Bankruptcy Measures Derived from the State of Alarm as a Result of Covid-19 (Spain)

by | Jun 25, 2020

Over the last few weeks, many regulations have been published with the aim of trying to reduce the foreseeable negative effects that the State of Alarm and the paralysis of a large part of the activity may cause in our economy. One of the latest topic is the potential increase of insolvency proceedings as a result of the difficulty that many companies will have to survive due to the shutdown of activity and the forced closure of their businesses.

There is no need to expand too much on this issue and it is very clear that, especially in certain sectors, the forced closure of businesses will lead to enormous economic losses for many companies. ´

The legislator has sought to adopt certain measures in the field of insolvency, which is where we will focus, in order to try to remedy these effects as far as possible. Furthermore, a new consolidated text of the Bankruptcy Law has been published, which substantially modifies it but will not be analysed in this article.

We will focus our explanation on four main areas regulated by Royal Decree 16/2020 of 28 April:

  • Deferral of the obligation to file for bankruptcy
  • Effects on approved agreements
  • Effects on approved refinancing plans
  • Improvement of the condition of people especially related to the bankrupt in certain situations

1.- Obligation to submit a tender:

The general rule obliges any company to file for bankruptcy within two months from the time it knew or should have known of its insolvency (Article 5 of the Bankruptcy Law, hereinafter LC). Non-compliance with this obligation could have serious consequences for the company’s directors, which could even lead to the bankruptcy being considered at fault due to a delay in its presentation and to the directors being sentenced to pay all or part of the bankruptcy deficit (the difference between the company’s assets and liabilities).

This obligation is postponed until 31 December 2020, without the debtor being obliged to file for bankruptcy until that date, despite the fact that his insolvency situation had continued prior to that date. The aim is to provide the debtor with a framework to improve its situation and avoid a flood of insolvencies of companies that are currently unable to meet their obligations on a regular basis.

At the same time, it is expected that necessary insolvency proceedings will not be admitted until that same date and that, if a necessary and voluntary insolvency proceeding is filed later, the voluntary insolvency proceeding will be processed in a preferential manner.

In other words, the deadline for debtors to be able to file for bankruptcy is extended and they are protected from possible necessary bankruptcy proceedings until 31 December 2020 with the aim, under our understanding, that they can try to reverse their situation within a longer period than the two months granted to them by law.

2.- Effects on agreements:

Another situation that could foreseeably occur is a massive breach of agreements approved in previous insolvency proceedings between debtors and their creditors. The current crisis may mean that many companies that have gone through insolvency proceedings will not be able to make the payments stipulated in the agreements with creditors, which would initially lead them to liquidation.

In order to avoid this situation, the regulation foresees two situations, for companies that have approved an agreement in the two years prior to the state of alert:

  • The possibility for the company to request a modification of the agreement until 14 March 2020. This involves trying to renegotiate agreements that will not be able to be fulfilled as a result of the Covid crisis and entails the suppression of the debtor’s obligation to request liquidation in the event of non-compliance with the agreement.
  • The inadmissibility of applications for liquidation due to failure to comply with the agreement within the previous period.

In other words, once again an attempt is made to give incentive to companies that would normally be obliged to file for liquidation, giving them a period of one year to recover and, if necessary, renegotiate with their creditors any modifications to the agreement.

3.- Effects on refinancing agreements:

Something similar occurs with the refinancing agreements that the debtor may have reached with his creditors in a pre-bankruptcy situation. In other words, the debtor who sees that he is in a situation of insolvency may choose to initiate negotiations with his creditors in order to avoid bankruptcy and, if a refinancing agreement is reached with them, this agreement may be approved by the court.

Again, the aim is to prevent the debtor’s failure to comply with such agreements from leading to a possible liquidation situation, which is why the rule provides for it:

  • That during the period of one year the court can be notified of the beginning of negotiations with the creditors to try to modify the refinancing agreement and avoid its breach.
  • The company that has approved a refinancing agreement is shielded during the six-month period from possible declarations of default by creditors who have not collected the corresponding fee. After this period, the company is given a further three months to negotiate with its creditors before admitting requests for a declaration of non-compliance.

As in the previous cases, the legislator’s aim is simply to give debtors extra time to stabilize their situation and to adopt measures to avoid bankruptcy and to reverse the crisis situation caused by Covid 19.

4.- Situation of the credits of specially related persons:

In insolvency proceedings, as a general rule, the credits of the so-called specially related persons are considered as subordinated credits. For practical purposes, this means that such claims are not collected until all other claims have been paid, which makes them virtually uncollectible.

These specially related persons, direct relatives of the entrepreneur, partners, administrators, group companies, etc., are often the only ones willing to finance the company, especially in small businesses where banks often require guarantees that the company cannot provide.

The approved regulations aim to encourage the support of these people to companies in crisis and, knowing that the ordinary situation is a clear obstacle to such financing, since in case of bankruptcy their contributions are unrecoverable, two measures have been adopted:

  • In the event of failure to comply with the approved or amended agreement within two years of the declaration of the state of alert, claims arising from cash income from loans, including those which, according to the law, have the status of specially related persons, will be considered as claims against the masses.
  • In insolvency proceedings declared within two years of the declaration of the alarm state, claims deriving from cash income from loans, credits or other businesses of a similar nature, which since the declaration of the alarm state have been granted to the debtor by specially related persons, shall be considered as ordinary claims.

In other words, the situation of credits derived from cash income from persons especially related to the bankrupt is improved in order to encourage these contributions and avoid the lack of support from these persons causing the company’s insolvency.

In short, this is a set of measures that aims to avoid the flood of bankruptcies that economic analysts predict and, at the very least, to defer them over time and give companies some margin to recover from this very serious situation.

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