When debts far outweigh the profits, the only exit for companies might be that of filing for bankruptcy. This article will show the needed procedures to start this measure.
Filing for bankruptcy might be the only solution for companies that are neither able to honor their debts, nor have a hope of doing so. In Brazil, bankruptcy is defined as the liquidation of a legal entity’s assets in order to extract value from the goods.
The debtor’s bankruptcy might be requested by:
- The debtor himself.
- An heir or surviving.
- A shareholder of the debtor.
- Any creditor.
If the debtor concludes that it is impossible to ask for a judicial recovery, he might file for bankruptcy. To do so, he must present, to the competent court, the reasons that make it impossible for the business to continue its economic activities. These reasons must also be presented towards court if a shareholder or creditor decides that this is the most suitable move.
In addition, financial statements for the three fiscal years prior to the filing must be presented. The statements must obligatorily contain:
- Balance sheet
- Statement of retained earnings
- Statement of earnings since the last fiscal year
- Cash flow statement
The one filing for bankruptcy must also present the following documents:
- Nominal list of all creditors, including the address, credit classification, and other information about them
- List of goods and rights that comprise the asset with its estimated value and documents proving ownership
- Proof of businessman condition
- All the required books and accounting documents
- List of the company’s administrators in the past five years, with addresses, functions, and shareholding
Consequences of Bankruptcy
If the bankruptcy is declared, there will be, basically, three types of consequences:
1. Those which affect the bankrupt entity
The bankrupt being is not allowed to exercise any business activity from the moment of the declaration of bankruptcy. It also loses the right to administer or dispose of its corporate assets.
2. Those which affect the company’s goods
Goods are collected by a judicial trustee. They are used to compose the bankrupt’s assets and pay the creditors.
3. Those which affect the bilateral contracts signed by the bankrupt entity
The judicial trustee decides if the contracts will either be maintained or extinguished after the declaration of bankruptcy. The main criterion is to preview which measure will bring more profit to the insolvency assets.
The personal goods of the partners or company owners are protected by the Brazilian justice. This measure is only sustained, though, if the businessman follows the conduct required by law.
This means that, in case of fraud or abusive conduct, the partner’s personal goods might be used to pay off social debts, if a court decision states it.
As shown above, filing for bankruptcy requires a long list of documents, reports, statements, and sheets. Depending on the size of the company, finding and presenting all the paperwork might be extremely laborious.
To avoid mistakes, delays, and negative consequences, the hiring of an accountant is recommended, in case the company is not already associated with one.
Also, the whole process might be conducted easier with the services of an attorney, even though they are not obligatory for filings started by individuals. Since bankruptcy has long-term, legal and financial consequences, it is not recommended to start this process without a competent professional, who can be responsible for all the procedures, commencing at the initial bankruptcy petition until its decree.