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Who, when and why to file a bankruptcy case

  1. Concurso de acreedores
  2. Who, when and why to file a bankruptcy case

Bankruptcy law is designed to help companies maintain their business while in difficult commercial situations. In order to do this, the who, when, and why has to be determined in a clear way, supplemented by commercial legislation.

The first article of the Insolvency Act provides that bankruptcy may be submitted both by individuals and by legal people. Legacies in probate are able to request a creditors meeting, provided they have not been accepted, and both debtors and creditors also.

As we have now seen who can apply for bankruptcy, the question now is when. To answer this question we must go to Article 2 of the Bankruptcy Act and article … of the Corporations Act.

Bankruptcy law provides that bankruptcy should be requested when an insolvency situation is deemed imminent. Once this situation is taken into consideration, you have two months to submit to the creditors meeting. Article 5 bis.

On the other hand, following the same criteria, commercial law provides that bankruptcy should be applied for when the company finds itself in a negative equity situation and has not chosen to regularize this situation through corporate agreements of extension or reduction or liquidation of the company. If, within two months from the time of being aware of the situation of negative equity, none of these possibilities are acted upon, the company is obliged to file for bankruptcy.

These deadlines do not coincide when it is the creditor requesting bankruptcy of his debtor and when the relatives request, in virtue of the Bankruptcy Act’s Article 5 bis, a period of three months to negotiate the debts with their creditors.

Finally, the most important question is to know why a company should request the Court for it to enter into bankruptcy or why a creditor may request his debtor’s declaration of bankruptcy.

Under bankruptcy law, when an insolvency situation is current or  imminent  bankruptcy should be applied for. An imminent insolvency situation does not mean waiting until the company has no credit, has debts everywhere, has generated mistrust and poor relationships with suppliers and customers, and its supplier’s credits have been seized. No. The insolvency situation is when the inability to meet payments within the next six months can be seen on the horizon. And that’s when a bankruptcy situation can help. In medical terms, we could say that if you take the patient to the hospital when he has not a drop of blood, it is very difficult to save him. However, if you take him when the wound starts to get bad and then the impossibility of cutting for fear of hemorrhage is risked, you may have more choices of saving him. This is a mistake, yet very common in our business class, that is worthwhile emphasizing.

Finally, the creditor may request the inclusion of his debtor in bankruptcy. This can be done when, without covering all the credit, and the relevant debt claims in process, the assets have been progressed. This, in itself, enables the creditor to demand bankruptcy. It is also possible that a creditor asks for bankruptcy when he is aware of a situation of general cessation of the debtor’s defaults, the existence of embargoes by pending enforcements generally affecting the property or if he is aware that asset stripping is being carried out, or hasty or ruinous liquidation of assets by the debtor. The last of these options is when the creditor has knowledge of widespread non-payment of the following obligations: payment of tax obligations payable during the three months prior to the bankruptcy application, payment of Social Security contributions, and other joint contribution items during the same period; payment of wages and compensation and other benefits resulting from working relations corresponding to the last three payrolls.

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