creditors agreement guide

Practical Guide to the creditor´s agreement

What is an early proposal for a composition agreement and how is it regulated? What majorities are needed? What legal claims can be filed during the reorganization plan? What happens if a deadline of the reorganization plan is not met? Can assets of the company be sold during the reorganization plan? Are credits against the insolvency estate the debts that arise during the fullfilment of the reorganization plan? In this article we answer these questions.

Practical guide to the creditor´s agreement ( composition)

Once the initial common phase has been completed, the two routes through which the arrangement with creditors can take place are: composition and liquidation. Both solutions have the common aim of satisfying the creditors. The composition skees this satisfaction by means of reductions and/or waivers of the credits agreed upon by the debtor and the ordinary creditors. However, from the date of the judgment of approval, the composition becomes effective. Since then, all the effects of the declaration of bankruptcy cease, including the termination of the bankruptcy administration. So, can assets be sold during the phase of compliance with the reorganization agreement, and can debts arising at this time be claimed in court? Let’s see.

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What is the early composition proposal and how is it regulated?

In the early composition, the proposal, acceptance and judicial approval take place during the common phase of the proceedings. In this case it is not necessary to proceed with the opening of the composition phase. The early proposal is only granted to those debtors who are not subject to the prohibitions of article 335 TRLC (TRLC: Bankruptcy Act)

The debtor has exclusive legal standing to file an advance proposal for a reorganization agreement. It can be filed before the judge both in cases of voluntary and necessary insolvency proceedings. The time limit for submitting an advance proposal for a reorganization agreement is the expiration of the term for the communication of credits (article 334 TRLC). That is to say, within one month from the publication of the order declaring the insolvency proceedings in the BOE (article 28.1.5 TRLC). The judge will decide on its admission in the order declaring the insolvency proceeding when the proposal is presented with the request for voluntary insolvency proceedings or before the judicial declaration. If it is presented after the declaration of bankruptcy, the judge will decide by an Order within three days following its presentation.

The proposal for early composition agreement must be accompanied by adhesions of creditors of any kind. If the proposal is presented together with the request for voluntary insolvency proceedings, for one tenth of the liabilities. Otherwise, it must be accompanied by the support of creditors whose claims exceed one-fifth of the liabilities.

Once the proposal has been admitted for processing, it must be evaluated by the insolvency administration. For this purpose, it must issue a report on its content within ten days. As we have said, the system of acceptance of the anticipated agreement by the creditors is a system of adhesions. Adhesions may be prior to the filing or subsequent to the admission for processing. Creditors may adhere up to five days after the filing of the report when the proposal is filed together with the insolvency petition. Otherwise, the period will end once the period for contesting the inventory and the list of creditors has elapsed (Article 359.2 TRLC).

If the adhesions reach the legally established percentage, a period of ten days is opened to file opposition to the judicial approval of the agreement.

What majorities are required?

The acceptance of the agreement is, in principle, reserved to the ordinary creditor. For the preferential creditor, it is optional. The agreement will affect the subordinate creditors even if they do not participate in the acceptance. What if the same person has ordinary and privileged claims? It is understood that he accepts in relation to the ordinary ones. The agreement will only affect the privileged ones if this has been expressly stated in the adhesion or in the vote.

The percentages of ordinary liabilities required vary depending on the content of the proposal (Article 376 TRLC):

  1. Full payment of ordinary credits within a term not exceeding three years or immediate payment of overdue ordinary credits with a reduction of less than twenty percent. The proposal will be deemed accepted when the votes in favor represent a higher share of the liabilities than the votes against it.
  2. Reductions equal to or less than half of the amount of the credit; waivers with a term not exceeding five years; or, in the case of creditors other than public and labor creditors, in the conversion of debt into participating loans with the same term. The proposal will be considered accepted when at least fifty percent of the ordinary liabilities have voted in favor of it.
  3. When the agreement proposal or any of the alternatives contained therein has any other content, sixty-five percent of the ordinary liabilities will be necessary.

As mentioned above, if the agreement is an early one, the only way to accept the proposal is by adhesion. If it is ordinary, adhesion and vote are left to the free decision of the creditors in the corresponding meeting of creditors.

What are the legal claims during the composition?

The insolvency proceeding does not end with the entry into force of the composition. The insolvency proceeding is terminated by the final order of the declaration of compliance with the composition agreement. However, with the effectiveness of the agreement, some of the effects of the declaration of insolvency cease (art. 394 TRLC). Therefore, any judicial claim can be made during the composition agreement as if the debtor itself were not in insolvency proceedings.

What happens if an agreement deadline is missed?

The non-payment of an enforceable credit entitles the creditor to request from the judge the declaration of breach of the agreement. Failure to comply with a covenant term entitles the creditor to terminate the covenant, after a declaration of default. However, the non-compliance must persist at the time of exercising the termination. If there is a delay, the creditor lacks standing because the deadline was met before the lawsuit was filed. Payment subsequent to the filing of the lawsuit does not convert non-performance into mere delay. If the claim is upheld, the judge will declare the agreement terminated and will open the liquidation phase of the assets (art. 403 TRLC).

Can company assets be sold during the composition?

With the effectiveness of the reorganization agreement, the insolvent party will fully recover the powers of administration and disposition of the assets.  The clauses of the composition agreement may include the disposal of certain assets integrated in the active mass. However, their global disposal is not admissible (art. 318.2 TRLC). The insolvent party may dispose of and charge the assets and rights included in the assets without the authorization of the judge. The agreement itself may establish measures prohibiting or limiting the exercise of its powers of administration and disposition (art. 321 TRLC).

Are considered  against the estate those credits arising during the compliance with the agreement?

As we have been saying, with the effectiveness of the agreement, that is to say, from the judgment approving it, the effects of the declaration of the insolvency proceeding cease (art. 394 TRLC). These effects are replaced by those established in the agreement itself. Therefore, during the phase of compliance with the agreement, the credits arising in the same are not considered as credits against the estate. It will be a different matter if the agreement is not complied with. In this case, the liquidation phase will be opened and the credits arising from the exercise of the professional or business activity of the insolvent party after the declaration of the insolvency proceedings will be considered credits against the estate (art. 242.8 TRLC).

If this article has been of interest, we also suggest you to read the following article published on our website: The Agreement with Creditors in the Bankruptcy Procedure.

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