can count on an extension of the period of external management. The court establishes a separate time period during which the next crop can be grown and harvested.
An additional year is added to the total period of 18 months in exceptional cases when the work of the debtor organization was affected by natural disasters.
Measures to restore the debtor's solvency
External bankruptcy management involves a number of measures aimed at restoring the company’s solvency and repaying debts.
The external manager plans and carries out these actions in accordance with his rights and obligations.
Various measures can be taken to restore the debtor’s solvency during the period of external administration. In this case, the financial manager should focus only on their feasibility. As a result, the following can be produced:
- closure of unprofitable production;
- opening new workshops to redevelop the company;
- retraining of employees;
- purchase of new equipment.
In this case, the manager may make large expenses if they are approved by creditors and promise to bring greater profits to the company in the future.
In addition, the manager can sell part of the debtor’s property to repay the loans.
What's included in the plan
The manager's plan consists of several mandatory points:
- A list of measures aimed at restoring the solvency of a legal entity in order to pay off debts.
- Financial justification and support for each of the above activities (listing of funding sources).
- Dates for each event.
- Expected positive results from the work done, which are calculated by calculating the difference between estimated income and expenses.
Wellness measures include a number of them, the main feature of which is the receipt of benefits on the part of the debtor and a gradual increase in income. This could be the repurposing of individual divisions or the entire organization, the sale or closure of unprofitable branches, sales centers, production facilities, dismissal of employees, etc. Additional measures include increasing the level of qualifications of performers, purchasing new real estate, opening new production facilities, upgrading equipment within the budget, etc.
Rights and obligations of participants
Participants in the bankruptcy procedure at the external management stage are considered to be: the debtor company, temporary manager, creditors, and government agencies.
The debtor has the right to make decisions:
- on a petition to creditors for the sale of the debtor's enterprise;
- on the election of a representative of the debtor;
- on replacement of the debtor's assets;
- on concluding an agreement with third parties to sign agreements on the provision of funds to fulfill debt obligations.
The temporary manager carries out full management of the debtor company, conducts an inventory, draws up an action plan to restore the organization's solvency, and reports on his actions to creditors and the court.
Creditors have the right:
- take direct part in the bankruptcy procedure;
- organize general meetings to discuss issues about the debtor’s economic activities;
- apply to the court to open bankruptcy proceedings;
- formulate the requirements that the manager must meet;
- approve the plan presented by the manager, make changes and additions to it.
Government agencies may have requirements to pay taxes, assessments or fees. These are the Federal Tax Service, the labor inspectorate, the customs service, the Social Insurance Fund, and the pension fund. These authorized bodies are not recognized as creditors, but their claims must be among the first to be satisfied.
Observation
Surveillance is the first procedure used in a bankruptcy case. It is carried out in order to preserve the debtor’s property.
During the procedure, an analysis of the financial condition of the enterprise is carried out, a register of creditors is compiled and the first meeting of creditors is held. According to the law, the period for conducting the monitoring procedure cannot exceed seven months from the date of acceptance of the bankruptcy petition
During the observation procedure, the enterprise can operate as usual. Moreover, arrests on his property are lifted, accounts are unblocked, and enforcement proceedings are suspended. Penalties and fines no longer accrue; bailiffs cannot interfere with the activities of the enterprise.
restrictions on the activities of the enterprise and its management bodies , but they are not significant:
It is prohibited to conduct transactions for more than 5% of the book value of assets without the consent of the arbitration manager. This refers to atypical transactions: figuratively speaking, you can sell your goods, but the equipment on which they are made cannot be sold.
It is prohibited to receive or issue loans without the consent of the arbitration manager.
The general meeting is prohibited from making decisions on the distribution of profits, the payment of dividends, and the payment of the actual value of a share upon the withdrawal of a participant.
The general meeting is prohibited from making decisions on liquidation and reorganization. But it has the right to change the charter, legal address and change the director.
The arbitration manager in the observation procedure is called a temporary manager . His candidacy is approved by the arbitration court.
As soon as the court introduces the monitoring procedure, the temporary manager makes a corresponding publication in the Kommersant newspaper and in the EFRSB. From the moment of publication, the 30-day period for submitting creditors' demands to participate in the first meeting begins to count. It is highly advisable for the creditor to be included in this list on time, otherwise he will have to wait for the transition to the further procedure.
The temporary manager gets access to all financial information of the debtor - he has the right to request and receive any documents and explanations from the debtor’s management, counterparties, banks, government agencies, etc. All these persons are obliged to provide him with information within 7 days without charging any fee.
Based on the information received, the temporary manager conducts a financial analysis of the debtor’s activities. Financial analysis is carried out for at least two (and usually three) years preceding bankruptcy. The purpose of this work is to provide a conclusion about the presence of signs of deliberate or fictitious bankruptcy, as well as the presence of dubious transactions. Together with the financial analysis, the arbitration manager prepares recommendations on the further development of the bankruptcy case.
At the end of the monitoring procedure, the arbitration manager convenes the first meeting of creditors. The agenda must include the following issues:
1. Report of the arbitration manager on the work done.
For the first meeting, the arbitration manager prepares a financial analysis, an analysis for the presence of signs of deliberate and fictitious bankruptcy, an analysis of transactions, and proposals for the further development of the bankruptcy case.
2. Selection of an arbitration manager for the next procedure. Additional requirements for the arbitration manager.
If the interim manager for some reason does not suit the creditors, they can vote for another candidate. They can also establish additional requirements for the arbitration manager beyond those established by law - work experience, education, etc.
3. Choice of bankruptcy procedure.
After the observation procedure, a decision can be made to switch to one of three procedures:
- financial recovery;
- external management;
- bankruptcy proceedings.
A decision may also be made to enter into a settlement agreement.
4. Involvement of an external registrar .
The registrar is the person who maintains the register of creditors. This may be an arbitration manager or an external specialized organization. The meeting of creditors decides whether to involve her or not.
5. Convening a committee of creditors.
If there are more than 50 creditors, then convening a committee is mandatory. In other cases it is a right, not an obligation.
The outcome of the bankruptcy case largely depends on the results of voting on these issues.
The results of the meeting are sent to the arbitration court, which makes the final decision on what procedure should be introduced next in the bankruptcy case.
If the enterprise does not have the assets to finance subsequent procedures, and the incumbents do not agree to bear these costs, the court, based on the results of observation, may terminate the bankruptcy proceedings. In this case, all restrictions imposed on the enterprise by the bankruptcy law are lifted, and the enterprise can continue to function.
Often, the creditor who initiated the bankruptcy case refuses further financing of the case after receiving information in the monitoring procedure. This is done in order to avoid financing the liquidation of the debtor in cases where recovery of funds is unlikely.
It is important to distinguish between “termination” and “dissolution” of a bankruptcy case. After termination, all restrictions are lifted and the enterprise continues to live. Upon completion, the company is liquidated, and debts outstanding in the bankruptcy procedure are considered discharged. In this case, the enterprise is excluded from the Unified State Register of Legal Entities.
The difference between external management and the stage of financial recovery
Financial recovery and external management are two rehabilitation stages of the bankruptcy procedure. They are introduced in relation to the debtor and have the main goal of maintaining the company as a market entity. Both procedures provide preferential conditions for conducting business and are introduced by a court decision or the first meeting of creditors.
Information
The fundamental differences between these two stages lie in the organization of financial and economic rehabilitation of the debtor organization. At the recovery stage, management remains with the company's management (with limited powers), and in the case of external management, these functions fall on the shoulders of a court-appointed manager.
There are also differences between the stages of external management and financial recovery in the methods adopted to restore the debtor’s work. Financial recovery in a general sense is an installment plan for repaying accounts payable under certain guarantees. During external management, a set of measures is used to change the strategy of running a legal entity.
Pros and cons for lenders
The activities of an external creditor are aimed at restoring the solvency of a legal entity (the procedure does not apply to individuals) through various effective economic measures. Thus, the positive side for the injured party is to create conditions under which the defendant’s debts will be returned to them.
Moreover, they have the right to approve the action plan developed by the manager if it suits them, or to reject it and wait for the next one if some of the points are in doubt. That is, during external management at the management level, it is the meeting of creditors that is the current temporary body.
True, such a procedure may also have negative consequences. Considering that the period of external management is quite long, debt collection will require a lot of time. And not always even the manager’s plan approved by the creditors guarantees the financial recovery of the debtor company. Thus, after 2 years they may be left with nothing and again file for bankruptcy of the defendant legal entity.
Consequences of the external management procedure in case of bankruptcy of a legal entity
After the introduction of external management of the legal entity, the powers of the management of the debtor company are completely terminated. All cases are transferred to a temporary administrator appointed by the court. He has the right to issue an order for the dismissal of the head of the company or offer him a transfer to another job under the conditions and in the manner prescribed by Russian legislation.
In addition, the consequences of the debtor’s transition to this stage include:
- termination of powers of the organization’s management bodies and owners of the company’s property;
- cancellation of previously taken measures to secure creditors' claims;
- introduction of a ban on satisfying claims on debt obligations and making obligatory payments, except in cases established by law.
If the results of rehabilitation turned out to be positive and led to the restoration of the debtor’s solvency, then the company proceeds to settlements with creditors and satisfies their financial demands. Otherwise, at the meeting of creditors, a decision is made on the need to extend the period of external management or introduce other measures by the arbitration court aimed at satisfying the claims of creditors. For example, as part of a bankruptcy procedure, the court may initiate bankruptcy proceedings to sell the debtor's property.
Settlements with creditors
Settlements with creditors are made by the external manager in accordance with the register of creditors' claims, starting from the day the arbitration court issues a ruling on the transition to settlements with creditors or a ruling on the start of settlements with creditors of a certain priority.
After satisfying the claim of a creditor included in the register of creditors' claims, the external manager or registrar excludes such claim from the register of creditors' claims.
If the register of creditors' claims is maintained by the registrar, documents confirming the satisfaction of the creditor's claim are sent to the external manager of the registrar.
Complaint against the manager
The manager is the person on whom the company’s chances for further functioning depend. But his actions are not always effective, the reasons for which may be:
- political situation;
- natural disasters;
- inflation and other factors.
This may also be due to pressure from creditors who want to quickly move to the stage of bankruptcy proceedings, which is why they put pressure on the manager and create obstacles for his effective work.
This is also important to know:
Bankruptcy of legal entities
But most often the lack of results is explained by the low level of professionalism of the interim manager.
If creditors are not satisfied with the manager's policies, they can file a complaint against him in court. Other persons to whom the company has unfulfilled financial obligations can also submit claims.
The complaint is drawn up in writing, taking into account the general rules of legal proceedings and contains:
- details of the judicial authority;
- information about the plaintiff and defendant;
- details of the bankruptcy case;
- the essence of the appeal - the grounds for the claim;
- requirements for the court - replacement of the manager or opening of bankruptcy proceedings;
- list of applications;
- date and signature of the plaintiff.
The court has a month to consider the appeal.
Stages
External management as a bankruptcy procedure is formed from the following stages:
- approval of the arbitration manager;
- creation of a project for the financial recovery of the company;
- bringing this project into operation after approval by creditors at the general meeting;
- fulfillment of all obligations to counterparties.
The plan for suspending bankruptcy proceedings contains:
- actions to restore the viability of the enterprise;
- circumstances and period of their activation;
- estimate for implementation;
- the period during which the insolvency of the company will be liquidated;
- arguments confirming the reality of restoring the viability of the company;
- division of functions of collectors of the general meeting and the committee for approving agreements of a bankrupt enterprise.
The interim manager is obliged not only to agree on the company’s recovery plan with financial counterparties, but also to report on the progress of its implementation upon request.
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The external management process will be considered successfully completed if the enterprise has no signs of insolvency and it fulfills its obligations under financial agreements.
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