Insolvency proceedings of a corporation

Insolvency proceedings of a corporation

The arrangement with creditors is a judicial procedure aimed at facilitating a legal entity (commercial company, association…) to settle its debts with its creditors, if it has entered into a situation of insolvency or sees that this will be imminent.

This legal figure replaces those traditional ones that we all remember and that were called suspension of payments and bankruptcy.


The insolvency law provides two ways for the debtor to pay its debts:

a) An agreement with its creditors.

b) The liquidation, assignment or transfer of the debtor’s assets.


What is an insolvency proceeding for?

The basic purpose of an insolvency proceeding is for creditors to collect their claims and for the debtor in a state of insolvency to settle its debts with its creditors. This can be achieved in two ways:

a) Through an agreement between debtor and creditor that includes certain measures to make payments more accessible: reductions in amounts, deferrals, assignments of assets …

b) At a more advanced stage of the proceedings, by forcing a series of sales of the debtor’s assets, or other assignments or transfers.

In addition, bankruptcy instruments and procedures, even before these agreements are formalized or liquidation is reached, allow the debtor to gain time:

a) They temporarily activate a series of protective effects on his assets. This will allow him to paralyze certain lawsuits, executions and seizures against his assets and to stop the accrual of interest on credits and loans.

b) They open up the possibility of continuing your economic activity, subject to certain controls by the insolvency administration.


What does the pre-insolvency procedure consist of?

The pre-insolvency or pre-bankruptcy stage is a period available to the insolvent debtor to try to reach an agreement with its creditors in order to avoid the liquidation of its assets.

Thus, before the insolvency proceeding is declared, the debtor may inform the competent judge that it has initiated negotiations to reach an agreement with its creditors in which a way to settle its debts is agreed upon.  

This will protect the debtor for up to four months, suspending his duty to file for bankruptcy or the possibility that the creditors may do so.

It will also produce some protective effects on your assets (against creditor claims).

These are the three instruments contemplated by the regulations to be negotiated in this pre-bankruptcy period:

Refinancing agreement.

Out-of-court payment agreement.

Anticipated proposal of Agreement.


What can be achieved:

a) If any of the first two agreements are reached, the debtor will avoid the insolvency proceedings and thus the liquidation of its assets, as long as it complies with the agreements.

b) If adhesions are achieved for the third one, the debtor will enter into insolvency proceedings, but if he formalizes the proposed agreement, he will shorten the judicial procedure and will also avoid liquidation.

In these agreements, if certain requirements are met, various measures may be agreed upon, such as debt reductions, delays or assignment of assets, among others. 


Who can be declared bankrupt?

In general, all types of debtors can be declared bankrupt. There are, however, some legal exceptions.

An insolvency proceeding may affect all types of persons in a state of insolvency:


A Self-employed (traders, professionals…).

Commercial companies (micro-enterprises, SMEs or large companies).

Other entities with legal status: associations, foundations, corporations, etc.

And an inheritance can also be included in this judicial procedure if it is accepted with benefit of inventory.

It is not necessary, therefore, that the debtor be a debtor with an economic activity or business, although most insolvency proceedings are for companies.


When is an insolvency proceeding filed?

Insolvency proceedings are initiated in the event of insolvency of a natural or legal person. It can be a situation of insolvency:

a) Imminent – It occurs when the debtor foresees that it will soon be unable to meet its payment obligations on a regular and timely basis: there have not yet been relevant and continuous non-payments, but the impossibility of compliance is foreseen.

b) Current – It is noted when the debtor can no longer regularly meet his obligations: some debts have already matured, there are repeated non-payments, other maturities are approaching and he does not have funds or assets easily convertible into money to meet them.


Signs of insolvency:

Bankruptcy regulations consider that certain significant facts make the debtor’s current insolvency situation presumable. These are the facts that allow the creditors to file for insolvency proceedings.

Among others, the existence of judicial or administrative declarations of insolvency, relevant executions and seizures, non-payment of taxes, salaries or social security contributions in the last three months, seizures of assets, etc.

In the case of inheritances, insolvency proceedings may only be filed if they are accepted with benefit of inventory.


Who can file for insolvency proceedings?

The application for insolvency proceedings must be made by an individual or legal entity with legal standing. It can be:

a) The debtor himself:

– Voluntarily, if he/she is aware of his/her imminent insolvency situation.

– Obligatorily, within two months of becoming aware or should have become aware of the debtor’s current insolvency situation.

– If it becomes aware that a pre-bankruptcy agreement agreed upon cannot be complied with or has already been breached.

b) A creditor of the debtor if the debtor is already in a state of current insolvency.

c) A partner of the debtor who has personal liability for the debts of the partnership (such as partners or limited partners), if the debtor is in a current state of insolvency.

d) The insolvency mediator, if he finds that the out-of-court payment agreement that has been attempted to be negotiated has not prospered, or that the agreed one has been annulled or has not been complied with.

It should be specified that the creditors may not request the debtor’s insolvency proceedings if in the previous six months they acquired the credits (collection rights) on a singular basis (not within a global patrimony transmitted) and by a business other than inheritance or legacy.

In the case of inheritances accepted with benefit of inventory, the heirs, the creditors or the administrator of the inheritance may request the insolvency proceedings.


What can happen if the insolvency proceeding is not filed?

A distinction must be made between the creditors and the debtor.

a) Creditor’s petition:

Creditors are entitled to apply for the debtor’s insolvency proceedings if the debtor is currently insolvent – as are certain of the debtor’s partners – but they are not obliged to do so.

The only thing that can happen if, given the debtor’s current insolvency, a creditor does not file for insolvency proceedings, is that:

– Must wait until the debtor or other entitled parties request it, which may slow down the solution of the problem.

– Lose some of the advantages of acting as an insolvency petitioner (such as the privilege on part of the collection rights if liquidation is reached).

b) Debtor’s request:

As for the debtor, it will depend on the state of insolvency:

– If it is imminent, the debtor may apply for insolvency proceedings, but is not obliged to do so.

– If it is current, failure to file for insolvency proceedings within two months from the time the debtor knew or should have known of the insolvency may have detrimental consequences. Among them, that:

· A creditor requests the insolvency proceeding and it is more likely that an insolvency administrator will take over the management of the company.

· The insolvency proceedings are classified as guilty, which may give rise to certain sentences and payment obligations (to administrators, managers, etc.).

However, if the debtor has informed the judge of the commencement of negotiations to reach a pre-bankruptcy agreement, for a period of time (three months, two months if the debtor is an individual), the debtor will not be obliged to file for bankruptcy, nor will the creditors be able to do so.


What are the different types of insolvency proceedings?

There are different types of insolvency proceedings (judicial stage) depending on who applies for insolvency and what type of procedure will be applied.

Depending on the applicant

On the one hand, the INSOLVENCY is called:

VOLUNTARY if requested directly by the debtor.

NECESSARY if it is declared at the initiative of other entitled parties: creditors, a partner with personal liability or the insolvency mediator in some cases.

There are hardly any procedural differences between the two cases, although they may produce some different effects.

For example, in the necessary insolvency proceedings, the petitioning creditor can obtain certain privileges on part of its credits and it is more likely that the insolvency administrator not only intervenes, but also substitutes the debtor in the management of the business.

For further information, please consult with Legal advice