Bankruptcy reform: Public credit discharge could squeeze businesses

bankruptcy reform

Three months before the possible approval of the new insolvency reform that would introduce the Restructuring and Insolvency Directive, there is growing concern among insolvency practitioners.

"The privileging of public credit in the future insolvency law is outrageous. If a solution is not found, it will be very difficult for SMEs to restructure. It is necessary to consider the need for the exoneration of public credit", says the magistrate Enrique Sanjuan y Muñoz, magistrate of the Provincial Court of Malaga, coordinator of the 17th Andalusian Congress on Insolvency and Commercial Law, which took place between 31 March and 2 April in Antequera, Malaga.

Under the title "The reform of the Insolvency Law. Transitional regime and new institutions", and organised by Exfimer, more than 300 participants - lawyers, economists, judges and insolvency administrators - analysed in depth the reform that is underway.

The battle-horse is whether the Congressional Justice Committee, where the bill and its 600 or so amendments are being debated, will be in favour of absolute exemption of public credit. "This would mean a significant change to what is stated in the regulatory text", several of the rapporteurs argued.

In the opinion of Barbara Córdoba, magistrate of the 13th Commercial Court of Madrid, "there is an over-privilege at the moment. It can cause problems, in the case of a company in insolvency and the court reports it, as soon as the Treasury and the Social Security Treasury become aware of it. They will make massive seizures against that company and its credit rights. That means financial strangulation. The company goes into insolvency".

With regard to the exoneration of unsatisfied liabilities, which is more closely linked to the Second Chance mechanism, this magistrate indicated that "public credit cannot be exonerated in tiny amounts. This means that debtors cannot be exonerated of this liability".

For his part, Fernandez Seijo, head of Barcelona Commercial Court 11, states that "the Spanish legislator opts for the most severe model of the Directive. We are going to be one of the countries in Europe that will forgive the least and it will be more difficult to find creditors who meet all the requirements. It is a political decision that restricts access to the Second Chance for many debtors, which I personally do not agree with".

Also of great concern are the delays of the technological platform, located in Book III of the reform, which could delay its entry for up to two years, as Confilegal has been able to learn from related sources in the sector. And this is of great concern, and in a special way. Because it is a vital resource for the implementation of the new reformed legislation.

In the same way, the absence of reforms, in the event that the text is approved as changed, could open the door to the submission of preliminary questions to the Court of Justice of the European Union (CJEU), especially in relation to the exemption of public credit, one of the points that the draft law does not allow despite widespread criticism from all experts.

"IT DOES NOT SEEM LOGICAL FOR THE DEBTOR TO DO IT ALL BY HIMSELF".

"It is a necessary, far-reaching reform. Without the necessary human and technical resources, it will not be able to work, and it is likely that judges and court officials will have to do this work. It is important that these experts in restructuring that the law indicates are insolvency administrators who already know this activity from their experience", explains Sanjuan, who has co-directed this event for 17 years together with Fernando Caballero, magistrate of the Provincial Court of Cordoba.

Enrique Sanjuan is a magistrate of the Provincial Court of Malaga, specialising in commercial law.

San Juan reminds us that "with a procedure as complex as the one for micro-SMEs, which is online and based on different forms, contemplated in Book III, it does not seem logical for the debtor to do it all on his own. In this context, it has been suggested that it should be compulsory to have a lawyer, as has been stated by the Bar Associations, especially the Barcelona Bar Association".

Regarding Book III, "it is a tool for radical change in our insolvency law. Another proposal made to the Ministry from this Congress is that the new platforms should coact with the private liquidation platforms. This should not be left out. The initiative is a good one because what we have so far has not worked. It makes 94% of the companies go into liquidation in the end".

There is also debate as to whether the debtor and the creditors can appoint an insolvency administrator by mutual agreement. Not all judges are in favour of this, according to what was seen at this Congress of experts. "The feeling is that the judge should have the more general option of appointing the insolvency administrator.

MEANS ARE NEEDED

Judge Bárbara Córdoba, who has been working in this jurisdiction since 2010, believes that changes are needed in the insolvency reform. "The most important changes in Book III would be to allow the participation of professionals such as lawyers and insolvency administrators in this procedure. And at the same time to reduce the procedural overprotection of public credit".

She is concerned about the impact of this reform on the courts. "It is essential that the courts are provided with the appropriate IT resources to be able to process the Book III procedure for SMEs and micro-SMEs. And that the technology works. There is a lot of uncertainty about what is going to happen.

Judge Bárbara Córdoba believes that with regard to the Second Chance "public credit cannot be exonerated in tiny amounts. This means that debtors cannot be exonerated from this liability".

As for the new procedure in Book III, which focuses on micro-companies, "as it stands, it encompasses 95 % of existing insolvency proceedings. It is a procedure that affects many companies, very new, of an online nature, where not having the presence of lawyers and insolvency administrators can be alarming". 

For this magistrate, it is foreseeable that such a procedure could lead to debtors not going into insolvency proceedings. "In the end, if debtors have to confront their creditors and, in addition, a duty of truthfulness is imposed on them when processing their own insolvency proceedings, it is possible that many of them will make disorderly liquidations, out of court. They may leave many creditors unpaid. In the end, they go to insolvency proceedings to have the company terminated and extinguished".

A DRASTIC MODEL TRADE-OFF

The magistrate Jose María Fernández Seijo stresses that with the transposition of the Directive "the Government is proposing a change to the current insolvency model. It is an ambitious reform despite the detractors. I believe that shifting the burden of insolvency to the negotiation of debtors and creditors without the intervention of the court can speed up the process".

This magistrate recalls that the old Bankruptcy Law was already over in 2004. "The Bankruptcy Law was already a revolution. Now the same thing is going to happen, because the model is different. There is a demand for restructuring as soon as possible and there is a desire for insolvency to be left to the companies that are liquidated. Creditors now have a more prominent role".

José María Fernández Seijo, head of Barcelona's Mercantile Court 11, also warns of the danger of the state not forgiving public credits.

"The procedures set out in the law are sophisticated," according to Fernández Seijo.

In his opinion, the problem lies in the provision of resources. "There are courts in Madrid that are overcrowded. It is essential that technology is introduced and that more courts are created. In the reform, the liquidation plan was abolished because it took the courts about eight months to implement it. Now, with its elimination, the aim is to speed up the procedure and avoid having to go through the courts".

He considers it "legitimate and reasonable for corporations to defend the presence of lawyers and insolvency administrators in these proceedings, but it is also true that the procedures set out in the law are sophisticated. However, my experience over the years is that in 80 % of the insolvency proceedings there is no added value provided by the insolvency administrator, nor by the lawyer, nor by the judge".

On the special procedure for SMEs, the magistrate points out that "it is good that they have adequate and sufficient technological means. It could help small businesses. Its entry into force depends on whether the technological platforms that configure them will be operational and can allow them to be implemented".

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