Financial recovery as a bankruptcy procedure

Bankruptcy as a way of financial recovery

“Are you ready to fight for your business?” S. Storozhenko

Business is like a living organism. And like any living organism, endowed with the instincts of self-preservation and procreation, it strives for safety and “reproduction” (growth).

When a business is in dire straits, a good leader must help it get better. Do everything possible to preserve the company and give a powerful impetus to its full development. Increase the competitiveness and market value of the company.

No matter how strange it may sound, it is bankruptcy that provides troubled businesses with effective tools for financial recovery.

Start of the procedure

Financial recovery is a long-term legal and economic process used in a bankruptcy case in order to restore the solvency of a legal entity: company, organization, institution. Thanks to such actions, it is possible to return the debtor to the opportunity to repay debts to creditors according to a specially developed debt repayment schedule.

The initiation of the process in court is accompanied by the submission of a number of documents, their assessment, as well as an analysis of the circumstances that led to the crisis. This procedure allows you to repay all claims of creditors in full and satisfy the requirements of everyone to whom the debtor is late in payments. Thus, all parties to the proceedings are interested in restoring the debtor’s solvency.

To initiate the reorganization procedure, it is necessary to send a petition to the court and the first meeting of creditors. The following shall be attached to such a petition:

debt payment schedule;
developed plan of health procedures;
security guarantee.

The payment schedule must include proportionally equal parts of the repayment of all debts of creditors, regardless of their number. The due date for the first payment is calculated no later than 30 days before the end of the recovery procedure.

The head of the enterprise is not removed from work at the entire observation stage, and management is carried out as before, but has a number of restrictions.

Features of financial recovery

This stage is not mandatory and can be approved if there are grounds. Given the mutual interest in the process, any of the parties can initiate financial recovery.

According to the Federal Bankruptcy Law, financial recovery includes the following conditions:

measures to secure creditor claims are cancelled;
seizures are lifted from the debtor’s property for the period of recovery;
the founders of a legal entity are limited in receiving payments;
fines for late payments are stopped;
all claims against the debtor, in addition to current ones, are accepted in the manner established by the current law.

Carrying out offset of mutual payment claims

In the Civil Code of the Russian Federation, offset is designated as a method of terminating obligations.
At first glance, a rather simple transaction design in reality turns out to be quite difficult to implement. In addition to the requirements specified in the Civil Code of the Russian Federation, under which it is possible to carry out an offset, there are also unspoken ones that have developed as a result of the formation of judicial practice on issues of offset of requirements. Let's consider the basic requirements regulated by the Civil Code of the Russian Federation: the obligations of the parties must be reciprocal. That is, “tripartite offsets”, when three parties take into account mutual obligations that are not reciprocal, are not a method of terminating obligations provided for in Art. 410–412 Civil Code of the Russian Federation; obligations must be homogeneous. According to the law, only one criterion of homogeneity is defined, namely the homogeneity of obligations in the subject matter, however, foreign civil codes and established judicial practice highlight another criterion - claims must be homogeneous based on the grounds for their occurrence (for example, it is unacceptable to set off a claim for compensation of losses against a claim for repayment of a loan, only contractual obligations - versus contractual obligations); the deadline for fulfilling obligations must be due.

Let us consider the condition on the degree of indisputability of mutual claims, the presence of which is regulated by established judicial practice and is also necessary when concluding an offset agreement. In this case, the requirements must be indisputable and obvious in equal measure. For example, a right of claim confirmed by a writ of execution can only be set off against the same claim confirmed by a writ of execution. Otherwise, judicial practice does not recognize the legality of offset and the possibility of terminating enforcement proceedings.

In addition, the Presidium of the Supreme Arbitration Court of the Russian Federation, in information letter No. 65 dated December 29, 2001, established that an obligation cannot be terminated by offsetting a counterclaim of a similar nature if, at the request of the other party, the claim is subject to a statute of limitations and this period has expired (paragraph 2 of Art. 411 of the Civil Code of the Russian Federation). In this case, the party that received the application for set-off is not obliged to declare that the statute of limitations has passed to the counterparty, since the statute of limitations can only be applied by the court, which applies it if there is an application when considering the relevant dispute (Clause 2 of Article 199 of the Civil Code of the Russian Federation).

If the offset of claims was carried out without a document, then it can be challenged, which is due to the lack of clear requirements for the form of the transaction. From current practice, we can conclude: if there are doubts about the legality of the offset being carried out, it is necessary to require a written agreement from the counterparty on the offset of counter-similar claims, which will constitute a termination of obligations based on the agreement of the parties.

What is included in financial recovery?

Financial recovery in a bankruptcy case includes a number of measures and procedures, which include:

possible change of company management;
reduction in production costs;
sale of part of the debtor’s property, for example, branches;
reduction of persons who have labor relations with the bankrupt;
strict inventory;
improving the skills of workers;
improvement of technical equipment.

Also, one of the recovery measures is the sale of obsolete goods, equipment and other items stored in the company’s warehouses.

If the company follows all the recommendations and cannot make payments in accordance with the repayment schedule, the manager may turn to third parties who provided security for the debtor’s fulfillment of its obligations.

Providing compensation

Providing compensation for the debtor, in fact, is a kind of payment for the termination of its obligations.
Compensation can be provided in cash, property, services, performance of work (information letter of the Presidium of the Supreme Arbitration Court of the Russian Federation dated December 21, 2005, No. 102 “Review of the practice of applying Article 409 of the Civil Code of the Russian Federation”). As an example, we can cite a situation where the buyer, having received the goods, cannot pay in cash, as provided for in the contract, but provides the seller with any services, and, conversely, the contractor was unable to fulfill his obligations under the contract and in return transfers funds to the customer . It is necessary to clearly separate the novation and compensation agreements. With compensation, obligations are completely terminated, and under a novation agreement, new ones arise. Thus, the transfer of one’s own bill of exchange in exchange for the fulfillment of contractual obligations cannot be called compensation, since a bill of exchange is nothing more than an obligation to pay. Thus, instead of debt under the contract, debt under the bill arises. Therefore, this is a contract of novation of debt. If the transferred bill is not your own, but, for example, a bank bill, then the obligation will be terminated, which indicates a compensation agreement.

Currently, the legislation does not contain specific requirements for the form of the compensation agreement and can only arise by agreement of the two parties. Thus, a compensation agreement is a type of transaction, the conclusion of which must be guided by the provisions of the Civil Code of the Russian Federation applicable to transactions.

The original obligation will cease only after the actual transfer of the property. To confirm the fact of termination of the obligation, it is necessary to draw up an act reflecting the acceptance and transfer of property (if the compensation is the performance of work or the provision of services, the initial obligation will be terminated after the signing of documents covering the work performed or services provided). Until this point, the creditor agrees not to demand the original debt.

Financial recovery plan: what it includes and how it is developed

The most important document is the wellness plan. According to the relevant Federal Law, this plan should be developed by the bankrupt based on the current situation. To present a work plan, you must include the following items:

information about the legal entity;
marketer research;
information about the state of finances in the company;
marketing strategy;
measures to restore solvency;
sources of financing.

An administrative manager appointed by the court and agreed upon with the creditors monitors the debtor’s implementation of the drawn up plan. This document must contain all data, information and information that can confirm the seriousness of intentions.

Features of the end of financial recovery

After all the necessary documents have been collected and the situation has been analyzed, the arbitration court can make the following decisions:

close the insolvency case;
introduce external management;
declare a person bankrupt.

If the court declares a person bankrupt, the stage of bankruptcy proceedings begins, which involves the sale of the debtor's property. It is necessary to take into account the register of creditors' claims, which lists all penalties accumulated by the debtor.

Reduced deadlines

The period for which the process of financial rehabilitation of the company is introduced can be reduced legally with the early termination of the financial obligations of the defaulter. This outcome becomes possible if the debtor is ahead of schedule, meeting a deadline less than stated.

If you are ahead of schedule, the same reports are submitted in the same order as at the end of the allotted time. This is followed by a court hearing, as a result of which the court makes a decision: to close the proceedings if the creditors no longer have claims, or to refuse to close the case if there are outstanding debts.

Financial recovery as a bankruptcy procedure: results

In an insolvency case and determining the need to introduce financial rehabilitation, it is necessary to take into account all the nuances of the company’s work and the possibility of restoring the debtor’s payments of obligations in accordance with and in the amount provided for by the Federal Law and the requirements of creditors.

Subject to all recommendations of the manager, proper distribution of finances, assets and effective management, a legal entity can restore its solvency and pay off all its obligations.

Considering a number of negative factors associated with the insolvency procedure, it is worth paying close attention to restoring the financial situation. One of these consequences is the sale of the debtor’s property at auction.

Always analyze the economic situation in the country, adequately assess your strengths and the company’s capabilities, and you will be able to avoid insolvency. In case of disputes or the need to interpret the law, seek assistance from qualified lawyers.

Replacing one obligation with another (novation)

Novation is the replacement of the original obligation that existed between the parties with another obligation providing for a different subject or method of execution (Article 414 of the Civil Code of the Russian Federation).
Its peculiarity is the release of the parties from a previously concluded obligation in order to enter into a new one. To make an innovation, the following conditions must be met:

When concluding a novation agreement, the parties must indicate in the terms the intention to terminate the original obligation. Otherwise, the new obligation will exist in parallel with the original one; the original and new obligations are valid. Since if the original obligation is declared invalid, then the very possibility of concluding new obligations between the parties arising on the basis of the primary ones disappears; the newly arisen obligation is determined on the basis of the primary one and provides for a different subject or method of execution. In other words, the termination of the primary and the determination of a new obligation are in a causal relationship: the former is terminated because the parties to the transaction agreed to establish another, and a new obligation is established because they decided to terminate the original. If this condition is not met, the parties will be bound by two different obligations; the composition of the participants in the new obligation concluded to replace the original one must remain unchanged. It is unacceptable not only for the departure of any of them, but also for the emergence (along with the previous ones) of new participants in the contractual obligation.

Novation is not allowed in relation to obligations to compensate for harm caused to life or health, and to pay alimony.

In addition to the above, one of the ways to restructure obligations may be bankruptcy proceedings for both the debtor and the debtor. Currently, tax control measures have been tightened, and in practice there are increasingly cases where the bulk of a company's obligations are debts to the budget, which the company cannot pay by initiating bankruptcy proceedings. In this context, I would like to consider another opportunity to optimize your debt obligations, but this time exclusively to the tax authority.