Following a bankruptcy order
Once the bankruptcy process has been instituted, the court appoints a bankruptcy administrator, who is not necessarily the same as the former interim administrator or expert. Under this process, the bankruptcy administrator is authorized to manage the bankrupt firm and its debts. The court – or on its behalf the bankruptcy administrator – sends the bankruptcy order to all (known) creditors. Unless the court orders written proceedings, which it may in simple situations, this order schedules the reporting date and the claim/debt verification hearing. The reporting date is set no longer than three months after the bankruptcy order, and in this document the administrator reports on the process so far and pending actions down the road. The creditors use the findings herein to meet and decide on how to proceed, especially on whether an ongoing operation should continue or be stopped. The bankruptcy order includes a precise agenda.
When the bankruptcy order is delivered, the creditors are also required to notify the administrator of their respective claims. These claims that the bankruptcy court addresses at the claim/debt verification hearing, form the basis for subsequent settlement payouts to creditors. During this hearing, each creditor (besides the bankruptcy administrator and debtor) has the opportunity to object to a claim made by any of the other creditors, an aspect of minimal relevance in practice. The process at this hearing does not, as one may suppose from the designation, really involve verification of the claims filed: the court only records all objections raised by the administrator, debtor, and other creditors. Resolution of any disputed claims does not occur in the bankruptcy court, but instead in trial courts – assuming no out-of-court settlement could be reached.
The tasks facing the administrator under a bankruptcy order are quite as complex as that of running the business itself. Depending on the circumstances, the administrator will continue the operations to reorganize them or dispose of healthy assets of the firm by way of a transfer to a rescue company. In this connection, the administrator weighs the option of preparing a bankruptcy plan. If it is not feasible to continue operations, the administrator discontinues it in an orderly manner, usually after drawing down production. The administrator also issues documents for employees, particularly certificates of their bankruptcy payments and employment. Finally, the administrator strives to clarify and execute all conceivable claims.
In the event the firm cannot be continued, the administrator disposes of the existing material and immaterial assets, adding the proceeds to the bankruptcy assets – of which the administrator is a trustee. The administrator has to separate out any items that are not a part of these assets, such as leased items or goods received under a simple lien, and hand these over to their rightful owners – clearly after verifying appropriate third-party rights. The administrator also has to check all other rights in the debtor company’s items held by third parties, including lessor liens, chattel mortgages (transfers of property by way of security), etc. The administrator separately settles – in legal parlance – claims of all relevant security recipients (or chattel mortgagors) from the sale proceeds, to the extent the third-party rights are protected under the bankruptcy code. In other words, the administrator may dispose of the items under a lessor’s lien, but must sweep the majority of the proceeds to the lessor to the extent of the lien. The administrator also verifies all contracts executed by the debtor firm. In the event of contracts not fulfilled by both parties, the administrator has the right to either enter into the contract and fulfill it, quid pro quo, or reject any further fulfillment thereof.
In making such a choice, the administrator must obviously do what is best for the creditors as a whole. Another task for the administrator is to verify and execute the rights to challenges and liabilities. Particularly here, the administrator must clarify if the debtor firm’s assets were shifted contrary to valuations under the bankruptcy code or possibly also paid out to specific creditors. In a bankruptcy, any such discrimination of creditors should be rescinded as far as possible. Additionally, the administrator has numerous other duties to fulfill under public law, such as those involving taxation and social security.
In most bankruptcy cases, not all claims and disputes can be settled out of court. This lies in the nature of the business, in view of the complexity of the matter at hand and because bankruptcy is an unknown territory for most of those concerned. With this backdrop, courts often have to be invoked to clarify legal issues and claims – sometimes over several levels of jurisdiction. For these reasons, corporate bankruptcies typically stretch over two to four years, or much longer in major cases or those involving prolonged legal disputes.