Before addressing the advantages of pre-insolvency versus insolvency proceedings, it is worth recalling the objectives of this legal alternative.
Objectives of the pre-insolvency
- Reduce the possibilities of eventual personal liability of the business owner
- Avoid the declaration of bankruptcy of the company at the request of a creditor for a period of 4 months
- Refinance the debt
- Prepare for insolvency proceedings by negotiating an early settlement proposal with creditors, which will shorten and simplify the proceedings
- Avoid the initiation or suspension of judicial or extrajudicial executions against assets or rights necessary for the continuity of the business, or against other assets (with the support of at least 51% of financial creditors)
- Suspend foreclosures temporarily
Advantages of the pre-insolvency
The pre-insolvency is a legal mechanism that offers the following benefits:
Maintains the work routine
Insolvency administrators do not intervene in the company as with bankruptcy proceedings. In other words, the company keeps its governing bodies and be responsible for all executive decisions during the time of the proceeding.
Avoids bad ratings
Companies in pre-insolvency proceedings enjoy protection against creditors’ applications of insolvency proceedings.
From the time of submission of the communication, the judicial enforcement of property or rights that are “necessary for the continuation of the professional activity” will not be possible.
Does not affect the image of the company
Companies in pre-insolvency have some privacy regarding the process. Although the court secretary can order the publication of the extract from the resolution in the Insolvency Register, if the debtor expressly requests it, it will not be made public. The debtor may subsequently request to reverse the confidentiality of the communication.
It is economical
Pre-insolvency costs are usually lower than bankruptcy proceedings’ ones because its duration is shorter and limited in time. Additionally, there are no bankruptcy administrators, and the fees for legal counsel and lawyers are inferior.
Most companies that apply for bankruptcy proceedings do so when there is no longer any possibility of reversing their situation. However, an early restructuring strategy tools can help them to overcome a short-term insolvency situation if implemented in time.
Finally, it is worth recalling that once the pre-insolvency notice is declared, the company will not be able to issue another one within a year.
This article is not considered as legal advice