The bankruptcy department of Lexer analyses in Expansión the role that pre-bankruptcy mechanisms are going to play in the fight against  Covid-19.

Pre-bankruptcy mechanisms are going to be key instruments in the management of the business crisis caused by Covid-19.

In order to minimise the impact of the health and economic crisis caused by Covid-19, the Council of Ministers approved on April 28, 2020 Royal Decree 16/2020 a battery of measures on litigation and bankruptcy matters. With regard to the area of bankruptcy, measures have been adopted to make the legal mechanisms and deadlines available to companies, professionals and self-employed persons more flexible in order to avoid a state of insolvency.

It is clear that the new reform is aimed at those companies and self-employed people who are economically viable, but who, given the difficulties that surround us, are unable to maintain their business or professional activity. These measures seek to strengthen the out-of-court mechanisms offered by the Bankruptcy Law so that companies, through them, can obtain financing to make up for the lack of liquidity, restructure their debts and reach out-of-court agreements with their creditors. Undoubtedly, the pre-bankruptcy mechanisms are going to be key instruments in the management of this business crisis.

In view of the extension of the term granted by RD 16/2020, it should be noted that many companies and self-employed workers will be able to rely on the effects of economic recovery in each sector by seeing their cash flow increase and thus have better economic expectations for negotiations with financial institutions, suppliers and public bodies.

The measures adopted in the refinancing agreements are aimed at those companies that foresee a gradual economic recovery and that are currently experiencing economic difficulties due to the forced halt in their activity due to the declaration of the state of alarm. To this end, RD 16/2020 seeks to encourage companies to begin a period of negotiations with financial creditors or to carry out a modification of the agreement reached and adapt the terms of the agreement to their needs.

Companies benefiting from these measures must act in good faith and have a coherent viability plan whose terms are feasible for the parties concerned. It would also be desirable to encourage public-law creditors who are not involved in the refinancing arrangements (see Tax and Social Security Agency) to be included in the negotiation of the plan. The reason for this is that the claims of these creditors often represent a major obstacle within the bankruptcy proceedings, for example, the lack of interest on the part of third party investors in the acquisition of productive units.

The purpose of these pre-bankruptcy agreements is to prevent both professionals and businesses from being declared bankrupt. To this end, the legislator has enacted Royal Decree 16/2020 with the intention of facilitating measures aimed at refinancing or restructuring the debts of individuals or companies. However, there will be a large number of companies or professionals who will not be able to avoid the declaration of bankruptcy proceedings.

Certain businesses and professionals will certainly not be able to make use of pre-bankruptcy mechanisms and will be forced to file for bankruptcy, which, in a normal situation of insolvency, has a very high probability of ending with the liquidation of the assets and therefore the extinction of the bankrupt entity. However, in a situation of extraordinary insolvency, such as the one we are dealing with here, caused by an unprecedented global health and economic crisis, it is not unreasonable to think that the conclusion of the insolvency proceedings will also be exceptional and such exceptionality could be due to the termination of the insolvency proceedings by the approval of the creditors’ agreement.

It is possible that, in the courts, the agreement of creditors, either before or after the common phase, will play a significant role in the avalanche of insolvency proceedings that is approaching, and this is due to the fact that the insolvency of the social actors has its origin in an exceptional situation unconnected with the activity of the bankrupt parties, in such a way that when this exceptionality disappears the bankrupt parties will be able to resume and continue their professional or business activity although not without making an enormous effort.

The approval of the agreement of creditors within a bankruptcy procedure will be an effective instrument for the bankrupt parties to resume their business activity, since the application of removals and stays within the agreement of creditors accompanied by other business measures such as adjustments of staff, payment of taxes and duties by instalments, can be essential to reverse the situation of insolvency of the commercial bankrupt parties and avoid the liquidation and extinction of the bankrupt parties, whether they are commercial or self-employed.

It should be noted that the Legislator enacted the Bankruptcy Law 22/2003 of 9 July, as well as its subsequent amendments, with the clear intention of avoiding the liquidation of the bankrupt parties and trying to facilitate the continuity of the economic activity of professionals and business people. It is therefore reasonable to think that the exceptional situation in which we find ourselves could be a great opportunity to check whether the method of the creditors’ agreement is indeed an effective tool to fulfil the desire of the Legislator. All this without forgetting that the approval of the Royal Decree 16/2020, insists even more on the intention of the legislator to focus on the bankruptcy as an instrument to promote the employment and business continuity of professionals and commercial companies that are in a situation of insolvency.

Finally, with regard to individuals, perhaps we are faced with an ideal moment for the Extrajudicial Payment Agreement, set out in Article 231 and following the Bankruptcy Law, to be used coherently and in good faith, so that the withdrawals requested are adequate and proportionate so that the debtor can resume its activity without excessively harming its creditors. However, it will be necessary to see how events develop with respect to the application of the aforementioned article, since there are serious doubts that it will be applied without the intention of evading payment of obligations and harming creditors, who in the end are the victims in an unprecedented situation of insolvency such as the one we are facing.

Ana Enguix. Director of the Judicial Department of Lexer