Differences between the voluntary bankruptcy and the necessary bankruptcy

Has your company entered into insolvency or has it considered declaring bankruptcy?

Before focusing on the differences between both types of bankruptcy, it should be noted that the bankruptcy bankruptcy will proceed in the event of the debtor’s state of insolvency, that is, when the debtor cannot regularly comply with its enforceable obligations.

Insolvency can be current or imminent. The current insolvency occurs when the debtor is unable to regularly meet its enforceable obligations. While imminent insolvency can occur when the debtor anticipates that he will not regularly and punctually meet his obligations. In the event of imminent insolvency, only the debtor may request the declaration of bankruptcy, while in the case of current insolvency, the declaration of bankruptcy may be requested both by the debtor and by one or more creditors.

According to the provisions of article 21 of the Bankruptcy Law, bankruptcy can be classified into two types depending on who initiates the process, thus we have the voluntary bankruptcy and the necessary bankruptcy.

If the bankruptcy is filed by one or more of your creditors, it is known as “necessary bankruptcy”, said request must be founded, among others, in the general breach of the debtor’s obligations. On the contrary, if the bankruptcy is requested by the administrator or the board of directors of the debtor company, it is known as a “voluntary bankruptcy“, that is, the administrators or the board of directors must go to the Mercantile Court to start the process, presenting the documentation proving the insolvency of the company.

This distinction has diverse consequences, since the origin of the bankruptcy influences the powers that the debtor possesses regarding the administration and disposition of his assets. In the event of a voluntary bankruptcy, it is the bankruptcy administrator or the judge who authorizes and participates in the administration and management of the assets, they can even veto certain decisions, but it is the debtor who manages and administers the company, that is, there is an intervention of debtor’s powers. While in the event of a necessary bankruptcy, the bankruptcy administrator is the one who manages and administers the debtor’s assets, suspending the powers of the debtor.

The term to declare voluntary bankruptcy is two months from the date of proof or knowledge of the insolvency situation. In the event that those responsible for the company do not comply with this term, they could incur legal and economic responsibilities.

This obligation to notify the state of insolvency may be suspended for an additional three months, provided that the debtor goes to the Commercial Court and requests to take advantage of article 5 bis of the Bankruptcy Law , said article establishes the possibility for the debtor to notify the Court of his intention to start negotiations with his creditors, in order to reach refinancing agreements, obtain adhesions to the anticipated agreement proposal, or to request an out-of-court payment agreement. all this in order to avoid having to request the declaration of bankruptcy.

After three months have elapsed since the debtor communicated to the Court the start of negotiations to reach a refinancing agreement, or to obtain adhesions to the anticipated agreement proposal, or to reach an out-of-court payment agreement, whether or not the debtor has reached the agreements must request the declaration of bankruptcy, unless it is no longer in a state of insolvency or it has been requested by the bankruptcy mediator.

The main advantage of anticipating and presenting the voluntary bankruptcy is that the company can freeze the payment of the credits with the creditors and can also proceed to negotiate with banks and suppliers in order to to reach agreements that give the company viability in the future, specifically, the company can renegotiate the debt with haircuts and waiting.

On the other hand, the fact that the contest is voluntary or necessary, although it cannot be directly linked, may be decisive for the contest judge to later classify it as fortuitous or guilty.

It will be classified as guilty when the insolvency situation is caused or aggravated with intent or gross negligence by the administrator or the board of directors of the company.

In the event that it can be shown that the administrator of the company or the board of directors of the same were aware of the insolvency situation and did nothing within the legal term than two months, that is, in the event that the voluntary bankruptcy does not start, they may have to face considerable legal and economic responsibilities, of which we can highlight:

• Disqualification from being part of the board of directors of any company for a period of two to fifteen years, depending on the amount of the company’s debt and the seriousness of its insolvency.
• Both the administrator of the company and the members of the board of directors may be sanctioned to answer for the company’s debts with their own assets, to the extent that their actions have affected the insolvency.

From the above, we can deduce that while the necessary declaration of bankruptcy is a duty, the voluntary one is a right. It is logical that the decision to request both the voluntary and the necessary bankruptcy is not pleasant to take, but in the vast majority of cases it is better to use them in order to offer a chance of success to society.

Alba Sacido
Member of the Commercial Law Department

09/26/2019