Creditors' arrangement with creditors - Description, service and performance

Description of insolvency proceedings

An arrangement with creditors is, fundamentally, a legal procedure whose objective is to solve the problems of lack of liquidity and insolvency of a certain business. It is so called because it allows creditors to collect what is owed to them without giving up the continuity of the company.

Anyone can benefit from this process. In fact, it does not matter whether the applicant is a legal entity, i.e. an SME or a large company, or a natural person in the form of a self-employed person. However, the latter option is quite unusual as the vast majority of insolvency proceedings in Spain are filed by companies.

Everything related to this process is set out in Law 22/2003 of 9 July, also known simply as the Insolvency Law. Its aim is to avoid, by all means, the total dissolution of the company and to enable it to preserve, at least in part, its assets. In fact, it is the shareholder, when availing himself of this law, who must use his own assets as a mortgage guarantee.

Individuals and legal entities that can avail themselves of the Insolvency Act must prove their insolvency and their inability to meet their credit obligations. In fact, it must be established that there is a real risk of bankruptcy and that, in order to avoid bankruptcy, it is necessary to carry out a reorganisation process that allows creditors to be paid and workers' jobs to be maintained.

How can an application for insolvency proceedings be made?

The truth is that, contrary to what it may seem, filing for insolvency proceedings is not always a voluntary option, although it is the most common. In any case, if this route is used, it is the corporate or individual entrepreneur who is obliged to file the application upon detecting that there is a situation of insolvency that has not been declared and that may lead to the bankruptcy and closure of the company. To do so, it has a maximum period of two months. Failure to do so may lead to heavy fines and even criminal charges. The main reason for this is that the judge may consider that the bankruptcy was provoked with the aim of profiting in some way.

It should also be noted that, in some cases, it is possible to enter into an insolvency proceeding by force. To do so, it is only necessary that one of the company's shareholders who do not agree with the actions of the management or at the request of one of the creditors, request the bankruptcy. In this regard, it will be the judge who, depending on the data and evidence presented, will determine whether or not to approve it.

Services: what documents are necessary to file for insolvency proceedings

The application for insolvency proceedings must always be made in writing to a commercial court, specifying whether the insolvency is imminent or has already occurred. To this end, it is necessary to submit a financial report of the debtor, an inventory of its rights and assets, a declaration of legitimacy to file for insolvency proceedings and a list of creditors in alphabetical order.

If the entry into the insolvency proceedings is accepted, it will be published in the Official State Gazette, at which point the creditors will be able to file a claim for the debts in court. In this regard, the judge will determine which debts are justified and which are not and will proceed to appoint an administrator, who will be in charge of negotiating the debt in terms of reductions, reductions and payment terms. This figure is usually an auditor, an economist or a lawyer.

If there is an agreement, the agreement is signed. Otherwise, or if it is not feasible, the company will be liquidated in order to satisfy, as far as possible, the debts incurred.

Procedure for companies in insolvency proceedings

Any natural or legal person that is subject to an arrangement with creditors must go through four different stages, which are the ones that mark the process as a whole. Specifically, they are as follows:

1. Preliminary acts phase. This includes all the events necessary prior to admitting the insolvency proceedings through the courts. In this sense, it requires the presentation of the documentation and the application for admission, among other formalities. It is much more complex than it may seem and can take a long time if you do not have a team of experienced lawyers.
2. Common phase. The aim of this phase is to exonerate the debtor from reprehensible guilt and to ensure that the creditor will be paid. To do this, it is necessary to know the exact assets of the debtor and how much the total debt amounts to. It ranges from the issuance of the admission order to the insolvency report.
3. Resolution phase. Once the previous phase is over, it is necessary to decide whether the company should be liquidated or stick to the agreement and preserve the company.
4. Phase for determining liabilities. The law is not very specific regarding this stage of the process. In any case, it will only happen in the event that the company is liquidated, if it fails to comply with the agreement or if the approval of the agreement is excessively costly. In any case, the question is whether the insolvency was the fault of the debtor or of any of the legal representatives in charge of the debtor.

This is all there is to know, in general terms, about insolvency proceedings, a formula which, despite having been a symbol of the downfall, in business terms, of the Spanish economy, has served to save and make viable a wide variety of businesses.