Do you know the advantages of the pre-contest? Very important for “the day after”

If your company is going through a delicate financial situation and its net worth is alarmingly reduced by accumulated losses from the income statement with the logical decrease in working capital, or what is equal to the solvency of the company, you should act as soon as possible to restructure its liabilities and return to business sustainability or better yet to the path of profits and surpluses.

Sometimes it is difficult to know when the company is insolvent. In fact, the bankruptcy law itself differentiates between current and imminent insolvency. The imminent insolvency would be that based only on a forecast of defaults and the current insolvency would be that situation in which the debtor can no longer comply with its expired and enforceable obligations.

It is the current insolvency that generates the obligation to request the bankruptcy within two months, on the contrary, the imminent insolvency, would only grant the debtor the power to make decisions to avoid greater evils

Failure to comply with the obligation to request the contest may be decisive for a judge to determine that you were aware of the problem and acted in bad faith, qualifying the contest as guilty.

So it was and so it will be after overcoming the crisis caused by the COVID 19 pandemic. Remember that Royal Decree Law 16/2020 establishes that:

Until December 31, 2020:

– The debtor who is in a state of insolvency will not have the duty to request the declaration of insolvency.

– The judges will not accept for processing the requests for the necessary bankruptcy that are presented by the creditors from the declaration of the state of alarm. It is presumed, unless proven otherwise, that the state of insolvency is a consequence of the crisis if, prior to March 14, 2020, none of the assumptions that enable the creditor to request the declaration of insolvency were found.

– If before December 31, 2020 the debtor had submitted a request for voluntary bankruptcy, it will be accepted for processing with preference, even if it was from the previous date.

– If before September 30, 2020 the debtor had communicated the opening of negotiations with the creditors to reach a refinancing agreement, an out-of-court payment agreement or adhesion to an advance agreement proposal, the general regime established by law will be followed .

Important legislative changes are coming, because, although the consolidated text of the Bankruptcy Law does not seem to establish significant modifications, the new European Directive on restructuring, which must be transposed before July 2021, does.

One of the planned reforms affects the pre-competition.

Companies with financial problems, covered by bankruptcy laws, will have the option of suspending any of the singular executions that they have in process (embargoes, judicial executions, tax interventions …) to favor the negotiations of a “preventive restructuring plan”, which in Currently, it lasts for four months and with the transposition of the Directive it could be extended up to one year (art. 6 Directive (EU) 2019/1023).

The aim of the European standard is to give companies that are viable and in financial difficulties the possibility of restructuring at a premature stage and thus avoid incurring a situation of insolvency and possibly having to be liquidated in the framework of a bankruptcy. .

What is the Pre-contest?

The pre-bankruptcy is fundamentally regulated in articles 583 and following TRL Insolvency and consists of the power that the debtor has to inform the court that he is in a situation of insolvency and that he has started negotiations with his creditors, fundamentally with the intention of :

– Avoid bankruptcy proceedings by getting an agreement that allows the viability of the company or

– Obtain the necessary adhesions for an advance agreement proposal, which expedites, where appropriate, the future and inevitable processing of the bankruptcy.

In short, it consists of a statement to the court, duly drawn up and presented by a lawyer and attorney, which gives us a period of three months, plus one, to make a final attempt to negotiate with our suppliers, especially with banks to try to refinance the debt that the company has and thus be able to refloat it.

Terms: Three months plus one

As its name indicates, the pre-bankruptcy is held prior to the declaration of bankruptcy, in order to avoid it. The law obliges to adhere to the bankruptcy law after the two months following the moment in which the debtor becomes aware of his insolvency. That is the moment in which you can decide whether to communicate the pre-bankruptcy situation or directly request the bankruptcy.

According to articles 583 et seq. TRL bankruptcy, the company in a pre-bankruptcy situation has thereafter a period of three months to negotiate with its creditors and try to resolve liquidity problems. If in that period or pre-bankruptcy phase an agreement is not reached, the company will have an additional month to declare the bankruptcy before the Commercial Court.

In this regard, it should be noted that the fact of not reaching an agreement does not imply a responsibility for the administrators, unless this period had not been actually used to negotiate, this route was used solely for delay or the situation had worsened. of insolvency in this period.

Advantages and disadvantages

The pre-contest is an alternative that offers many advantages:

-Does not alter the work routine during the duration of the procedure

Unlike the bankruptcy, the company is not intervened by bankruptcy administrators. In other words, the company manages to maintain its governing bodies and be responsible for all executive decisions.

-Avoid bad rating

Companies in pre-bankruptcy are protected against the possible request for a necessary bankruptcy by their creditors.

-Stop executions

From the presentation of the communication, judicial enforcement of assets or rights that are “necessary for the continuity of professional activity” will not be possible.

-It does not affect the image of the company

The companies in pre-competition have some privacy regarding the process. Although the court clerk may order the publication of the extract of the resolution in the Public Bankruptcy Registry, if the debtor expressly requests it, it will not be made public. However, the debtor may request that the confidentiality of the communication be lifted whenever he wishes.

-It’s cheaper

In a pre-contest the expenses will always be much lower than those that can be given in a contest since its duration is short and limited; there is no bankruptcy administrator and the costs of the lawyer and attorney are much lower.

Most companies that go to bankruptcy do so when there is no longer any possibility of reversing their situation. Early turnaround strategy tools can help your business overcome a short-term insolvency as long as they are used on time

And remember, once the pre-contest communication has been made, no new one can be formulated within a year.