Postponement of bankruptcy and issuance of over-indebtedness balance sheet

Abstract

As per the concept “continuity of enterprises”, the lifetime of enterprises is considered as indefinite and financial statements are issued under this assumption. However, the lifetime of enterprises may come to an end due to economic and commercial circumstances. The situation “the lifetime of an enterprise has come to an end”, which is characterised as bankruptcy in the law literature, is never a desired situation for any parties associated with such enterprise. Over-indebtedness constitutes one of the signs indicating that the enterprise is about to go bankrupt. Over-indebtedness is a situation where the assets of an enterprise remain insufficient to fulfil its debts and liabilities or where its shareholder equity becomes negative. The board of directors of an over-indebted company should apply for a competent court, for bankruptcy. However, such company may request for postponement of bankruptcy if it submits to the court reasonable recovery projects to overcome overindebtedness. If a company applies for a competent court, for postponement of its bankruptcy; it will be necessary for that company to submit to the court an interim balance sheet issued on the basis of the current values of its assets, debts and liabilities to determine the situation of over-indebtedness, in addition to its balance sheet issued by taking its accounting records as basis. This interim balance sheet is called as over-indebtedness balance sheet. The purpose of this study is to scrutinize the concepts “bankruptcy”, “postponement of bankruptcy” and “over-indebtedness” within the legal system and to describe the transaction “issuance of an over-indebtedness balance sheet” within the accounting system.