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Effects of bad faith on insolvency proceedings

One of the most important things to consider in an insolvency proceeding is a matter of good faith.

If the commissioner or the court determines that the debtor acted in bad faith, this could have far-reaching consequences.

How to avoid this and how to act in good faith in an insolvency proceeding?

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• Insolvency

Adv. Masla Achilthom, in collaboration with Zap Legal

Sunday, 15 August 2021, 16:32 Updated: 16:45

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In good faith or not?

Insolvency (Photo: ShutterStock)

The Insolvency Law was born out of a central goal of the state to help debtors recover, and return the money to their creditors. Insolvency proceedings usually involve forgiveness of part of the debtor's debt, with the expectation that the debtor will conduct the proceedings in good faith, that is, will cooperate and provide full disclosure regarding the state of his assets.

What is the meaning of good faith in an insolvency proceeding?

Good faith means that an individual conducting bankruptcy or insolvency proceedings must behave directly and fairly with the person in charge of the proceedings, with the trustee appointed in his case and with his creditors. This means that he must disclose all vital information regarding his assets. For example, if he is about to receive an inheritance order, find out about it and not get away with an inheritance order so that creditors will not reach him. That is, the debtor must not commit any act of abusing the proceeding in order to evade paying his debts to the creditors and must not conceal information from the creditors about his assets.

Good faith at the examination stage of proceedings

As a rule, in the first steps of the procedure, in submitting the application for an order to open proceedings, the weight of good faith is less. However, with the court clearly noting the debtor's bad faith in the creation of the debt such as notable gambling debts etc., it may decide not to grant the debtor an order to open proceedings.

What is the consequence of bad faith in the debt creation phase?

At the stage of creating the debts, the consequence is that a court may not let the same debtor who created the debts in an extravagant, fraudulent or deceptive manner, not accept the request to open the order of proceedings. It is very important before spending a lot of money on filing an application for a procedural order, to consult a professional lawyer beforehand, so that a situation does not arise where a lot of effort effort is invested and the application is not accepted.

In the case of falling into the hands of the gambler, the debtor fell into gambling addiction and thus lost all his money and property. And described criminal elements who threatened the debtor and thus he was able to obtain an order to open proceedings and overcome the lack of good faith at the stage of creating the debts.

Good faith at the stage of the trustee's interrogation

After the order is opened, the examination of good faith is more stringent and the trustee in charge of the case summons the debtor who is in debt to the initial stage of the investigation. In the initial investigation phase the trustee investigates the same person in more depth about how the debts were created, whether while running a business or personal debts, whether these were loans taken to finance himself and his family that got into trouble or God forbid if the debts were created through gambling or fines for certain offenses. Violence, sex, etc.This examination of the trustee also indicates the good faith of the debtor.

At this stage, it is very important that the debtor prepares for the investigation phase as anything that is said in the investigation can affect the trustee’s determination of whether the debtor is in good faith or not.

Faith during the order of payments and redemption of debt

after the stage of the proceedings and test phase of the trustee, and after determining the plan economic reconstruction, there are several factors that can be considered bad faith on the part of the debtor:

- If the debtor fails to pay the warrant payments held out to him to pay out of his time.

- If he has not submitted reports of income and expenses once every two months.

- If it turns out that the debtor did not cooperate regarding the state of his assets and hid information from the trustee.

- Other circumstances of bad faith related to the non - cooperation of the debtor with the proceeding.

Consequences of bad faith

at any stage until the dismissal is obtained, if the court decides that the debtor acted in extreme bad faith, both in the creation of the debts and during the proceedings, he can return him to be defenseless against the creditors.

The court ruled in CA 6416/01 - Benvenisti v. The Official Receiver - that the procedure should not be turned into a shelter for criminals. This means that bankruptcy proceedings are not a refuge for people not to pay their debts. Bankruptcy proceedings are for people who have really fallen in good faith, "have had an economic accident" and the duty of society to help them.

Under the new law, a lack of good faith in conducting a proceeding may extend the period in extreme cases and may also void the proceeding.

Therefore, it is important to act in good faith throughout the insolvency proceedings; Be sure to pay in accordance with the payment order and report the reports in accordance with the standards and rules required by the authority, so that a new page can be opened in life.

What happens to those debtors who have had the procedure canceled due to lack of good faith or due to their omissions during the procedure?

In cases such as these, a request must be submitted from a court to rectify the default, for example to submit all the reports retroactively or in the case of payment order payments, to submit a request for the spread of arrears for a certain period or for the payment of arrears. In this way it is possible to try to convince the court that they express remorse for not complying with the order of the proceedings that the debtor had to comply with.

In many cases, the appropriate attorney will be able to convince the court that the debtors committed the omissions in the proceeding out of misconduct of previous attorneys who did not properly represent the debtor or out of a lack of understanding of the proceeding in the proceeding, thus giving them another chance to correct and conduct the proceeding properly. Therefore, it is of utmost importance to choose the right lawyer in insolvency law.

If the debtor's claims are nevertheless rejected, it is possible to appeal the court decision and not give up on the bankruptcy proceedings. In the new law, once bankruptcy proceedings have been canceled due to omissions, we will have to wait up to a year or two in many cases as a cooling-off period until we can apply again to open court proceedings to re-enter the insolvency proceedings (Al-Qatsati Law CA 663/21 CA 1204/21) . During this period the debtor will remain without protection and without the ability to deal with foreclosures and enforcement and therefore the attorney must do everything possible to avoid this.

In conclusion, the

principle of good faith is an important and central principle in all stages of insolvency proceedings. Creditors can have very serious consequences for the debtor, to the point of not issuing a court order or canceling the insolvency proceedings. A professional and specialized attorney will do everything possible to convince the court to give the debtor another chance not to leave him alone in front of a broken trough.

Adv. Masala Achilthom specializes in insolvency and corporate law and debt settlements with banks.

Phone: 053-9387292

Article courtesy of Zap Legal The

information presented in the article does not constitute legal advice or a substitute for it and does not constitute a recommendation for taking proceedings or avoiding proceedings. The article does so at his own risk

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