Out of Court Payment Agreement (I): Focus on the debts of business owners, small and medium sized enterprises and a second chance
This is the first in a series of posts, by way of primers on the subject of the Out of Court Payment Agreement (Acuerdo Extrajudicial de Pagos), not intended to explain their complete legal regime, but to make known the chances this instrument offers and the problems that have emerged so far in its recent history.
The Out of Court Payment Agreement (also known by the name of expediente de mediación concursal, insolvency mediation proceeding) was created by Law 14/2013, of September 27, 2013 to support entrepreneurs and their internationalization, with the aim to make available out of court arrangements or restructurings between debtor companies and their creditors in a short and flexible proceeding which would allow business owners to learn from their failures and move on, without all the frustration associated with an insolvency proceeding, still a mechanism for liquidating companies in most cases. An Out of Court Payment Agreement is achieved with the assistance of an “insolvency mediator”, an ad hoc professional who must be an experienced mediator, and ideally, an insolvency manager.
These agreements have been devised for small and medium sized enterprises, which, as a general rule, do not have liabilities over five million euros.
The legal definition of small and medium sized enterprises (SMEs), however, as contained in Annex I of Commission Regulation (EU) No 651/2014 which distinguishes between micro, small and medium-sized enterprises, describes small and medium sized enterprises as any enterprise with an annual balance sheet total not exceeding forty-three (43) million euros. Consequently it is not completely accurate to say that the Out of Court Payment Agreement is designed for the restructuring of the debts of small and medium sized enterprises because that legal category takes in enterprises having liabilities much higher than five (5) million euros on their annual balance sheets.
The latest information published by the Ministry of Economy, Industry and Competitiveness (December 2016) estimates that there are more than 1.3 million Spanish companies falling within the legal definition of small and medium sized enterprises. Under the Spanish insolvency law, as we have said, only those with liabilities not exceeding five million (5) euros are eligible for this statutory debt restructuring instrument. There is nevertheless a very large number of companies potentially able to benefit from this legal instrument (definitely underutilized in practice). By this we mean that in Spain there are more than 1.1 micro enterprises with annual balance sheet totals below two (2) million euros and, of course, more than 1.5 self-employed workers are also eligible for this instrument.
The Out of Court Payment Agreement proceeding is also targeted at individuals, business owners or otherwise, and therefore might be the best solution for both the guarantors of large financing deals who are required to pay the guaranteed debt and having difficulties with doing so, and also for ordinary consumers who are in debt above their means to pay. For these debtors, moreover, insolvency mediation is, in most cases, the necessary antechamber to be eligible for the second chance mechanism or debt relief.
Any individual or consumer, self-employed individual or business owner, together with any legal entity (a Spanish corporation –sociedad anónima-, limited liability company –sociedad limitada-, cooperative, professional firm –sociedad profesional-, worker-owned company –sociedad laboral-, etc.), with liabilities below five (5) million euros, wanting to embark on a debt restructuring process in which to reach an Out of Court Payment Agreement with their creditors must apply, by filing a standard form as the first step, for the appointment of an insolvency mediator.
Garrigues Restructuring and Insolvency department