Bankruptcy in Spain (2): Mechanisms and measures to prevent corporate insolvency in Spain

The statistics are not promising: in Spain, 95% of companies in insolvency proceedings end up liquidated, thus ending their economic activity.

However, several measures can prevent the insolvency of a company and its entry into insolvency proceedings. The speed of decision-making and taking these measures are crucial to avoid insolvency.

Traditional measures

Economic measures: Control of accounts, evaluation of profitability, reinforcement of liquidity flow, cost reduction, negotiation with suppliers, etc.
Labour measures: ERTES, ERE’s, redundancies, reductions in working hours, promotion of teleworking, etc.
Contractual measures: Termination of contracts for extraordinary causes, specific agreements with suppliers, etc.
Corporate measures: Company restructurings, share capital increases, shareholder contributions to equity, subscription of equity loans, etc.
Procedural measures: A collection of outstanding debts, extrajudicial and judicial claims procedures, etc.
Fiscal measures: Tax optimisation, consideration of tax benefits, etc.

Measures derived from Covid-19 legislation

Since the declaration of the state of alarm at the beginning of last year, the Spanish government has been taking different measures to ease the severe consequences of the health, economic, and social spheres.

The latest measures in corporate and insolvency matters approved by Royal Decree-Law 5/2021, on 12 March, aim to:

• Strengthen the liquidity and solvency of companies (economic measures).
• Extend some of the corporate and insolvency measures previously adopted to maintain the economic viability of companies and avoid insolvency (procedural measures).

Economic measures

New business line support to companies

The Covid line of direct support to companies and the self-employed, endowed with EUR 7 billion, aims to reduce companies’ indebtedness (payment of suppliers and creditors, supplies, etc.).

The Bank of Spain’s Annual Report published on 11 May 2021 stressed, concerning this service, the need to adopt additional regulatory measures. For example, the approval of administrative and fiscal incentives as an incentive to investors to inject capital into companies with temporary solvency problems.

Aid for financial debt restructuring

There is a second Covid-19 financial debt restructuring credit line of EUR 3 billion to restructure the financial debt of companies and the self-employed with public guarantees subscribed since the start of the state of emergency.

Fund for the recapitalisation of companies affected by Covid-19

Companies that cannot access the fund managed by the Sociedad Estatal de Participaciones Industriales (SEPI) and need additional capital reinforcement are eligible for a new fund for the recapitalisation of companies affected by Covid-19. The fund is managed by COFIDES and endowed with EUR 1 billion.

Deferral of tax debts

The interest-free deferral of tax debts is extended, as well as the deadlines for repayment of certain public credits.

Procedural measures

Suspension of the duty to file for a declaration of insolvency and suspension of judges’ admission of the necessary insolvency proceedings.

Suspension for debtors in a state of insolvency of the duty to file for voluntary insolvency proceedings is established until 31 December 2021, granting the debtor a period of two months from this date to file for voluntary insolvency proceedings. Similarly, the suspension of the judges’ duty to admit for processing any application for insolvency proceedings filed has been extended until 31 December 2020.

Inadmissibility of applications for non-compliance with creditors’ agreements, extrajudicial payment agreements, and refinancing agreements

Applications for non-compliance with creditors’ agreements, extrajudicial payment agreements, and refinancing agreements shall be inadmissible until 31 December 2021 to encourage renegotiations.

Renegotiation and modification of agreements, refinancing agreements, and extrajudicial payment agreements

Companies with signed creditors’ agreements, approved refinancing agreements or extrajudicial payment agreements will have until 31 December 2021 to renegotiate and amend them.

Preferential processing of certain insolvency proceedings

Some procedural steps in insolvency proceedings will have priority until 31 December 2021, for example, the approval of refinancing agreements.

Pre-bankruptcy mechanisms

If the above measures are ineffective, the pre-insolvency mechanisms are the last lifeline before the entry into insolvency proceedings. These are a series of instruments provided for by Spanish insolvency law to avoid filing for insolvency proceedings.

Concerning these mechanisms, it is worth highlighting the significance of the procedure to notify the opening of negotiations or pre-insolvency proceedings (former 5bis LC, now 583 TRLC). Its purpose is to provide the insolvent company with additional time to negotiate an early arrangement proposal or a refinancing agreement with its creditors or, where appropriate, to get the creditors’ support for an early creditors agreement.

The deadline for notifying the court of the initiation of negotiations is two months after the company becomes insolvent. This mechanism provides for three additional months to negotiate. During this added period, the initiation of judicial or extrajudicial enforcement is prohibited and pending executions are suspended. These measures prevent the declaration of insolvency proceedings at the request of a creditor, increases the chances of an agreement, and protect the company’s image.

The pre-bankruptcy mechanisms are:

Refinancing agreements

Agreements negotiated and adopted between the company and its creditors (generally financial institutions) for debt reductions, extensions of the deadlines for debt payment, or alternative mechanisms.

Extrajudicial payment agreements

Extrajudicial debt negotiation procedure for small companies (there can be no more than 50 creditors and the assets/liabilities cannot exceed EUR 5 million). It involves the intervention of an insolvency mediator to settle an agreement with creditors.

Early creditors agreement

Negotiation on creditors’ claims to facilitate and speed up the subsequent bankruptcy proceedings and accompanying the bankruptcy petition.

Saphira Mouzayek

See infographic

For additional information regarding the mechanisms and measures to prevent corporate insolvency in Spain,