Introduction of "Cover Gap" in Insolvency Act

21. 8. 2017

The latest amendment of the Insolvency Act introduces the term of "cover gap" which is closely connected with certain items in the report of the level of liquidity. Our article explains the meaning of the term and its relation to the insolvency proceedings and details of the liquidity level report.

The Insolvency Act amendment which became effective in July introduces the so-called cover gap to the concept of bankruptcy of a business keeping their accounts in the form of insolvency.

A new supposition has been introduced that a debtor, who runs a business and keeps accounts, is capable of fulfilling their financial obligations (thus not being in the state of insolvency) if the difference between the met obligations and the available financial means (the "cover gap") stated in the liquidity level report amounts to less than 10% of their due financial obligations or the prospects of liquidity development suggest that the cover gap will narrow during the period  which the liquidity level report has been prepared for to under 10% of their due financial obligations.

The liquidity level report or The liquidity development survey are to be produced in accordance with the requirements stipulated by the legal provisions by 1) an auditor, 2) an expert or 3) a specialist in the area of economic consultancy regarding insolvency and structural changes and meets the legal criteria.

If, then, the debtor has the means to meet most of their financial obligations and their insolvency may be deemed short-term, they are seen as subject capable of fulfilling their obligations; it is, however, a mere supposition which may prove to be incorrect in some cases and the business in question is bankrupt indeed.

After the term of cover gap has been introduced, the Ministry of Justice issued a regulation on insolvency of a business which stipulates details relating to the liquidity level report.

The liquidity level report or the liquidity development prospect summary are to be produced on the basis of data provided by the debtor and only if the report compiler has access to all the data needed for the report compilation, particularly to all the accounting books, documents and other accounting records of the debtor and also to all other documents relating to the debtor's business activities.

The liquidity level report is to be compiled as of the last calendar day of the month preceding the month in which the insolvency proceedings commenced (hereinafter referred to as "the date of the liquidity assessment").

The liquidity development prospect summary represents a short-term plan of the development of current assets, short-term obligations and cash flow of the debtor and it aims to assess the ability of the debtor to fulfil their obligations within the period which the prospect summary is compiled for; it is compiled for an 8-week period starting with the date of the liquidity assessment in a form of weekly summary for the period with a possible prolongation of further four weeks.   

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