Out Of Court Payment Agreement (VI): Need to attempt an Out Of Court Payment Agreement for the individual debtor to achieve the benefit of relief from unpaid claims (second chance)
An individual in debt who wishes to benefit from the new mechanism for relief from unpaid claims under article 178 bis of the Insolvency Law must first go through an insolvency proceeding and that proceeding must have been terminated by reason of insufficient assets. It is uncertain whether it is also necessary for the debtor to have gone through or attempted an Out of Court Payment Agreement in any event.
The Insolvency Law appears to lay down an attempt to conclude an Out of Court Payment Agreement as one of the requirements determining the necessary good faith for that relief. But the wording of art. 178 bis (3) (3, 4 and 5) of the Insolvency Law is turgid, allowing different interpretations, which casts some doubt as to whether it will still be necessary to attempt this type of agreement to be able to reap the benefit of the “second chance” mechanism.
In very concise terms, we could say there are two models or alternatives for relief from unpaid claims: (i) model A, consisting of permanent relief from the claims (subject to potential withdrawal) after the payment of a minimum liability threshold has been determined, and (ii) model B, consisting of provisional relief from the claims (also subject to potential withdrawal), by accepting a payment plan for the claims falling outside the relief and meeting a number of other requirements specified in the law.
One of the good faith requirements laid down before either alternative may be implemented is that the debtor must have concluded, or at least attempted to conclude, an Out of Court Payment Agreement. The attempt to obtain an agreement is therefore seen as a form of expression that the benefit of debt relief is requested by a responsible and cooperative debtor, willing to pay his debts. It so happens, however, that for model A, (under article 178 bis (3.4) of the Insolvency Law) it is provided that the minimum payment threshold is complete payment of the post-insolvency order claims and the preferred pre-insolvency order claims and, “if a prior out of court payment agreement has not been attempted”, at least 25% of the unsecured pre-insolvency order claims, which seems to pave the way to interpreting that the requirement to attempt an Out of Court Payment Agreement is optional for the debtor. Model B (article 178 bis (3.5) of the Insolvency Law) is presented as an alternative to the previous point, model A.
It may be inferred therefore, and this has been corroborated mainly by the decisions of the Barcelona commercial courts (apart from the earliest decisions on relief from unpaid claims, which tended to be very magnanimous with debtors), that any debtors wishing to opt for model B for relief from unpaid claims, for the purpose of implementing a payment plan for claims falling outside the relief, must in all cases have concluded or attempted to conclude an Out of Court Payment Agreement.
This is also a requirement for debtors who opt for model A for relief from unpaid claims (payment of a minimum liability threshold) and anticipate that they are only going to be able to pay the post-insolvency order claims and preferred claims.
The only debtors that will not have to attempt an Out of Court Payment Agreement to achieve relief from their unpaid claims, therefore, are those who can evidence that they have paid the post-insolvency order claims, the preferred claims and, in addition to these, 25% of the unsecured claims.
Lastly, in insolvency proceedings in which, on the date of the insolvency order, the requirement to attempt an Out of Court Payment Agreement to be able to benefit from relief from unpaid claims was not yet in force (or the Out of Court Payment Agreement as a preinsolvency mechanism did not yet exist), the courts have allowed that benefit to be granted even if that agreement has not first been attempted.
Garrigues Restructuring and Insolvency department