What bankruptcy tools does the family business have to overcome the COVID-19 crisis?

The state of alarm has caused the paralysis of activity in many sectors to which the family business is dedicated and a consequent decrease in income. As a result, many businessmen have adopted urgent measures to cut their expenses, processing, for example, ERTEs, and have stocked up on liquidity by requesting ICO lines approved by the Government. After these steps, family businesses should know that they have a range of tools in the bankruptcy and pre-bankruptcy field that, properly focused, can help them maintain their viability to successfully overcome the situation in which they find themselves.

These bankruptcy tools have also been systematized and clarified in a new Consolidated Text of the Bankruptcy Law recently approved and which will come into force on September 1. Additionally, it is necessary to know that the state of alarm has led to the adoption of some procedural and organizational measures in the field of justice that will help encourage the commitment to the viability of companies and speed up these bankruptcy processes in the short and medium term.

In accordance with the Bankruptcy Law, the debtor is in a state of insolvency if he cannot regularly meet his required obligations, being a legal duty to request the declaration of bankruptcy.within the two months following the date on which the debtor would have known or should have known his state of insolvency. Without now going into a detailed analysis of the concept of insolvency, the truth is that the current situation may cause many entrepreneurs to find themselves in the dilemma of not being able to meet their due obligations under the agreed terms and that they begin to accumulate financial debts, suppliers, public creditors, etc. Whether this is a short-term insolvency situation -simply due to the extraordinary current circumstances- or not, the family business has to weigh the different options that exist on the game board to restructure its debt and the terms it has to do so, so that can save the company and the administrators do not incur any kind of liability.

One of the exceptional measures adopted in the field of justice by the Government has been to grant a moratorium to debtors who are in a state of insolvency to request the declaration of insolvency until December 31, 2020. It is therefore suspended, until said date the obligation to act within the period of two months that we collected in the previous paragraph. In the same way, until December 31, 2020, in principle, the necessary insolvency requests made by the creditors against the debtor will not be accepted for processing.

However, administrators should not be overconfident as this does not mean that they cannot incur responsibilities for causing or aggravating the company’s insolvency during this period. In addition, the family business must assess the risks that creditors may initiate their remedies for the recovery of their credits and initiate executions against the company’s assets , since such executions have not been deactivated by the state of alarm.

Thus, on the one hand, the family business can consider redirecting its situation through pre-bankruptcy solutions , especially if there are still no judicial or extrajudicial foreclosure proceedings against the company. Among them, we highlight the court-approved refinancing agreement, as a refinancing and restructuring tool that allows creditors who do not sign the agreement (” cram down “) to impose certain effects on their credits such as waiting, removals, conversions of debt into shares or loans. participatory; It is an agreement designed exclusively for financial liabilities. And also the extrajudicial payment agreement, the latter negotiated and closed entirely outside the court with the help of a bankruptcy mediator; Extrajudicial payment agreements can also be imposed on the rest of the creditors with certain majorities and are designed for smaller companies (according to the estimate of assets or liabilities -less than five million euros- or the number of creditors) . In none of them is it foreseen, for the time being, to be able to include public credit.

These pre-bankruptcy solutions can be accompanied by a prior communication to the court of the negotiations or pre-bankruptcy so that the companies can forge the agreement with their creditors from a stability platform for a period of three months. Through said communication, the duty to request the contest is temporarily waived and the necessary contests are inactivated (something that the state of alarm regime has already legally decreed and exceptionally until December 31); but what may be most interesting about the pre-bankruptcy in the current context is that during the negotiation period the debtor is protected against foreclosure against his estate.

Approved refinancing agreements or out-of-court payment agreements have the advantage of taking less time and cost than a bankruptcy process, so they are a good bet if you consider that there is a real possibility of reaching an agreement with the creditors. It is possible to request the confidential nature of the communication of negotiations, to avoid making the pre-insolvency situation public. These agreements, in addition, are protected against a possible bankruptcy rescission in the event that bankruptcy is subsequently declared.

‘Hibernate’ during the crisis

However, on the other hand, bankruptcy proceedings can be a useful tool for debtors who need to hibernate during the COVID-19 crisis while they decide which restructuring option they need for the family business. And this, without waiting until the last moment granted by the aforementioned moratorium. At this point, we must remember that the contest – which will be processed before the commercial court – will allow the family business to stop paying its previous debts without the creditors being able to execute their credits and seize the debtor’s assets since, by As in the case of the pre-contest, during the contest, the family business will enjoy the protective shieldthat will make you immune from executions or seizures by your creditors (also including public credits here). The entrepreneur could thus paralyze the payment of the debt service, which in many cases would not even accrue interest, and focus on making the payments associated with the operating or working capital contracts necessary for the continuation of its activity, with the consequent improvement in the position of its treasury. Likewise, the aforementioned shield prevents the contractual counterparties of the employer from being able to resolve contracts out of court, and the commercial judge must decide in this regard, who can keep an unfulfilled contract in force in the interest of the bankruptcy.

In addition, the range of restructuring measures in the competition is very wide. In the competition, operational restructuring measures can be carried out, such as, for example, staff cuts, if necessary, or the resolution of burdensome contracts and the maintenance of those that are really essential, and this without the need to use the force majeure or the rebus sic standibus clauses that have been used so much in recent times. Likewise, financial restructuring tools have a place in the contest through an agreement with creditors with options that are also very diverse, all of them suitable for overcoming insolvency.

For its part, the competition is also an ideal breeding ground for carrying out the sale of one or several production units , defining the exact perimeter of the elements that would make up said production unit and having the option, even, of being able to do so in a agile at the beginning of the procedure, through the so-called ” pre-pack “, without ruling out that the family business partner could be the ultimate purchaser of the same, although with some restrictions. The actions aimed at the disposal of productive units in the contests have been decreed for preferential judicial processing until next March 2021 with the clear purpose of maintaining the activity of the companies and preserving their value.

Finally, it should not be forgotten that among the measures decreed as a result of the state of alarm there is also the temporary measure of the improvement in the range of new money contributed by the partners of a bankrupt company, which usually has a subordinated credit range (postponed over time, without guarantees and without voting rights). This measure encourages the injection of financing from the partners or people linked to the family business. When the financing has been channeled through a creditor agreement, this financing may have the highest priority rank (credit against the estate) if the agreement is subsequently breached and liquidation is opened. If it is money income by people linked to the family business produced after the declaration of the state of alarm, or subrogations for payments made by these specially related people also made after the state of alarm, this financing will be ordinary if a contest is declared before March 15, 2022.

Analysis and adoption of measures

In short, there are many options for the family business that may have fallen into a situation of insolvency due to the COVID-19 crisis; Among them, the role of bankruptcy is noteworthy, whose associated stigma must be left aside, since it is really a tool that serves to help and protect the family business in difficulty, with countless measures available to the debtor entrepreneur. In view of the insolvency budgets that apply to the company, the necessary requirements to access the different bankruptcy tools and the effects and consequences that derive from each of them, each family business must receive tailored advice. 

We will see if the additional streamlining measures approved for many of the bankruptcy procedures (preferential processing, avoidance of hearings or others) and the reinforcement measures (in terms of personnel, working days and hours, for example) approved in general for all courts promote effective solutions.