Informative Note: The new Insolvency Law (RDL 1/2020)

We provide a brief informative note concerning the Royal Legislative Decree 1/2020, of 5 May, (the new Insolvency Law) that approves the redrafted text of the Insolvency Law and conducts a general revision of its structure and key characteristics.

After several years of delay, the Spanish Official State Gazette (Boletín Oficial del Estado, BOE) has published, on the 7th May 2020, the new Insolvency Law, specifically, the Royal Legislative Decree 1/2020, of 5 May, that approves the redrafted text of the Insolvency Law.

The publication of the new legislation ensues amid the sanitary crisis caused by COVID-19. And a few days after the government’s approval of a series of measures designed to increase the flexibility of insolvency proceedings, and avoid a flood of business insolvencies (specifically, through the Royal Decree-Law 16/2020, of 28 April, for procedural and organizational measures to tackle COVID-19 in the field of Justice Administration).

However, the new Insolvency Law will not come into force until the 1st of September.

Since the enactment date of the current Spanish Insolvency Law 22/2003, of July 9, it has suffered many modifications and reforms, through successive laws and decree-laws, to adapt it to the new circumstances and economic reality. As a result, insolvency regulations were unfocused and convoluted, given the high number of applicable legal provisions.

Accordingly and as its name indicates, the new Insolvency Law intends to combine the different modifications and alterations made to Act 22/2003, of 9 July 9, resolving the problem of the dispersed provisions, and ordering, clarifying and coordinating it, through a single regulatory body.

As a result, the new Insolvency Law has 752 articles (compared to over 250 of Act 22/2003, of July 9, Insolvency). An analysis of the text, however, shows no significant changes regarding substantive law, which remains essentially the same.

The 752 articles of the new law are divided into three books:

  • Book I: On insolvency proceedings
  • Book II: On pre-insolvency law
  • Book III: On the rules of private international law

The new Insolvency Law, Book I

Book I is the most extensive and is dedicated to insolvency proceedings and different questions concerning the procedure. Accordingly, there are modifications to distribute and order subjects regarding Act 22/2003, of July 9, Insolvency. There is, for example, a specific title on insolvency authorities, divided into two chapters, one dedicated to the judge hearing the insolvency proceedings and another devoted to insolvency administration. There is a title on assets and another on liabilities; there is a title on the insolvency administration report; there is a title for the payment of money owed to creditors, etc.

The new Insolvency Law, Book II

Book II concerns pre-insolvency law and is divided into four independent titles:

  • Communication about the opening of negotiations with creditors
  • Refinancing agreements
  • Extrajudicial payment agreements
  • The specific details of consecutive insolvency.

The new Insolvency Law, Book III

Finally, book III contains private international law regulations that hitherto included title IX of Act 22/2003, of July 9, Insolvency. The reason for the creation of this last independent book is found in Regulation (EU) 2015/848, given that, although hitherto there existed rules of private international law limited exclusively to creditor insolvency, they should now also apply to refinance agreements and extrajudicial payment agreements. This change was thus required for the new regulation to follow the same system.

Correspondingly, after a preliminary analysis of the new legal text, and as we anticipated at the beginning of this information note, we can conclude that the new Insolvency Law pursues three primary objectives: reorganization, clarification, and harmonization.

Regarding the first of these objectives, the new Insolvency Law rearranges the different legal content, easing its identification and function. This has led to a new distribution and the transfer and relocation of many articles. Thus, Title IV of Book I, dedicated to assets, incorporates questions such as reintegration and reduction regimes or the regulation of credits against assets.

Secondly, the new regulation redrafts many of its articles to provide them with greater precision and accuracy without altering their legal content and unifies concepts. It also eliminates existing contradictions between different provisions, cuts duplicated or unnecessary regulations, and fills some current gaps, inter alia.

Thirdly, there is a vast work of harmonization. The new Insolvency Law dedicates an article to each specific subject, instead of employing the same precept to regulate different issues. In this way, on occasion, a single article of Act 22/2003, July 9, Insolvency, has become a chapter, section, or even an entire title in the new regulation. For example, chapter 5 bis, on the communication of negotiation with creditors (currently in Book II, Title I, Chapter I, arts. 583 et seq.) or Article 64, on the effects of the declaration of insolvency on employment contracts (currently in Book I, Title III, Chapter IV, Section 4a arts. 169 et seq.). Likewise, Article 71 bis, on the special termination regime of certain refinancing agreements, and the Additional Provision 4a, on the homologation of those agreements, now also have a full Title (currently, Book II, Title II, arts. 596 et seq.).

Finally, it is worth noting that, as indicated in the preface, the new law seeks to:

  • Serve as the basis for the transposition of the Directive 2019/1023 of June 20 on frameworks of preventive restructuring, exoneration of debts and disqualifications, of which the time limit for incorporation into Spanish law expires in January 2021, and
  • Allow the implementation of future regulatory reforms to alleviate the economic effects of COVID-19, that may develop the exceptional measures already adopted in Royal Decree-Law 16/2020, of April 28.

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