Informative note on Insolvency Measures – RDL 16/2020

The following informative note considers the Royal Decree-Law 16/2020 of the 28th of April on procedural and organisational measures to deal with Covid-19, focusing on the main insolvency proceeding measures.

Royal Decree-Law 16/2020 came into force on the 30th of April 2020 and has a noticeable impact on insolvency proceedings as it proposes a substantial modification of the basis of the law in Spain, with important implications for all legal and economic agents in the market.

Articles 8 to 18 of the Royal Decree-Law and the Second Transitory Provision contain the principal measures on insolvency proceedings. The provisions include the postponement of the duty to request the opening of the liquidation, the application for voluntary insolvency proceedings, the possibility of changing the current creditors’ agreement, or the granting of incentives for the financing of companies under the current circumstances.

By way of summary, the main insolvency proceedings measures are as follows:

  • Possibility of modification of the creditor’s agreement: during the 12 months following the declaration of the state of alert, the debtor may request the amendment of the existing agreement.

Similarly, the requests of agreement’s infringement submitted by creditors within the six months after the declaration of the state of alert will not be processed until three months after the ending of the aforementioned six-month period. During the three months, the insolvent party may submit a proposal to modify the agreement.

  • Postponement of the duty to request the liquidation procedure: during one year since the declaration of the state of alert, the debtor will not be obliged to request the liquidation when the latter is aware of the impossibility to fulfil its contractual or incurred obligations after the approval of the creditor’s agreement, provided that within this period there is an agreement’s modification proposal and it is deemed admissible.

During this one year, the judge will not order the opening of the liquidation phase at the request of a creditor.

  • Approved refinancing agreements: during one year since the declaration of the state of alert, the debtor with an approved refinancing agreement may notify the courts that it has initiated or intends to start negotiations with the creditors to modify the existing contract or to reach a new one (even if one year has not passed since the previous application for approval).

Similarly, this point also establishes a temporary regime of inadmissibility. It applies to all declarations of infringement of the refinancing agreement submitted by creditors, within six months since the declaration of the state of alert and until one month after the end of these six months. During that month, the debtor may inform the courts of the opening of negotiations with the creditors to modify the existing agreement, or, if appropriate, to reach a new one.

  • Request for voluntary and necessary insolvency proceedings: suspension of the general obligation for insolvent debtors to request the voluntary insolvency proceedings until the 31st of December 2020. Until that date, the judges will not admit the applications for necessary insolvency proceedings requested by creditors since the declaration of the state of alert.

Within this period, all applications for voluntary insolvency proceedings will be prioritized over requests for necessary insolvency proceedings, even if the latter were of an earlier date.

  • Incentives for company financing: The following arrangements enhance the debtor’s financing within this crisis:
    • Loans, credits and revenues of a similar nature (included those from related persons) granted to the insolvent debtor will be considered as credits against the estate if, within two years since the declaration of the state of alert the approved or modified creditor’s agreement is not fulfilled
    • In insolvency proceedings declared within two years of the declaration of the state of alert, loans, credits, and revenues of similar nature granted to the insolvent debtor by related persons since the declaration of the state of alert will be considered ordinary credits.
  • Simplification and acceleration of the insolvency proceedings: amongst other things, suspension of hearings and admission of documentary and expert evidence only with regards to:
    • Insolvency proceedings in which the administrator has not yet provided the provisional inventory and the provisional list of creditors
    • Insolvency proceedings initiated within the two years since the declaration of the state of alert
    • Insolvency proceedings started to solve the inventory and the creditor’s list contestation.
  • Preferential processing: there is preferential processing of some actions deemed relevant for the debtor’s assets until one year has passed since the declaration of the state of alert: insolvency proceedings in labour matters, sale of productive units, proposals for agreements, reintegration of assets, precautionary measures, etc.
  • Suspension of the cause for dissolution due to losses: losses for the current financial year 2020 will not be taken into account in order to determine the cause for the dissolution foreseen in article 363.1 e) of the Spanish Company Act (Ley de Sociedades de Capital) (losses that reduce the net equity below half the share capital of the corresponding company).

As it can be seen, through the measures provided for in Royal Decree-Law 16/2020, the goal is mainly to avoid at all cost the massive entry of insolvent companies into insolvency proceedings, granting them more time to try to overcome the situation of insolvency, as well as to reach agreements that allow them to refinance their debt.

It is also a matter of rewarding those individuals or entities who, despite being related to the insolvent debtor, have made contributions in its favour after the declaration of the state of alert by improving their credit rating (which would generally be subordinate).

Finally, at a corporate level, the aim is to avoid the dissolution and liquidation of the company, by ignoring the losses experienced in the financial year 2020.

Time will determine the effect of these measures on the Spanish business and productive sectors: if these prevent the accumulation of insolvency proceedings or, on the contrary, only postpone an inevitable cascade of insolvency proceedings.

In any case, regardless of these deferral measures and considering the more than foreseeable extension in time of the current crisis and its dangerous economic impact for businesses, the debtor’s right to file the application for bankruptcy or request the liquidation at any time remains in force.

This statement is crucial if we keep in view that, occasionally, when the business is not possible, the decision to liquidate soon and orderly is the most logical and the least economically harmful as it can avoid additional liabilities. Besides, the aggravation of the insolvency situation due to failure to act in time or inaction may create, among other things, negative financial consequences for the directors of the insolvent company.

Therefore, sometimes, a timely liquidation will be better than an agreement entered under unfavourable conditions.

If you have questions regarding the insolvency measures in Spain,

This article is not considered as legal advice

José María Mesa

A licensed attorney with both Business Administration and Law degrees, José María Mesa is specialized in the areas of commercial contract, corporate law and mergers and acquisitions. Working languages: Spanish and English. For any query Contact José María Mesa