What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?
Restructuring & Insolvency (3rd edition)
Pursuant to section 2 of the BIA, an insolvent person means a person who is not bankrupt and who resides, carries on business or has property in Canada, whose liabilities to creditors provable as claims under the BIA amount to Cdn$1,000, and
(i) who is for any reason unable to meet his obligations as they generally become due;
(ii) who has ceased paying his current obligations in the ordinary course of business as they generally become due; or
(iii) the aggregate of whose property is not, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due.
While there are no formal or express obligations imposed on directors or officers of debtors to open insolvency procedures under Canadian law, they are required to govern themselves in accordance with the corporate duties imposed on them and discussed at greater length in Question 14 (see below). While directors may consider other stakeholders (including creditors) when executing their duties, their obligations to act reasonably and in the best interests of the corporation are owed solely to the corporation.
British Virgin Islands
A company is insolvent if:
- it fails to comply with the requirements of a statutory demand that has not been set aside;
- execution or other process issued on a judgment, decree, or order of a BVI court in favour of a creditor of the company is returned wholly or partly unsatisfied; or
a) the value of the company’s liabilities exceed its assets, or
b) the company is unable to pay its debts as they fall due section 8(1) IA.
In the BVI, there is no express duty on the directors of a company to commence insolvency proceedings at any particular time; however, there is a substantial body of case law from a number of common-law jurisdictions which confirms that the directors’ common law duty to act in the best interests of the company as a whole requires them to take account of the interests of the company’s creditors ahead of those of the company’s members. The logic being that, when the company is insolvent or on the verge of insolvency, it is the creditors’ assets (as opposed to the members’ capital or profits) that are being placed at risk by the decisions of the directors. The point has recently been considered in the English case of Sequana SA  EWCA Civ 112 where it was found that the creditors' interest duty arose when the directors knew or should have known that the company was or was likely to become insolvent. In that context, "likely" meant probable. In some cases, therefore, acting in the best interests of the company will mean recommending that the members put the company into liquidation or causing the company to apply for the appointment of a liquidator.
Section 162 IA provides that the court may appoint a liquidator because of the company’s insolvency, on just and equitable grounds, or if it is in the public interest. The same section states that such an application may be brought by the company (which must act by its directors), a creditor, or a member (among others). It is noteworthy that the IA does not, expressly, list a director as having standing in their personal capacity to apply for the appointment of a liquidator (contrary to the position in England), which does leave open arguments as to whether the directors have the power to cause the company to apply for the appointment of a liquidator.
There is some English case law (that has been overtaken in England by the English Insolvency Act 1986) which suggests that the board of directors cannot cause the company to make an application to appoint liquidators unless the company’s articles of association expressly confer the power to do so. These authorities suggest that the board of directors only have the power to do so with a resolution of the company’s members (see In re Emmadart Ltd  Ch 540). Those authorities have since been rejected in other common law countries (such as Australia and Bermuda) and it is possible (albeit, not certain) that the BVI Court would also adopt the more flexible approach towards the exercise of corporate powers and thus find that a board of directors has ostensible power to cause the company to make the application. This approach is particularly so when you consider the personal liability that can attach to a director for breaching their common law to act in the interest of creditors (as noted above) and statutory duties (as noted below).
If a director acts in breach of their duties, there are consequences. If a company goes into insolvent liquidation and the court is satisfied that a director “at any time before the commencement of the liquidation of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company could avoid going into insolvent liquidation”, then it can order any director to make such contribution to the assets of the company as it considers proper. Whilst there is a defense if the director took every step reasonably open to him to minimise the loss to the company’s creditors, it is often, in practice, a high threshold to meet: section 256 IA (insolvent trading).
If the court does make an order under Section 256 IA, it must be compensatory rather than penal. In addition, the court has broad powers to order persons (including director) to repay, restore or account for the money or assets, or pay compensation for any misfeasance or breach of any fiduciary or other duty owed to the company.
A company may be wound up by the Court if it is unable to pay its debts. A company will be deemed to be unable to pay its debts if:
- it fails to satisfy a statutory demand exceeding $100;
- execution of a judgment is returned unsatisfied in whole or in part; or
- it is proved to the satisfaction of the Court that the company is unable to pay its debts. The Court will apply a cash flow insolvency test for this purpose.
There is no statutory obligation on a company's directors to commence liquidation proceedings upon the debtor becoming distressed or insolvent. However, the directors have a duty to act in the best interests of the company, which requires them to consider the interests of its creditors in the event that the company becomes distressed or insolvent. Directors may incur personal liability to the company for any losses which they cause to the company if they act in breach of their duties, for example by causing the company to incur further debts when they knew or should have known that there was no reasonable prospect of the company avoiding an insolvent liquidation. Directors can also face liability if they carry on the business of the company with the intent to defraud its creditors or for any fraudulent purpose.
If a debtor is unable to repay its debts as they become due, and its assets are insufficient for the settlement of all its debts or it is obviously insolvent, this provides a ground for the debtor to be bankrupted. Chinese law is silent on any obligation on the part of the management of a debtor to initiate a bankruptcy procedure, but in the dissolution and liquidation proceedings of a company, the liquidation team is obliged to promptly request the court of competent jurisdiction to declare the company bankrupt if it discovers that the assets of the company are insufficient to settle its debts, or else the team will be held accountable for any losses incurred by the creditors therefrom.
Under Danish law, the test for insolvency for the debtor’s insolvency is whether the debtor is able to fulfill its obligation as they fall due. If the debtor cannot do this, it is assumed that the debtor is insolvent, unless the inability to pay is temporary.
Individuals are not obliged to file their own petition.
Under Danish law, the management of a distressed company (the debtor) is not obliged to file a petition in bankruptcy. Under the Danish Companies Act the management of a company must ensure that the debtor’s capital reserves are sufficient at any time so that the debtor is able to fulfill its present and future obligations as they fall due.
As a starting point, the management of a company does not incur liability if insolvency proceedings are commenced against the debtor. However, the trustee or a third party may raise a claim for civil management liability or criminal management liability against the management if it is discovered that the management has carried out transactions in a manner that has contributed decisively to the debtor’s insolvency or if the operation has continued after the time at which the management could establish that further operation was to no avail.
The trustee may also institute disqualification proceedings against the management. If the management is disqualified, the management must not participate in the management of a limited liability company without being personally liable for the company’s obligations.
The French insolvency test is a pure cash flow test, defined as the debtor’s inability to pay its debts as they fall due with its immediately available assets (cessation des paiements), taking into account available credit lines and moratoria. Within 45 days from the insolvency date, the legal representative of the insolvent company is required to file for reorganization proceedings or liquidation proceedings.
In the event directors of the debtor knew of the insolvency and failed to file the appropriate proceeding within this required time period, they will be held personally liable in tort for an act of mismanagement (faute de gestion).
There are three independent tests that determine whether a debtor can file for the opening of insolvency proceedings:
- Illiquidity (Zahlungsunfähigkeit): A debtor is illiquid if it is unable to honor its due payment obligations. According to exceptions set out by the Federal Court, a debtor shall not be regarded as illiquid (i) when it is unable to pay less than 10% of his aggregate liabilities unless it is foreseeable that the shortfall will exceed 10% in the near future, or (ii) if the debtor’s illiquidity can with some certainty be cured within a very short period of time (three weeks).
- Over-indebtedness (Überschuldung – only applicable to legal entities / partnerships which have no natural person as personally liable partner): A debtor is over-indebted if its assets (at liquidation value) no longer cover its existing payment obligations, unless it is predominantly likely, considering the circumstances, that the enterprise will continue to exist. Hence, even if the balance sheet test is negative, a debtor is not obligated to file for insolvency as long as the continuation of the company’s main business is predominantly likely (positive going concern prognosis/positive Fortführungsprognose). The prognosis is mainly based on (i) a sound liquidity plan for the current and following fiscal year and (ii) the existence of a conclusive business plan.
- Impending illiquidity (drohende Zahlungsunfähigkeit): A debtor is considered to be facing impending illiquidity if it is likely to be unable to meet its existing payment obligations on the date of their maturity.
Managing directors have a personal duty to file for insolvency within three weeks at the latest, if the entity/partnership (which has no natural person as personally liable partner) is illiquid or over-indebted, in accordance with the criteria set forth above. A breach of this obligation results in severe personal civil and criminal liability risks (see Question 14). In the event that a company with limited liability has no management, each shareholder, and in the event that a stock corporation or a cooperative has no management, each member of the supervisory board, is obliged to file an application for the opening of insolvency proceedings unless such person was unaware of the company`s illiquidity and over-indebtedness or lack of management.
Note: In case of impending illiquidity, management has the option, but not an obligation to file for the opening of insolvency proceedings.
The Companies Act 1981 (Companies Act) and the Companies (Winding-Up) Rules 1982 (Rules) are the main pieces of legislation regulating the re-organisation and insolvency of corporate entities in Bermuda. The re-organisation and insolvency regimes provided by the Companies Act are derived largely from the English Companies Act 1948.
The Companies Act does not define or use the terms ‘solvency’ or ‘insolvency’, but rather refers to a company being ‘unable to pay its debts’. A company will be deemed to be unable to pay its debts if:
- the court is satisfied that the company is unable to pay its debts taking into account the contingent and prospective liabilities of the company;
- the company fails to discharge an undisputed statutory demand exceeding 500 Bermuda dollars within 21 days; or
- execution of a judgment or order against the company is returned unsatisfied.
A company is not under any statutory duty to commence winding up in circumstances where it is insolvent or likely to become insolvent. However, where such circumstances exist the directors of a company must act in the best interests of the company’s unsecured creditors. Directors are not required to file liquidation proceedings where a company becomes insolvent. However, if they do not they can, depending on the circumstances, incur personal liability for breach of their fiduciary duty, fraudulent trading and/or misfeasance.
The concept of ‘wrongful trading’ in circumstances where the company continues to trade while insolvent is not recognised by Bermuda law.
Solvency in Guernsey is measured against the solvency test set out in section 527 of the Companies (Guernsey) Law 2008, as amended (the Companies Law).
A company satisfies the statutory solvency test if the:
i. company is able to pay its debts as they become due. A company is deemed unable to pay its debts if either:
a. Her Majesty's Sergeant has served on the company a written demand for payment of a due debt of more than £750 and the debt remains outstanding for 21 days after the demand has been made; or
b. the court is satisfied that the company is otherwise unable to pay its debts.
ii. value of its assets is greater than the value of its liabilities. In determining whether this is the case, the directors can rely on valuations of assets or estimates of liabilities that are reasonable in the circumstances, and must have regard to both:
a. the company's most recent accounts; and
b. all other circumstances that the directors know, or ought to know, affect the value of the company's assets and liabilities.
If a company fails the solvency test, there is no explicit statutory obligation to initiate proceedings, although directors' fiduciary duties may require them to consider doing so where the company has no prospect of avoiding an insolvent liquidation. Failing to do so may result in personal liability for directors under the statutory provisions relating to, inter alios, fraudulent trading, wrongful trading and misfeasance.
A company will be deemed insolvent where it is unable to pay its debts. The Companies Act 2014 provides that a company shall be deemed to be unable to pay its debts where (a) a debt of the requisite size has been demanded and the company has failed to make payment within 21 days, or (b) it is proved to the satisfaction of the Court that the company is unable to pay its debts, taking into account the actual as well as contingent and prospective liabilities of the company.
The directors are not obliged to commence insolvency proceedings in respect of an insolvent company and the directors of a company do not have locus standi to present a petition for the winding up, or commence a voluntary liquidation. However, they have the standing, but not the obligation, to present a petition for the appointment of an examiner to a company that is insolvent or at risk of insolvency.
Where the directors of a company are aware (or ought to be aware) that there is no reasonable prospect of the company avoiding an insolvent liquidation, they have a duty to take steps to minimise any loss to the company's creditors i.e. to preserve, or at least not dissipate, the company’s assets. Depending on the circumstances, the directors may decide to cease trading or to recommend to the shareholders that the company be wound up by means of a voluntary liquidation. Alternatively, if the company’s business has a reasonable prospect of survival, the directors may decide to file a petition with the Court for the appointment of an examiner which will impose a moratorium on creditor action for a period to enable the examiner to formulate a scheme of arrangement that would facilitate a restructuring of the company’s debts.
Where it is reasonable to continue to trade, for example where efforts are continuing to secure investment or financing that would allow the business to survive, the directors will not necessarily be required to cease trading, particularly where to do so would cause material value destruction, which is contrary to the interests of creditors. Nevertheless, a director of a potentially insolvent company must be careful to avoid a scenario where the company continues to trade, and to incur liabilities to creditors, unless he or she has an honest and reasonable belief that those liabilities would be discharged. In those circumstances there is a risk that the directors will be found to have engaged in reckless trading, and could be fixed with personal liability for losses suffered by creditors. There is also a risk that a liquidator would subsequently apply to the Court for an order restricting the directors from acting in that capacity for companies that do not satisfy certain minimum capital requirements, and in cases of serious misconduct the Court may disqualify the directors from holding office in any company for a period of up to five years.
- The test for insolvency in Jersey law is the cash-flow test although a declaration of a désastre, (as to which see below) may be set aside if a debtor is balance sheet solvent and can liquidate assets within an acceptable period of time. While there is no direct authority on the point it is likely that the Jersey Court would evaluate insolvency by reference to the analysis of the English Supreme Court in BNY Corporate Trustee Services Limited v Eurosail-UK 2007-3BL PLC  UKSC 28.
- Although there are no express obligations on directors or officers to commence insolvency proceedings, where the directors of a Jersey company continue to trade when they reasonably know that the company cannot avoid an insolvency process or are reckless as to whether an insolvency process can be avoided, they may be liable for debts incurred when they did or should have formed that view unless they acted so as to minimise the potential loss to creditors.
- Further, when a company is in the zone of insolvency the directors general obligations to the company and its shareholders are displaced by duties to creditors, albeit that any breach of those duties to creditors can only be enforced by the company, and if appropriate any liquidator or insolvency appointee.
A debtor will be declared en concurso if it has ceased (or is imminent that it will cease), in general, paying its debts as they become due.
The debtor, any creditor or the Office of the Attorney General, may file an insolvency petition.
The principal indications to establish when a debtor has “generally ceased paying debts when due” are the failure of a debtor to comply with its payment obligations in respect of two or more creditors, and the existence of the following two conditions: (i) 35 percent or more of the debtor’s outstanding liabilities are 30 days past due; and (ii) the debtor has insufficient liquid assets, which are specifically defined, to support at least 80 percent of its obligations which are due and payable. A debtor can petition for concurso if any of the two tests are met or if it declares under oath that it will inevitably fall in any of these two tests within the next ninety days. A creditor or the Office of the Attorney General can demand the concurso if both tests are met.
Specific instances such as insufficiency of assets available for attachment or a payment default with respect to two or more creditors are facts which by themselves result in a rebuttable presumption of insolvency.
Directors or officers of the debtor do not have an obligation to open insolvency procedures upon the debtor becoming distressed or insolvent and, therefore, there are no consequences for failing to do so.
In Peru, the Insolvency Act (Ley General del Sistema Concursal) does not expressly define “insolvency”. However, to determine whether a company is insolvent, two criteria must be tested:
(i) Cash Flow Test: a company is insolvent if the company is unable to pay its debts within a period of time of becoming due and payable; and
(ii) Balance Sheet Test: the balance sheet insolvency test is based on the ration total overdue debt to total assets.
In addition, it is not mandatory for the debtor to file an insolvency proceeding. However, pursuant to the Companies Act (Ley General de Sociedades), if half or more of the capital stock has been or is reasonably deemed to have been lost, the Board of Directors must immediately call a general assembly to inform of such loss.
Moreover, if company’s assets are not, or are reasonably deemed not to be, sufficient to satisfy its obligations or liabilities, the Board of Directors must immediately call a general assembly to inform of this situation and must meet with the company’s creditors within fifteen days of such general assembly and request, if applicable, that the company be declared insolvent.
Furthermore, pursuant to the Companies Act, the company must be wound up and liquidated if the company’s net equity has decreased to less than one third of the paid-in capital stock.
Under the Polish law, insolvent is a debtor, who has lost the ability to fulfill his matured pecuniary liabilities, or a debtor which is a legal person, or an organizational unit without legal personality upon which a separate Act confers legal capacity, if its pecuniary obligations are in excess of the value of its assets, and this state of facts persists throughout a period exceeding twenty four months.
Any individual authorized to represent the debtor and to manage debtor’s affaires under the law or articles of association (board members in particular) is obliged to file a bankruptcy petition within the due date – which falls 30 days after the grounds for declaring bankruptcy arise.
Article 299 of the Commercial Companies Code (in the case of the management board of limited liability company), along with Article 21 para 3 of the Bankruptcy Law (and other legal provisions, including criminal liability and liability for tax obligations) set the board members’ and other persons’ (upon whom the obligation to file a bankruptcy petition rests) liability towards creditors for obligations of insolvent body in the event the bankruptcy petition is not filed within the due date.
There is no conclusive test as a measure of solvency. Generally, the two most common tests are whether a company is unable to pay its debts as it falls due (the “cash flow” test), or whether its total liabilities is in excess of its assets (the “balance sheet” test).
There is no statutory obligation for directors of a company to commence insolvency procedures upon the debtor becoming financially distressed. However, where a company is insolvent, there is a common law duty on the directors to run the company in the best interests of its creditors (as opposed to its shareholders).
Directors who fail to take creditors’ interests into account may be found personally liable for a breach of their duties, fraudulent trading, or other statutory offenses. It is not unusual for liquidators to look into the dealings of former directors, as it offers a potential avenue to obtain recovery for creditors.
Insolvency test under Swedish law is a prognosis. A debtor is deemed insolvent when it is unable to pay all its debts as they fall due, if this inability is not only temporary. The latter prerequisite means that a debtor may be illiquid while at the same time not necessarily insolvent. Future foreseeable financing may thus be considered in the insolvency test.
No, strictly speaking, a debtor or its directors are under no formal obligation to file for bankruptcy upon the debtor becoming distressed or insolvent. However, as further described in Question 14 below, if an insolvent debtor’s business is continued, its directors may be personally liable if they breach certain duties set forth in the Swedish Limited Liability Companies Act and in the Swedish Penal Code.
Under Swiss law, the following terms must be distinguished:
- Illiquidity (Zahlungsunfähigkeit): A Swiss corporate debtor is illiquid pursuant to Art. 191 of the Swiss Federal Act on Debt Enforcement and Bankruptcy (DEBA) if it is no longer in a position to pay its debts as and when they fall due. Hence, this test focuses on the solvency of the corporation.
- Over-indebtedness (Überschuldung): A Swiss corporate debtor is over-indebted within the meaning of Art. 725 para. 2 of the Swiss Code of Obligations (CO) if its assets are no longer sufficient to cover its liabilities. This test is balance sheet based. That said, over-indebtedness may result from illiquidity where, as a result, the going concern assumption is no longer sustainable and, thus, accounting will have to be made at liquidation values.
The highest executive body of a Swiss corporate debtor is generally obliged to file for bankruptcy proceedings in case of over-indebtedness within the meaning of Art. 725 CO. Certain exceptions apply where a deep subordination exists (cf. section 5 below) or where a restructuring can be implemented without delay. The general assembly of a Swiss corporate debtor may further resolve to apply for the liquidation through a bankruptcy proceeding if the company is illiquid pursuant to Art. 191 DEBA but no general obligation to initiate such proceedings in case of illiquidity currently exists under Swiss corporate law. Furthermore, a creditor may directly apply for the opening of bankruptcy proceedings if the corporation has ceased to make payments pursuant to Art. 190 DEBA.
There is no specific trigger event for a debtor to request the opening of composition proceedings although (looming) illiquidity and/or over-indebtedness will often exist. In addition, both creditors entitled to request the opening of bankruptcy proceedings and the bankruptcy court may request the opening of composition instead of bankruptcy proceedings.
It is currently being proposed within the context of a general revision of Swiss corporate law to extend the duties of the highest executive bodies of a Swiss corporation in case of (looming) illiquidity. Such rules are not currently expected to enter into force before 2021. It is not proposed to make (looming) illiquidity an automatic trigger for insolvency proceedings.
Please refer to section 14 below for the consequences of a breach of obligations by the highest executive body of a Swiss corporation.
As a subjective premise, natural persona, legal persons and inheritance pending to be accepted are able to apply for the DIP (art. 1 SIA).
On the other hand, as an objective premise, it is required that the debtor is insolvent and that the debtor will have this consideration when he is not able/ will not be able to fulfill (current or imminent insolvency) regular and punctually his enforceable obligations (art.2 SIA).
When the debtor is in this situation, directors or boards of directors must to apply for the DIP within the two months following the date of having known, or should have known his state of insolvency (art. 5 SIA). In addition, shareholders, partners, members or parties who are personally liable for the debtor are also entitled to apply for the DIP (art. 3 SIA)(1).
In case that the directors or boards of directors do not apply for the DIP, the insolvency proceeding could be qualified in the classification phase as tortious (art. 164 y 165 SIA). Consequently, the sentence of classification of the insolvency proceeding will determine the persons affected by the classification sentence. These persons could be condemned to the prohibition to administrate the assets of others for a period of two to fifteen years, as well as to act on behalf to any person during the same period (art. 172.2.2 SIA). Moreover, directors or boards directors could be condemned to pay totally o partially the credits that have not been satisfy by the liquidation of the assets (art. 171.2.3 SIA).
(1) Any creditor is entitled to petition for the insolvency proceeding to be opened (art. 3.1 SIA).
There are three tests for establishing insolvency in the U.S.: (i) balance sheet insolvency, where a company’s liabilities exceed its assets, at fair valuation; (ii) equitable insolvency, where a company fails to pay its debts as they ordinarily come due; and (iii) the inadequate capitalization test, which analyzes whether at the time of a transfer or as a result thereof, the debtor/company had or was left with insufficient capital to continue to conduct its business and affairs.
U.S. law does not require an insolvent company’s board to commence insolvency proceedings when the company becomes insolvent and provides the board with the latitude to pursue alternative strategies to maximize the value of the company. As a general rule, directors and officers of a solvent company owe fiduciary duties only to its shareholders, and not to its creditors. When a company is insolvent or in the zone of insolvency, however, such fiduciary duties generally expand to include the entire enterprise, including creditors.
“Insolvency” is not expressly defined under English law but can generally be demonstrated if (1) a debtor is unable to pay its debts as they fall due (the “cash flow” test); or (2) its liabilities (including contingent and prospective liabilities) exceed its assets (the “balance sheet” test). A company will also be insolvent if it fails to comply with a statutory demand for a debt of over £750 or it fails to satisfy enforcement of a judgment debt.
There is no obligation on directors to commence insolvency proceedings when a company is insolvent. However, directors may be personally liable if they breach certain duties, as set out in Question 14 below. For example, directors can be liable for wrongful trading if they knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation or administration and, from that point, failed to take every step to minimise potential losses to creditors. There are also potential criminal sanctions for fraudulent trading (which includes where the business was carried on with the intent to defraud creditors).
The insolvency tests are used to establish whether:
- there are grounds for the company to enter liquidation or administration;
- a company was “insolvent” for the purpose of antecedent transaction claims subsequently brought by an insolvency officeholder; and
- there has been an event of default under the company’s finance documents.
(a) Insolvency is defined by the Act XLIX of 1991 on Bankruptcy Proceedings and Liquidation Proceedings (the “Insolvency Act”). According to the Insolvency Act the court shall declare the debtor insolvent:
- if the debtor fails to settle or contest his previously uncontested and acknowledged contractual debts within 20 days of the due date, and fails to satisfy such debt upon receipt of the creditor’s written payment notice;
- if the debtor fails to settle his debt within the deadline specified in a final court decision or order for payment;
- if the enforcement procedure against the debtor was unsuccessful;
- if the debtor did not fulfil his payment obligation as stipulated in the agreement concluded in bankruptcy or liquidation proceedings;
- if it has declared the previous bankruptcy proceedings terminated; or
- if the debtor's liabilities in proceedings initiated by the debtor or by the receiver exceed the debtor’s assets, or the debtor is unable and presumably will not be able to settle its debts on the date they are due and, in proceedings opened by the receiver, the members (shareholders) of the debtor economic operator fail to provide a statement of commitment following due notice, in order to guarantee the funds necessary to cover such debts when due.
(b) If the statutory auditor detects any changes in the legal person’s assets that are likely to jeopardise its ability to satisfy any claims filed against the legal person, or learns of any circumstance that entails the liability of the executive officers or supervisory board members with respect to their activities performed in that capacity, he shall forthwith request management to take immediate action to the extent required for enabling the members – or the persons exercising founders' rights in the case of non-membership legal persons – to take the necessary decisions. In the event of non-compliance with his request, the auditor shall inform the court of registry that is exercising judicial oversight over the legal person concerning the situation at hand. The court of registry has a right to commence liquidation proceedings.
(c) The management of a company has the obligation to monitor the solvency of the company managed by it. If the management becomes aware of a situation which is threatening to lead to the insolvency of the company it shall act in the interest of the creditors. If the insolvency of the company can be foreseen by the management, the management shall initiate liquidation of the company. Failure by the management to observe these provisions may lead to claims for damages by the creditors or even in extreme situations to criminal liability on the side of the management.
The enterprise that consistently ceased to pay its debts when they are due and that has lost the confidence of its creditors is in a state of bankruptcy. Both conditions need to be met simultaneously.
The new insolvency law has drastically expanded the scope of insolvency legislation and now applies to any ‘enterprises’ which includes (i) any individual who independently exercises a professional activity, (ii) any legal entity and (iii) any organisation without legal personality.
The debtor is obliged, within one month after it is in a state of bankruptcy, to file for bankruptcy at the territorially competent Enterprise Court. The declaration should be made electronically in the Central Solvency Register (REGSOL) via www.regsol.be unless the debtor is not in the possibility to file for bankruptcy. In this exceptional situation, the debtor is allowed to file for bankruptcy at the clerk’s office of the competent Enterprise Court. Failure to do so may lead to civil and criminal liability of the directors.
Over the years, Israeli Law has developed two tests for insolvency: The balance sheet test and the cash flow test. The balance sheet test considers total assets of the debtor against total liabilities thereof. When total liabilities of the debtor exceed total assets, the debtor is deemed to be insolvent according to this test. Conversely, the cash flow test considers whether the debtor could fulfill their obligations when due. Current Law has not decided between these two tests, and the Court rulings recognizing both as valid tests for proving insolvency.
In the proposed Insolvency Law, the balance sheet test was abandoned as a test for definition of insolvency, with only the cash flow test adopted. However, the strong disagreements caused by this topic resulted in amendment of the law, with both tests integrated as alternatives for the definition of insolvency.
Along with existing duties of officers towards the corporation (such as fiduciary duty and duty of care pursuant to the companies law), the new Insolvency law imposes further liability on company directors or on the CEO with regard to reducing the scope of corporate insolvency. According to this provision, a director or CEO who knew, or should have known, that the corporation is insolvent, and did not take reasonable measures to reduce the scope of such insolvency, may be liable for damage incurred to creditors of the corporation due to their omission. The new law lists several actions which if taken would constitute a presumption whereby the director or CEO did take reasonable measures to reduce the corporation's insolvency; these actions are: (a) Obtaining assistance from parties specializing in corporate recovery; (b) Negotiating with debtors of the corporation to agree a debt settlement; (c) Launching insolvency proceedings.
According to the applicable legal provisions, insolvency is characterized by the insufficiency of available funds for payment of certain, due and payable debts. Such a state is presumed to exist if the debtor has debts older than 60 days and higher than RON 40,000.
A debtor company must file the claim for the opening of an insolvency proceeding within a maximum of 30 days from the occurrence of the state of insolvency.
As such, if the legal representatives of a debtor company fail to submit, in due time, the petition for the opening of the insolvency proceeding (exceeding, by more than six months, the above stated term of 30 days) they may be liable for criminal prosecution.