Negligence and Dishonesty in Insolvency Proceedings, or When a Debtor Risks Revocation of Arrangement

Debt Relief as a Benefit

One of the main duties of a debtor in insolvency proceedings is, for example, the obligation to provide the insolvency court with true and complete information about their liabilities, assets, and financial situation, particularly in the form of lists. These lists must contain all relevant information, including information that the debtor may subjectively consider less significant or worthless.

In practice, it often happens that a debtor omits certain information – whether through negligence (a reckless approach by the debtor) or intentionally (a dishonest intent by the debtor). However, this negligent approach or dishonest intent can have fundamental consequences. Failure to list a creditor or an asset may be perceived as a reckless approach, which can lead to the rejection of the debt relief petition or the cancellation of the debt relief (however, in the case of failing to list a creditor, this only applies if the debtor was requested to do so by the insolvency court as part of its supervisory activities or if they submitted the list with the debt relief petition, cf. below).

Recklessness in Compiling Lists

A reckless approach to compiling the list of liabilities (if the debtor submits it with the debt relief petition and declares it to be correct and complete) or assets is one of the most common reasons why courts reject debt relief petitions.

In the aforementioned Supreme Court decision, it was stated that if a debtor fails to submit a complete list of their liabilities, their conduct may be assessed as at least reckless or negligent. This conclusion also applies to cases where the debtor fails to submit the list of liabilities, even though required to do so by a resolution of the insolvency court.

Negligence in Disclosing Assets

Another common problem in debt relief proceedings is the submission of an incomplete or distorted list of assets. The debtor is obliged to list all their assets, including assets they consider worthless or insignificant. If the debtor fails to list such assets, the insolvency court may conclude that the debtor has breached their obligations, and if it is proven that the failure to disclose was intentional, it may even lead to the cancellation of the debt relief due to the debtor's dishonest intent, cf. Supreme Court decision ref. no. 29 NSCR 45/2010.

The debtor's obligation to disclose absolutely all of their assets was confirmed by the Supreme Court in the aforementioned decision (ref. no. 29 NSCR 28/2023), where it stated that the debtor cannot decide for themselves whether a particular asset has value for the insolvency proceedings. If an asset exists, the debtor is obliged to list it, even if, in their opinion, it has no market value.

Incomplete List of Creditors

A typical example of a debtor's reckless and negligent conduct is the failure to list certain creditors in the list of liabilities upon the request of the insolvency court during its supervisory activities (if the debtor did not voluntarily list them in the debt relief petition, as this is not the debtor's obligation in debt relief proceedings, cf. Section 104(1)(b) in conjunction with the last sentence of Section 104(4) of the Insolvency Act).

An example can be found in the case law of the Supreme Court (e.g., ref. no. 29 NSCR 45/2010), where a debtor, as part of their debt relief petition, failed to list their foreign creditors, whom they subsequently claimed were not relevant to the insolvency proceedings. However, the insolvency court discovered the existence of liabilities between the foreign creditors and the debtor, as well as the fact that the debtor was aware of these liabilities, from which the debtor's dishonest intent could be inferred.

The reason for such a procedure is primarily the protection of creditors' rights. Insolvency proceedings are collective proceedings, which also aim for the highest possible satisfaction of creditors' claims. Any omission or distortion in the list of liabilities undermines this goal and increases the risk that some creditors will not be properly satisfied. Therefore, it is important for the debtor to carefully compile the list of liabilities (if they are obliged to compile it or have compiled it in accordance with the above-cited provisions of the Insolvency Act) and, in case of uncertainty, to consult the procedure with their legal representative, for example.

Effort to Maximise Creditor Satisfaction

In addition to the obligation to provide complete and truthful lists of assets and liabilities, a debtor in insolvency proceedings is obliged to strive for the highest possible satisfaction of their creditors. This means they must use all their income to meet the conditions of the debt relief.

In practice, it often happens that a debtor is, for example, employed by an acquaintance and their salary is artificially set at the minimum required for debt relief, so that the debtor can keep the funds for personal use after making the debt relief payments. However, if the insolvency court finds that assets are being "diverted" outside the debt relief in this way, this situation is very often a reason for cancelling the debt relief, as the debtor's actions, among other things, do not demonstrate that they are making every effort to maximise the satisfaction of their creditors.

Incomplete Information as a Sign of Dishonest Intent

The Supreme Court has repeatedly emphasised in its decisions that the intentional concealment of assets, creditors, or income can also be considered dishonest intent, even if it involves relatively small amounts. The debtor must approach the debt relief process with maximum responsibility and transparency; otherwise, they risk the insolvency court rejecting their debt relief petition or deciding to cancel the debt relief.

Conclusion

Insolvency proceedings are a process that offers debtors a unique chance for a fresh start. However, this chance comes with clear rules that must be followed. The debtor must act honestly, transparently, and responsibly throughout the proceedings. Any reckless, negligent, or even dishonest approach can lead to the insolvency court rejecting the debt relief petition or cancelling the debt relief. Therefore, it is essential for the debtor to diligently fulfil all their obligations, provide complete and truthful information, and make every effort to satisfy their creditors.

If you have any questions regarding this topic or related issues, do not hesitate to contact us. We will be happy to learn more about your case and provide you with the appropriate legal assistance.

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