What happens when a company enters bankruptcy?
Before focusing on what happens when a company enters bankruptcy proceedings, we must answer the following question:
What is bankruptcy?
The bankruptcy is a procedure that takes place before the court of first instance in the event that the debtor is a natural person, or before the commercial court when the debtor is a legal person. It arises when the debtor cannot meet the payment of its enforceable obligations, that is, when it is in a state of current insolvency. It can also occur when the debtor anticipates that he will not be able to regularly and punctually meet said obligations, that is, when he is in a situation of imminent insolvency.
By means of bankruptcy, it is a question of seeking a solution to the state of insolvency. The Bankruptcy Law includes among its articles a procedure through which an attempt is made to renegotiate with creditors, making efficient use of the resources available to the debtor, in order to achieve the viability of the business or company, that is, through bankruptcy creditors try to seek business continuity whenever possible. In the event that this is not possible, the orderly liquidation of the debtor’s assets will be carried out, ensuring the payment of creditors in the strict order of preference determined by law.
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Effects on the declaration of bankruptcy
The declaration of the contest produces effects in different areas:
Effects on debtors:
Regarding the effects that the declaration of bankruptcy produces on the debtor, it will largely depend on whether the bankruptcy is voluntary (requested by the debtor) or necessary (requested by the creditors).
In the event of voluntary bankruptcy the powers of administration and disposition of the debtor over his assets are subject to a regime of intervention by the administration bankruptcy, requiring the authorization of the latter to exercise certain powers. While if the bankruptcy is necessary, the debtor will see his administration and disposal powers suspended, being replaced by the bankruptcy administration in the exercise of said powers.
However, the bankruptcy judge may agree at any time to change the situation regarding the debtor’s powers.
Once the bankruptcy has been declared, the natural person debtor or the administrators, liquidators and attorneys of the legal person are obliged to collaborate and inform the court and the bankruptcy administration< /strong>, it must also make the obligatory books and any other document related to the patrimonial aspects of the debtor’s activity available to the latter.
It should be noted that the declaration of bankruptcy does not interrupt the debtor’s activity, without prejudice to the limitations on the exercise of the powers of administration and disposition that it has established. Although the judge may agree to the total or partial closure of the company.
More information in our article “Differences between the voluntary bankruptcy and the necessary bankruptcy“.
Effects on creditors:
Regarding the effects of the bankruptcy with respect to the creditors, once the bankruptcy has been declared, all the debtor’s creditors, except for those expressly marked by law, they make up the passive mass of the contest.
In general, the exercise of new individual legal actions in civil and labor matters is limited after the declaration of bankruptcy.
Regarding the procedures in which the debtor is a party and that are in process prior to the declaration of bankruptcy, they will continue with their processing until the judgment is final. It should also be noted that the judgments handed down prior to the declaration of the bankruptcy will be binding on the judge thereof.
On the other hand, executive actions against the debtor’s assets will be paralyzed, that is, that the embargoes pending execution on the debtor’s assets will be paralyzed, this fact responds to the purpose of the bankruptcy, which is none other than the orderly payment of the creditors according to the nature of their credits, in order to guarantee the continuity of the company.
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Effects on credits:
Once the bankruptcy has been declared compensation of the bankrupt’s credits and debts will not proceed, that is, compensation of credits is prohibited. The accrual of interest generated by the credits will also be suspended, except for those corresponding to credits with real guarantee (such as the mortgage) or recognized salary credits.
Likewise, the prescription of actions against the debtor will be interrupted, as well as those that could be brought against its partners, administrators, liquidators and auditors of the legal person, from the date of the declaration of the bankruptcy and until its completion.
Effects on contracts:
The declaration of bankruptcy does not affect the validity of contracts with reciprocal obligations pending compliance, the obligations contracted by the debtor will be carried out at the expense of mass. Although the bankruptcy administration may request the termination of the contract if it deems it appropriate for the interest of the bankruptcy.
In contracts with reciprocal obligations, when at the time of declaring the bankruptcy one of the parties has complied with its obligations, pending compliance by the other, the credit or the Debt that corresponds to the bankrupt debtor will be included, as appropriate, in the active or passive mass of the bankruptcy.
For example, if the bankrupt is a factory, which has supplied its products to a customer, but the latter has not paid for them, the debtor will have a credit against that customer, who will be included in the active mass of the contest. On the contrary, if the debtor owes the invoices for the supply of materials to one of his suppliers, the debt of said invoices will be included in the passive mass of the contest.
Regarding the termination for breach of contracts, the declaration of bankruptcy will not affect said resolution, which will be made before the bankruptcy judge, at through a bankruptcy incident. The judge, despite there being cause for resolution and in the interest of the contest, may agree to comply with the contract charged to the mass. In the event that the resolution is agreed, the obligations pending maturity will be extinguished, but the expired ones will be in charge of the mass when the obligations were subsequent to the declaration of bankruptcy; or being earlier will be included as bankruptcy credits.
Regarding urban lease contracts, the bankruptcy administration may avoid the eviction exercised against the debtor before the declaration of bankruptcy and rehabilitate the validity of the contract until the time of launch. For this to be possible, all rents and other pending expenses must be paid from the mass, as well as the procedural costs caused.
Effects on acts harmful to the active mass:
In order to prevent the debtor from carrying out acts of patrimonial disposition, carried out prior to the declaration of bankruptcy and that may be detrimental to the rights of its creditors, the bankruptcy legislation has provided for the mechanism of reintegration action.
Declared bankruptcy, acts detrimental to the active mass carried out by the debtor within the previous two years will be rescindible, even if there was no fraudulent intention.
Reinstatement constitutes the essential mechanism to roll back or return to the bankruptcy the goods or rights that have left the assets of the insolvent debtor prior to the declaration of bankruptcy.
Finally, we must emphasize that ordinary acts of professional or business activity carried out by the debtor under normal conditions will not be rescindible.
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