Pre-Bankruptcy Procedure (also known as 5Bis)

What’s the Pre-Bankruptcy Procedure (also known as 5Bis)?

Is using the Pre-Bankruptcy Procedure (5bis) as a dilatory practice risky?

Is it mandatory to apply for the Bankruptcy Procedure once the 3 months- term of the Pre-Bankruptcy Procedure is over?

What are the effects of applying for a Pre-Bankruptcy Procedure (5bis)?

How does the Pre-Bankruptcy Procedure affect judicial enforcements?

Conclusions.

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What’s the Pre-Bankruptcy Procedure (also known as 5bis)?

Quizás esta pregunta habría que dividirla en dos:

Perhaps this question should be divided in two:

What is the Pre-Bankruptcy Procedure designed for?

1. Theoretically, it should provide two functions:
   1. To facilitate the refinancing of the small and medium companies’ debt.
   2. To prepare the necessary documents to apply for the Bankruptcy Procedure ruling.
2. In practice, most of the times the Pre-Bankruptcy Procedure only manages to delay the moment of application to the Bankruptcy Procedure. Practice shows that this Pre-Bankruptcy Procedure is only useful to sabe time and rarely to negotiate with the creditors.

Is it risky to use the Pre-Bankruptcy Procedure as a delaying tool?

Theoretically, yes. The Receivership could analyze if 5bis was really used as a dilatory practice or as a real attempt to refinance the debt.

In practice, no. The Receivership does not usually analyze whether the period of 5bis was used properly or not.

However, there are some Judges who still analyze this Pre-Bankruptcy Procedure application.

Is it mandatory to apply for the Bankruptcy Procedure at the end of the three months of Pre-Bankruptcy Procedure (5bis)?

Theoretically yes, as the law says so. Once this deadline has passed, the debtor must apply for the Bankruptcy Procedure.

In practice (having in mind that the debtor and its administrators may have some responsability if the don’t apply) no.

What are the effects of applying for a Pre-Bankruptcy Procedure (5bis)?

1. From that moment on, the obligation to apply for the Bankruptcy Procedure is suspended. It is as obvious as necessary to reiterate it once again: To apply for a Bankruptcy Procedure is not a right; it is an obligation.
2. From the time of the Pre-Bankruptcy Procedure (5bis) application, it is not posible to file lawsuits or to take legal actions against the debtor regarding assets that are necessary for its business activity.
   • What are the assets that are necessary for its business activity? Who decides it?
   • The decision is made by the Judge.
   • Therefore,
     • Theoretically, any creditor that has iniciated any enforcement against the debtor can urge the Judge to continue with the enforcement if they are not against a necessary asset.
     • In practice, it is in the creditor’s interest to wait for the 3 months+ 1 month of the Pre-Bankruptcy Procedure and to be aware of the debtor’s next move.
   • Legal proceedings already initiated will be suspended.

However, this point will be developed in more detail in the following section:

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Rescission in the Bankruptcy Procedure. The Reintegration

The purpose of the rescission action is to prevent the debtor, in anticipation of insolvency, from safeguarding assets, hurting creditors.

How does the Pre-Bankruptcy Procedure affects judicial enforcements.

Prior to the 2014 Bankruptcy Procedure Law reform, nothing prevented the application of enforcements againts debtors who initiated the negotiations mentioned in this law. And of course, nothing prevented keeping active all those enforcements that were in process.

However, after this reform, it is introduced a new point in article 5bis that gives debtors some space. Its purpose is to give them another chance to get out of the insolvency situations without their assets being seized during this period of time. The article we are mentioning states the following:

“The enforcement of these assets that are in process will be suspended by the Judge that is hearing them on presentation of the resolution of the court clerk acknowledging the communication. The limitations provided in the first paragraph of this section shall be lifted if the Judge that is competent to hear of the Bankruptcy Procedure rules that the assets of rights affected by this enforcement are not necessary to continue the debtor’s business or professional activity, and in any case, once the deadlines stated in the following section have ended…”

Although the wording seems clear, the truth is that in practice we have seen how various controversies arise. About cour jurisdiction, for example: should the Judge that is hearing the enforcement suspend the mentioned enforcement once the debtor who is being enforced presents the beginning of negotiations? Or should the Judge wait until the Commercial Court states that he must suspend the enforcement?

On the other hand, many debtors and creditors ask themselves what happens with the seizures that have been previously attached. Should the assets be returned to the debtor?

From a study of case law, it seems that the Provincial Courts are quite clear in setting these requirements:

1.- Jurisdiction to suspend the enforcement once the negotiations (5bis) have begun.

As we said, the application of the beginning of the negotiations prevents the initation of enforcements and the continuation of those already begun. However, it must be clear that the previous statements are not automatically done and they are not produced by the mere submission of the communication.

The first requirement is the issuance of a judicial decree by the Commercial Court , admitting the communication to be processed.

An example of this requirement is found in Order numer 96/2018, Barcelona Provincial Court (16th Section) :

“In effect, according with articles 568 LEC (RCL 2000, 34, 962 and RCL 2001, 1892) and 5bis-4 of our Bankruptcy Procedure Law (LC), the second of the conditions to suspend an enforcement that has already been dispatched is that the Court hearing this enforcement must have been informed about the Pre-Bankruptcy Procedure that is taking place. Therefore, the ruling of the Commercial Court stating that the debtor has communicated the beginning of the negotiations must be submitted to the Judge hearing the enforcement. That means that all the proceedings that took place before the Judge that is hearing the enforcement was notified of the beginning of the Pre-Bankruptcy Procedure remain valid.

In the case in question, Ms. Micael did not submit the decree that was issued on July 10th by Commercial Court Nº 3 until July 12th 2017, when not only was the decree convening the electronic auction final, but the tender was also closed with the result described above. It was impossible for the Judge to rule the suspension of the enforcement, and therefore the decisión is not worthy of criticism.(…)”

Another necessary condition is that the Decree should consider whether or not the assets of the enforced debtor are necessary for its business activity or not. And only if the Judge considers those assets necessary, the enforcement must be suspended. As stated in Order Nº 131/2019, March 22nd, of the Provincial Court of Valencia (9th Section):

“Therefore, “the assets determined in that article”, on which enforcement cannot be continued against the debtor are: those that the debtor has stated in his communication to the court (with enforcement against him already existing) and indicated by the court clerk in the decree; and in any case, those that are necessary for the continuation of the professional and business activity.(…)”

Without these two conditions, the Judge hearing the enforcement cannot suspend it.

2.- Seizures ruled before the beginning of the negotiations.

The creditor won’t have to return what has been seized prior to the admission of the beginning of the negotiations. The suspension won’t be retroactive to the moment in which the communication was submitted to the Commercial Court, either. As stated in Order Nº 108/2017, Provincial Court of Castellón, (3rd Section):

“Thus, the latter being what must be applied in this case at hand, we do not think that there is any areason why the appeal should have been upheld, nor to declare the nullity of what has been done in the way it has been done, since on the date the request of suspension was submitted (November 5th, 2015), no decree had been issued communicating the beginning of the negotiations, which in both cases is dated after the holding of the auction, so it is not appropiate to rule the nullity of the proceedings.

We do not consider it correct to deny the suspension based on the communication of the negotiations for not having submitted the decree, and once this decree is submitted, even if it is of a later date, the suspension should be retroactive to the moment in which said communication was submitted to the Commercial Court. This is not what the Law provides for the cases in which the enforcement is already in process. (…)”

Conclusions.

In conclusion, it should be noted that,

• The beginning of the negotations established in article 5Bis LC prevents the start of new enforcements and suspends those that are in process.
• However, it will be necessary, on the one hand, a decree by the Commercial Court with its admission.
• And on the other hand, the decree must contain a pronouncement on the necessity of the seized assets for the continuity of the business activity.
• The creditor does not have to return the assets seized before the admission of the beginning of the communications.
• Also, the suspension will not be retroactive.