What is an arrangement with creditors?

Insolvency proceedings are a legal concept that became particularly famous during the economic crisis of 2008, which also affected several years later. However, having heard about it frequently in the media does not mean that you know exactly what it is. Here we want to explain it in depth and add all the interesting facts related to it.

What is an insolvency proceeding?

As any insolvency lawyer in Madrid can confirm, it is a judicial procedure that is held when a natural or legal person, i.e. a company, becomes insolvent and is unable to meet the payments of the different debts it has incurred in recent years. It is possible to apply both in a situation of suspension of payments and bankruptcy.

This process is regulated by insolvency law and, in Spain, by Law 22/2003 of 9 July. The aim of this process is to enable the company to meet its debt and payment obligations through its assets, even if only partially. It also seeks to reach agreements between the debtor and its creditors to find a solution that is the least damaging for both.

But this law pursues another objective. Specifically, it seeks to ensure that, regardless of the debtor's financial situation, no creditor receives detrimental or favourable treatment with respect to the others. In doing so, it aims to satisfy as many debts as possible without any disadvantage.

When should insolvency proceedings be filed?

As soon as the company's managers realise that they will not be able to meet their obligations. It does not matter whether it is a question of payment of credits to private entities, tax levies to the Treasury, salaries or indemnities to workers or Social Security contributions.

In this case, according to the provisions of the aforementioned legislation, we would be in a case of imminent insolvency. In other words, the debtor can still meet the payments, but knows that in the near future it will be impossible to do so. The law also speaks of 'current insolvency', which is the insolvency that has already occurred at the time of filing for insolvency proceedings.

Evidently, due to the current economic crisis, it is possible to perceive a notable increase in insolvency proceedings in Spain. The losses of social and economic capital caused by the pandemic are responsible for this.

Who can apply for insolvency proceedings?

The commencement of this judicial process must be requested by the debtor himself or, failing that, by one or more of his creditors, who also have the power to request it. The same applies to the insolvency mediators in the event that an out-of-court settlement agreement has been concluded. It should be remembered that the debtor, in the case of a company, will have to delegate this action to its administrative or liquidation bodies.

How long does it take to resolve an insolvency proceeding?

This is a difficult question to answer. According to any insolvency lawyer in Madrid, on the one hand, it depends on the workload of the commercial court where the application is processed. On the other hand, it also varies depending on the type of insolvency proceedings filed by the debtor or requested by the creditor. These are:

• Forced. This occurs when a creditor applies for insolvency proceedings due to the debtor's failure to make payments. Normally, when this formula is used, there are problems between the creditor and the debtor, which will normally complicate the process. It will be a judge who will decide whether to proceed and who will process it.
• Voluntary. It is the debtor who requests it when he/she is aware of the present or future situation of suspension of payments or bankruptcy. If, knowing that the company is in such a situation, it does not request it, it may have to face fines and even prison sentences.

If everything goes well and there are agreements, it may take 2 or 3 months for the contest to be resolved. However, if there are disputes, it can take much longer. In Spain there are examples of insolvency proceedings that have taken more than 5 years to finalise.

Phases and deadlines of insolvency proceedings 

Specialists in insolvency proceedings state that the process is divided into four phases. However, with the amendment of article 5 bis of Law 22/2003, of 9 July, an additional one could be added: the pre-insolvency proceedings.

What is pre-insolvency proceedings?

It takes place, in the words of insolvency specialists, immediately after the debtor has filed for insolvency. It is a period in which the commercial court opens a negotiation period with the creditors in order to reach an out-of-court agreement, to refinance the debt or to obtain an early proposal for an arrangement. This period can last a maximum of 4 months.

First or common phase

This is the beginning of the insolvency proceedings. It begins with the presentation of the application for examination by the judge. The judge will implement the relevant precautionary measures, if necessary, and will issue a decision in which the application is either upheld or rejected. The company's assets and liabilities are then determined.

Second phase or composition phase 

In this phase, the debtor must present the judge with possible proposals and proposals for debt relief or a debt waiver. It must include a realistic payment plan that can be met based on the continuity of the debtor's business or professional activity. Finally, the creditors in a meeting will vote for or against the agreement presented. If it is approved, the judge will ratify the decision.

Third or liquidation phase

In case of approval of the arrangement, this phase may not be necessary. In fact, it can only be initiated by decision of the debtor. Generally, it takes place when the debtor does not submit any arrangement proposal or when the proposal informed to his creditors is not approved. In this case, the debtor transfers its management and administration capacities to an insolvency administrator appointed by the judge. The latter will proceed to sell all the debtor's assets in order to pay the creditors proportionally as much of the debt as possible.

Fourth or qualification phase

The last. The judge will try to determine whether the insolvency proceedings can be classified as fortuitous or culpable depending on whether the insolvency situation has arisen without or with the debtor's responsibility. In the event of being declared guilty, the debtor will be unable to administer the assets of others and will have to compensate the creditors for the damages caused.

Conclusiones sobre concursos de acreedores

In short, this is a process that only occurs in the event that a natural or legal person is in a situation of extreme economic crisis and in which it is impossible for them to reformulate their debts. Therefore, if you live in the capital and you think you will have to face it soon, the best thing to do is always to use the services of a bankruptcy lawyer in Madrid.