THE EXTRAJUDICIAL PAYMENT AGREEMENT TO KEEP THE COMPANY
Written by Josep Conesa
Labor and bankruptcy lawyer
These weeks of health alert due to COV-19, we find numerous companies that have been forced to close their business doors, cease their activity, initiate ERTE procedures, etc. and this is provoquing drastic incom decrease (often with a non-proportional decrease in expenses). The immediate consequence of all this is that many companies are beginning to be unable to make front to their regular payments.
That is to say, they are in what is legally called "insolvency" state, which is contemplated at the Bankruptcy Law and which can be: "actual insolvency" (that is when today cannot longer pay obligations) or "imminent" (that is when still can pay obligations but you can foresee that you will not be able to fulfill your obligations regularly and punctually)
In these cases, the bankruptcy law obliges the debtor who is in a state of insolvency to request the bankruptcy of creditors in the Court. This is a long procedure , which generates additional expenses for the company (and often the company does not have enough liquidity to make front). The bankrupcy proceeding can lead to personal liabilities for the company administrator in the event that the bankruptcy would be declared guilty, and in most cases the company ends with the liquidation and extinction of the society.
However, the Bankruptcy Law, -with the incorporation of Article 5 bis of the Bankruptcy Law and the articles of Law 25/2015 on second chance-, introduced a way of escape with a possible solution for many debtor companies: the extrajudicial payment agreement (arts 231 to 242 LC)
This route allows the debtor, in an out-of-court venue, to negotiate the debt for three months and to present a proposal payment to the creditors. The objective is to achieve a reduction of the debt and to delay its payment (remove and wait). With this, it is possible to save time, negotiate the debts to try to get the company out of its insolvency situation sot that the company can continue its activity, without having to go to court in a bankruptcy.
If the necessary majority is achieved, the agreement is imposed even on dissenting or non-voting creditors.
Another important advantage, unlike what happens in bankruptcy, is that during the negotiation the debtor's liberty to act is not intervened, there is no third party external to the company (Insolvency Administrator) that controls all company activity, bank accounts or management daily. In addition, the company retains its administrative body, or if it wishes it is free to cease and appoint new administrators or managers.
WHO CAN APPLY FOR THE PRE-CONTEST?
The out-of-court settlement of payments can be requested both by NATURAL persons and by COMPANIES, provided that they are in a state of insolvency, and the initial estimate of the liability does not exceed five million euros.
In the event that the debtors are businessmen or registrable entities, the appointment of a bankruptcy mediator will be requested from the Mercantile Registrar or the Official Chambers of Commerce. If it is a natural person, it will be requested from the Notary of the debtor's domicile. In both cases, the opening of the negotiations is communicated to the competent court for the declaration of insolvency.
Then a period of three months of negotiation with the creditors opens. The debtor can negotiate with all creditors except with the Public Administration, because all public law credits (Treasury, Social Security) cannot be affected by the out-of-court agreement.
In addition, during those months of negotiation, new judicial executions of assets or rights cannot be initiated if they attempt against assets or goods necessary for the continuity of the debtor's professional or business activity; and those proceedings that are already in process are suspended (excpet procedures that are intended to enforce public law credits and creditors of credits with real guarantee).
If the proposal is accepted, it will be submitted to a public deed. If it is not (after three months from the communication to the court and within the following business month) and the debtor continues to be insolvent, the bankruptcy mediator will request the judge to declare bankruptcy (consecutive bankruptcy article 242 LC). The suspension of the deadlines provided for in article 43 of RD 430/2020 and article 11 RD 16/2020 must be taken into account.
In the case of natural persons, if finally there is no agreement and it ends up in bankruptcy, having entered into or, at least, attempted to enter into an out-of-court payment agreement is one of the requirements for the debtor to request the benefit of the exoneration of unsatisfied liabilities (article 178 bis).
Therefore, both in the case of companies and individuals, the out-of-court settlement can put an end to the insolvency situation and avoid the judicial proceeding of bankruptcy, so it is advisable not to arrive late and adopt the decision to negotiate on time an out-of-court settlement of payments with the creditors and save the company.
WHEN SHOULD I APPLY FOR A BANKRUPCY PROCEEDING?
Answer: it is possible since there is a bankruptcy risk situation which will occur in the following three cases:1. That you cannot make front the payments in a general way.
2. That there are seizes that generally affect debtor's assets.
3. Three months of generalized default in the payment of:
- tax obligations.
- social security contributions
- wages and compensation to workers
WHAT DO I NEED TO PRESENT A PRE-CONTEST?
It should start with the communication model for the start of negotiations to the Court with the intention of reaching:
- A refinancing Agreement (article 71 bis.1 and fourth additional provision)
- An advance proposal for a bankruptcy agreement (in the terms provided by the bankruptcy law)
- An Extrajudicial Payment Agreement (article 231 ss LC).
- A Notary or Commercial Registry is requested to appoint a bankruptcy mediator
- Acceptance of the charge by the mediator
- The Mercantile Registrar or Notary Public shall communicate, ex officio, the opening of the negotiations to the competent Court for the declaration of insolvency.
WHAT DO I NEED TO SUBMIT A CONTEST?
The declaration of insolvency will proceed in the event of insolvency of the debtor.
IF THE APPLICATION IS SUBMITTED BY THE DEBTOR, it must be based on the fact that it is in a state of insolvency, which may be:
- CURRENT when the debtor who cannot regularly face his due obligations.
- IMMINENT when the debtor who foresees that he will not be able to regularly and punctually fulfill his obligations.
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