New Debt Settlement Procedure for Entrepreneurs in Spain

The 14/2013 Law of September 27 to Support Entrepreneurs and Internationalization (the Entrepreneur Support Act) has initiated several different reforms. In the bankruptcy field, the quorum of financial creditors needed to obtain court approval of refinancing agreements is more flexible. On the other hand, regulations govern extrajudicial payments agreements as mechanisms of extrajudicial negotiation with creditors.

In the bankruptcy field, there now exists a novel and important procedure introduced in the Insolvency Act called Extrajudicial Payments Agreement. This new procedure is a mechanism that aims to obtain the extrajudicial negotiation of a Payments Plan (public debts such as Social Security and Spanish Tax Authority debts not included) with creditors as an alternative to bankruptcy proceedings and to the Formal Refinancing Agreement.

Extrajudicial payments agreements

The regulation of Extrajudicial Payments Agreement will become effective 20 days after the publication of the 14/2013 Law to Support Entrepreneurs in the Official Spanish Bulletin (BOE) of September 28, 2013 and will apply only to bankruptcy proceedings held after that date (bankruptcy proceedings held before that date will remain subject to completion by earlier bankruptcy laws).

Who can negotiate an extrajudicial payments agreement?

An entrepreneur who is either one of two different types can negotiate an extrajudicial payments agreement. These two types of entrepreneurs include:

  • a legal person who is currently or imminently insolvent and whose liabilities do not exceed five million Euros, or
  • an insolvent legal person with fewer than 50 creditors or whose liabilities do not exceed five million Euros. In both cases, the entrepreneur must cover the costs of the agreement, and the assets and predictable income must allow for a viable agreement.

Certain debtors may not negotiate this type of agreement. The list includes debtors who:

  • during the past three years have reached an extrajudicial agreement;
  • have refinancing agreements that a competent court approved;
  • have been declared bankrupt;
  • are negotiating a formal refinancing agreement;
  • have requested a declaration of bankruptcy and would have an admissible application;
  • have a creditor in an insolvent state that risks the agreement’s effects.

Which credits does the agreement affect?

The agreement does not affect public and secured credits — unless the creditors expressly accept. Creditors who hold secured credits shall expressly notify the bankruptcy mediator of their intention to take part in the extrajudicial agreement within one month of receiving the notice of the meeting with the creditors. The agreement will affect the remaining credits equally. These credits include work credits, suppliers’ credits, financial entities’ (without security) credits, and even subordinate credits.

Upon acceptance of the extrajudicial payments agreement request, the debtor must request the deferral of the public credits pending deposit. The agreement to resolve the division or deferral of these credits will be given when the extrajudicial payments agreement formalizes. The extrajudicial payments agreement faces limitations of delay in the agreement, although the frequency of instalments may be different.

Terms of the agreement: content of the payment plan

Considering the content of the payment plan proposed to creditors, the delay or moratorium must not exceed three years. Likewise, the composition and the cancellation cannot exceed 25% of the credits’ amount, and the payment plan shall include a proposal to negotiate the conditions of the loans and credits and, where appropriate, fix an amount for food for the debtor and his or her family.

Who is the bankruptcy mediator?

The bankruptcy mediator manages the negotiation and conclusion of the agreement. The Commercial Registry of the debtor’s registered office appoints the bankruptcy mediator if the debtor is an entrepreneur or a legal entity capable of registration. Otherwise, a notary will appoint the bankruptcy mediator.

The mediator must be a natural or a legal person registered at the new Registry of Mediators and Mediation Institutions of the Spanish Justice Department. In addition to the conditions required in the Law 5/2012, of July 6, of mediation in civil and commercial matters, the mediator must be a lawyer, economist, or auditor with at least five years of effective professional experience. Compensation must follow the fee approved for receivers.

 This article is not considered as legal advice

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