More time before an insolvency filing is compulsory

Royal Decree-Law 34/2020 of 17 November, on urgent measures to support corporate solvency and the energy sector, and on tax matters, was published in the Official State Gazette on 18 November and came into force on the 19th. Among its measures, it extends to 14 March 2021 the suspension of the duty to file for insolvency, which was due to expire at the end of the year, and includes changes in insolvency law on arrangements and refinancings.

Companies with payment difficulties can breathe for a few more months, but they must understand exactly what this suspension covers and what it does not. Neither the directors’ duty to act diligently nor the debts disappear, and the deadlines that are postponed will have to be faced later, in a situation that may have improved or worsened. For business owners and for families who are shareholders in companies, it is worth being clear about the scope of this measure.

The duty to file for insolvency

As a general rule, a debtor in a state of insolvency, that is, unable to regularly meet its due obligations, must apply for a declaration of insolvency within two months of becoming aware, or having to be aware, of that state. If it does not, directors may face serious consequences, ranging from the insolvency being classified as culpable to personal financial liability. That liability is personal and may affect the assets of those who run the company.

The emergency rules temporarily suspended that duty to give viable companies time to recover after the shutdown. This new extension carries it to 14 March 2021, so that during that period it is not compulsory to file for insolvency merely for being insolvent, although that does not prevent filing voluntarily when it is the best solution for the company and its creditors. Nor does it relieve the company of paying wages, taxes or invoices when they fall due.

Arrangements and refinancings

The tenth final provision of the royal decree-law introduces changes in insolvency law affecting arrangements and refinancing agreements, with the aim of making it easier for companies to reach deals with creditors and avoid unnecessary liquidations. The technical detail is complex and varies depending on the type of procedure, so it should be analysed with the insolvency lawyer advising the company. Companies that had already begun negotiations with creditors should check whether they can take advantage of these changes.

In general terms, an arrangement is the agreement between the debtor and the majority of its creditors on write-downs and payment delays, and a refinancing agreement is a deal with financial creditors to adjust the debt before reaching insolvency proceedings. They are tools to gain time and reorganise the balance sheet, and they work better the sooner preparation begins, because they require information, negotiation and majorities.

What to review

Companies in difficulty should review their real situation: cash flow at three and six months, financial debt maturities, debts to the tax authorities and social security, and the date on which any moratoria they enjoy expire. A realistic cash forecast shows whether the problem is temporary and whether the time gained will serve to solve it or only to postpone it.

Directors should keep a record of the decisions they take and the reasons, because their liability does not disappear. And creditors, including suppliers and landlords, would do well to watch the situation of their customers and to document the terms granted. This note is general information: faced with a specific situation, consult an insolvency lawyer as soon as possible.

The moratorium gives time, but it only helps those who use it to negotiate.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.