Primers on the Out Of Court Payment Agreement (XIII): A positive final assessment or view of the benefits of an Out Of Court Payment Agreement
The Out of Court Payment Agreement proceeding provides a good opportunity for distressed small and medium sized enterprises to restructure their debts, despite some of the uncertainty still surrounding the procedure. This proceeding is another means for an early restructuring of debts and its effects may be made binding on dissenting creditors, although on a small scale. Moreover, for individual debtors, if it is unsuccessful, this Out of Court Payment Agreement proceeding will be the necessary antechamber to request relief from unpaid claims.
The advantage that agreements of this kind have over validated refinancing agreements under additional provision 4 of the Insolvency Law is that they may be negotiated with the debtor’s creditors of all kinds –except for creditors holding public law claims-, meaning they are not restricted therefore to creditors holding financial claims. So they respond to the petition, after this was found lacking in validated refinancing agreements, to be able to include suppliers in the negotiation of the agreement.
The Out of Court Payment Agreement proceeding is swift and straightforward. Assisted by the right professional and, especially, by having accurate information on what is had and what is owed, an insolvency mediator ought to be able to compose an agreement for the debtor and his creditors which will normally be better than any that may be reached in an arrangement in an insolvency proceeding, due to the amount of time that is usually required in the insolvency proceeding for the proposal for an arrangement to take place, at the end of which the debtor’s assets and activity may have become impaired. Moreover, the possible terms of an Out of Court Payment Agreement are as broad and varied as those of an arrangement with creditors in an insolvency proceeding, with the advantage that it has a more flexible negotiation process, because it is not prohibited to change any of the originally submitted proposals. The debtor may even choose to hold prior meetings or talks with his creditors to achieve support for a proposal for an agreement and commence the insolvency mediation proceeding confident that it will be accepted.
While the Out of Court Payment Agreement proceeding is in progress, the debtor may continue with his employment, professional or business activities subject to no further limitation than a legal warning to be careful not to carry out any extraordinary management or disposal transactions, though he may continue receiving income for professional or business activities. Gone are the days of (absurd) restrictions in the former legislation on insolvency mediation requiring the debtor to return credit cards, and not to apply for fresh financing or use electronic payment methods.
An important incentive for small debtors to opt for an Out of Court Payment Agreement proceeding –rather than a validated refinancing agreement- is that in the negotiation phase interest stops accruing on any claims that might fall under the agreement.
To provide the negotiations on the Out of Court Payment Agreement with a stable platform, moreover, the rules provide a broader scope for the moratorium on enforcement action against the debtor’s property than the scope provided generally in article 5 bis of the Insolvency Law, a broader scope that always contemplates the debtor’s principal residence, if the debtor is an individual.
After the Out of Court Payment Agreement has been reached, this moratorium on enforcement action will remain in force for the creditors bound by it, in relation to claims before the notice of the commencement of the proceeding, and the relevant attachments may even be cancelled.
Similarly to refinancing agreements, Out of Court Payment Agreements are protected from clawback action in a later insolvency proceeding. This provides an incentive for creditors to support the negotiated solution proposed by the debtor, given that their rights will not be harmed in a later insolvency proceeding and any received payments will be deemed validly made, in principle, unless specific harm caused by the payment made in compliance with the Out of Court Payment Agreement can be evidenced.
The ultimate aim of the Out of Court Payment Agreement, however, must be to avoid an insolvency proceeding. The steps needed for the adoption of an Out of Court Payment Agreement should not last longer than three months all in all, and, as its name suggests, it sidesteps the hassle of having to go through a court process which, due to the workload of the commercial courts would end up not being as swift or as smooth and would definitely be more costly. Even so, if a consecutive insolvency proceeding were unavoidable, a prior insolvency mediation proceeding has the advantage of saving the debtor from certain steps in an insolvency proceeding and speeding up the common phase of the proceeding, even if certain problems that occur when those savings are brought into effect need to be improved.
The Out of Court Payment Agreement therefore offers an alternative means for SMEs and individuals to solve their insolvency problem without incurring high costs in terms of time, and in financial and reputational terms. Note in relation to this last element that the publicity given to the insolvency mediation proceeding, while greater than that required for other refinancing agreements, is less than that associated with an insolvency proceeding, which continues to be seen by many as a social stigma.
Consequently, any fears of using this new debt restructuring method may be put to rest, it is designed to help save professionals and small businesses with cash flow problems swiftly and efficiently. And it should not be forgotten that a quick diagnosis of the problem will serve to implement the solution provided by an Out of Court Payment Agreement as efficiently as possible.