New Effects of Filing for Pre-Insolvency in Spain: 5 Bis Communication
On 8 March 2014, Spain’s Royal Decree-law 4/2014 on urgent measures concerning the refinancing and restructuring of corporate debt (the New Reform) was published in an attempt to improve the Spanish Insolvency Law.
The New Reform recognizes that there existed a degree of inflexibility within certain aspects of Spain’s pre-insolvency and insolvency regimes that was discouraging financial creditors from entering into refinancing arrangements and hence the New Reform pursues to encourage the refinancing discussions by, among others, providing a more firm pre-insolvency environment in which the main assets of the debtor are protected against enforcement by unsecured creditors.
In a nutshell, the Spanish insolvency arena has been constantly evidencing that although an insolvency company may be viable from an operational perspective at the end it ends up in liquidation due to its excessive debt burden.
Under the Spanish Insolvency Law, directors of company are obliged to file for insolvency before the Court within a period of two months from the date on which they knew or should have known that the company is unable to regularly comply with its obligations when they become due and payable (the so called liquidity test), being in a situation of actual insolvency (insolvencia actual).
As an exception to the directors’ obligation to file for insolvency, Section 5 bis of the Spanish Insolvency Law (the 5bis Communication) provides that if a debtor notifies the Court that it has started negotiations with its creditors to seek support for either
- an out-of-court refinancing agreement or
- an early composition agreement, it will have a three months additional grace period to reach the agreement and one more to file for insolvency, provided that it files the notice with the Court within the two-month limitation period (the so called 2+3+1 rule).
In the event directors breach their duty to file for insolvency, the insolvency may be declared guilty and the directors may be held liable.
Traditionally, the main effect of filing for pre-insolvency by means of the 5bis Communication has been the protection of the debtor from being filed for insolvency within the referred to grace period as well as suspending the obligation of such debtor to file for insolvency.
Under the new drafting of the 5bis Communication pursuant to the New Reform, the 5bis Communication may also stay:
- any judicial enforcements over assets which are necessary for the continuity of the debtor’s activity
- any enforcement of security rights encumbering assets necessary for business continuity, and
- any enforcement of financial claims provided that creditors representing at least 51% of such financial debt have expressly supported the commencement of negotiations under Section 5 bis.
This article is not considered as legal advice
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[…] Once the company’s managers have established the existence of a situation of insolvency, they must undertake voluntary bankruptcy proceedings within two months from the date on which they discovered (or should have discovered) said situation, notwithstanding the provisions of Article 5 bis of the Spanish Bankruptcy Law. […]
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