Diagnosis of bankruptcy risk and methods for reducing it

The realities of the modern economy are such that not all enterprises manage to stay afloat. Sometimes the irrational conduct of a company’s affairs or external circumstances lead it to inevitable bankruptcy. Ordinary citizens are not protected from insolvency. Both in the situation with legal entities and in cases with individuals, in order to start the procedure for declaring the entity bankrupt, the criteria and signs of bankruptcy insolvency must be present.

Signs and criteria of insolvency of a legal entity

The privilege of considering cases of declaring the insolvency of companies and individuals is legally assigned to the Arbitration Court. In order for the debtor's bankruptcy petition to proceed, the situation must meet the requirements of current legislation.

The bankruptcy insolvency criteria are clearly outlined in Federal Law No. 127. The basic composition of the criteria for assessing the insolvency of a bankruptcy organization is as follows.

1. A legal entity has accumulated debts to creditors in the amount of more than 300 thousand rubles. We are talking about obligations to banks, counterparties, payments to the budget and non-state funds. This fact must be confirmed by the claims of creditors for monetary obligations.
2. The delay exceeded three months.
3. The assets available to the entity are clearly not enough to pay the bills.

But even if all of the above criteria for assessing the insolvency of a bankrupt organization are present, this does not mean that the company will definitely be declared bankrupt. The insolvency procedure can take several years.

Bankruptcy concept

If an enterprise incurs constant losses during its activities and cannot effectively manage the production process, this inevitably leads to the fact that its obligations to creditors are not fulfilled, and this entails bankruptcy.

The arbitration court assigns the status of “bankrupt” to a legal entity, which actually puts an end to its future activities. Next, special arbitration managers are appointed, who must organize the work of the enterprise in such a way as to pay off all the debts of the creditors “hanging” on it.

As a rule, it looks like this: all assets of a legal entity are sold, and the money received from them is repaid; if the property of the enterprise is not enough, then the court can seize the property of the owner of the legal entity.

Stages of the bankruptcy process of companies

The very concept of bankruptcy insolvency and its inherent criteria presuppose several stages of judicial proceedings, during which the interests of the parties are observed by the arbitration manager.

1. Observation. During the three-month period allotted for this stage by the bankruptcy law, the bankruptcy trustee checks the reliability of the declared signs for declaring the debtor insolvent:

• collects all available information about the property owned by the potential bankrupt;
• creates a property register, resorting to an independent assessment if necessary;
• informs creditors about the beginning of the insolvency procedure;
• takes a set of measures aimed at identifying the borrower’s hidden assets;
• checks all property transactions carried out over a three-year period.

1. Financial recovery. The concept is applied if, during an analysis of the economic situation of a potential bankrupt, it turns out that not everything is as bad as it seems, and the company has the necessary reserves to restore its functionality. The arbitration manager submits for discussion at the meeting of creditors a list of measures to save the company from ruin, confirmed by calculations. For forecasting, the company's solvency recovery ratio is usually used. If the effectiveness of the method proposed by the specialist is proven, then the enterprise begins to implement the designated set of measures.
2. External control. This measure can be applied after the sanitation procedure or instead of it. Typically, external management is resorted to if the root cause of the signs and criteria of bankruptcy due to the insolvency of a company lies in the ineffective management of a potential bankrupt.
3. If the use of rescue actions is impossible or they have not brought the desired results, the arbitration manager prepares and conducts auctions for the sale of the debtor’s property through electronic platforms in order to satisfy the demands of creditors.

Bankruptcy diagnostic methods

Note 1

Typically, diagnostic methods are inherently divided into forecasting methods, which are based on mathematical and statistical relationships and equations, and financial and economic methods, which assess the state of the enterprise by analyzing balance sheet items, changes in indicators, study the dynamics and structure of performance indicators, and others.

Basic forecasting methods:

1. two-factor, five-factor models of E. Altman (1968,1983);
2. four-factor model of R. Lees;
3. R. Taffler's four-factor model;
4. five-factor model of J. Depalyan;
5. Russian developments of models developed at KSU R.S. Saifullin, G.G. Kadykov, six-factor model O.P. Zaitseva, four-factor model for predicting the risk of bankruptcy of IGA Davydova-Belikova;
6. individual models developed by enterprise specialists independently.

The listed models confirm their effectiveness and are often used for early diagnosis, but for a more accurate analysis it is recommended to use all possible models in the aggregate and, based on the results, rank the results of each model in order to establish the probability of bankruptcy.

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Basic methods of financial analysis:

1. assessment of liquidity ratios and financial stability for compliance with the standard;
2. analysis of profitability indicators;
3. grouping balance sheet items by liquidity and solvency, identifying inconsistencies and causes;
4. assessment of the enterprise's fixed assets and intangible assets regarding the issue of moral and technical obsolescence;
5. assessing labor productivity, identifying the reasons for its decline;
6. analysis of sales dynamics and structure;
7. analysis of the structure and dynamics of the assets and liabilities of the enterprise;
8. analysis of the tax burden on the enterprise.

Criteria for declaring an individual bankrupt

As in the case of legal entities, the concept of bankruptcy of an individual, as well as the criteria and signs of its insolvency, are strictly defined in the current legislation.

1. The citizen has unpaid claims from creditors for monetary debts in the amount of at least half a million rubles. This amount includes debts to banks, individuals, microloan organizations, as well as the outstanding obligation to make mandatory payments to the state budget. But unlike legal entities, a person can declare his insolvency with a smaller amount of debt, if it exceeds the value of the property owned by the debtor.
2. No loan payments for three months.
3. Insufficient own funds and property to pay off debt obligations.
4. Proven impossibility of satisfying creditors' claims in the near future.

Bankruptcy procedure

So, there are five main stages of bankruptcy, described in Table 2.

Step-by-step steps on video:

There is also a simplified procedure that involves liquidation within five to seven months. It also eliminates the financial losses that would occur with a standard procedure. To describe it briefly, after analyzing the main accounting reports and papers, the court liquidates the organization and immediately moves to the stage of bankruptcy proceedings.

Progress of the trial against the citizen

Just as in the situation with legal entities, either the debtor himself or any of the parties who have material claims against him can apply to the court. Throughout the court proceedings, a bankruptcy trustee with clear powers works with the parties to the process, one of whose duties is to establish the reliability of the provided signs of insolvency.

1. Preparation. This is the first and main step in the question of the advisability of declaring the debtor bankrupt. The specialist literally analyzes the current situation bit by bit, identifies the reasons that led to the appearance of signs of insolvency, and clarifies the role of the debtor in the occurrence of such signs. The arbitration manager performs the following actions:

• draws up an inventory of property belonging to the debtor and members of his family;
• determines the legality of transactions carried out in the three-year period before bankruptcy;
• determines whether the procedure for recognizing the debtor's insolvency is fictitious, fabricated to evade the claims of creditors;
• notifies organizations that have monetary claims against a citizen about the start of legal proceedings.

1. Restructuring. This method of solving the problem is resorted to only if the individual debtor has the opportunity to restore solvency and pay off debts monthly in a smaller amount than was indicated before the start of the bankruptcy process. We are talking about a debtor who has a permanent job or another type of income (rent, monthly financial assistance from relatives, etc.).
2. Liquidation of the debtor's property, which is carried out when the borrower does not have a permanent income, as well as property that can be sold and pay off debts.

Even if a legal entity or citizen has all the signs to begin the procedure for recognizing insolvency, this does not mean that the judge will issue a ruling on the beginning of the process. A subject may be denied consideration of his case if the documents are improperly executed, there are signs of fraud, or the criteria do not correspond to those specified in the legislation.

Bankruptcy probability analysis

Using this analysis allows you to determine how long the company will be left without money. This also allows you to assess the likely possibility of its financial recovery and the time frame within which this can be done.

There are several techniques and models created specifically for analysis. Their effectiveness depends on how well a particular method is applied to the present situation.

Main stages of declaring a person bankrupt

Persons who are interested in obtaining objective information about the financial status of the enterprise are authorized to file a claim for consideration of a bankruptcy case of an entity. The law provides for the right to initiate insolvency proceedings against a debtor by creditors or their authorized representatives.

The concept and signs of bankruptcy (insolvency) in itself are not enough to declare a company or individual insolvent. This is a complex process that begins with the fact of filing an application with the arbitration court. The claim states a request to recognize the debtor as financially insolvent.

Since the concept and signs of insolvency (bankruptcy) can be used by an unscrupulous borrower in order to evade the obligations imposed on him, it is important to accurately determine whether bankruptcy is fictitious. In this context, the task of the arbitration court is to carefully examine all the subtleties and nuances of the court case, to adequately assess all subjective and objective signs of insolvency. It is important to avoid misleading creditors or other interested parties.

After the application submitted to the court is registered, a pre-trial check of the debtor for actual ruin will begin. Only after this can you declare the opening of bankruptcy proceedings.

Extrajudicial bankruptcy of citizens: what will it be?

The law on extrajudicial bankruptcy of citizens No. 289-FZ of July 31, 2020 has been published and comes into force on September 1, 2020.

In short, the legislator proposes the following procedure: a citizen who has a debt in the range from 50 to 500 thousand rubles (excluding penalties), and in respect of whom enforcement proceedings have been completed on the grounds that he does not have property that can be levied against collection, submits to the MFC at the place of residence (stay) an application in the established form about his own bankruptcy, in which he indicates all his creditors and the debt to them. The MFC conducts an inspection to determine the completion (termination) of enforcement proceedings, and after confirming this information, publishes a publication in the EFRSB about the beginning of the extrajudicial bankruptcy procedure. After 6 months, if the composition of the citizen’s property has not changed significantly, and if the usual bankruptcy procedure has not been initiated against the debtor, the MFC makes a publication in the EFRSB, the extrajudicial bankruptcy is completed with the write-off of debt to all creditors indicated by the citizen, but within 500 thousand rubles (excluding penalties). A number of obligations remain in any case (current, alimony, inextricably linked to the person, not written off during the usual bankruptcy procedure, such as losses and subsidiary liability). The entire procedure is completely free for the debtor.

At first glance, the procedure is quite simple.

Upon closer examination, it turns out to be quite crude and requires serious improvement, because it raises a fairly large number of questions.

1. Article 25 of the Civil Code of the Russian Federation (a codified act of greater legal force than the Bankruptcy Law) indicates that a citizen can be declared bankrupt only by decision of an arbitration court. Despite the fact that even at the stage of work on the bill both the professional community and control bodies pointed this out, the adopted law does not contain an amendment to Article 25 of the Civil Code of the Russian Federation. Thus, out of the blue, a conflict is created and the basis is laid for challenging the legality of the provisions of extrajudicial bankruptcy, or, for example, claims from creditors who do not agree with the completion of such a procedure in relation to debtors (after its actual completion).

2. One of the most significant drawbacks, in my opinion, is that the procedure is not available to those citizens who have any income from which it is possible to make at least the most minimal deductions in enforcement proceedings (wages, pensions, etc.). etc.), since enforcement proceedings do not end in relation to such citizens, that is, they do not meet the criteria established by Article 223.2 of the Bankruptcy Law.

At the same time, in one of the first editions of the bill it was proposed to extend its effect to persons whose confirmed income does not exceed the subsistence level, but this proposal was not included in the final edition (apparently for the sake of making the procedure simpler).

3. The condition of Article 223.2 of the Bankruptcy Law, that enforcement proceedings must be completed against a citizen on the basis of his lack of property that can be foreclosed on, raises the following question: does such a citizen fall under the criteria for extrajudicial bankruptcy, if If there are several enforcement proceedings, some of them are completed (discontinued) and some are not?

Considering that Article 223.4 of the Bankruptcy Law, as a consequence of the introduction of extrajudicial bankruptcy, indicates the suspension of enforcement proceedings on those claims in respect of which a moratorium on satisfaction is introduced due to the start of this procedure, it is more likely to come to the conclusion that the presence of such proceedings will not be an obstacle. But will the MFC think the same way?

As a more special case: will a citizen be considered to meet the criteria if there are completed enforcement proceedings against him due to lack of property and unfinished enforcement proceedings for such types of debt that are not subject to write-off as a result of extrajudicial bankruptcy, for example, alimony?

Taking into account the fact that, in accordance with Part 5 of Article 223.2 of the Bankruptcy Law, the MFC checks the absence of enforcement proceedings by analyzing the website of the bailiff service on the Internet, which should happen if the website does not contain information about the completion of enforcement proceedings for any reason reasons (information not entered, technical error, etc.)? Will preference be given to a resolution on the completion of enforcement proceedings submitted by the debtor, in the absence of information about it in the database?

4. The procedure actually allows you to write off only part of the debt or be selective in choosing the debt to be written off.

According to paragraph 2 of Article 223.6 of the Bankruptcy Law, if a citizen’s application for declaring him bankrupt out of court indicates the amount of the creditor’s claims, which is less than the actual amount of the creditor’s claims, the citizen is released from obligations to this creditor in the amount specified in the application.

As a result, a citizen whose total creditor claims exceed 500 thousand rubles can submit an application indicating smaller amounts in order to meet this limit, and as a result of the procedure will be released from part of the claims in the amount of 500 thousand rubles.

No sanction is provided for the debtor for such a circumvention of the law, that is, in essence, for abuse of law. In article 223.5. The law, however, contains an indication that if the debt to the creditor is not fully indicated by the citizen, which significantly affects the citizen’s compliance with the criteria for extrajudicial bankruptcy, then such creditor has the right to apply to the court to declare the debtor bankrupt under the general procedure. But this measure does not seem to be an effective tool at all.

Another question: if such a creditor has obligations from several transactions, which ones will be considered repaid and which ones will not? This issue, for example, may be of significant importance in the presence of circumstances related to the limitation period that secure the obligations of third parties.

Another question is to what extent will the debtor’s obligation to pay penalties be terminated in this case? Fully, in proportion to the amount of the terminated principal debt?

It should also be noted that, according to Article 223.4 of the Bankruptcy Law, the moratorium on satisfying the claims of creditors from the date of the start of the out-of-court bankruptcy procedure applies only to those creditors whose claims the citizen indicated in the list of creditors.

As a result, a citizen may not indicate any creditor in the list of creditors and continue to fulfill obligations to him during the extrajudicial bankruptcy procedure (for example, under an obligation secured by the pledge of his only home, in order to prevent foreclosure on him). Again, there are no sanctions as such for such actions.

5. The procedure does not leave room for error on the part of the debtor, but leaves room for abuse on the part of creditors.

A citizen may not indicate the creditor by mistake or ignorance. For example, in practice there are often situations when banks assign citizens' debts to collection agencies, etc., and the citizen does not receive notice of a change of creditor. A situation may arise when a citizen indicates as a creditor the bank where he took out the loan, and then the collection agency will challenge the results of the out-of-court bankruptcy with the reference that it is not listed in the list of creditors. There are often cases when a citizen does not know that he has debts or arrears in taxes, fees, or penalties. This, in a situation of honest ignorance/misconception, will entail non-writing off the debt for a creditor whose requirements were not specified.

The law also leaves room for abuse by creditors. For example, a creditor, even one listed on the list, may “retroactively” assign the right of claim to a third party, who will refer to failure to indicate itself on the list as a basis for non-exemption from debts.