Insolvency settlement

The Royal Legislative Decree 1/2020 of May 5, approving the revised text of the Insolvency Law (TRLC), reaffirms the legislator's preference for agreed and concerted solutions for companies in insolvency, in particular the settlements with creditors.

The settlement, despite the intervention of the insolvency administrator and judicial legality control, is to be considered an act of corporate governance aimed at preserving the legal relations of the company in insolvency, within the scope of the insolvent company's ability to fulfil its obligations. The control of legality by the court is due to the fact that the approval of the settlement by judgment results in the extinction of the original claims in favour of a new settlement with new terms. 

The debtor and the creditors whose claims exceed one tenth of the liabilities are entitled to propose a settlement. The proposal must be accompanied by a payment plan and feasibility plan that credibly demonstrate the measures taken to generate financial resources in order to actually fulfil the said plans.

The settlement may provide for a variety of scenarios. On the one hand, there is the possibility of agreeing on a takeover contract, which consists of a third party taking over all the assets and rights of the asset estate relating to the entrepreneurial or professional activity of the bankrupt party or acquiring certain business units, agreeing to continue the business activity during the period specified in the offer and to fulfil the payment obligations assumed by the contract.

On the other hand, the settlement may include a proposal for debt forgiveness or deferral of the claim. It may also provide for the conversion of claims into shares, business shares or into convertible bonds of the insolvent company itself or of another company, or for the assignment to the creditors against payment of assets or rights which are not necessary for the continuation of the professional or business activity of the insolvent.

Taking into account the legal classification of the creditor's claim, the composition must be approved by the majority of the participants of the creditors' meeting entitled to vote, whereby the majority varies depending on the content of the settlement proposal and must be between 50% and 65% of the ordinary claims or between 60% and 75% of the priority claims.

Failure to comply with the settlement creates the obligation for the debtor to file for liquidation. In this case, any creditor may apply for a court declaration of default.

Autor: Unai Mieza
Autor: Axel Roth