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Is there really a False Start in Bankruptcy Matters or is this an Illusion?

In recent months, an idea is spreading in the press that is not accurate from a legal point of view, as the judicial approval of a creditor agreement is being equated with an exit from the Bankruptcy Procedure. This perspective does not have any legal basis. According to the Spanish Bankruptcy Act, the opening of section six will not be necessary in the following case:

When the court approves an agreement which establishes for all creditors or for those of one or more classes, a reduction equivalent to the third of the amount of their credits or a stalling period of three years, unless the agreement is breeched.”

It is true that the filing of an Agreement with a very long stalling period (over 5 years), produces an improvement in the situation of the company, as, from the financial point of view, this 5 year period allows for the development of the business model and, once those five years has past, to proceed orderly with the payment of creditors.

However, the agreement, since it is not included in the three year case, would necessarily mean the opening of the sixth section, in which both the Bankruptcy Administration report, as well as the Spanish Fiscalía with its report will establish whether the behavior of the company´s Directors has caused detriment to the assets of the bankrupt party. In the event that both the Bankruptcy Administration and the Fiscalía consider the bankruptcy incidental, the judge will cancel the proceedings.

From this moment, there will be a splitting of the process in two; on the one hand, the part of the debt that has not been affected by the agreement, that is the reduction, with regards to which the behaviour of the Directors is examined at the signing of the agreement and the previous procedure will be followed, and on the other hand, the debts affected by the agreement. Regarding these, the stalling period produces a standstill for examining the behavior  of the managers. However, article 172 bis provides the possibility of reopening the qualification phase, in the case of a breach of the agreement, and in this procedure not only the facts of the previous qualification phase will be taken into account but also new facts.

Therefore, the submitting of an agreement with a business plan which is not possible to carry out, far from meaning an exit from the bankruptcy procedure, actually only produces a standstill over the course of the years necessary for the reopening of the qualification phase.

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