A company is insolvent if it is unable to regularly fulfil its economic obligations. The direct consequence is that the company must file for insolvency within two months following the date upon which it was aware or may have been aware of its insolvent status.
If the company does not file for insolvency before the abovementioned deadline, the insolvency proceedings may be filed by any creditor, whether a company or an individual, which may be interested in the insolvent company.
THE CONSEQUENCES OF FILING FOR INSOLVENCY.
Entering into insolvency proceedings brings with it, amongst others, the following:
- The intervention or even the suspension of the powers of the debtor for the administration and disposal of the company assets. As a consequence of the above, the debtor may not attend to any payment at his own discretion.
- The resolution of all agreements signed during the two years prior to the filing of the declaration of insolvency, which may be damaging to the assets of the debtor.
- A debt held by a creditor against the company may not be converted into a credit.
- Enforcements against the assets of the debtor may not be initiated.
HOW AND WHEN MAY I RECOVER MY CREDIT?
To a large extent, this question depends upon whether within the framework of the insolvency proceedings, an agreement between the insolvent company and its creditors is reached and whether or not the company is wound up.
The agreement phase
During the agreement phase, the debtor may attempt to reach an agreement with creditors pursuant to which the latter agree to reduce in part their credits and a “wait”, that is to say, a payment plan. For approval, the agreement requires that creditors representing at least 50% of the total debt of the company adhere to the agreement.
As a fact of interest, in practice it is normal that the creditors accept a reduction of debt amounting to more than 50% of the debt, due to the low expectations of recovery if the company is eventually wound up, as indicated in the following.
The winding up phase
If the agreement proposal is not backed by creditors representing 50% of liabilities, due to the non fulfilment of an agreement already approved by the insolvent debtor, or at the request of the debtor, the judge shall proceed to open the winding up phase, during which the assets making up the estate of the company shall be sold at auction.
The judge shall attempt to sell the totality of the assets of the company in one block, that is to say, as an operative production unit, given that a functioning company has a value superior to its individual assets. Without prejudice to the above, the sale of the functioning production unit is prevalent in order to preserve jobs.
Notwithstanding the above, if the sale of the production unit is not possible, whether due to a lack of bidders or because the company has not continued to operate during the course of the insolvency proceedings, the judge shall proceed to the sale of the company assets by auction in batches or individually.
A higher amount is usually gained from the production unit of the company than what would be obtained from the sale of batches of assets or individual assets. This is due to the fact that certain intangible assets such as the value of a trademark, certain contractual relationships or client portfolios are not destroyed, and that certain individual assets, such as machinery, which depending on its age, would not reach the price of scrap in a prospective auction.
If, a priori, it is not in the interest of the creditors that the assets of the insolvent company are auctioned for derisory prices, it is probable that one of the creditors may be interested in bidding for the production unit or certain assets which may be useful to him at a price lower than market value. For this reason, if such interest exists, it is important to be aware of the announcement of the various auctions, which take place in the insolvency environment.
HOW IS THE MONEY OBTAINED FROM THE LIQUIDATION PROCESS ALLOCATED AMONG THE CREDITORS?
The credits shall be qualified in accordance with their nature, as privileged, ordinary or subordinated. As examples of privileged creditors we may quote those guaranteed by a mortgage and as subordinated credits, those held by persons especially related to the insolvent company. Those credits, which are neither qualified as privileged nor subordinated, shall be understood to be of an ordinary nature.
The qualification of the credits is directly related to the order of precedence for their collection. The first credits to be paid shall be the privileged ones, followed by the ordinary ones, and in the last place, always provided there is money left, the subordinated credits. Given that, if for instance, the money obtained from the sale of the company’s assets is just enough to satisfy the privileged credits, the rest shall be left unpaid.
The credit qualification is normally unchangeable except on an exceptional basis. Whenever a credit is held by a creditor who actually filed the court declaration of insolvency, half of what was originally an ordinary credit may be upgraded to the status of a privileged credit, as a reward for having requested the legal declaration of bankruptcy of the debtor.
WILL THE ADMINISTRATORS / DIRECTORS OF THE COMPANY BE HELD PERSONALLY RESPONSIBLE FOR THE DEBTS OF THE COMPANY?
No, generally speaking. The company bears a legal personality and consistently, its assets are to be held independent from those of its managers.
That said, should the court detect fraud or gross negligence in the generation or deterioration of the insolvency situation of the company; or in case of the fraudulent exit of all or part of the company’s equity, then the insolvency proceeding may be declared negligent. As a consequence thereof, the administrators/managers shall be bound to return those assets unjustly detached from the company’s assets and pay an indemnity for such cause. Likewise, if the amount obtained from liquidating the company’s assets is not enough to cover the credits, the administrators/managers of the company shall be held responsible and bound to pay the balance.
CONCLUSION
In broad terms it can be said that the creditors of a company under insolvency proceedings very seldom collect their credits in total, especially when the credits are qualified as ordinary or subordinated.
Therefore, the qualification awarded to the credit is crucial, as well as the estimated volume and value of the insolvent company’s assets, in order to vote in favour or against a creditors’ agreement proposal. It should be taken into account that even if the acquittance and stay terms of the proposal are burdensome, it may be worth casting your vote in favour, since the possibilities of collecting the credit under a liquidation process drop significantly.
Vilá Abogados
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29th May 2015
