Bankruptcy proceedings can affect almost any company facing financial problems, both a huge production facility and a small company with a dozen employees. The key question in the bankruptcy process most often becomes: what should be the order of payments in the event of bankruptcy of an enterprise. This procedure is fixed by law and is not subject to “free interpretation”. The article discusses the general scheme for declaring a company bankrupt through court and the rules for satisfying creditors' claims in bankruptcy.
How is the bankruptcy procedure carried out?
Bankruptcy is established in the Arbitration Court, where either the company itself can apply voluntarily (using the bankruptcy procedure as a kind of protection from creditors), or one of the creditors, demanding payment of debts in court.
A company in bankruptcy either sells off its assets to pay off debts, or, in a more optimistic version, improves its financial condition through effective external management and pays off creditors without liquidation.
Bankruptcy payment procedure
After bankruptcy is declared, payments are made in order of priority. First of all, satisfaction of current payments and reimbursement of legal costs. Subsequently, the registry requirements, including arrears of wages, are satisfied.
During bankruptcy proceedings, repayment of debts is possible within the limits of the funds available to the company.
When are wages paid?
In the event of bankruptcy of an enterprise, it is the employees who fall into the priority group of creditors. The company, by law, must pay them first. In the second line are subordinates whose salaries were accrued even before the start of the default procedure.
Wage compensation is paid on the employee’s last working day at the enterprise.
Stages of the bankruptcy procedure
Stage #1 - applying to the court to declare the company bankrupt (either by the company itself or by any of the creditors or government authorities). The court considers all the circumstances (including the presence of outstanding debts in the amount of at least three hundred thousand rubles) and makes or does not decide to initiate one of the procedures related to bankruptcy. If the company’s malicious intent is proven to deliberately deceive creditors, the court will recognize such bankruptcy as false and begin criminal prosecution.
Stage #2 - observation. A temporary manager appointed by the court at this stage assesses existing debts and the possibilities of paying them off without losing all property. The manager refers to the company’s accounting and tax records, and also compiles a list of all creditors indicating the amount of debt (“register of claims”).
Stage #3 - financial recovery. It is possible if the interim manager suggested ways out of the crisis and found ways to pay off debts. The company continues to remain under the control of its owners, albeit with some restrictions.
Stage #4 - external control. If financial recovery is not successful, then the company’s management is transferred to an arbitration manager, who can impose a temporary moratorium on debt payments. During this “deferment” period, the manager takes steps to improve the company (through the sale of illiquid divisions, reorganization of the organization, etc.).
This is also important to know:
How bankruptcy of a non-profit organization with debts is carried out
Stage #5 - bankruptcy proceedings. Introduced if it is not possible to save the company at the previous stages. The organization is liquidated, its property is subject to sale, all proceeds are transferred to creditors according to the established priority.
The procedure for establishing the priority of payments to creditors
The order of payments in the event of bankruptcy of an enterprise is prescribed by law (in the Federal Law “On Insolvency (Bankruptcy)” No. 127) and is not subject to arbitrary change. The law divides a bankrupt’s debt into regular and extraordinary, prioritizing it as follows:
- first of all, priority (“extraordinary”) debts that appeared to the bankrupt company after the start of the bankruptcy procedure must be paid (they are called “current” payments);
- the second priority includes all payments that arose before the bankruptcy was declared.
The following payments have the highest priority (in descending order of their “importance”):
- various expenses associated with the prevention of potential man-made or environmental disasters (if they may arise due to the cessation of the operation of a bankrupt enterprise);
- legal costs associated with the conduct of a bankruptcy case, payment for the services of an arbitration manager, as well as the work of persons who were involved in mandatory work as a manager in accordance with the bankruptcy law;
- payment of wages and severance benefits to employees working (or already dismissed) under employment contracts after the commencement of bankruptcy proceedings;
- payment for the work of employees hired by an external manager (not falling under the second point);
- utility payments required to maintain normal operation of the enterprise;
- other current payments.
After paying all debts on current payments, the enterprise proceeds to payments according to the second priority list (in descending order of importance):
- debts to citizens who suffered from the actions of a bankrupt company (causing harm to health or life);
- obligations to pay severance pay, to pay wages to company employees (who worked under employment contracts), as well as debts under copyright contracts;
- payment for services, settlements with other creditors of the company (under supply agreements, bank loans, etc.).
Separately, debts are secured under an agreement with specific property; such payments are made through the sale of the collateral.
Extraordinary payments
There is an established sequence of debt payments in accordance with Article 134 of Federal Law No. 127. Before the start of settlements with creditors in a certain order, the bankrupt enterprise is obliged to make extraordinary (or current) payments.
Debts incurred by the enterprise from the moment it was declared bankrupt are repaid out of turn. These costs, in fact, support the progress of the case according to calculations.
Current payments include:
- payment of costs caused by the bankruptcy procedure: state fees, fees for employees participating in court proceedings.
- wages to employees of a bankrupt enterprise who continued to work from the moment the liquidation procedure began.
- remuneration of persons who were involved in the implementation of activities within the framework of the bankruptcy case.
- payments for consumed utility resources - electricity, water supply, etc.
- current costs.
If stopping the company's activities could lead to loss of life or environmental or man-made emergencies, then funds from the debtor's accounts are primarily used to prevent undesirable consequences, despite other debt obligations.
This is also important to know:
Resolution of the plenum on bankruptcy of individuals
The queue of creditors in bankruptcy is controlled by the bank, which receives payment orders. The loan obligation is considered fulfilled at the moment the funds are credited to the account of the creditor company. An important condition for repaying the debt is making a payment with notification to a notary.
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Basic payments
The previous version of the law provided for 5 stages of fulfillment of debt obligations, and with the latest publication the order of priority was reduced to 3 main stages:
- Settlements with citizens who are entitled to compensation for causing moral or physical harm.
- Salaries of personnel registered under an employment contract, severance pay, royalties for intellectual activity.
- Other creditors.
Compared to the previous version of the law, items that refer to transfers to the state budget and mandatory funds, as well as on a competitive basis, have been excluded from the list of priority payments.
Last in line are loan payments.
How are wages paid when a company goes bankrupt?
All employees of the enterprise have a priority position in the payment of wages in the event of bankruptcy of the enterprise. That is, first, according to the law, the company must pay off its employees, and only then pay off, for example, its creditors.
All salaries in case of bankruptcy of an enterprise are paid in order of priority and the main queue is divided according to the current rules into two categories - current debt and registered debt. Current debt includes all salaries that were accrued after the start of the bankruptcy process, that is, to employees who performed their duties in a risky situation and retained their jobs until the end.
Secondly, salaries are paid to all other employees who were previously paid until the bankruptcy process begins. Undoubtedly, the fate of these payments depends directly on the solvency of the enterprise that turned out to be bankrupt, and it happens that there is enough money for the first group of salaries, but there is no longer enough money for the second.
In general, it is worth remembering that absolutely all employees of an enterprise can count on bankruptcy payments, regardless of social status and terms of employment. Compensation is provided for a period of 2 to 3 months after loss of employment until re-employment. First of all, salaries are paid on current debts - that is, the most recent accrued salaries. Secondly, salaries are paid to all employees who previously held positions before the start of the bankruptcy process and did not receive salaries. A job cannot be maintained after a company goes bankrupt.
What you can do right now:
- Watch the video in this article to understand how debt is paid in bankruptcy
- If you feel that there are financial problems in the company, you may need to think about leaving
- Read the article on our website What will happen to employees if a company goes bankrupt?
Current payments
The order of satisfaction of creditors' claims for so-called current payments is provided for in Article 855 of the Civil Code. If the organization does not have enough money in its account to pay all bills, then the necessary amounts will be debited in this order.
- Requirements for compensation for moral damage, damage to health, alimony.
- Severance benefits and salary, royalties.
- Pension and insurance contributions.
- Budget payments and contributions to funds not included in previous queues.
- Other requirements.
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Current payments in bankruptcy: how and in what order they are paid
In this case, the rule of calendar order applies. It means that claims of the 1st stage are paid in the order in which such documents are received.
The legislation has one caveat: requirements for the payment of salaries and bonuses to the management of a bankrupt company (these are directors, branch managers, chief accountants, etc.) cannot be included in the amount of current deductions.
Art. 134 of the Federal Insolvency Law also regulated the issue of payment of wages during bankruptcy proceedings. So, if persons continue to work during this period or were hired during a bankruptcy case, then the responsibility for paying them wages and deductions from it (personal income tax, alimony, insurance contributions) is assigned to the manager. He is appointed by the court after recognition of bankruptcy status (according to Article 127).
Payments in case of bankruptcy of an enterprise according to the law
All default procedures and actions of external administrators are regulated by the official Insolvency Law.
According to the law, the default date is the day the arbitration court decides to begin the first stage of the procedure - monitoring. Wages to employees in the event of official recognition of insolvency are paid in full and under special conditions, in accordance with the Convention on the Protection of Wages.
The registrar is obliged to enter into the register all data on current debts to employees:
- by salary;
- on severance pay;
- on compensation for vacation;
- as a result of indexing.
All necessary information is submitted by the manager or entered by him personally if he maintains the register himself. If disputes arise between a group of workers and the arbitration manager regarding the establishment of the calculation procedure, their composition and size, the court will resolve the disagreements within a month, starting from the date of receipt of the application.
All labor disputes arising during the default of the organization must be considered by the district court. The amount of wages paid should not be less than the federal minimum wage.
Examples of forming the order of payments in bankruptcy
Example #1. Drawing up the order of payments in bankruptcy (for current payments)
Flagman PJSC voluntarily declared itself bankrupt and, with the help of an arbitration manager, determined the existence of the following debts that arose after going to court:
- payments for electricity and water necessary for the operation of the company’s office and plant,
- remuneration to the external manager,
- arrears of wages to accounting department employees who worked after the declaration of bankruptcy,
- court costs in a bankruptcy case,
- withheld personal income tax from the wages of those employees who continued working after bankruptcy,
- expenses for environmentally safe shutdown of the company's plant,
- remuneration for specialists hired by an external manager who carried out work on the “preservation” of production.
In accordance with Article One Hundred Thirty-four, paragraphs one and two of the Federal Law “On Bankruptcy”, these payments must be made in the following order:
- expenses for environmentally safe shutdown of the company's plant,
- remuneration to the external manager,
- court costs in a bankruptcy case,
- arrears of wages to accounting department employees who worked after the declaration of bankruptcy,
- remuneration of specialists hired by an external manager who carried out work on the “preservation” of production,
- payments for electricity and water necessary for the operation of the company’s office and plant,
- withheld personal income tax from the wages of those employees who continued to work after bankruptcy.
Example #2. Order of payments in bankruptcy (for main debts)
PJSC Svetograd was declared bankrupt by the court, with the help of the arbitration manager, it determined the existence of debts that arose before the court decision:
- income tax debt for 2015,
- arrears of wages to the company's employees for three months,
- debt on sick leave for I.P. Ivanov, who was injured while working at,
- debt under a loan agreement concluded with the First Russian Bank in 2013 (payments have not been received by the bank since 2014),
- debt to the component supplier, under a supply agreement dated 2016.
This is also important to know:
The bankruptcy procedure for an individual: reviews of those who have undergone the procedure
According to paragraph four, one hundred and thirty-fourth article of the Federal Law “On Bankruptcy”, these payments must be made in the following order (taking into account the priority and calendar dates):
- debt on sick leave for I.P. Ivanov, who was injured while working at,
- arrears of wages to the company's employees for three months,
- debt under a loan agreement concluded with the First Russian Bank in 2013 (payments have not been received by the bank since 2014),
- income tax debt for 2015,
- debt to the component supplier, under a supply agreement dated 2016.
Procedure for informing an employee about upcoming dismissal
The bankruptcy of a company implies not only payments to employees, but also advance warning of the staff about this fact so that employees can find new jobs.
There are two types of dismissal during liquidation of an enterprise:
- traditional;
- massive.
A mass layoff refers to a process where there is a reduction in staff by 15 or more employees at a time. If the case does not fit this description, then, accordingly, the process of traditional dismissal takes place.
In the first case, the employee must be notified two months before terminating the employment agreement, and in the second case - three months. In the event of a mass layoff, the management or founders of a legal entity or an individual entrepreneur must notify the local employment service.
It is possible to terminate the contract before the expiration of 2 months from the moment the employee is notified of the impending bankruptcy, but the employer will be forced to pay additional compensation, in accordance with current legislation.
