What is Bankruptcy: Individual Entrepreneur (IE) and LLC Bankruptcy
What is Bankruptcy
Bankruptcy is the actual inability of a natural or legal person to fulfill all of their financial obligations.
Insolvency is inherently determined by the nature of market relations, which are always associated with uncertainty in achieving final business results or the risk of losing invested funds.
There are two types of bankruptcy:
- Compulsory bankruptcy – when payment obligations exceeding 2 million AMD are overdue for more than 90 days, as defined by law.
- Voluntary bankruptcy (self-initiated application) – when the debtor’s liabilities exceed 2 million AMD and surpass the value of the debtor’s assets, or when state-imposed monetary obligations exceed the debtor’s assets.
- In the case of legal entities, this is assessed based on accounting standards.
- In the case of individuals, it is assessed based on valuation standards (balance-sheet insolvency).
Article 3 of the RA Law on Bankruptcy
The RA Law on Bankruptcy grants the debtor the right to apply to the court in cases of anticipated bankruptcy, when it is evident that the above-mentioned grounds for declaring bankruptcy will arise.
How the Bankruptcy Process Begins and Ends
The bankruptcy process begins on the date the application to declare a natural or legal person bankrupt is submitted to the RA Bankruptcy Court, and ends when the court issues a ruling to conclude the bankruptcy case.
The process may also end without declaring the person bankrupt in the following cases
- Withdrawal of the application before a bankruptcy ruling is issued
- Settlement agreement between the parties
- Refusal to accept the application
- Rejection of the bankruptcy claim
Both Individual Entrepreneurs (IE) and limited liability companies (LLCs) can be declared bankrupt, and in both cases, the procedures are governed by the same law. Let’s understand the difference:
IE vs LLC Bankruptcy
If an individual entrepreneur (IE) or an LLC cannot properly fulfill their financial obligations (taxes, loans, and other liabilities) on time, bankruptcy proceedings may be initiated against them.
They may be declared bankrupt if:
- They have outstanding financial obligations
- They are unable to repay them within the legally prescribed timeframes
- Creditors or the debtor (individual, IE, or LLC) apply to the court
It is important to emphasize that in the case of an IE, the individual bears liability with their entire personal property. This may include all assets owned by the IE (car, bank accounts, etc.) for the purpose of settling debts.
For example, if an IE has 20 million AMD in unpaid obligations but only 5 million AMD is involved in business operations, the court may also consider the IE’s personal property to cover the remaining 15 million AMD.
In contrast, in the case of LLCs, the advantage is that the owners generally do not bear liability with their personal assets. Liability is limited to the company’s assets (except in cases of fraudulent or intentional bankruptcy).
It is also important to note that intentional bankruptcy is a criminal offense.
Financial Rehabilitation Procedure
This is an independent procedure aimed at restoring the debtor’s solvency.
It allows the debtor to overcome financial difficulties through internal resources and/or external funding, while providing appropriate legal guarantees to creditors. This process is carried out under the supervision of creditors and the court.
The importance of financial rehabilitation lies in the fact that it is considered the primary objective of bankruptcy proceedings.