The rules for filing for bankruptcy
How do you file for a company’s bankruptcy? The procedure firstly involves a court, followed by close collaboration with the bankruptcy office.
There are two main methods for filing for bankruptcy for a company: either a creditor initiates the procedure via debt enforcement or the company declares itself bankrupt when it establishes its insolvency. In some rare cases, the creditor may call for bankruptcy without prior enforcement (Art. 190 LP).
Steps for declaring bankruptcy
When a company has serious reason to suppose itself heavily in debt, its board of directors must draw up an interim balance sheet and present it to its auditors for verification. If it shows that the debts owed can no longer be paid, the board of directors is required to go to the office of the judge of the district court with jurisdiction to declare its insolvency and initiate bankruptcy proceedings (Art. 725 CO).
There is one exception to this rule: the judge does not have to be informed if the creditors agree for their debt to be considered subordinate to all of the company's other debts for an amount equal to the shortfall in assets. The step of going to the office of the judge in the event of excessive debt applies to limited companies (SAs) as well as limited liability companies (SARLs) and sole proprietorships.
The court may defer the bankruptcy ruling at the request of the board of directors or a creditor if restructuring of the company is possible. This type of scenario is quite rare. The debtor may also propose an arrangement with the creditors, known as a composition in legal terms. For more information about composition, see below under “Avoiding bankruptcy through an arrangement”.
After the ruling declaring bankruptcy takes place, implementation of the procedure is no longer managed by the company, which loses the right to manage its own assets, but by the relevant bankruptcy office. The bankrupt entity must then remain available to the office, specifying all of its assets and making them available, subject to penalties.
For more information detailing the procedure with the bankruptcy office, see:
For more information about the consequences of a bankruptcy procedure on an entrepreneur and his or her creditors, see:
Any creditor may initiate a procedure against a debtor who has not paid them. If the debtor is an individual or a trading company, the procedure may result in bankruptcy, that is, total liquidation of the bankrupt entity's assets in order to cover as many of its debts as possible. This type of enforcement is known as “enforcement through bankruptcy”, unlike “enforcement through attachment”, which involves non-trading entities.
To initiate an enforcement procedure, the creditor first needs to complete a formal request for enforcement, a form obtained from the enforcement offices, and then send it to the office. On receipt of the formal request, the office must draw up an order to pay and send it to the debtor.
On receipt of the order to pay, the debtor can:
- pay within 20 days,
- challenge the debt, or
- do nothing.
If the debtor does not challenge the order to pay, the enforcement procedure enters the second phase, i.e. bankruptcy. The procedure first goes through the judge and progresses in the same way as if the company had itself declared bankruptcy (see explanations below).
If the debtor challenges the debt, the creditor may initiate legal proceedings (release proceedings) with the judge. These proceedings may also result in bankruptcy (Online-Betreibungsschalter: Angebote für Gläubiger (only in German)).
Avoiding bankruptcy through an arrangement
To avoid a bankruptcy ruling, it is sometimes possible to make an arrangement with creditors. In fact, if medium-term business prospects are encouraging, suppliers and creditors may remain hopeful of being able to continue to do business.
Creditors frequently abandon some claims or agree to wait to be paid. Sometimes, creditors agree to take existing assets and make them successful themselves.
This type of arrangement is known as composition in legal terms. The Federal Law on Debt Enforcement and Bankruptcy governs composition (Art. 293 to 318 LP). The debtor or any creditor may apply for a composition procedure before the judge. The applicant must justify its application (producing a balance sheet, operating account or statement of assets and income) and present an arrangement plan.
The judge may therefore grant a period of suspension, known as a stay of bankruptcy. He or she appoints an auditor to check that the agreements reached are respected. The auditor keeps the judge up-to-date. A binding deadline is set by which the operations of the stay of bankruptcy must be completed.
Preparing an application for a stay of bankruptcy is a complicated operation which must be carefully planned. It is advisable to seek the help of a lawyer or fiduciary. If the application for stay of bankruptcy is refused or if the operations negotiated and provided for in the composition fail, bankruptcy proceedings will be imminent.