Long-Awaited Amendment to Insolvency Legislation in Spain: Is it Sufficient?

New legislation came into force on 1 January 2012, although certain provisions have been in force since 12 October 2011. The law is a response to the current economic crises and priority in reform appears to have been given to rules that will have a beneficial economic effect on the country. The aim is to standardize the role of restructuring as an instrument to be used to save businesses in Spain.

The main points of the new law can be summarised as follows:

  • Greater legal certainty for restructuring procedures
  • New channels of restructuring that focus on the balance between the company’s viability and the necessary protection of creditors
  • The simplification and speeding-up of the procedure
  • A notable improvement to the position of workers First of all, we will analyze the goals of this legislation and, secondly, we will give a brief critical summary related to the gaps in this law, including the cultural problem in Spain whereby debtors and creditors prefer to solve their problems outside of court.

A Detailed Examination of Restructuring

This law attempts to provide an insolvent company with a quicker, cheaper alternative that is less reliant on the courts. This is achieved through provisions concerning restructuring agreements. The debtor can officially notify the Court of the commencement of negotiations with creditors to reach a restructuring agreement and this agreement can be approved by the court within three months of the date on which it is submitted. Consideration must be given to the fact that these restructuring agreements must correspond to a viability plan that allows the continuation of the professional or business activity in the short and medium term.

To provide the company that is being refinanced with liquidity, the concept of fresh money is introduced in the legislation.  This means that creditors can provide the company with new revenue and receive priority in distributions should the company be subsequently liquidated.  This attempts to encourage banks to award new loans and, therefore, contribute to the company’s viability and the continuation of its activity.

Simplification and Acceleration of the Insolvency Procedure

In many cases, the restructuring must not be delayed since it may be damaging for the insolvent party and its creditors through the loss of value of their assets.  Where the sale of assets is vital for the collection of debts, there are provisions to simplify and speed up the sale of such assets.

The law also focuses on regulating the petition for restructuring to reduce the cost and time of the insolvency proceedings. The decision to accept the petition for restructuring will be taken by the Judge, who will consider the following issues:

  • The situation of the company in crisis
  •  The number of workers
  •  Any negotiations that may have started for the sale of the company or structural modification of the company

The Law also improves the system for the public registration of insolvency and creates a new Public Insolvency Registry to ensure that there is transparency concerning insolvencies to provide assurance for all parties affected.

To favour a conservative solution for insolvency, structural modifications may be made with the approval of a certain percentage of the creditors and debts may be acquired albeit only when the acquirer is an entity subject to financial supervision.

Enhancements to Worker Protection

When considering the labour and employment issues in the restructuring procedure, the principles of social law must be taken into account and, accordingly, the new Insolvency Act seeks to avoid conflicts with social jurisdiction and the labour authorities.  This has the effect of increasing the weight given to the impact on workers in the bankruptcy.

The required coordination with the latest employment and labour reform has been introduced and the new concepts regarding labour force adjustment plans (in Spanish, ERE) correspond to the competent authority depending on when it is processed: after the insolvency has been declared, restructuring plans that make substantial changes to collective working conditions or involve the collective termination or suspension of contracts must be brought before the Insolvency Judge.

New Types of Receivers and Their Impact

Greater emphasis is placed on the functions and responsibilities of receivers, strengthening the requirements to be appointed as a receiver. There are two essential new issues to be considered:

  • The court may now appoint individuals as insolvency receivers.  This has a clear effect on the way the receivership operates, how receivers make their decisions and the savings made in costs. This model is already in place in other countries in the EU and is more appropriate for the organisation and working system used by insolvency professionals. This avoids unfair participation by the various receivers.
  • Also, the court may now appoint bodies corporate as receivers and the exercise of this function by several professionals with the required training and experience is to be favoured. This option also reduces the costs of bankruptcy and implies that judges can appoint specialist companies as receivers.

Continued Enhancements in Insolvency Legislation

We consider it appropriate to highlight two further points here:

  • The reinforcement of connected insolvencies: the new law contains provisions whereby insolvencies that are declared jointly must be processed in a coordinated way without necessarily requiring the co-mingling of assets and liabilities.
  • Experience has shown that insolvencies without assets constitute an extended form of liquidation.  Accordingly, the new law contains a more detailed regulation of the insufficiency of assets: if the assets are insufficient, a payment order is provided for credits against these assets.

At present, the restructuring procedure as a natural way of solving the business crisis is still unusual. In Spain, it is a cultural problem and the huge majority of companies in insolvency end up in liquidation: Business owners consider the filing of insolvency as a form of dishonour and delay in the commencement of proceedings, which leaves the liquidation of the company as the only possible conclusion.

Also, due to Spain´s economic crisis, the Courts are under extreme pressure due to an excess of work, a lack of qualified personnel and low budgets.  This also significantly delays the declaration and processing of insolvencies.

Although the Law indeed makes a positive change to the system for financing agreements and restructuring, the new text does not seem to solve the serious problems that have arisen in recent years. The resources available to the Justice system for protecting interests in insolvencies remain insufficient and a reform of the commercial courts is also necessary; furthermore, the new Law does not provide solutions to the debt problems of families and individuals.  Finally, special mention must again be made of the low-level satisfaction of ordinary creditors with the almost nonexistent use of the restructuring procedure, which should be a natural way of solving corporate crises.

Leyre Barragán 

For additional information regarding the insolvency legislation in Spain,

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

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