What is a pre-bankruptcy
With the current situation of health crisis that we are experiencing due to COVID-19, accompanied by a paralysis of the economy, at this time the question that both natural persons are asking as legal entities is: What will happen to your business or company?
Experts predict that economic activity will take a few months to start up once the state of alarm is lifted, and that it will take a long time before reaching economic levels similar to those existing before the crisis caused by COVID-19.
The lack of activity of many companies means that they are not having income, together with the fact that many of them were already in debt before the health crisis. All this makes it foreseeable that these companies will not be able to face the start-up period when we overcome the health crisis.
For companies, it is time to make decisions and adopt measures derived from this situation, in order to prevent them from going under. Among these solutions, the Bankruptcy Law includes the pre-bankruptcy , but:
What is a pre-bankruptcy?
Actually, the pre-bankruptcy period is a period of grace or extension that the Bankruptcy Law grants to those companies that due to their financial situation are about to enter into bankruptcy proceedings, with so that these companies have time to redirect their financial situation.
Article 5 of the Bankruptcy Law establishes that:
“the debtor must request the declaration of bankruptcy within two months from the date on which he knew or should have known of his state of insolvency”
Due to the difficulty of establishing precisely the date on which the debtor knew or should have known the state of insolvency, the Bankruptcy Law has contemplated in its article 5 bis the pre-bankruptcy creditors, that is, the possibility that an insolvent company may have a term to renegotiate with its creditors and reach a refinancing agreement.
To request the pre-bankruptcy, the debtor must notify the Court that is competent to declare the bankruptcy, that is, the Commercial Court, that has begun negotiations to reach a refinancing agreement or to obtain adhesions to an anticipated agreement proposal. Notification to the Court must be made at any time before the expiration of the two-month period set in article 5, in order to avoid having to request the declaration of voluntary bankruptcy. Once the debtor has informed the Court of the pre-bankruptcy situation, it cannot be re-formulated within a period of one year.
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The debtor in his communication to the Court must indicate what executions exist against the assets of the company and if these fall on assets that should be considered necessary for the continuity of the company.< /p>
The Bankruptcy Law grants the company a period of three months, from the communication to the Court, to reach an agreement with the creditors. If at the end of said period a refinancing agreement has not been reached, or an out-of-court payment agreement, or the necessary adhesions for the anticipated agreement proposal, the company has another month to present the request for declaration of bankruptcy to the Court. Therefore, in practice the duration of the pre-bankruptcy is four months.
During the duration of the pre-contest, judicial or extrajudicial executions of assets or rights necessary for the continuity of the business activity may not be initiated, that is, , except to record the communication of the pre-bankruptcy made by the debtor, the Court does not intervene in the operation of the companies. Requests for a necessary bankruptcy declaration made by creditors are also “blocked”, since the pre-bankruptcy request temporarily suspends the obligation to request bankruptcy.
During this extension, the administrators of the company have time to reach agreements with the creditors, being able to obtain an early agreement proposal, therefore, in the event that the bankruptcy the procedure would be expedited.
The debtor may expressly request that the pre-bankruptcy situation of the company be reserved, that is, that the communication made to the Court not be made public . In this way the reputation and image of the company does not suffer in the face of third parties outside the company. Although it is true that the debtor can request at any time the lifting of the reserved nature of the pre-bankruptcy communication.
It should be noted that, during the pre-bankruptcy situation, the company’s activity does not undergo any alteration, the bankruptcy administration does not intervene and the management and administration bodies of the same are maintained
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