Bankruptcy Lawsuit

Bankruptcy is a collective liquidation process in which the entire estate of a merchant who cannot pay their debts is converted into cash by court order and distributed among creditors equally and in order of priority. A bankruptcy lawsuit is a petition to the commercial court of first instance to issue a bankruptcy decision so that this process can begin. Unlike enforcement proceedings, in which a single creditor individually seizes assets, in bankruptcy all of the debtor's creditors come together at the same table.

Bankruptcy is a route with serious consequences for both creditor and debtor. For this reason, before filing a bankruptcy lawsuit, it is worth assessing matters such as the debtor's assets and the position of other creditors, which can sometimes show that the seizure route would be more effective. On this page we summarize the bankruptcy routes, the court process and the consequences of a bankruptcy decision.

Who is subject to bankruptcy?

Under the Enforcement and Bankruptcy Law, enforcement by way of bankruptcy can only be brought against debtors who hold the status of a merchant or who are subject to the provisions governing merchants. Commercial companies, above all joint-stock and limited liability companies, and individuals who operate a commercial business in their own name fall within this scope. Persons with the status of tradesmen and individuals who are not merchants are not subject to bankruptcy; enforcement against them can only be pursued through seizure.

Enforcement by way of bankruptcy can also be brought against persons who have lost their merchant status for a certain period after this fact has been announced in the trade registry. For this reason, the first step is to review the debtor's current registry record.

Bankruptcy routes

Bankruptcy through enforcement proceedings (enforcement by way of bankruptcy)

The most frequently used route is bankruptcy enforcement through general seizure. The creditor submits a request for enforcement by way of bankruptcy to the enforcement office, and a bankruptcy payment order is sent to the debtor. In this payment order, the debtor is warned to pay the debt within seven days and, if they have an objection, to notify it within the same seven days. If the debtor neither pays nor objects, the creditor may ask the commercial court to declare the debtor bankrupt. If the debtor has objected, the creditor requests in the same lawsuit that the objection be lifted and a bankruptcy decision be issued.

For receivables based on negotiable instruments, a separate bankruptcy route specific to negotiable instruments is also provided.

Direct bankruptcy (without prior enforcement proceedings)

In some cases, bankruptcy can be requested directly without the need for prior enforcement proceedings. The main cases listed in the law are as follows:

• The debtor's place of residence is unknown, or the debtor has fled in order to avoid paying their debts,
• The debtor has engaged in fraudulent transactions that violate the creditors' rights, or has concealed their assets during seizure-based enforcement,
• Other cases listed in the law, such as non-ratification of a composition (concordat) or non-payment of a judgment-based receivable despite an enforcement order,
• The debtor has suspended their payments,
• Over-indebtedness (insolvency on a balance-sheet basis) in capital companies.

A merchant debtor may also request their own bankruptcy by declaring that they are unable to pay their debts. In capital companies, the management body is obliged to notify the court if it becomes clear that the company is over-indebted.

Court process and the deposit order

Bankruptcy lawsuits are heard before the commercial court of first instance at the location of the debtor's center of operations; no jurisdiction agreement can be made on this matter. In bankruptcy through enforcement proceedings, the court hears the debtor and then examines the existence of the receivable and the procedural conformity of the enforcement. Before issuing a bankruptcy decision, the court gives the debtor a period of seven days to deposit the receivable, interest and enforcement costs with the court's cashier; in practice this is called the deposit order.

If the debtor deposits the debt within this period or documents that it has been paid, the lawsuit is dismissed. If no deposit is made and the other conditions are met, the court declares bankruptcy. This stage is the last significant opportunity for the debtor to prevent bankruptcy.

Consequences of a bankruptcy decision

• The bankruptcy estate is formed: All of the debtor's assets that may be seized form a single estate at the moment bankruptcy is opened and are distributed to the creditors.
• The power of disposal ends: After bankruptcy is opened, the bankrupt cannot carry out any transaction over the assets of the estate that is valid against the creditors.
• Enforcement proceedings stop: Enforcement proceedings initiated against the bankrupt stop upon the opening of bankruptcy; creditors must register their receivables with the bankruptcy estate.
• Acceleration of debts: As a rule, the bankrupt's debts that have not yet fallen due become due upon the opening of bankruptcy.

The bankruptcy administration examines the receivables and prepares a schedule of ranking. The bankruptcy decision is announced and creditors are invited to declare their receivables; creditors who do not declare their receivables on time may lose some of their rights. Receivables are paid according to the order of priority set out in the law; for example, privileged receivables such as employee receivables come before ordinary receivables. If there are not enough assets in the estate, the bankruptcy may be liquidated under the simplified procedure or closed for lack of assets to liquidate.

Appeal and time limits

An appeal against the bankruptcy decision may be filed within two weeks of notification of the decision. Because the time limits in bankruptcy are short and strict, the timeline of each stage should be mapped out from the very beginning for both the creditor and the debtor.

The bankruptcy postponement option previously available to companies was abolished in 2018. Today, the route that stands out as an alternative to bankruptcy for a business in financial difficulty is the composition (concordat). On the debtor's side, it is important to consider these options before facing a bankruptcy petition.

Points to note for creditors and debtors

For the creditor, bankruptcy is a powerful means of pressure on the debtor; however, because all creditors line up in the bankruptcy estate, the likelihood of collecting one's receivable in full may be lower than through the seizure route. In addition, the creditor who files a bankruptcy lawsuit is required to pay an expense advance to cover costs. For the debtor, a bankruptcy decision can mean the practical end of commercial activity. For this reason, it is advisable for both parties to carry out an assessment before filing a lawsuit and, where necessary, to explore settlement possibilities. For the general framework on enforcement routes, you can see our Enforcement and Bankruptcy Law page.

Our firm's support

On the creditor's side, we provide support with enforcement by way of bankruptcy, bankruptcy lawsuits, registration of receivables and objections to the schedule of ranking; on the debtor's side, with objections to the payment order, management of the deposit period and evaluation of alternative solutions. Every case is unique; the debtor's financial position and the structure of the creditors must be assessed separately and in concrete terms. To arrange a consultation, you can use our contact page.