Bankruptcy Law and Insolvency

WHAT IS THE BANKRUPTCY PROCESS ABOUT?

  • Definition:

    • A judicial process governed by specific legal frameworks aimed at resolving a debtor's insolvency.

  • Purpose:

    • Ensures equal treatment (par conditio creditorum) of all creditors, preventing a "first-come, first-served" scramble for assets.

  • Assets at Stake:

    • Universal Liability: All of the debtor's current and future assets are considered within the scope of the process.

  • Applicable Law:

    • In Spain: Ley Concursal (Bankruptcy Law, specifically the Recast Text of 2020).

    • While the EU provides frameworks for cross-border insolvency, it is not a fully unified procedure across all member states.

ROLES OF THE BANKRUPTCY PROCESS

  • Main Participants:

    • Bankruptcy Judge: A commercial court judge who oversees the legality of the process and makes final rulings.

    • Debtor: The individual or entity in a state of insolvency (unable to pay debts as they fall due).

    • Creditors: Individuals or entities holding financial claims against the debtor, categorized by priority.

    • Bankruptcy Administrator: A professional (lawyer or economist) appointed to monitor or replace the debtor's management powers.

STAGES OF THE BANKRUPTCY PROCESS

  • Common Stage:

    • Steps include:

    • Formal application by the debtor (voluntary) or creditors (necessary).

    • Judicial declaration of bankruptcy.

    • Submission of the inventory of assets and the list of creditors by the administrator.

  • Resolution Stage:

    • The process follows one of two paths: Agreement (reorganization and payment plan) or Liquidation (sale of assets to pay debts).

  • Qualification and Conclusion:

    • Final stages determining if the insolvency was accidental or "guilty" due to negligence or fraud.

DECLARATION OF BANKRUPTCY

  • Who can declare bankruptcy?

    • Any debtor, including both natural persons (individuals/entrepreneurs) and legal persons (corporations like S.A. or S.L.).

    • Legal persons: Administrators have a fiduciary duty to declare bankruptcy; failure to do so can lead to personal liability.

  • When is bankruptcy declared?

    • Current Insolvency: The debtor cannot regularly fulfill enforceable obligations right now.

    • Imminent Insolvency: The debtor foresees that they will not be able to fulfill obligations within the next few months.

APPLICATION FOR BANKRUPTCY

  • Duty to Apply:

    • The debtor must file for bankruptcy within 2 months from the date they became aware (or should have been aware) of their insolvency.

  • Evidence of Insolvency:

    • Frustrated seizure: A lack of free assets during an attempted seizure by a court.

    • General noncompliance: Widespread failure to pay debts.

  • Specific Triggering Breaches:

    • Unpaid tax obligations for over 3 months.

    • Unpaid social security contributions for over 3 months.

    • Unpaid salaries for the last 3 months.

    • Hiding assets (asset stripping) or selling them at ruinous prices to avoid creditors.

THE BANKRUPTCY ADMINISTRATOR

  • Appointment and Qualifications:

    • Appointed by the judge. Must be a lawyer with > 5 years of experience or an auditor/economist with equivalent standing.

  • Remuneration:

    • Fees are calculated based on the complexity and size of the estate, paid directly from the debtor's assets.

  • Primary Functions:

    • Asset Management: Supervising or replacing the debtor's power to manage property.

    • Liability Assessment: Preparing the "active estate" (inventory) and "passive estate" (creditor ranking).

    • Reporting: Assessing the viability of the company and any proposals for settlement.

    • The bankruptcy administrator acts like a neutral manager of the debtor’s estate, ensuring that:

      1. Assets are properly handled

      2. Creditors’ claims are verified and paid fairly

      3. The process complies with the law

      4. Fraud or misconduct is investigated

TYPES OF CREDITS & ORDER OF PAYMENT

  1. Credits Against the Estate:

    • These are paid first. Includes bankruptcy costs (administrator fees) and debts generated after the declaration (e.g., new utility bills).

  2. Privileged Credits:

    • Special Privilege: Secured by specific assets (e.g., mortgages or pledges).

    • General Privilege: Specific legal priority (e.g., portions of taxes, social security, and a percentage of employee wages).

  3. Ordinary Credits:

    • Standard trade debts and unsecured loans. Paid pro-rata after privileged credits.

  4. Subordinate Credits:

    • Lowest priority. Includes interest, fines, and debts held by "specially related persons" (e.g., company directors or family members).

AGREEMENT VS. LIQUIDATION

  • Agreement (Convênio):

    • Aimed at company survival. Requires a Waiver (reducing the debt amount) and/or a Stay (extending the payment period).

    • Usually requires support from 50\% or more of ordinary creditors, depending on the terms.

  • Liquidation:

    • Triggered if no agreement is reached or the debtor fails to comply with the agreement.

    • Liquidation Plan: The administrator sells assets. Preference is given to selling the company as a "productive unit" to save jobs.

QUALIFICATION STAGE

  • Fortuitous Bankruptcy: The insolvency was a result of bad luck or market conditions.

  • Guilty (Culpable) Bankruptcy: The debtor or its directors acted with willful intent or gross negligence.

    • Criteria: Accounting fraud, asset stripping, or failing to apply for bankruptcy on time.

    • Consequences: Directors may be banned from managing companies for 2 to 15 years and may have to pay the remaining debt personally.

SPECIAL SITUATIONS

  • Second Opportunity Principle:

    • Allows "good faith" individuals to have their remaining debts cancelled (discharge) after liquidation, provided they meet strict legal requirements.

  • Microenterprises:

    • A simplified digital procedure for companies with fewer than 10 employees and a turnover/debt under 2,000,000 euros.