What do you need to know before you enter a Bankruptcy Procedure?

So if you are thinking of applying for bankruptcy procedure, bear in mind the following considerations. They are of vital importance for a successful bankruptcy procedure.

It is a simple Decalogue. But believe us, it’s very practical.

The Decalogue. What should you know before filing for bankruptcy?

FIRST: Good relationship between the parties

It is a priority and essential that the debtor or bankrupt company (its administrator) and his/her lawyer have an active (not reactive) relationship. In addition to being cordial and fluent relationship with the Receivership.

Therefore, experience tells us that this is more important than any other consideration.

SECOND: Annual Accounts duly registered

With regard to the Annual Accounts, the application for the bankruptcy procedure can only be submitted if they are duly registered.

Also, it is advisable to have the Minute Books up to date.

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Delay in the Bankruptcy Procedure´s Application

The Directors have a two months term starting when they knew or should have known the insolvency situation.

THIRD: Guilty or Fortuitous Bankruptcy Procedure

It should be noted that Commercial Judges can only declare a Bankruptcy Procedure guilty when:

• The Receivership requests it
• It is requested by the Public Prosecutor’s Office

If both consider that the procedure is fortuitous, the Judge will be obliged to declare it as such. Even if the judge had other criteria.

FOURTH: Intervention of the Public Prosecutor’s Office

The Bankruptcy procedure is extraordinarily active and voluminous. The Public Prosecutor’s Office (in addition to lacking specific financial training) does not usually participate in it.

Therefore, in many bankruptcy procedures, the Public Ministry adheres to the qualification proposed by the Receivership.

FIFTH: Effects of the qualification of the bankruptcy

With regard to the effects of the qualification of the bankruptcy procedure, the following should be recalled.  It can only analyse and affect acts or business carried out in the two years prior to the date of declaration.  This date is the one of the declaration of the Bankruptcy Procedure by the judge and not when it was apply for by the debtor.

We consider the reading of STS 122/2014 of April 1, 2014. It clearly explains the effects of the bankruptcy qualification.

SIXTH: Actions of responsibility of the administrators

While the Bankruptcy Procedure is in progress, there is no room for liability actions by the board of directors of the debtor. These will be dealt with in the sixth section regarding the qualification of the Bankruptcy Procedure. This means that the Bankruptcy Procedure is a “refuge” for the Debtor’s Managers in the bankruptcy procedure. Or at least temporarily.

SEVENTH: Judges’ Opinion on the Guilt of the Bankruptcy Procedure

There are 89 Commercial Judges in Spain. Practically ALL of them consider that systematically the bankruptcy procedures are presented too late. What in itself is an assumption of guilt of the bankruptcy procedure.

EIGHTH: When should you apply for a bankruptcy procedure?

With respect to the moment of application for the Bankruptcy Procedure, we emphasize the following idea.

NOT ONLY must be applied for in two months following the detection that  its Net Worth is less than half of Share Capital.

You also have to apply for bankruptcy procedure when it is expected to be (although there is not now) insolvency.  Or when it is difficult to obtain financing, or to restructure a debt.

NINTH: Financing

Once the Bankruptcy Procedure has been declared, the Bank is obliged to maintain the financing lines. At least under similar conditions to how it had been doing so.

The judge can oblige financial institutions to do so. The truth is that not all judges dare to do so.  Not all debtors apply for it. And yes, ALL financial institutions refuse, supported by their legal advice.

TENTH: The most important.

We leave the most important aspect of this Decalogue to the end. It is the most important of all. You can be well advised. You can have all the resources at your disposal. But understand this well: You know how to enter a bankruptcy procedure, but not how you leave it.

Conclusion

In conclusion, despite the economic growth, both natural and legal persons continue to apply for bankruptcy procedure.

However, the satisfactory outcome of the bankruptcy procedure may depend on several factors. So, please take into account the key aspects indicated above before filing for bankruptcy. They can be of great help to you.

In relation to this section, we propose the reading of the following collaboration:

Non-compliance with accounting duties

Who is eligible to apply for a Bankruptcy Procedure?