Bankruptcy is a state of financial distress in which a company or individual is unable to pay its bills. This can lead to insolvency proceedings, where legal action can be brought against the insolvent person or company and assets can be liquidated to settle outstanding debts. Business owners can contact creditors directly and restructure debt into more manageable installments. Creditors are generally receptive to this approach because they want a refund, even if the repayment is late. The new legal framework provides greater legal certainty for domestic and foreign investors as to their situation in the event of insolvency; This was not clear from previous legislation regarding types of loans and priority of payments. Previously, a debtor`s bankruptcy was governed by CPAC regulations, which limited their ability and powers to continue operations to meet their obligations, so in more than 50 years of this current law, only 14 bankruptcy proceedings have been initiated (according to our investigations). The insolvency law provides a different approach from the previous law and provides the debtor with the opportunity to undertake a financial and monetary restructuring of its business in order to keep its debts operational. The Bankruptcy Act follows Chapter 11 of the United States Bankruptcy Act, which promotes the financial recovery of the debtor and allows its economic activity to be the main source of income to meet its obligations. [2] In general, bankruptcy refers to situations where a debtor cannot pay the debts it owes. For example, a troubled company can become insolvent if it is unable to repay the money owed by its creditors on time, which often leads to a bankruptcy application. Nevertheless, the legal definition of insolvency is complicated and situational. “The meaning of the term `bankruptcy,`” as noted by a Texas court in Parkway/Lamar Partners, L.P.

v. Tom Thumb Stores, Inc., “is not definitively fixed and is not always used in the same sense, but rather its definition depends on the commercial or factual situation to which the term refers.” The credit diagnosis often varies depending on the credit test applied. Creditworthiness according to one test does not imply solvency according to another and vice versa because they measure different things. It`s important to use the appropriate definition of bankruptcy depending on the context, because solvent businesses can do things that insolvent companies cannot, such as paying dividends. The solvency review is therefore a critical dividing line in corporate and bankruptcy law. The distinction between the terms “bankruptcy” and “insolvency” is important. Insolvency is not synonymous with bankruptcy. Insolvency is a legal finding that imposes judicial review of the debtor`s financial affairs. In modern law, insolvency is often a necessary but not sufficient condition for bankruptcy.

As a “finding of fact” in the insolvency court, the plaintiff bears “the final burden of the conviction” in determining a debtor`s insolvency. The First Circuit, in Consove v. Cohen argued that unaudited financial statements are permissible in cases where they are the best available evidence of a debtor`s insolvency and that it is incumbent upon us to assess the accuracy of these accounts receivable. Similarly, in In re Erstmark Capital Corp., the Fifth Circuit found that “while balance sheets alone are not sufficient evidence to declare bankruptcy, they may, in certain circumstances, provide competent evidence from which conclusions about a debtor`s insolvency can be drawn.” In order to provide legal certainty for creditors and debtors, the insolvency law introduces specific provisions providing for different types of loans and a preferential order for payment[4]: In addition, the number of insolvency practitioners[7] is created. The role of the insolvency practitioner is to supervise the reorganization or liquidation proceedings of the insolvent debtor. The person to be appointed as a receiver must provide proof of his or her knowledge of financial, accounting or legal matters. This person can only act in favour of the insolvency proceedings, for which he is liable for all damages caused by negligence, lack of expertise or ignorance. Chapter 11 is the main procedure for corporate restructuring, although it can also be used for orderly liquidation purposes. Chapter 15 governs the procedure for the recognition of foreign bankruptcy or restructuring proceedings and the conduct of ancillary proceedings in the United States. Ancillary proceedings are proceedings in support of a “foreign matter” administered by a foreign representative and designed to promote cooperation between U.S. and foreign courts. 6.1 What is the impact of restructuring or insolvency proceedings on employees? What would be the requirements of employees and where do they rank? In general, when a corporation becomes insolvent, directors must discharge their fiduciary duty in the best interests of the corporation, taking into account, among other things, the interests of creditors.

In the event of insolvency, creditors may, in certain circumstances, assert derivative claims on behalf of the company against the directors. Means of fiduciary duty, fraud and fraudulent transfer may be appropriate to challenge the unlawful actions of directors of insolvent corporations. If a debtor decides to take over a contract or lease, he is bound by the terms of the contract. The debtor may accept such a contract or lease only if: (i) it remedies a delay or provides sufficient security; (ii) indemnify the counterparty for any actual loss of assets resulting from the default or provide reasonable assurance that it will compensate the counterparty; and (iii) provides reasonable assurance as to the future performance of the contract or lease. However, a debtor is not required to remedy a default arising from a provision of the contract that is dependent on its insolvency. The debtor cannot accept a contract if the applicable law exempts the other party to the contract from accepting or performing a business other than the debtor, for example: a personal services contract. Guatemala`s legal history has shown that CCPC`s mass executions are impractical or offer benefits to debtors and creditors, since only 14 trials have been conducted, 8 of which have been rejected by the parties or rejected by the presiding judge. In this context, the insolvency law is innovative in that it provides that (i) the steps in insolvency proceedings are oral in nature and may even be conducted online; (ii) it is possible to conduct short insolvency proceedings (i.e. with shorter maturities) [5]; and (iii) new specialized insolvency courts will be established within 5 years of the entry into force of the insolvency law. [6] The CCPC`s enforcement procedure is not eliminated and does not apply to creditors with a priority interest in the debtor`s assets (i.e., liens, mortgages and security trust agreements).

Insolvency proceedings are an additional option. The consequences of insolvency are significant for companies, their creditors and shareholders. As a primary objective, insolvency law seeks to protect the interests of creditors by preventing many gratuitous transfers of assets or activities that could be detrimental to the credit of the debtor. An overly comprehensive insolvency test would have a detrimental effect on the value of the business, as it would reduce entrepreneurial investment and limit other forms of capital raising. Similarly, a non-inclusive test would be detrimental to creditors, who would have little choice in terms of repayment; A borrower could loot the company`s assets through free transfers, excessive debt buybacks, massive salaries and bonuses, etc.