Companies – Bankruptcy, Suspension of Payments and Contest of Credit

Companies – Bankruptcy, Suspension of Payments and Contest of Credit
The legal procedure for creditors’ competition comes when a company, individual or legal entity, becomes insolvent, unable to meet the payments it owes.

The situations contemplated are those of suspension of payments and bankruptcy.

bankruptcy in gran canaria - canary islands las palmasThe difference between the two is that in the first case the debtor has sufficient assets to deal with the debt, due to its lack or delay in payments to a situation of lack of liquidity, whereas in the second case it is not so and the debtor has no funds or assets with which to pay. For that reason it is said that the suspension of payments is a temporary insolvency situation and bankruptcy is final.

With the Contest of creditors is to organize the financial situation of the bankrupt to get the largest number of creditors get to receive as much as possible of what is owed, plus prevailing in collections the most unprotected (workers) against those which may have influenced the company to that situation (managers and related persons).

The Spanish legal regulation of this matter is found in Law 22/2003 of July 9, Insolvency, modified by Royal Decree Law 3/2009, of March 27, of urgent measures in tax, financial and insolvency matters before the evolution of the economic situation, and Law 38/2011, of October 10, and more recently by the Reform of the bankruptcy law through law 14/2013, to support entrepreneurs and their internationalization.

On September 28, 2013, the Official State Gazette published this Law 14/2013, to support Entrepreneurs and their internationalization (the “Entrepreneurs Law”). Its objective is to carry out reforms favorable to growth and economic activity.

The Law on Entrepreneurs modifies many aspects of the Insolvency Law, especially in pre-insolvency matters and in three significant aspects:

  • The modification of the Formal Refinancing Agreements regulated by the Fourth Additional Provision (the so-called “Spanish scheme”). A more flexible rule is included in the computation of the majority of the liabilities subscribed by the agreement, in view of the extension of the majority agreed upon by the non-participating or dissident entities.
  • More complete regulation of the procedure for designating the independent expert responsible for issuing the report on the viability of the debtor and the proportionality of the guarantees.
  • The facilitation of extra-bankruptcy agreements between certain types of debtors and their creditors, through a system called “Extrajudicial settlement of payments” and carried out by the new figure of the insolvency mediator.

In addition, the so-called “second chance” or “fresh start” is regulated for the first time in Spain, which is specified in the possibility that the debtor natural person may, in the context of his creditors’ tender, definitively cancel debts that have not could be satisfied with their present assets and assets.

However, the scope of this “fresh start” is limited because only certain types of debtors can be accessed, it does not extend to public-law credits and requires the debtor to satisfy certain classes of credit in its entirety, , among which are those secured by mortgage or pledge.

The phases of the contest are as follows:

  1. Declaration of competition, with adoption, where appropriate, of precautionary measures.
  2. Bankruptcy administration, appointment of administrators and rendering of accounts.
  3. Determination of the active mass, with the relation of the goods and rights that comprise it. In this mass also include the credits needed for the activity, and must be liquidated as a priority.
  4. Determination of the passive mass (credits against the debtor), with the communication, recognition, graduation and classification of credits.
  5. Agreement or, as the case may be, liquidation.
  6. Qualification and effects of the contest.

Position of the creditors

In the first phase of the competition, the judge appeals to the creditors to inform the insolvency administration of the existence of their claims. This is the moment to present itself, which must be done within one month from the publication of the declaration of the contest in the Official State Gazette or when a contest affects a multitude of people, its beginning is usually known through the media.
The creditors must present the supporting documents of their credits to be included in the list of creditors.

The credits included in the list of creditors will be classified mainly as privileged, both special (generally guaranteed with some real right) and general (taxes, social security contributions, etc.) and ordinary (those who are not qualified in this Law as privileged or subordinate, such as consumer loans and users).
The order of priority of the credits places the ordinary credits last to be settled. All ordinary credits are on an equal footing.

Once the credits have been related, a proposal for an agreement will be formulated for payment, which must be approved by the judge. This proposal may contain “withdrawals”, that is, reductions in the amount to be collected, or “waits”, which means accepting a delay in the collection of the debt owed.

The contest ends, in general, by agreement of the creditors with the agreement, which is reflected in a judgment; or by liquidation, which is sometimes the only way for the insolvent person or company to stop generating more debt. The judgment is executed by paying or consigning all the credits recognized or the full satisfaction of creditors by any other means.
In all cases of conclusion of the competition, the limitations of the powers of administration and disposition of the subscriber will cease, except those contained in the final judgment of qualification.
When the conclusion occurs due to non-existence of assets and rights, the debtor will be responsible for payment of the remaining credits.

Our legal office offers services of legal management and representation in the different areas:

  • Advice in the pre-bankruptcy phase
  • Voluntary Contest of Creditors
  • Competition required
  • Responsibility of administrators
  • Negotiation with creditors
  • Person and defence of creditors
  • Agreement with creditors
  • Settlement plan