The effects of a bankruptcy proceeding

1.- Effects on the debtor: effects on the insolvent party in general.

If the insolvency proceeding is voluntary, the insolvent party will retain the powers of administration and disposition of the assets. However, such exercise will be supervised by the Insolvency Administration.

If the insolvency proceeding is necessary, the insolvent party’s powers of administration and disposition of the assets will be suspended. Consequently, the Insolvency Administration will replace the debtor in the exercise of such powers. The judge may modify such intervention regime at the request of the Insolvency Administration after having heard the Insolvent Party.

The declaration of bankruptcy will not interrupt the continuation of the professional or business activity that the debtor has been carrying out. The judge may, at the request of the Insolvency Administration, agree to the total or partial closure of the insolvent party´s offices .

The bankrupt party will have the duty to formulate the Annual Accounts in the case of intervention. In the case of suspension, this obligation will correspond to the Insolvency Administration.

Unless in suspension,  the bankrupt party will have the obligation to present the tax self-assessments

 2.- Effects on the debtor: effects on the representation and procedural defense of the insolvent debtor

In the event of intervention, the insolvent party will retain the capacity to act in Court. However, he/she will need the authorization of the Insolvency Administrator to sue, appeal, settle and compromise when the action affects the assets.

In the event of suspension, the Insolvency Administrator will be responsible for defending the assets in the interest of the insolvency assets.

3.- Effects on the debtor: specific effects on the debtor’s natural person.

If there are sufficient assets and the insolvent debtor is in a state of need, he/she will have the right to receive alimony. This right shall be maintained during the processing of the insolvency proceeding. The insolvent party will be able to take care of his needs, those of his spouse and those of the descendants under his authority.

The insolvent party will be able to request the resolution of the marital partnership when the active mass includes marital assets.

The spouse of the insolvent party will have the right  to be preferentially awarded the habitual residence of the marriage.

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Necessary Insolvency Proceedings and the hasty or ruinous liquidation of assets by the debtor.

The hasty or ruinous uprising or liquidation of assets by the debtor is a revealing fact of their insolvency

4.- Effects on the debtor: specific effects on the company.

During the insolvency proceedings, the organs of the insolvent legal entity will be maintained.

In case of intervention, the power of administration and disposition of the assets will correspond to the administrators. Always under the supervision of the Insolvency Administration.

In case of suspension, such power of administration and disposal corresponds to the Insolvency Administration.

The powers of attorney that could exist at the time of the declaration of the bankruptcy will be affected by the intervention or the suspension.

The administrators of the insolvent party will continue to represent the Company in the insolvency proceeding.

5.- Effects on the debtor: duties of appearance, collaboration and information.

The insolvent party shall make available the ledgers to the insolvency administration . As well as any other documentation needed for the business activity.

The insolvent party and/or its administrators must appear before the Court and the insolvency administration as many times as they are required to do so. In addition, they must collaborate and inform of all that is necessary.

6.- Effects on individual actions and declaratory proceedings

From the date of the declaration of the insolvency proceeding, claims against the insolvent party will not be admitted for processing. This suspension will be maintained until the approval of the agreement or until the conclusion of the proceedings. If admitted, the proceedings will be filed and declared null and void.

The declaratory judgments that are being processed will continue until the judgment is final. All this unless they are accumulated to the insolvency proceeding.

The declaration of the insolvency proceedings will not affect the validity of the mediation agreements or the arbitration agreements.

The mediation and arbitration proceedings initiated before the declaration of the insolvency proceeding will continue until the finality of the award.

7.- Effects on Enforcement Proceedings

From the declaration of the insolvency proceeding, no singular, judicial or extrajudicial executions may be initiated.

Nor may administrative enforcement proceedings including tax proceedings be iniciated,  against assets or rights of the active mass.

The actions and procedures in execution that are in process will be suspended.

Labor executions and administrative proceedings with seizure of assets not essential for the activity may continue.

The holders of real rights of guarantee will not be able to initiate procedures of execution or forced realization. Provided that these are necessary to continue the activity.

The opening of the liquidation phase will result in the loss of the right to initiate enforcement or forced realization.

8.- Effects on credits

From the declaration of bankruptcy the accrual of legal and conventional interests will be suspended.

Exceptions to the above are salary credits and credits with real guarantee.

Once the insolvency proceeding has been declared, there will be no offsetting of credits and debts, except for those arising from the same legal relationship.

Once the insolvency proceeding has been declared, the exercise of the right of retention on assets and rights integrated in the active mass will be suspended.

As from the declaration of the insolvency proceeding, the statute of limitations of the actions against the debtor for credits prior to the declaration of the insolvency proceeding will be interrupted. The actions against partners and administrators will also be suspended.

9.- Effects on contracts

If you wish to know the effect of the declaration of bankruptcy on contracts, click here.

10.- Conclusion

As we have seen, the impact of the declaration of insolvency is a complex issue. Depending on the role played within the insolvency proceeding, certain rules must be taken into account. In addition to the above, the legislation has been recently modified. Therefore, it is recommended to put yourself in the hands of professionals in this type of complex process.

If this article has been of interest, we also suggest you to read the following article published on our website: The homologation of refinancing agreements