Business Bankruptcy

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Contributed by: Mohammad Hamdan

 

Business Bankruptcy

We sometimes hear of companies going bankrupt, bankruptcy procedures being initiated against a certain company, reconciliation agreements (Preventive Composition) being concluded that protect companies from bankruptcy, or a company's work being retreated because it was about to go bankrupt. The term "Bankruptcy" is often mentioned in the world of commerce and business when the business of a company (or a person) has faltered and remained without enough revenues or profits. But is every default of a company (or of a person) to be considered bankruptcy? And what are the conditions that must be met in order for a company (or a person) to be declared bankrupt? And is bankruptcy always the same, or are there multiple types?

Below we summarize the definition, conditions, and types of bankruptcy of a business.


What is Business Bankruptcy? Definition

Business bankruptcy is a legal procedure taken when the trader (debtor), whether it is a company or a person, becomes unable to pay the amounts owed by her/him (debts) to their owners (creditors) on time. It aims to liquidate the trader's assets and properties and distribute their value to creditors fairly, relying on the provisions and legal legislation which are recognized in the commercial law, in a manner that guarantees creditors the restoration of their rights; all in order to support confidence and credit in commercial transactions.


Conditions for Filing Business Bankruptcy

  1. TRADER STATUS: The person whose bankruptcy is required to be declared has to be a trader. In the event that a non-trader stops paying the premium for her/his bank loan, for example, it is not possible to file a declaration of her/his bankruptcy. The status "trader" is entitled to any natural or legal person who undertakes a commercial business and adopts it as a usual and continuous profession in accordance with the procedures and conditions legally considered to practice trade.
  2. STOP PAYING: This is considered one of the most important conditions for bankruptcy. It means the inability of the debtor to meet an owed debt with the resources available to her/him. This inability to fulfill commercial debts on their maturity dates has to be real, in a way that indicates that the debtor's financial position is turbulent and will lose her/his credit and confidence. Therefore, stopping of payment is not sufficient to consider the trader as ceasing to pay in the legal sense; rather, this stopping has to affect the debtor's credit and confidence negatively. Facts from which it is possible to conclude that the debtor has stopped paying in real are, for example: signing of a check without balance, closing her/his commercial center and hiding from view, failure of a friendly settlement project, and many other circumstances.
  3. NATURE OF DEBT: The debt, whose failure to pay leads to bankruptcy of the debtor, must be of a COMMERCIAL NATURE. This is considered to be the case if the debt is related to business, which is considered as a commercial act by nature, an accessory commercial act or a mixed act. So you cannot file a request to declare the bankruptcy of the traded who stops paying the rent to you, if this debt results from a civil act and is not commercial. Also, this debt must be PRESENT, SPECIFIED AND PAYABLE. For example: If the debtor stops paying the debt due to its expiration by clearing or by prescription, or objects to its amount or its maturity date, this stopping is not considered for declaring the debtor's bankruptcy.

Kinds Of Bankruptcy. Types

  1. Simple Bankruptcy: This is the situation in which the trader becomes insolvent due to many factors that have negatively affected her/his economic situation, so she/he stops paying debts for reasons that she/he has nothing to do with it, which leads to bankruptcy despite her/his good faith and lack of her/his negligence or fraud. Examples of these factors: the existence of an economic crisis, the outbreak of war, the imposition of new restrictions on import and export, the spread of an epidemic.
  2. Bankruptcy Caused by Default: The bankruptcy caused by default represents the case of the trader who stopped paying debts due to a default on her/his part or because of mistakes she/he committed while practicing trade, such as: the increase in personal and family spending rates at the expense of other obligations, as well as using the sums of debited money in the stock exchange, and then default in returning it to its owners because of losses. Such bankruptcy is usually classified as a misdemeanor punishable by law.
  3. Bankruptcy Caused by Fraud: Bankruptcy caused by fraud represents the case of a trader who stopped paying her/his due debts because of actions she/he committed with the intent to harm creditors, and it is one of the most dangerous types of bankruptcy, such as wasting money, hiding her/his commercial notebooks, inflating her/his debts, or smuggling her/his assets. Bankruptcy caused by fraud is usually a criminal offense.

The importance of differentiating between simple bankruptcy and other types of bankruptcy involving a crime lies in the possibility of certain legal procedures like granting a Preventive Composition to a goodwilling and unlucky trader. The purpose of criminalizing the other types of bankruptcy lies in the goal of preserving the credit and confidence in which businesses have to be run.


Sources:
Alain Pietrancosta, Sophie Vermeille (2010), A Critical Appraisal of French Bankruptcy Law Through the Lens of the Law and Economics Movement: A Solution for the Future?, Revue Trimestrielle de Droit Financier, No. , p. 40.
Michelle J. White (2011), Corporate and Personal Bankruptcy Law, National Bureau of Economic Research , Working paper, No. 17237, p. 43.
Yu Junfu and Chen Dong (2006), Issues in The Acceptance of Bankruptcy Cases by Chinese Courts, OECD, p. 24.


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