What Are Insolvency Types

What Are Insolvency Types. This is insolvency when a company fails to meet its economic obligations to its creditors. Insolvency can be culpable or accidental, with different consequences for people and companies involved in the process, according to  article 185 of CIRE .

We are facing culpable insolvency whenever there is a situation created or aggravated by the debtor company or by the respective administrators, in the three years prior to the beginning of the insolvency process:

• use of company assets for personal gain;
• destruction of part or all of the company’s assets;
• aggravating losses or reducing the company’s profit.

On the other hand, it is considered  fortuitous insolvency when there is no serious fault in the three years prior to the beginning of the insolvency and the administrators have performed all possible procedures to avoid the situation of insolvency.

Who can apply for a company insolvency?

Creditors, insolvency practitioners, the insolvent company itself or persons who are legally liable for debts, may file for insolvency. According to  article 2 of CIRE , the  entities that can benefit from the insolvency proceedings are the following:

• Natural (operating company) or legal persons;
• Associations without legal personality;
• Special commissions;
• Civil societies;
• Commercial companies and civil companies in commercial form until the date of the definitive registration of the contract by which they are formed;
• Cooperatives, before registration of their constitution;
• The individual establishment of limited liability;
• Other autonomous assets.

Before initiating insolvency proceedings and if the company is in an economically difficult situation or in a situation of imminent insolvency, it is possible to negotiate a special revitalization process with creditors (Article 17B of CIRE).

How does the Insolvency Process start?

The insolvency process is a set of acts and formalities that begins with the filing of insolvency by the debtor or with the insolvency request by the creditor, ending with the payment to the creditors. The  CIRE – Insolvency and Company Recovery Code – describes the  steps that must be taken to start and end the insolvency process.

Stages of the Insolvency Process

1. Application for declaration of insolvency (Articles 18 to 26);
2. Threshold assessment and precautionary measures (Articles 27 to 34);
3. Discussion and judgment hearing (articles 35);
4. Declaration of insolvency and impugnation (articles 36 to 43);
5. Seizure of property (articles 149 to 152);
6. Meeting of creditors to assess the creditors’ report (Articles 72 to 80 and 153 to 155);
7. Claims for credit verification, impugnation and credit verification sentence (articles 128 to 140);
8. Subsequent verification (articles 146 to 148);
9. Settlement and payment (articles 156 to 184);
10. Insolvency qualification incidents (Articles 185 to 191);
11. Insolvency plan (Articles 192 to 222);
12. Closure of the process (articles 230 to 234).

Which Documents should be included in the Declaration of Insolvency?

In order to initiate the insolvency process it is necessary to deliver the following documents :

• Inicial petition;
• Commercial registration certificate;
• List of all creditors;
• List of all pending actions;
• Explanatory document of the activities of the last three years;
• Document with identification of the partners, associates or members of the legal person;
• List of assets held under lease, rental or finance lease;
• Annual accounts for the last three financial years (with respective management, inspection and audit reports and information on relevant changes in assets that occurred after the date of the last accounts);
• Staff map that the debtor has at the service.

What is an Insolvency Plan?

In the course of the insolvency process, the insolvency practitioner or creditors may submit an insolvency plan . This may be a recovery plan for the company, if it is economically viable. Alternatively, it will be the liquidation of the company (sale of assets) and consequent payment to creditors, in accordance with the Insolvency and Corporate Recovery Code. The insolvency proceedings are closed after the sentence approving this plan.

But, how long does an insolvency plan take? Legally, the insolvency plan must be carried out with the utmost urgency. In other words, it must be completely finished, with the respective debts paid to creditors, in the shortest possible time.

And in case of non – compliance with the insolvency plan , what to do ? If the debtor company does not comply with the agreement between itself and the creditors, the insolvency plan is rendered ineffective. The company is again in debt and creditors can file for new insolvency.