Act – Restructuring law is addressed to insolvent entrepreneurs as well as those at risk of insolvency. A key factor in the conscious use of the provisions of the abovementioned Act is the definition of the risk of insolvency. However, the definition of this concept is not precise and requires practical clarification.
Article 6(3) The Restructuring Law defines the risk of insolvency: ‘The debtor in difficulty must understand a debtor whose economic situation indicates that he may soon become insolvent’.
Risk of insolvency – definition
The threat is a condition where we foresee the possibility of insolvency, but this insolvency is not yet in place. A small degree of probability is enough here, as indicated by the phrase "may happen". The risk of insolvency can be referred to when it is planned to cover future certain expenses from revenue that is ultimately not present.
It is therefore vital to analyse the economic situation of the company, which is a reflection of developments within and around the company, which may affect its functioning. The risk of insolvency can therefore be determined subject to precise expenditure and revenue planning.
A not entirely precise interpretation of the concept of the risk of insolvency can only lead to restructuring proceedings in the event of insolvency of the debtor. However, it is worth keeping vigilant and taking steps to determine the economic situation of the company at an earlier stage in order to have the opportunity to start restructuring early in the crisis.
Insolvency as a condition for restructuring
Insolvency occurs in turn if the debtor has already lost its ability to carry out its due cash liabilities. The debtor is presumed to have lost his or her ability to execute his or her due cash liabilities if the delay in the execution of the cash liabilities exceeds three months.
This means a loss of payment capacity, thus a lack of funds in bank accounts and a lack of cash to settle outstanding cash liabilities. The loss of the ability to regulate due cash liabilities should be understood as the ability to settle all monetary liabilities in time.
A debtor, either a legal person or an organisational entity not having legal personality, whose separate law confers legal capacity (including partnerships, ordinary associations) is insolvent when his monetary liabilities exceed the value of his assets and this condition persists for a period above 24 months.
It's a condition that goes on and on. Even the temporary ability to settle liabilities causes the debtor to cease to be insolvent and to recalculate that period.
Although the repeatability of these states may be an important argument in favour of stating that there is a threat of insolvency (see Commentary Restructuring Law Zimmerman 2022, Edition 7).
The insolvency analysis should be carried out on the basis of the balance sheet as part of the financial statements. Liabilities are presumed to exceed the value of the debtor's assets when his liabilities exceed the value of his assets.
In the event of insolvency or a threat of insolvency, the debtor shall be entitled to submit a restructuring application initiating a restructuring procedure with the aim of:
- to control and eliminate the immediate symptoms of the crisis,
- rebuilding the support of interest groups,
- the recovery of the company,
- addressing future sources of funding,
- and consequently avoid declaring the debtor bankrupt.