Out Of Court Payment Agreement (VII): What happens if an individual debtor fails to satisfy the requirements to qualify for an Out Of Court Payment Agreement but wants to apply for the second chance mechanism?
The question of whether or not it is first necessary to attempt an Out of Court Payment Agreement to secure relief from unpaid claims which we started to look at in earlier posts is not a trivial matter when it comes to the individual debtor devising a debt composition strategy (remember that the benefit of relief from unpaid claims is only available to individuals).
For a start, an Out of Court Payment Agreement cannot consist of an overall liquidation of the debtor’s property, but rather the insolvency mediator, with the debtor’s consent, must submit a viability plan which will accompany its payment plan. Often, however, individual debtors will not have a viability plan, because they do not have many assets to distribute among their creditors. In these cases, would it make sense to attempt to reach an Out of Court Payment Agreement if the debtor knows he cannot make a proposal able to comply with the contents that the law requires of him? It might be questionable, but the law appears to be mandatory: if the debtor falls within the requirements to qualify for an Out of Court Payment Agreement, he must try to achieve one even if he apparently has absolutely no chance of obtaining one. Otherwise the debtor will have no other option than to pay all the post-insolvency order claims, all the preferred pre-insolvency order claims and 25% of the unsecured claims to be able to secure relief from his other debts.
And what happens if individual debtors do not qualify for an Out of Court Payment Agreement by failing to satisfy the requirement restricting access under article 231 of the Insolvency Law, because their liabilities exceed five (5) million euros? One possible interpretation (like that made by the commercial judges practicing in Barcelona -at a seminar held on June 15, 2016-), is that these debtors who cannot opt for un Out of Court Payment Agreement may only obtain relief from unpaid claims by paying a minimum liability threshold, in other words, by electing model A, due to considering that the reference in art. 178 bis (3.4) “if a prior Out of Court Payment Agreement has not been attempted” relates to debtors of this kind. The authors who subscribe to this view consider, therefore, that a debtor who is not authorized to conclude an Out of Court Payment Agreement must, in all cases, pay the minimum liability threshold, including 25% of the unsecured claims, to warrant a “second chance”.
It seems to us less restrictive to consider that these debtors may elect the model for relief from unpaid claims that best suits their interests, and that, if they elect model A (determination of payment of a minimum liability threshold), they will not have to pay 25% of the unsecured claims, an additional requirement devised, in our view, for those who could have opted for an Out of Court Payment Agreement, but did not attempt to achieve one. Bear in mind that these debtors could not reach an Out of Court Payment Agreement due to being prevented from doing so by the legislation, although they might indeed have earlier made an attempt, in an insolvency proceeding, to reach an arrangement with creditors for the restructuring of their debts with a viability plan. It hardly seems sensible to curtail these debtors’ options to be able to be released from their debts simply because their liabilities exceed five (5) million euros.
Garrigues Restructuring and Insolvency department