Bankruptcy estate - basic information

Bankruptcy proceedings are a special type of civil procedure that aims to sorting out the debtor's financial situation, who is unable to meet its obligations. In the Polish legal system, they are primarily regulated by the Act of 28 February 2003 – Bankruptcy Law, which introduces detailed rules for declaring bankruptcy, its course, and the procedure related to the liquidation of the bankrupt's assets. The central element of these proceedings is the concept of the "bankruptcy estate". This term refers to all the debtor's assets that can be used to satisfy creditors. Understanding this concept is essential for both creditors and debtors, as well as for all persons involved in the bankruptcy process. In this article, we will discuss the definition of the bankruptcy estate, its composition, functions and significance in the context of bankruptcy proceedings.

Contents

Definition of bankruptcy estate

The bankruptcy estate is all assets of the debtor that are part of their assets at the time of the declaration of bankruptcy and assets acquired by the debtor during the bankruptcy proceedings, with exceptions specified in the regulations. After the declaration of bankruptcy, the bankrupt loses the right to manage the assets that are part of the bankruptcy estate and the legal standing to act in matters concerning the bankruptcy estate. This means that they cannot independently pursue their rights in court or be sued in matters related to their assets. In place of the bankrupt, the legal standing in these matters is taken over by a trustee who acts on behalf of the bankruptcy estate. The bankruptcy estate itself, although it includes the bankrupt's assets, has no legal personality or legal capacity - it cannot sue or be sued.

The term "bankruptcy estate" means the property that is subject to the division procedure in order to satisfy the bankrupt's creditors. The bankruptcy estate consists of things, rights and claims that constitute the debtor's property at the time of the declaration of bankruptcy, with the exception of property components excluded by law. The bankruptcy estate is otherwise a collection of assets that are part of the bankrupt's property and that are intended to satisfy the claims of creditors. 

The bankruptcy estate is important because it is a source from which creditors can satisfy their claims. It is therefore an instrument that ensures the implementation of the principle of fair distribution among creditors, while maintaining the rules and order provided for by law.

Components of the bankruptcy estate

The bankruptcy estate consists of various assets, including:

1. Real Estate – all real estate belonging to the debtor, including land, buildings, commercial premises, residential premises, building plots, as well as other rights related to real estate, such as perpetual usufruct.
2. Movable things – movable property such as cars, machinery, equipment, furniture, jewellery, works of art, computer equipment and other goods.
3. Property rights – including rights to remuneration for work, copyrights, intellectual property rights, shares and stocks in other business entities, receivables from contracts.
4. Cash – including cash and funds in bank accounts.
5. Claims – all claims of the debtor against third parties, e.g. under contracts, loans, compensation or receivables for unperformed or improperly performed services.
6. Other assets – these may be, for example, lease rights, trust agreements, licenses, contracts that can be sold or transferred in bankruptcy proceedings.

From the perspective of bankruptcy law, the bankruptcy estate does not include everything that the bankrupt possesses. Certain assets are excluded from the bankruptcy estate, e.g. things that serve to satisfy the life needs of the debtor and his family (e.g. necessary everyday items), as well as assets that have been encumbered with the rights of third parties in a way that excludes their acquisition by the trustee.

Date of creation of the bankruptcy estate and its administration

The bankruptcy estate is created when the court declares bankruptcy. On the day of the declaration of bankruptcy, liquidation proceedings begin, in which all assets of the bankruptcy estate come under the control of the trustee - a person appointed by the court to manage the bankrupt's assets. First, the trustee prepares a list of assets that have been included in the bankruptcy estate. This task involves identifying what goods, rights and receivables the bankrupt is entitled to. The trustee is responsible for:

• securing and taking over property included in the bankruptcy estate;
• examining the legal situation of individual assets of the estate, including carrying out activities related to securing receivables and checking whether there are no circumstances that could undermine the rights to individual assets (e.g. transfer of ownership before the declaration of bankruptcy in order to harm creditors);
• conducting the sale of components of the bankruptcy estate in order to satisfy creditors’ claims;
• organization and distribution of collected funds among creditors in accordance with their rank and legal provisions;
• the proper conduct of the entire bankruptcy proceedings, including submitting appropriate reports to the court and informing creditors about the status of the proceedings.

The trustee also has a duty to look after the interests of creditors so that their claims can be satisfied to the greatest extent possible. An important aspect of his work is also the recovery of any claims from third parties that may be part of the bankruptcy estate.

The role of the bankruptcy estate in satisfying creditors

The bankruptcy estate plays a key role in ensuring fair satisfaction of creditors' claims. It enables the achievement of the fundamental goal of bankruptcy proceedings, which is to recover the greatest possible value from the bankrupt's assets and divide this value between creditors. Good management of the bankruptcy estate allows for increased efficiency of the bankruptcy process, minimizing the risk of losses and ensuring that none of the parties to the proceedings are harmed.

In addition, the bankruptcy estate also serves a protective function, both for the debtor and their creditors. For the debtor, this means security against further claims and enforcement, and for creditors - certainty that the process of dividing assets is taking place in accordance with the law.

Basically, there are several groups of creditors in bankruptcy proceedings:

1. Secured creditors – have the right to satisfy their claims from the subject of the security, e.g. by exercising rights arising from a mortgage or pledge.
2. Preferential creditors – have the right to have their claims satisfied first (e.g. employees who have outstanding wages, persons entitled to receive alimony for the period before the declaration of bankruptcy).
3. Ordinary creditors – their claims are satisfied in the next order, after satisfying the privileged creditors. These include suppliers, banks, and individuals.
4. Creditors whose receivables are not subject to write-off – their claims are not extinguished in bankruptcy proceedings despite, for example, the execution of a creditor repayment plan (e.g. persons entitled to compensation from the bankrupt for damage caused). These persons, despite the extinguishment of the debtor's remaining liabilities in bankruptcy proceedings, may still demand repayment of the remaining unsatisfied part of their receivables.

The satisfaction of creditors in so-called business bankruptcy is based on the so-called division plan. We distinguish two types of division plans, namely the plan for the division of the amount obtained from the sale of the encumbered item (separate division plans) and the plan for the division of the bankruptcy estate funds. In the case of bankruptcy proceedings of individuals who do not conduct business activity, i.e. consumers - the satisfaction of creditors differs slightly depending on the mode in which such proceedings are conducted. In the case of proceedings conducted in the commissioner mode, the situation is analogous to the case of business proceedings, while in the case of simplified proceedings - we are dealing with a creditor repayment plan, which somehow combines several functions - including a list of receivables, separate division plans and a plan for the division of the bankruptcy estate funds.  

Summary

The bankruptcy estate in bankruptcy proceedings is a key element that allows the implementation of the purpose of the proceedings, which is to satisfy the bankrupt's creditors in a manner that is as fair and proportional to their claims as possible. It is the bankruptcy estate that the entire structure of bankruptcy proceedings is based on, including both the management of assets and the division of funds between creditors. For the debtor, this means the need to come to terms with the loss of assets, and for creditors, this is the only chance to recover at least part of their claims. This article was an introduction to further studies related to the bankruptcy estate and its liquidation. In the following articles, I will present to you, among other things, methods of liquidating the components of the bankruptcy estate, the effects of acquiring property included in the bankruptcy estate, and exclusion from the bankruptcy estate.