Since the Spanish Insolvency Law (22/2003) entered into force in 2003 it has been the subject of several amendments. The most recent amending law was approved on September 22 2011 and entered into force on January 1 2012 (although certain articles came into force on October 12 2011). Given that both company insolvency and individual bankruptcy proceedings in Spain are exclusively regulated by the Insolvency Law, this is the relevant tool for any insolvency professional.
Whereas the original aim of the Insolvency Law was to maximise the return of the creditors by, among other measures, providing the debtor with a legal instrument which supports and ensures the continuity of its activity and reduces liquidation of insolvent companies, the current amendment has a more limited scope. It is not designed to overhaul the Insolvency Law but rather to correct defects and to fill in some legal gaps in order to reaffirm the principle of business activity preservation and to adapt to the new needs of the economy. According to the preamble of the Insolvency Law its objective is to develop pre-insolvency restructuring mechanisms and solutions for companies in distress. It also aims to simplify and expedite the insolvency proceedings and to reduce the expense of such proceedings.
One of the aspects highlighted in the amended law is the changes set forth by the so-called pre-insolvency institutions. These are the legal institutions whose intended purpose is to promote the restructuring of companies in distress and prevent insolvency situations by anticipating company crises.
When the debtor has knowledge of its insolvency situation or should have known it – that is, it should have known that it could not regularly comply with its due payment obligations – it has the duty to file for insolvency within two months following the date on which it becomes aware of the state of current or imminent insolvency (when the debtor foresees that it will not be able to comply with its obligations in the near future). This deadline may be extended to up to four additional months by presenting a notification to court.
With this notification the debtor can inform the court about negotiations of an out-of-court formal refinancing agreement or of a proposal of early arrangement with its creditors initiated in order to eliminate the insolvency situation. The debtor has no obligation to provide any evidence of the negotiations and the moratorium will be effective after the notification without the need for any further formalities.
One of the aims of the 2009 reform of the Insolvency Law was the development of a protective shield against claw-back actions offered to parties of a refinancing agreement. The current amended law addresses some problems evidenced in the application of the previously existing rules and intends to provide more certainty for the parties of refinancing agreements.
In this regard, if an insolvency proceeding is opened, a refinancing agreement (and any transactions, acts, payments and security entered into or carried out in connection thereto) will not be subject to a claw-back action provided that the agreement complies with the following requirements:
(i) The purpose of the refinancing agreement is to substantially increase the funds available for the debtor and/or to negotiate a debt moratorium;
(ii) It is part of a viability plan prepared by the debtor that justifies the short and mid term viability of debtor's business;
(iii) It is supported by creditors whose claims represent at least 60% of the debtor's liabilities at the date of the refinancing agreement;
(iv) It is assessed by an independent expert appointed by the commercial register corresponding to the place where the debtor's registered office is located. The independent expert's report must include a technical opinion on the adequacy of the information provided by the parties (in particular by the debtor), the reasonability of the refinancing agreement and that the viability plan is sensible and flexible, and the reasonableness of guarantees securing the refinancing agreement, which must be proportional to usual market conditions at the date of the refinancing agreement.); and
(v) It is formalised before a Spanish public notary and recorded in a public deed.
The new law also introduces a tool which allows the novation of debts by majority vote in a pre-insolvency stage similar to a scheme of arrangement according to English law. This tool will make refinancing agreements susceptible to judicial approval and will lead to an imposition of a debt moratorium upon dissenting creditors not holding an in rem guarantee, provided that the formal refinancing agreement obtains a favourable report prepared by an independent expert appointed by the commercial register where the debtor is registered; and it is entered into and approved by financial creditors holding at least 75% of the debtor's liabilities at the date of the formal refinancing agreement.
At the request of the debtor, the court may order a provisional stay of enforcement actions initiated by creditors while the debtor seeks judicial approval and the court issues a decision regarding the cram-down petition (and for no more than one month).
Unless the formal refinancing agreement implies a "disproportionate sacrifice" for the financial creditors who did not enter into the formal refinancing agreement, the court must validate the formal refinancing agreement that complies with the above requirements. Judicial approval of the agreement will have two effects (one is mandatory and the other one is optional): first, in any event, the effect of imposing upon dissenting financial creditors the agreed debt moratorium, and, if so requested, the effect of imposing upon financial creditors a restriction on enforcement actions.
Such court approval may also provide for a stay in individual enforcement proceedings during the extension period established in the formal refinancing agreement for the deferral of payments of unsecured claims. Such stay-in-action period must not exceed a three-year term.
Non-consenting creditors who are affected by such court approval have 15 days to object to the formal refinancing agreement but only on the grounds that the required majority was not met or that there has been an error by the court in assessing the disproportionate sacrifice.
Claims derived from financing granted before the opening of an insolvency proceeding in the context of a formal refinancing agreement and, in case of subsequent opening of insolvency proceeding, are recognised in the amount of 50% of the funds provided as claims against the insolvency estate and in the amount of the remaining 50% as general preferential claim. Therefore in the ranking of claims this remaining 50% as general preferential claim will be senior to the other ordinary or subordinated claims. Nevertheless, this ranking does not apply to financing (share capital increase, loans or similar acts) granted by the debtor or by persons especially related with the debtor.
Appointment of representatives, and improvement of rights
The receiver is appointed exclusively by the court. As a general rule, according to the amended Law, only a sole receiver will be appointed,, except in the case of insolvency proceedings with extraordinary circumstances or special importance – notably when debtor's liabilities exceed €100 million ($131.25 million), or it owes money to more than 1,000 creditors – where a second receiver could be appointed. In this case, the board of receivers must be composed of two members: one lawyer, accountant or auditor, and one ordinary or general preferential creditor appointed by the court.
The court may appoint in all cases a legal entity as receiver. Where there is a sole receiver (which will usually occur in expedited proceedings), the court may appoint an assistant to whom the receiver may delegate some of his powers. The appointment of an assistant will be compulsory in certain cases (such as inter-related insolvency proceedings or large-sized enterprises)
Not only is the debtor himself entitled to file for declaration of debtor's insolvency, but so are one or more of his creditors. When – upon a creditor's request – the insolvency proceeding was declared, before the amendment the Insolvency Law stated that 25% of his claim had to be recognised as a general preferential claim. Such preferential claims are paid out of the non-secured assets, once the debts payable out of the insolvency estate are satisfied, following the ranking order of the claims established in the Insolvency Act. The amended Law has improved the creditor's right by increasing this share up to 50% of the total amount of the claim.
Receivers can be held liable for a debtor's tax liabilities if he or she does not eliminate deficiencies in tax returns.
Expedited insolvency proceedings
The Court may decide on fast-track proceedings when it considers the insolvency proceeding to be uncomplicated; that is: (i) the list of creditors filed by the debtor contains less than 50 creditors; (ii) the initial estimated liabilities do not exceed €5 million; and (iii) the value of the tangible and intangible assets is below €5 million.
The insolvency court is given greater flexibility to choose an expedited proceeding from the outset: for example, an expedited proceeding can be conducted where the debtor files an advanced proposal for an arrangement with its creditors; where it is anticipated that all of the assets and liabilities are to be assigned to a third party under a structural modification; or where the company has ceased trading or has no contracts of employment in force.
Before including a claim into the creditors list, the receiver has to verify and expressly accept the claim to be included in the list. For that purpose, within one month after publication of the insolvency order, creditors have to submit the documents that prove the existence of their outstanding claims. If the notice is not served before the expiry of the above-mentioned period of one month, the claim may be qualified as a subordinated credit.
Pursuant to the amended Insolvency Law, the creditors now have to lodge their claims directly with the insolvency representative, the receiver, and not to the Court. The claims can even be filed electronically and it will not be necessary to provide original documentation, unless otherwise requested by the receiver.
The receiver has one month in which to submit its report including the list of creditors, although the inventory must be submitted within fifteen days.
In certain circumstances, if there are discrepancies, following a request by the creditor (identification of an insolvency claim not on the list, confirmation of contingent claims, change of holder of the claim by assignment, and so on) it is possible for the receiver to amend the claim of the final list of creditors directly and with no court intervention.
Where objections to insolvency receivers report account for less than 20% of the assets or liabilities of the debtor, the court can order the common phase to be concluded and open the arrangement or liquidation phase. This will also help to speed up the approval of a potential advance proposal for an arrangement as there will be no need to wait for a decision on the objections.
The debtor may file for liquidation at any time. In such case, the court must open the liquidation phase within 10 days following the application made by the debtor, with all the inherent effects (such as dissolution of the company and removal of managing directors) Subsequently the receiver must prepare the liquidation plan.
The receiver can request a direct application for liquidation if debtor's business or professional activity has ceased and he or she also can apply for the termination and dismissal of insolvency proceedings where there are insufficient assets available to pay post-insolvency claims.
To speed up insolvency proceedings as well as to enable the preservation of asset value, the amended law introduces significant changes regarding asset disposals and simplifies the authorisations required by the insolvency court to implement a sale of assets.
One such change is that receivers can authorise acts of this nature without prior court authorisation. A subsequent notice to the insolvency Court on a later date will be sufficient.
Another is that if the purchaser's offer is "substantially" equal to the value allocated to the assets in the inventory prepared by the receiver, such offer will be automatically approved if a higher offer is not made for such assets within 10 days. An offer is regarded as substantially equal if the difference with respect to its inventory value is lower than 10% in the case of real estate, or lower than 20% in the case of moveable assets.
At the request of the receiver (or by a creditor with a special preferred claim to the asset assigned in a creditor arrangement), the court can authorise the direct sale of an asset to a third party or the transfer of an asset in or for payment of the special preferred claim, provided that such disposal results in complete satisfaction of the special preferred claim. If the disposal of the secured asset had taken place outside a creditor's arrangement, the purchaser must pay in cash a price higher than the agreed minimum. In any case, that mechanism would be the exception to the general rule for disposal in the insolvency proceeding of assets or rights subject to special preferred claims, which must be done generally in public auction by the court.
The amended law also introduces the rule that the debtor may submit a liquidation plan with its insolvency petition that includes a written binding acquisition offer for the whole or part of the business. In this case, the liquidation phase will be immediately opened by the Court and special rules will apply to allow the quick transfer of the business.
The debtor or the receiver, and alternatively any creditor, is entitled to request the joinder of insolvency proceedings for companies of the same corporate group. The amended law expressly allows joint insolvency orders and coordinated insolvency proceedings in these cases. Nevertheless, such a joinder does not lead to a consolidation of the insolvency estates, unless there exists a confusion intermingled of assets and it is not possible to delineate clearly the ownership of assets and liabilities without unjustified expenses or delay.
In the Act, the term "specially related person" covers, among others, companies of the same group as the debtor and their shareholders in common, but only where these shareholders hold at least 5% of the stock capital of listed companies, or 10% in non-listed companies.
The use of the term "shareholders in common" prevents subordination from applying to shareholders who have a significant ownership interest in a group company but have no ownership interest in the insolvent debtor's stock capital.
Subordination does not apply to claims others than loans or operations of similar nature and purpose, even if the holder of the claim is a shareholder with a significant ownership interest in the insolvent debtor, a company from the same group as the insolvent debtor, or a shareholder in common between the insolvent party and a group company with a significant ownership interest in both.
Traditionally the Insolvency Law hindered distressed debt trading by refusing the buyer's voting right in any creditors' meeting when the credit has been acquired by inter vivos acts after opening of the insolvency proceeding. With the recent amendment of the Insolvency Law this rule was modified, and consequently the purchase of credit after opening of the proceeding will not result in a loss of voting rights, provided that the buyer is an entity subject to financial supervision (for example a financial institution).
The amended law clarifies that the insolvency judge will have exclusive jurisdiction to be in charge of a collective layoff procedure, even if it had already been started by the labour authorities before the insolvency order. The severance paid in any collective layoff procedure will be calculated as determined in employment legislation.
Claims arising after the approval of an arrangement are regarded as post-insolvency order claims in the event of a breach of the arrangement and subsequent opening of liquidation proceedings.
|Stefanie Endres |
||Stefanie Endres is a lawyer at Pluta Abogados based in the Barcelona office. She is qualified as a lawyer in Germany and in Spain and is responsible for the international department of the firm’s Spanish offices. She studied law at the Universities of Heidelberg and Barcelona, obtained a Masters in International Business Law from ESADE Law School and completed postgraduate studies at University Ramon Llull (Barcelona).|
Stefanie has published and contributed to several technical articles and publications, mainly about cross-border restructuring and insolvency issues, and specialises in Spanish and international insolvency law, corporate law and international commercial law. She has advised several foreign financial institutions and creditors in the finding of exit solutions for their distressed investments in Spain or has assisted them during the formal insolvency proceeding of their debtors. She has extensive experience in corporate restructuring and distressed sale processes.
Stefanie is a member of the Stuttgart and Barcelona Bar Associations, German-Spanish Law Association, British-Spanish Law Association, Insol Europe and the International Association of Young Lawyers.
Avinguda Diagonal, 611,
08028 Barcelona, Spain
T: +34 934 44 18 76 ?
F: +34 93 4196751
|Juan Ferré |
||Juan Ferré is lawyer and director of the Barcelona and Madrid Offices of Pluta Rechtsanwalts, and also assistant professor of company and insolvency law at Universidad de Barcelona and a regular lecturer in other institutions. He holds a Bachelors of Science from Universidad Autónoma de Barcelona and a PhD (cum laude) in insolvency law from Universidad de Barcelona; he completed postgraduate studies in Management at IESE Business School.|
Juan is a frequent speaker at national and international seminars on insolvency and restructuring as well as a publisher and contributor to technical and industry publications. Since 1998, he is or has been involved as insolvency receiver, creditor or debtor representative in several significant insolvency proceedings in Spain and Germany. His cases have included the finding of an exit solution for a foreign financial institution with regards to two luxury hotels in the city of Barcelona, the restructuring of two of the 10 biggest construction companies in Spain, the sale as a going concern of the two plants of a Tier 2 auto parts supplier, and the rescue of a hospital in Madrid, among many others.
Juan was elected as one of the leading lawyers in Spain in insolvency and restructuring and also as one of the 40 best lawyers in Spain and Portugal under 40 years. He is a member of Insol Europe, the American Bankruptcy Institute, Turnaround Management Association and the Barcelona and Madrid Bar.
Avinguda Diagonal, 611,
08028 Barcelona, Spain
T: +34 934 44 18 76 ?
F: +34 93 4196751