Castellán

In this context, it is likely that many companies will enter a state of insolvency, defined by Article 1 of Law 18,387 (Law of Bankruptcies and Business Reorganization - LCRE) as the one in which the debtor is when "... cannot meet its obligations".

If the above occurs, an important legal tool that companies may consider using is the private reorganization agreement (APR) provided for in the LCRE, which is being talked about a lot these days, and to which we have already referred before (https://www.castellan.com.uy/es/noticias/54/alternativa-al-concurso-de-acreedores-el-acuerdo-privado-de-reorganizacion-apr.html). Now, if an APR is not viable and/or convenient in the specific case, the request for its own judicial bankruptcy could be a necessary and/or convenient tool.

Does the debtor company have the duty to request its own bankruptcy? Is there a deadline?

According to Article 10 of the LCRE, the company in a state of insolvency has "... the obligation to request its own bankruptcy", and must do so mandatorily "within thirty days after it has known or should have known its state of insolvency".

What are the consequences of not requesting bankruptcy in a timely manner?

a) the risk that a creditor requests it in advance: bankruptcy can be requested not only by the debtor company itself (voluntary bankruptcy), but also by a creditor, in which case we are facing what is called "mandatory bankruptcy". In fact, the LCRE itself seeks to encourage creditors to request the bankruptcy of debtor companies, by assigning in Article 110 the nature of a privileged credit to 50% of the amount of the creditor's credit; and by facilitating the bankruptcy request, requiring them to meet a significantly lower number of requirements than those required of the debtor company itself.
The preparation of the bankruptcy request by the debtor company requires more time and effort, so it is vitally important that during this period the creditors do not become aware of this, at the risk that the bankruptcy request is filed first by them, and the bankruptcy becomes mandatory and not voluntary.

This is because, for Uruguayan law, the "who" makes the bankruptcy request is substantive, since:
- if the debtor company requests it, the Court probably will not take measures such as those provided for in Article 23 of the LCRE (intervention of communications; prohibition of change of address or leaving the country without authorization). On the other hand, if it is mandatory, it probably will.
- if a creditor requests it, the Judge may apply Article 24 of the LCRE, being able to order the preventive embargo of the assets of its administrators, if certain hypotheses are met.
- if the debtor company requests it, as long as the assets are sufficient to satisfy the liabilities, there will be no displacement of the management body (administrator and/or board of directors), but only an intervener will be appointed who will merely co-administer the assets with the debtor company. In these cases, the debtor company will require the intervener's authorization for some acts, but not, for example, for the ordinary course of business operations. On the other hand, if a creditor requests it, according to Article 45 of the LCRE the "debtor's legitimacy to dispose and obligate the bankruptcy estate will be suspended, being replaced in the administration and disposition of its assets by a trustee". In this case, only the trustee will be authorized to carry out acts of administration and disposition. Clearly, the above is a defining point, as a displacement in the management body leads to an almost total dependence on the decisions of the appointed trustee, demonstrating the experience, the existence of very few uniform criteria in their actions.

b) that the bankruptcy request does not achieve the goal set by the company: voluntary bankruptcy is a legal tool recommended especially when the purpose is to restructure or reorganize liabilities, with the aim of achieving business continuity. And not as a resource to achieve closure, shutdown, or dissolution. But if continuity is sought, experience shows that timely filing is key to achieving the desired result. In fact, forensic practice shows, time and time again, how the vast majority of companies that filed for bankruptcy late (even without prior request from any creditor) eventually closed down.

c) that the bankruptcy is classified as guilty and personal responsibilities are attributed: the classification of bankruptcy is a procedural stage that occurs in almost all bankruptcy processes, in order to determine whether the bankruptcy was fortuitous or guilty, and in the case of guilty bankruptcy, the applicable sanctions to those responsible for the insolvency. But Article 196 of the LCRE provides the possibility of avoiding the classification of bankruptcy, in cases where, for example, the bankruptcy is requested by the debtor company itself, and as long as there is an approved agreement that allows the full satisfaction of the credits within a certain period. Even if the judicial stage of bankruptcy classification cannot be avoided, it is relevant that the debtor company fulfills the burden of requesting bankruptcy in a timely manner, either to ensure that it is classified as fortuitous, or to ensure that even if classified as guilty, there are no consequences on the personal assets of the administrators of the debtor company. In the current context, if the cause of insolvency is based on the spread of the COVID-19 coronavirus, it is likely that the company can prove the absence of fraud or gross negligence in its generation or aggravation, achieving a fortuitous classification of bankruptcy that exempts it from the consequences provided by the LCRE for guilty bankruptcies, or at least partially exempts the personal responsibility of the administrators of the bankrupt companies, even in cases of a guilty bankruptcy classification.

What benefits does the judicial declaration of bankruptcy enable?

In addition to the advantages described, it seems relevant to highlight that bankruptcy is an important legal tool that can allow debtor companies, for example:

a) a restructuring of a significant part of their liabilities:  the LCRE establishes three classes of credits: a) special privileged (credits secured with pledge and mortgage) and general (labor credits, BPS, national and municipal taxes); b) unsecured or common (for example, most commercial ones); and c) subordinated (fines and penalties of any nature and credits of persons related to the debtor are in this class). The bankruptcy tool is more useful the higher the unsecured and subordinated liabilities, and the lower the privileged liabilities. Regarding the former, the LCRE allows a wide margin of negotiation between the parties, with the aim of reaching agreements that benefit all parties. Because, according to Article 139 of the LCRE, agreements may have as content: "writedowns and/or waits, transfer of assets to creditors, establishment of a company with unsecured creditors, capitalization of liabilities, creation of a trust, reorganization of the company, administration of all or part of the assets in the interest of creditors or have any other lawful content ... or any combination of the above". These agreements are reached by certain majorities, but will be mandatory for the debtor company and for all unsecured and subordinated creditors.

b) a halt to individual executions or postponement of creditors with mortgage or pledge guarantees: the declaration of bankruptcy will prevent the creditors of the debtor company from initiating judicial or arbitration proceedings against the debtor company. And the executions that are in progress, as well as the embargoes, will be suspended. Even with regard to mortgage and pledge credits, the LCRE provides for the prohibition of initiating new executions and the suspension of ongoing executions for a period of 120 days.

c) the conversion to the national currency of debts and adjustment of obligations: once bankruptcy is declared, credits expressed in foreign currency will be converted to the national currency, except for mortgage and pledge credits expressed in foreign currency, up to the limit of their respective guarantee. In addition, from the date of the bankruptcy declaration until the date of payment, all credits will be adjusted exclusively by the Consumer Price Index (IPC).

d) the suspension of interest accrual from interests: from the declaration of bankruptcy, the accrual of interests will be suspended except for mortgage and pledge credits up to the limit of their respective guarantee, and labor credits.

e) the possibility of unilaterally rescinding pending execution contracts: if there are contracts from which obligations of the debtor company pending execution derive, it will have the power to unilaterally rescind the contract, notifying this fact to the counterparty.

f) possibility of rehabilitating contracts that have expired or have been terminated: the bankrupt company will have the power to rehabilitate, for example, loan contracts, credit sales of movable or immovable property, promises of sale of real estate in installments, leases, and use credits, when these have expired due to non-payment of the price and/or failure to make the committed periodic payments.

Final considerations

The bankruptcy tool (APR or voluntary bankruptcy) has historically been conceived by the majority of companies as the last option in a scenario of financial difficulty. This has led to late bankruptcy requests that usually prevent the desired financial restructuring, and consequently the continuity of business operations. Therefore, and especially in times of COVID-19, the analysis of this legal tool in a timely manner can be decisive.

Montevideo, April 10, 2020.