Served with a bankruptcy petition – what now?
A bankruptcy petition does not mean the company is already bankrupt. It means a creditor has asked the district court to consider whether the conditions are met. Deal with it immediately – read the petition, check that the claim is correct, and establish whether the company is actually solvent.
What does it take for the court to open bankruptcy?
The general rule is that bankruptcy can be opened where the debtor is insolvent and bankruptcy has been petitioned for by the debtor itself or by a creditor. So it is not enough that the company has one unpaid bill. A company is insolvent when it cannot pay its obligations as they fall due and the payment difficulties are not merely temporary. Where the company's assets and income together can give creditors full recovery, the assessment can be different even if it takes some time to realise the funds. The courts explain how a bankruptcy petition is handled in the district court.
What is a bankruptcy notice?
A common way for a creditor to show insolvency is the bankruptcy notice procedure. For businesses required to keep accounts, the usual course is that the creditor demands payment of a clear and overdue debt, a formal bankruptcy notice (konkursvarsel) is served within the statutory time limits, the debtor gets a short period to pay, and the creditor can send the petition to the court within the statutory limit if the claim is still not paid. Where that process has been followed, insolvency can normally be presumed – but the company can try to document that it is in fact solvent.
1. Read the petition itself
Establish who has petitioned, which claim the case concerns, how large it is, what the creditor bases it on, which procedure has been used, and when the court hearing will be held.
2. Establish whether the claim is actually correct
Check invoices, contracts, payments, credit notes and earlier correspondence. Where the company disputes all or part of the claim, document that specifically. A claim does not automatically become unsuitable as a basis for bankruptcy merely because the debtor writes that it is disputed. The court has to assess whether the creditor has established the claim as probable. Where the claim itself is legally disputed, involve a lawyer.
3. Establish whether the company is actually solvent
The board should gather the current bank balance, the trial balance, the customer and supplier ledgers, an overview of overdue debt and upcoming due dates, documentation of certain customer payments, available credit facilities, an overview of assets and realistic realisation values, and a short-term cash flow forecast. If the company argues that the payment problem is only temporary, it should be able to document that.
Do you have to appear in court?
If the business has been summoned, it should attend or arrange proper representation. Otherwise the court can decide the case without hearing the company's position. At the hearing the court can open bankruptcy, refuse the petition, or adjourn briefly if more information is needed.
Can you stop the case by paying?
Often, yes. Many bankruptcy petitions are withdrawn because the debtor settles the claim before the court opens bankruptcy. Where the company can settle, agree it in writing with the creditor: the total amount, interest and any costs, how payment will be made, and that the creditor will withdraw the petition once payment is received. Where the company cannot pay all its creditors, be careful about paying one creditor at random simply to make one petition go away. For wider payment problems, see Cannot pay tax and VAT – payment plan or bankruptcy?.
What happens if bankruptcy is opened?
When the court opens bankruptcy, the company loses the right to deal with the assets that fall into the estate. The court appoints a trustee, normally a lawyer, whose tasks include mapping assets and liabilities, securing the estate's value, deciding how assets should be realised, and examining the company's earlier trading and transactions. Management still has extensive duties to give information and assistance. Accounting data, vouchers and other documentation therefore have to be secured.
What is the difference between an AS and a sole proprietorship?
In a limited company, the company is the debtor. Shareholders are as a general rule not personally liable for the company's ordinary debts. In a sole proprietorship (enkeltpersonforetak), the owner and the business are the same legal person. Bankruptcy in a sole proprietorship is therefore personal bankruptcy for the owner. Nor does unpaid debt of a natural person automatically disappear when the bankruptcy proceedings close. The opening of bankruptcy can be appealed, but an appeal does not automatically suspend its effects. Where questions of personal liability arise at the same time, see Directors' liability – when do you become personally liable?. If the trustee later considers disqualification, see Bankruptcy disqualification – what does it mean and how long does it last?.
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This is general guidance, not advice on your specific case. Deadlines, rates and amounts change – always check the current rules, or get in touch with us.
More on payment problems, bankruptcy and personal liability
- Advance tax deductions not paid – what now?
- Cannot pay tax and VAT – payment plan or bankruptcy?
- The enforcement officer has been in touch – what are attachment and wage deductions?
- Directors' liability – when do you become personally liable for the company's debts?
- Bankruptcy disqualification – what does it mean and how long does it last?
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