End of the insolvency moratorium in Spain: consequences for debtors

To provide a framework of legal certainty that grants economic stability and supports companies in the recovery phase and to ensure the process of economic reactivation in Spain, the moratorium on declaring bankruptcy – in force in Spain since March 14, 2020, as a result of Covid-19 – has been extended several times. Postponing the duty of company administrators to declare insolvent the company they manage has given insolvent companies a respite over the last two years to restore their financial situation.

However, this bankruptcy moratorium ends on June 30, 2022, and it does not seem it will be extended again. In fact, the responsibilities of the social administrators of companies in a state of insolvency concerning the need to request bankruptcy will be reactivated by the end of June.

In this regard, it is necessary to determine what insolvency means. To detect if a company is insolvent, it must have an inability to pay its debts and a lack of regularity in payments. In other words, the debtor is insolvent when it cannot regularly afford its obligations as these become due.

Once the insolvency situation is verified, the company administrators have two months to request the declaration of voluntary bankruptcy (article 5.1 of the Spanish Bankruptcy Law).

In other words, for companies already in insolvency, the two-month period to request bankruptcy begins on July 1, 2022.

Consequences of failing to file for voluntary insolvency proceedings on time:

• On the one hand, the configuration of the necessary bankruptcy (when requested by a creditor or person of legitimate interest and not by the debtor) can lead to negative consequences for the debtor. For instance, the suspension of the exercise by the debtor of the powers of administration and disposition over his assets. Therefore, it is clearly advisable for the debtor to get ahead of his creditors and file for bankruptcy first, so that it is voluntary, within two months from July 1, 2022.
• On the other hand, failure to comply with the obligation not to apply for insolvency proceedings in due time may result in the insolvency proceedings being classified as guilty. In such a case, there may be far-reaching implications for the assets of the so-called persons concerned, namely:
  • De facto or de jure company administrators
  • Shareholders, as well as the attorneys-in-fact
  • General directors

Effects on the affected persons

The persons concerned may:

• Be disqualified from administering the assets of others for a period of two to fifteen years
• Be disqualified from representing any natural or legal person for the same period.
• Be ordered to return the goods or rights improperly obtained from the debtor’s assets
• Be ordered to pay compensation for damages caused to creditors.
• Be ordered to pay the insolvency deficit, which means to assume the amount necessary to cover all outstanding claims that could not be satisfied from the assets.

In short, the countdown to the end of the bankruptcy moratorium in Spain begins, and the duty to request bankruptcy begins. Companies in a state of insolvency, as well as their managing partners and directors, must seriously consider the deadline for submitting the request for insolvency proceedings to avoid a guilty classification of the bankruptcy and its direct negative financial consequences.

Mercedes Guitián & José María Mesa

For additional information regarding the consequences for debtors of the end of the insolvency moratorium in Spain,