Given the impending surge in bankruptcy filings, it's worth considering other, more viable and less drastic alternatives, such as pre-bankruptcy proceedings. These can help business owners and their creditors overcome this situation, allowing the company to survive and continue operating. Pre-bankruptcy proceedings don't necessarily have to culminate in formal bankruptcy. If the insolvency is resolved within the pre-bankruptcy period—for example, through successful refinancing—it provides valuable benefits and a four-month window to weather the crisis.
With the return to normality underway, it's time for companies to start exploring legal avenues to address a potential insolvency situation, and in many cases, bankruptcy proceedings seem like the right tool, but they can be a very drastic solution.
Therefore, it is interesting to consider other more viable and less drastic alternatives such as pre-bankruptcy proceedings, which can help the entrepreneur and his creditors overcome this situation, allowing the company to survive and continue developing its activity.
Pre-bankruptcy proceedings can be especially useful, as they are a simple and short process that allows the debtor to start negotiations with their creditors to reach an agreement and avoid bankruptcy, renegotiating debts, both in their amount and in the payment period.
We cannot forget that, as a consequence of the crisis caused by the COVID-19 pandemic, Royal Decree-Law 16/2020 establishes that until December 31, 2020:
- A debtor who is insolvent will not have the duty to request a declaration of bankruptcy.
- Judges will not accept applications for compulsory insolvency proceedings filed by creditors after the declaration of the state of emergency. It is presumed, unless proven otherwise, that the insolvency is a consequence of the crisis if, prior to March 14, 2020, the debtor was not subject to any of the circumstances that entitle a creditor to request insolvency proceedings.
- If the debtor had filed a voluntary bankruptcy application before December 31, 2020, it will be admitted for processing with priority, even if it was filed earlier.
- If, before September 30, 2020, the debtor had communicated the opening of negotiations with creditors to reach a refinancing agreement, an out-of-court payment agreement or adherence to an early proposal for a settlement, the general regime established by law will apply.
What is the Pre-Competition?
Regulated by the Insolvency Law, pre-insolvency proceedings consist of the debtor's right to inform the court that they are insolvent and have begun negotiations with their creditors, primarily with the intention of:
- Avoiding insolvency proceedings by reaching an agreement that ensures the company's viability or
- To obtain the necessary support for an early proposal for an agreement, which will expedite, if necessary, the future and inevitable processing of the insolvency proceedings.
In short, it consists of a declaration to the court, which gives us a period of three months, plus one, to make a final attempt at negotiation with our suppliers, especially with banking entities, to try to refinance the debt that the company has and thus be able to revive it.
Pre-bankruptcy proceedings are held before formal bankruptcy proceedings are declared, with the aim of avoiding them. The law requires debtors to file for bankruptcy within two months of becoming aware of their insolvency. At this point, they can decide whether to initiate pre-bankruptcy proceedings or directly file for bankruptcy.
According to the Insolvency Law, the company in pre-insolvency proceedings then has a period of three months to negotiate with its creditors and try to resolve its liquidity problems.
If no agreement is reached during that period or pre-bankruptcy phase, the company will have an additional month to declare bankruptcy before the Commercial Court.
In this respect it should be noted that the failure to reach an agreement does not imply liability for the administrators, unless the period for negotiation was not actually used, this route was used only as a dilatory measure, or the insolvency situation worsened during this period.
Therefore, pre-bankruptcy proceedings are a legal measure that we can apply simultaneously with refinancing if the company is insolvent or becomes insolvent, with which we will seek the following objectives:
- To reduce the chances of eventual personal liability for the employer.
- To avoid the declaration of bankruptcy of our company at the request of a creditor for a period of 4 months.
- Refinance our debt.
- Prepare for bankruptcy proceedings by negotiating an early settlement proposal with our creditors, which will shorten and simplify the process.
- To prevent the initiation or to suspend judicial or extrajudicial executions against assets or rights necessary for business continuity, or even on other assets if we have the support of at least 51% of our financial creditors.
- Temporarily suspend mortgage foreclosures.
Advantages
The pre-competition process is an alternative that offers many advantages:
- It does not disrupt the work routine during the procedure: Unlike insolvency proceedings, the company is not placed under the control of insolvency administrators. In other words, the company retains its governing bodies and remains responsible for all executive decisions.
- Avoid a bad rating: Companies in pre-bankruptcy proceedings are protected against possible requests for compulsory bankruptcy by their creditors.
- Stop executions: From the presentation of the communication, judicial executions of assets or rights that are "necessary for the continuity of the professional activity" will not be possible.
- It does not affect the company's image: Companies in pre-bankruptcy proceedings enjoy a degree of privacy regarding the process. Although the court clerk may order the publication of the resolution summary in the Public Bankruptcy Registry, if the debtor expressly requests it, it will not be made public. However, the debtor may request that the confidentiality of the communication be lifted at any time.
- It's cheaper: In a pre-bankruptcy proceeding, the costs will always be much lower than those in a bankruptcy proceeding because its duration is short and limited; there is no bankruptcy administrator and the costs of lawyers and solicitors are considerably lower.
Most companies that file for bankruptcy do so when there is no longer any possibility of reversing their situation. Early restructuring strategy tools can help your company overcome a temporary insolvency situation, provided they are used in time
And remember, once the pre-bankruptcy notification has been made, a new one cannot be made within one year.
You can contact this professional office for any questions or clarifications you may have.
Warm regards,
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A Àmbit Assessor, SL has 40 years dedicated to the tax, comptable and labor consultancy of the Pime.
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