Out-of-Court Settlement & Modification to the Bankruptcy Act
One of the most significant innovations the Bankruptcy Act introduces is out-of-court settlement of payments and a mediator that oversees the settlement. Out-of-court settlement agreements represent an alternative form to negotiate the debts of businesses, whether they belong to natural persons or legal entities. Therefore, it is a mechanism that aims to negotiate an extrajudicial Payment Plan with creditors, as an alternative to contestations and formal refinancing agreements.
The Law establishes various mechanisms to promote the use of these settlement agreements, which include the residual debt exemption in cases of consecutive liquidation of individual entrepreneurs that have satisfied a minimum liability amount.
The regulation of out-of-court settlements will be effective 20 days after the publication of the Law in the Official Gazette, and will be applicable only to insolvencies declared after that date (insolvencies declared before that date will remain subject to completion in accordance with previous bankruptcy laws).
Entrepreneurs who are natural persons can negotiate out-of-court settlements when facing actual or imminent insolvency and dealing with liabilities valued at less than five million euros. Insolvent corporations must have fewer than 50 creditors, or assets or liabilities valued at less than five million euros. In both cases, negotiation is possible only when the costs of the agreement can be covered and the assets and predictable income allow for a viable agreement.
Businesses that cannot negotiate out-of-court settlement agreements are businesses that reached a settlement in the past three years; businesses approved for a refinancing agreement; businesses that have been declared insolvent; businesses negotiating a formal refinancing agreement or that have applied for insolvency and have had its application accepted for processing; and businesses with a bankrupt creditor who will be affected by the aforementioned agreement.
Public Law loans and secured loans will not be affected by these agreements, except when there is express acceptance by the owners. Upon acceptance of the application for out-of-court payment, the debtor must request a credit deferral of pending income from the Public Law. The agreement to resolve the fragmentation or postponement of such loans shall be indicated when the out-of-court settlement agreement is formalized and shall include a set postponement period, although the frequency of instalments may be different.
This article is not considered as legal advice