Merry-Go-Round of Amendments to the Spanish Insolvency Law

The Spanish insolvency arena is witnessing an unprecedented review of amendments to Spanish Law 22/2003 on Insolvency Proceedings (the Spanish Insolvency Law) to solve technical problems and to facilitate the continuity of economically or operationally viable companies.

Throughout 2014 and (beginning) 2015, the following three partial reforms of the Spanish Insolvency Law have been approved by means of Royal Decree-Laws (RDL): (i) RDL 4/2014, of 7 March (RDL 4/2014), (ii) RDL 11/2014, of 5 September (RDL 11/2014), and (iii) RDL 1/2015, of 27 February (RDL 1/2015).

Royal Decree-Laws are specific regulations issued by the Spanish Government in cases of urgent need and come into force upon publication within the Spanish Official State Gazette (Boletín Oficial del Estado, BOE).  Although Royal Decree-Laws have the status of law, their publication, however, needs to be validated by the Spanish Parliament within 1 month of publication.

Whereby RDL 4/2014 has already been validated by the Spanish Parliament (giving rise to Law 17/2014, of 30 September), RDL 11/2014 and RDL 1/2015 are currently being processed as new draft bills (Proyectos de Ley).  As such they are subject to new amendments submitted by the different political parties in the Spanish Parliament within the coming weeks or months.

In a nutshell, the main aims of the referred Royal Decree-Laws are the following: (i) RDL 4/2014 (now, Law 17/2014, of 30 September) principally targets to enhance the deleveraging of viable Spanish companies and facilitating prepetition restructuring deals; (ii) RDL 11/2014 extends the main principles of pre-insolvency refinancing agreements (introduced by RDL 4/2014) to composition agreements and lays down certain rules regarding the sale of production units and company liquidation; and, (iii) RDL 1/2015 seeks to facilitate a second chance for individual creditors so that they may now benefit from the same fresh-start as shareholders of insolvent companies that are wound-up and liquidated.

Focusing on RDL 11/2014, this reform pays special attention to the sale of productive units in the context of liquidation (once a composition agreement has been ruled out).

Before RDL 11/2014 entered into force, Article 149 of the Spanish Insolvency Law laid down that the transfer of a debtor’s productive unit did not entail company successor liability (sucesión de empresa), except for labour purposes.  All employment contracts included within the productive unit were automatically transferred with the business to the acquirer (subject to certain exemptions).

Such possibility enabled a potential acquirer of a productive unit to acquire a restructured company with the debtor’s debts remaining in the hands of the insolvency proceedings and without the acquirer having to assume any liabilities or obligations (except those linked to the employment contracts included within the productive unit).

Otherwise, should the sale of a debtor’s productive unit finally not be possible due to a lack of third-party offers or due to non-competitive offers, the debtor’s assets would be sold individually in a public auction.

Given the above, it was not clear if Social Security debts would fall under company successor liability, existing hereto different criteria by Spanish case law.  These debts could be understood to be of a labour nature because they are linked to wages.  In practice, Social Security authorities were challenging all those judicial resolutions that excluded Social Security debts of the transferred productive unit giving rise to legal uncertainty.

In this context, RDL 11/2014 has come to address this discussion.  It expressly lays down the acquirer’s exemption from liability for debts in case of the sale of productive units, clearly excepting Social Security debts of the company in insolvency (in addition to those of a labour nature).  Hence these Social Security debts become part of the liabilities to be assumed by the potential acquirer.

Insolvency practitioners (lawyers, companies and judges, among others) have expressed their concerns with this measure since it may backfire on future sales of debtor’s productive units within the liquidation phase.

This measure not only hampers the sale of productive units, but it also makes such sales almost unfeasible (clearly destroying employment) given the burden (in economic terms) it imposes on the potential acquirer.

Spanish insolvency practice has evidenced that the sale of productive units is not only feasible but also the best alternative to the subsidiary solution of an individual sale of debtor’s assets in public auction (prior termination of employment agreements).  Such direct transfer will enable the continuity of the debtor’s productive activity in the hands of a new owner and the maintenance of all or part of the workforce.  In sum, the sale of productive units supports economic activity triggering future tax charges and social security contributions.

The sale of productive units has been widely used in past years.  Recent examples of the sale of production units can be found in the cases of Cubigel, Cacaolat, Sati and Dogi, whose businesses were transferred during their respective insolvency proceedings.

As stated above, RDL 11/2014 (together with RDL 1/2015) is currently being processed as a draft bill, and several amendments to the final text have been submitted by the different political parties in the Spanish Parliament.  We are yet to see the final drafting of the new draft bill approved and the consequences triggered by the measure implemented within future sales of productive units.

For additional information regarding the insolvency law in Spain,

Please note that this article is not intended to provide legal advice.

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