July 24, 2023
Everything about insolvency (Part 2: Insolvency of an individual)
Table of contents:
- Insolvency of an individual.
- Initiation of insolvency proceedings of an individual.
- The debt restructuring procedure.
- The debt restructuring plan for an individual.
- Sale of property of an individual.
- Order of creditors’ claims satisfaction.
According to the law “On insolvency” (the “Law”), along with legal entities and individual entrepreneurs, individuals, can also be declared bankrupt. It is worth noting that this procedure is used for the first time in Uzbekistan after the adoption of the Law, as under the previous law “On bankruptcy” dated 24.04.2003, an individual could not be declared bankrupt if he had not had the status of an individual entrepreneur.
1. Insolvency of an individual
Insolvency of individuals is a procedure in which an individual who cannot pay his or her debts is declared bankrupt and given the opportunity to free himself or herself from debts by selling his or her property.
The following are the signs of insolvency of an individual:
- the inability of an individual to satisfy the claims of creditors on monetary obligations;
- the inability of an individual to fulfill his or her tax and levy obligations in full;
- obligatory payments have not been made within 3 months from the date of their occurrence; and
- claims against the debtor-individual are not less than 200 times the basic calculated amount (the “BCA”).
In most cases, in the case of the insolvency of an individual, the rules relating to the insolvency of a legal entity apply. The distinctive features of the insolvency of an individual are described below.
2. Initiation of insolvency proceedings of individual
In the presence of the above characteristics, a court may initiate insolvency proceedings against an individual. Insolvency proceedings are initiated on the basis of an application. Such an application can be filed with the court by:
- the debtor himself;
- a body of the State Tax Service; and
- other authorized bodies.
On behalf of an individual, applications may be filed with the court by authorized state agencies. In this case, the court considers the application and issues either a ruling on accepting the application and initiating insolvency proceedings or issues a ruling on the return of the application. In cases where the court decides to accept the application and the initiation of insolvency proceedings, it shall oblige the debtor – an individual within 15 days from the date of receipt of the court decision to submit a written opinion. After considering the case of declaring an individual insolvent, the court shall take one of the following decisions:
- the ruling on the introduction of debt restructuring procedure for a natural person;
- the decision to declare a natural person bankrupt and initiate the procedure of selling the property of the natural person;
- a decision to refuse to satisfy the application.
3. The debt restructuring procedure
The debt restructuring procedure – is applied by the court in a case of insolvency of an individual debtor to restore solvency and satisfy the claims of creditors. The introduction of this procedure entails certain consequences. For example, from the date of a court ruling on the satisfaction of the application for recognition of a physical person as insolvent and introduction of a debt restructuring procedure for a physical person:
- a moratorium is imposed on the satisfaction of creditors’ claims on monetary liabilities and tax arrears;
- money obligations of creditors, claims for payment of taxes and fees (except for current payments), as well as claims for recognition of ownership, for the seizure of property from illegal ownership and invalidation of transactions, as well as on the application of the consequences of invalidity of void transactions, can be made only in the manner prescribed by this Law;
- removal of previously established restrictions in respect of the property of an individual on which a ban has been imposed, the imposition of a ban on the property of an individual, and other restrictions in respect of his property may be applied only within the framework of a case on the insolvency of an individual;
- execution of enforcement documents shall be suspended, in particular enforcement documents on foreclosure on the property of an individual, except for the enforcement documents on compensation for the damage caused to life or health of citizens, on recovery of property from illegal possession, on lifting the ban on possession of the specified property, on recognition of the ownership of the specified property, on recovery of alimony, as well as on the recovery of the pledged property.
However, if during the process of debt restructuring, an individual wants to enter into transactions; aimed at (1) the alienation or purchase of property, securities, shares in the authorized capital and vehicles in an amount not exceeding 40 BCA, (2) on receipt and issuance of loans, (3) credits, (4) assignment of guarantees, surety, (5) assignment of claims, (6) transfer of debt and (7) transfer of property of an individual in trust management and (8) pledge, he can do it with the consent of the creditors’ meeting, which protects the interests of all creditors.
4. The debt restructuring plan for an individual
During the debt restructuring procedure of an individual, a debtor – an individual and (or) a creditor within 10 days- has the right to submit to the financial manager a plan for the restructuring of an individual’s debt. The period of implementation of the debt restructuring plan of an individual cannot exceed three years. This plan shall meet the following requirements:
- the debtor – a natural person must have a source of income on the date of submission of the restructuring plan for the debt of the natural person;
- before the date of accepting the application on recognizing the individual as insolvent, the proceedings on bringing the individual to administrative or criminal liability for petty theft, on the grounds of intentional destruction, damage or harm to property, or false insolvency or deliberate insolvency, and the individual’s conviction for the intentional commission of a crime in the economic sphere has been dismissed or expunged;
- during the 5 years preceding the submission of the debt restructuring plan, the individual has not been declared bankrupt and no procedure of selling his property has been applied.
- within 8 years preceding the submission of this plan, the individual’s debt restructuring plan has not been approved.
In addition to the above requirements, the plan must contain full satisfaction of the creditors’ claims on the obligations of the individual secured by pledge at the expense of the proceeds from the sale of the property secured by pledge.
The following documents shall be attached to the plan for restructuring of individual’s debt:
- list of property and property rights of the natural person;
- information on the individual’s income sources for the six months preceding the submission of the debt restructuring plan to the court;
- information on accounts payable, including payments on current liabilities;
- credit report obtained from the organization keeping the register of pledges and information on the credit history of the natural person;
- application of the individual if he/she has any objections upon submission of the debt restructuring plan by the creditor or by the respective authorized body.
The individual’s debt restructuring plan approved by the meeting of creditors shall also be subject to court approval.
5. Sale of property of an individual
In the case of bankruptcy of an individual, his property may be sold to repay debts to creditors. The sale of property may be carried out both voluntarily and forcibly, depending on the situation.
The property of the debtor of an individual is sold in the following cases:
- the individual, without good reason, has not fulfilled the obligation imposed by the court;
- the individual’s debt restructuring plan has not been submitted within the time limit prescribed by law;
- the court has refused to approve the individual’s debt restructuring plan.
All assets of the debtor, regardless of whether they are shown in the balance sheets or not, are the basis for the formation of the liquidation estate.
From the date of declaring the debtor – an individual bankrupt and the beginning of the procedure for selling his property:
- all rights with respect to the property constituting the liquidation estate, including the right to dispose of it, shall be exercised only by the financial manager on behalf of the individual;
- transactions performed by an individual (without the participation of the financial manager) in respect of the property comprising the liquidation estate are void. The claims of creditors on transactions made by the individual personally (without the participation of the financial manager) shall not be subject to the satisfaction at the expense of the liquidation estate;
- previously imposed bans on the property of an individual and other restrictions on the disposal of property of an individual are removed;
- the accrual of penalties (fines, penalties) and other financial sanctions, as well as interest on all liabilities of the individual, except for current payments, shall be terminated.
6. Order of creditors’ claims satisfaction
The claims of creditors shall be satisfied one by one, as follows:
- out of turn shall be satisfied the claim of creditors on current payments.
- first of all, current payments related to alimony payments, court expenses in the insolvency case of a natural person, payment of remuneration to the financial manager, persons engaged by the financial manager to ensure the obligations imposed on him in the insolvency case of a natural person shall be paid;
- the second line – the current payments related to labor relations;
- the third priority – utility payments, as well as compulsory payments to homeowners associations for the management of apartment buildings;
- fourth priority – claims for other current payments.
Within 5 years from the date of completion of the property sale procedure in respect of an individual or termination of insolvency proceedings, this person shall not be entitled to assume obligations under loan agreements and (or) loan agreements without reporting the fact of initiation of insolvency proceedings against him.
No insolvency proceedings may be initiated against an individual within 5 years from the date of completion of the property sale procedure or termination of insolvency proceedings at the request of such individual.