Liquidation of a legal entity due to the bankruptcy

Jan, 03 2024


A particular case of terminating company’s activity is to declare insolvency – situation when the company is unable to pay its credit debts, dismissal compensations and other compulsory payments. Grounds for liquidation of a legal entity due to the bankruptcy and its procedure are stated in the law on “Insolvency (bankruptcy)”. This is the essential law regulating situation when a company is not able to fulfill its obligations.

Liquidation of a legal entity due to the bankruptcy serves to the several purposes. The first one is to return a debt to the creditors. The second one is to assist an enterprise to continue or restore its activity. The type of business organization and lawyer’s experience have impact on the size of damage caused to the owners of the ruined business.

Stages of bankruptcy of a legal entity and its liquidation

Liquidation of a legal entity due to bankruptcy consists of the following procedures:

  • observation
  • financial recovery
  • external management
  • bankruptcy proceedings
  • amicable settlement

Observation is the first stage that is carried out to save the property of the debtor enterprise. At this stage, should be analyzed financial condition, prepared the requirements of creditors and conducted their first meeting. Observation is introduced as a result of the consideration by the arbitral tribunal of an application declaring the company insolvent. This stage should be completed within 7 months from the date of filing the application to the court. Further, the steps are as follows:

  • cases related to the recovery of funds shall be suspended at the request of the creditor;
  • property recovery shall be suspended, including the removal of arrests and restrictions that are related to the values of the debtor;
  • satisfying the requirements of the members of the debtor company for operations with shares in property in connection with the withdrawal from the composition of its founders is not allowed;
  • termination of monetary obligations by offsetting a counterclaim of uniform demand is not allowed if the order of satisfaction of the creditors’ claims is violated;
  • the payment of dividends, income, as well as the distribution of profit between members is not allowed;
  • penalties, fines and other sanctions for failure to fulfill monetary obligations and payments, with the exception of current ones are not charged.

Liquidation and bankruptcy of legal entities through financial recovery

This procedure is provided for restoring a company’s solvency. It is aimed to help the company to manage debts. Financial recovery may be introduced by the arbitral tribunal in accordance with the results of observation on the basis of a decision of the meeting of creditors or even contrary to this decision, if there is a petition and a guarantee of obligations of the debtor is presented.

The term of this stage is no more than two years and it can be resulted in:

  • termination of the bankruptcy case, provided that there are no outstanding debts, and the complaints of creditors are considered unfounded;
  • introduction of bankruptcy administration if there is a chance to restore the solvency of the debtor;
  • a decision to declare a company bankrupt and to open bankruptcy proceedings – if there are no grounds for external management.

Liquidation and Bankruptcy of Legal Entities: Bankruptcy administration phase

An external management procedure is provided for when it is likely to restore the solvency of the debtor company. It is introduced by the arbitration court on the basis of a decision of the meeting of creditors. The maximum term is 18 months, and it can be extended only by 6 months. This stage of liquidation of a legal entity due to bankruptcy involves:

  • termination of powers of the head of the debtor (management bodies);
  • transfer of management of the debtor’s affairs to an external manager;
  • transfer of accounting documents, stamps, and values to an external manager;
  • cancellation of previously taken measures to ensure the requirements of creditors.

Bankruptcy proceedings on liquidation and bankruptcy of legal entities

The main task of this stage is to ensure that each of the former partners of the enterprise receives what is due to him by law. The opening of bankruptcy proceedings is the result of a decision of the arbitral tribunal declaring the debtor bankrupt. It is introduced for a period of up to 6 months with the possibility of extension upon application.

One of the main stages is the formation of a bankruptcy estate: all property of the debtor for its further sale. At this stage of liquidation of the legal entity due to bankruptcy, the manager conducts an inventory and valuation of the property of the debtor.

The organization’s account is credited with money received from bankruptcy proceedings. From the same account, payments are made to creditors. The manager submits the report on the use of finance to the arbitration court and to the meeting of creditors.

Settlement agreement on the liquidation and bankruptcy of legal entities

This procedure is provided for in the event of termination of the bankruptcy case by reaching agreement between the debtor and the creditors. An amicable agreement can be concluded at any stage of the consideration of the case by the arbitration court. It is concluded only in writing, approved in court. If the agreement was signed during bankruptcy proceedings, it is important to indicate in the statement that the decision to declare the debtor bankrupt and to open the proceedings is not enforceable. Unilateral refusal of the settlement agreement that has entered into force is impossible.

Our services

VALEN has many years of experience in the area of business liquidation, as well as its comprehensive support. Our specialists are ready to provide comprehensive bankruptcy management services, starting from developing a concept to minimize risks and ending with representation in court.

You can contact our lawyers through the website or by phone +7 (495) 7-888-096. We advise companies remotely and in our office in Moscow. Collaborate with professionals, it saves time and money!

Author of the article
Liquidation of a legal entity due to the bankruptcy
Valentina Khlavich
Managing Partner
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