To understand the so-called pre-bankruptcy process, consider the provisions of Article 5.1 of the Spanish Insolvency Law (IL). Under this Article, The debtor must request the declaration of insolvency within two months from the date on which the debtor had become aware or should have been aware of its insolvency.
A debtor is insolvent when unable to meet regular obligations.
A debtor must file the request for declaration of bankruptcy with the Commercial Court of the territory in which the debtor’s main interests lie.
After clarifying what a bankruptcy proceeding of creditors is and when it is appropriate, we will discuss the pre-bankruptcy process. The Reform of the Bankruptcy Act and Article 5a of the Act introduced the pre-bankruptcy concept. This Article allows the bankrupt debtor to waive the requirement to file for bankruptcy before the Commercial Court for a maximum period of four months.
How Does It Work?
As indicated previously, the Law requires any debtor filing for bankruptcy to do so within the two months following the date that the debtor knew or could have known of its insolvency.
If, before that time (the two months), the bankrupt debtor informs the Court that it has initiated a series of negotiations with creditors, the deadline above will be frozen, and the debtor will not be forced to file for bankruptcy within the time set by Article 5.1 of the IL (the two months).
Types of negotiations may include:
- A refinancing of the debt
- Acceptance of a proposed agreement
Once the bankrupt debtor presents the necessary documentation to the Commercial Court, the debtor has three months to finalize a deal with the creditors. This agreement may consist, inter alia, that the creditor forego or forgive part or all of the debt.
At the conclusion of these agreements, the goal is to save the company from insolvency and to avoid the declaration of bankruptcy.
Should the parties reach an agreement to refinance, and the agreement meets the requirements of Article 71.6 of the IL according to the Fourth Additional Provision of the Bankruptcy Act, a court may approve the agreement.
The main objective of this judicial approval is that the creditors who, during the negotiations were critical of the agreement or had not signed, will be subjected to the waiting period and/or deferral that the parties negotiated, provided that none are dealing with a secured credit.
To obtain judicial approval of the agreement, Article 71.6 of the IL establishes the following requirements:
- The creditors who represent at least three-fifths of the liability of the debtor on the date of adoption of the refinance agreement have signed it
- An independent expert, appointed at the discretion of the Mercantile Registrar of the domicile of the debtor as provided in the Regulations of the Mercantile Registry finds the agreement acceptable
- All documents that prove the content of the agreement and compliance with the above requirements combine to create a formalized public instrument.
What Occurs If No Agreement Results?
If, within the three months since the debtor has informed the court of the initiation of negotiations to refinance its debt or to come to an agreement with creditors the negotiations are unsuccessful and the debtor is still insolvent, the debtor must file for bankruptcy within the next business month.
As stated in this article, the pre-bankruptcy process serves primarily as a way to save time and to save the company from filing for bankruptcy (as long as the company can overcome its insolvency), and secondly, as a protective barrier against creditors. According to the provisions of Article 15.3 of the IL, during the pre-filing period, creditors cannot initiate bankruptcy proceedings against the debtor.
This article is not considered as legal advice