Solutions for companies in financial difficulty: liquidation or recovery?
When companies find themselves in financial difficulty, they can/should essentially resort to two mechanisms, depending on whether the situation is irreversible, i.e. whether or not there are viable chances of recovery.
If the company is not recoverable, there is an effective duty to file for insolvency, which can occur when they are unable to fulfil their obligations or when their liabilities exceed their assets.
The law stipulates that creditors can also request the insolvency of their debtor, if certain requirements are met.
In this context, the insolvency procedure is a universal enforcement procedure, with the purpose of satisfying the creditors, either through the liquidation of the company’s assets or through an insolvency plan.
The declaration of insolvency also has the effect of suspending any enforcement proceedings that affect the assets of the debtor. On the other hand, if the company is in a difficult economic situation or even merely imminent insolvent, but is susceptible to recovery, the company may resort to a special revitalisation process (“PER”).
The aim of this procedure is to enable the company to negotiate with its creditors to get an agreement approved that will lead to its recovery, without the need to liquidate its assets or transfer the business.
The measures provided for in the PER may include agreeing to partial debt write-off, extending the number of debt payment instalments, benefiting from capital grace periods, obtaining financing under special conditions, among others.
This type of process depends heavily on the will of the creditors, both in its initial phase, i.e. the admission phase, and in the approval phase of the plan presented by the company.
Despite its strong negotiation component, the PER is still a judicial procedure, requiring the fulfilment of various legally required formalities.
Once the plan has been approved by a majority of creditors and ratified by the court, it binds the company and its creditors, even those who have not claimed their credits or participated in the negotiations, or even those who voted against the plan.
As with insolvency proceedings, the PER also suspends any enforcement proceedings, which will not be resumed if negotiations with creditors are successful, and the plan is approved. Companies that find themselves in a difficult economic situation should consult a lawyer to advise them on the choice of the adequate procedure and implementation of the most appropriate solutions for their specific case.
