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1. Insolvency and restructuring procedures
1.1 – What are the main insolvency and restructuring procedures applicable to companies?
The two main types of procedures are pre-insolvency and insolvency procedures.
The request to initiate a pre-insolvency procedure can be made by companies in a situation of insolvency. The procedure is initiated by means of a notice given by the debtor to the court to inform it that it is negotiating with its creditors any of the applicable instruments allowed under Spanish law. The purpose of the procedure is to allow for a period in which the debtor company can negotiate with its creditors to reach a restructuring plan that, on the one hand, corrects the insolvency situation and, on the other, ensures the company’s viability in the short or medium term.
Whilst such pre-insolvency procedures are filed before the competent courts, they do not involve any judicial intervention. However, the appointment of a restructuring expert may be requested and, in some cases, judicial approval of an agreed restructuring plan will be necessary.
Insolvency procedures can be requested by a debtor in a situation of insolvency (voluntary insolvency procedure) and, in some cases, may also be requested by any creditor of an insolvent company (mandatory insolvency procedure). Both types of insolvency procedures (voluntary and mandatory) always involve judicial intervention in the company.
Notwithstanding the difference between insolvency procedures initiated by a creditor’s request and those initiated by the debtor itself —mandatory and voluntary insolvency procedures— a preliminary phase called the common phase applies to both in which the insolvency receiver prepares an inventory of assets and liabilities and a list of creditors.
Insolvency proceedings can generally be divided into three types based on their processing:
Continuity procedures — these are insolvency procedures aimed at reaching composition agreements with creditors and other ancillary measures so that the company can resolve its insolvency situation and continue its operations. In the absence of approval of an arrangement with creditors, or of a breach of any such arrangement, the liquidation phase will open.
Liquidation procedures — these are procedures aimed at realizing all the assets and rights of the company, either by way of a piecemeal liquidation or in a single unitary liquidation (that is, by selling the business as a going concern to a third party) following which the company will cease to exist in the commercial market.
Procedures for microenterprises — this is a special procedure intended for insolvent companies with a small volume of activity and which is aimed at simplifying and speeding up the process.
1.2 – Can a company obtain a moratorium whilst it prepares a restructuring plan? If so, what is the effect of the moratorium?
Yes. Whilst the preparation of a restructuring plan does not necessarily have to be part of a pre-insolvency procedure, this procedure is specifically intended to inform the court that work is being done on the development of a restructuring plan and includes a moratorium period.
During this period (except in the case of microenterprises), the approximate duration of which is four months, (i) the insolvent company is protected from any ongoing executions against its assets, (ii) the initiation of any new executions is prevented, (iii) contracts with mutual obligations can be maintained (amongst other measures that may help to preserve the continuity of the business activity), and (iv) the company’s directors are no longer legally bound to initiate a voluntary insolvency procedure even though the company is in a situation of current insolvency.
1.3 – How long will it generally take for a creditor to achieve the liquidation of an insolvent company, assuming an undisputed claim and no opposition from the company?
The start of the liquidation can be requested at any point during the insolvency procedure by the debtor company, even in the initial request for the declaration of insolvency.
The duration of this procedure varies greatly depending on several factors such as whether a global liquidation of the entire productive unit is intended or a sale of individual assets, the number of assets involved, any bureaucratic hurdles that may hinder their sale, and/or the market interest in the assets. In any case, the typical duration is usually never less than 24 months.
1.4 – Does your jurisdiction make use of a distressed sale process by which the business/assets of the company can be sold?
Yes, the Spanish Insolvency Act now includes the possibility of including the sale of business units in the pre-insolvency stage (pre-pack or pre-packaged sales). It also sets out guidelines for the appointment of an independent expert who is responsible for collecting purchase offers for the purchase of the production units.
The sale of distressed assets can also take place during the liquidation phase and there is specific regulation for the sale of productive units (that is, businesses in operation), as well as for individual assets (i) by including the sale in the liquidation plan or (ii) as a supervening offer not included in the liquidation plan. This regulation applies subsidiarily to the rules that may be judicially approved ad hoc in each procedure.
2. Insolvency office-holders and courts
2.1 – Who can act as an insolvency office-holder?
The insolvency office-holder, or receiver (“Administrador Concursal”) must be either a lawyer or an economist with more than five years of experience and accredited knowledge in insolvency proceedings. A company may also be appointed provided that it has, at least, both a lawyer and an economist. If the proceedings are of a greater level of complexity, the appointed office-holder must provide evidence of his/her relevant knowledge pertaining to the particularities of the insolvency proceeding.
2.2 – Who decides the identity of the insolvency office-holder, and what restrictions apply?
The insolvency office-holder is appointed by the insolvency judge who refers to the publicly available lists in the Insolvency Public Registry of professionals who have expressed their availability and demonstrated training and expertise in insolvency matters. Neither the debtor nor its creditors may influence the decision of the insolvency judge regarding the selection of which office-holder is appointed.
There are a number of incompatibilities and restrictions expressly listed in the Spanish Insolvency Act which ensures the suitability and independence of such professionals.
2.3 – Are insolvency cases heard by specialist judges, or in the general commercial courts?
The insolvency proceedings are heard by the Spanish Commercial Courts (“Juzgados de lo Mercantil”). Although the judges in such courts are familiar with other matters not related to insolvencies, they are professionals with a very high level of specialization in this area. In the case of appeals related to pre-insolvency and insolvency matters, there are specialized sections that exclusively handle insolvency cases.
3. Position of directors
3.1 – To what extent do the directors of the company remain in control of its affairs during any of the procedures described above?
In the pre-insolvency procedure, as previously mentioned, there is no judicial intervention and so the directors of the insolvent company maintain full control.
However, when the company is within the framework of an insolvency procedure, the directors can only make decisions if they are approved by the insolvency office-holder. If the petition for a mandatory insolvency procedure is successful, as a general rule the court replaces the directors by an insolvency office-holder. In the case of a liquidation insolvency procedure, the directors are dismissed and replaced by the insolvency office-holder.
3.2 – Are there circumstances in which directors are obliged to file for insolvency proceedings? If so, when do those circumstances arise?
The directors of the company are required to file for insolvency to the relevant court within two months from the time they become aware (or should have become aware) of the actual or imminent insolvency of the company. The main obligation which applies to directors when the company is considered to be in a state of actual or imminent insolvency, and no alternative routes are available, is to apply for a declaration of insolvency.
If the directors fail to file for insolvency within two months of the time they become aware (or should have become aware) of the company’s actual or imminent insolvency, a legal presumption of negligence exists that would entitle the court to declare the insolvency as “negligent.” In that event, the directors could, amongst other consequences, be held personally liable for the payment of any shortfall.
3.3 – What are the risks facing the directors of an insolvent company?
The directors of companies have a number of obligations which include filing the insolvency petition in a timely manner, not worsening the insolvency situation, maintaining accurate accounting, etc. During the processing of insolvency procedures, the responsibility of the directors will be judged and, if they are found guilty of failing to fulfil their obligations, they will face punitive measures that the court may impose such as the following:
- They may be prohibited from acting as directors (or administering the assets of others in any way) for a period of between two and fifteen years. The specific period will be fixed by the judge considering, amongst other matters, the seriousness of the facts and the extent of the damage caused to the company’s assets.
- They may lose any rights they had as creditors in the insolvency proceedings.
- They may be sentenced to return any assets or rights that they may have unduly obtained from the company. An order may be made against the directors to pay compensation for damages.
- They may be sentenced to cover the insolvency deficit (that is, become personally liable for the deficit as indicated above).
- They may also face (i) individual liability actions, which may be brought by shareholders or third parties for acts of the directors that directly harm their interests, (ii) corporate liability actions against directors, which may be brought by the company, and (iii) joint and several liability actions for corporate debts.
4. Position of creditors
4.1 – What are the main forms of security over movable and immovable property?
The main types of security interests which may be granted over movable and immovable property are as follows:
- Real estate mortgages, which can be granted over any real estate asset and are registered with the relevant land registry.
- A floating mortgage, which is a security interest created over a specific real estate asset to secure liabilities which are not identified at the time of the furnishing of the mortgage up to a maximum cap or maximum liability amount.
- Chattel mortgages which can only be created over business premises, cars, trains, planes and other motor vehicles, machinery and equipment, and intellectual and industrial property. There is a specific type of mortgage for ships (known as a naval mortgage).
- Pledges, which can be granted over movable assets and credit rights (such as shares, machinery, vehicles, or credit rights). For an ordinary pledge to be validly granted, it is required that the possession of the collateral or credit right is transferred to the pledgee but in some cases does not require delivery of the asset.
- Pledges without displacement, which can be created over harvests from agricultural plots, livestock on plots of land, harvesting machinery, raw materials or merchandise in warehouses, and credit rights held by the beneficiaries of administrative contracts, licences, awards or subsidies and over receivables (including future receivables) not represented by securities and not qualifying as financial instruments.
4.2 – How does the opening of insolvency proceedings affect the rights of secured creditors?
An insolvency declaration triggers an automatic stay for a period of one year in respect of secured creditors with collateral over assets that are necessary to continue the business operations of the company. This automatic stay can also apply in the pre-insolvency proceedings in order to allow a period to negotiate an out-of-court-solution to financial distress for a four-month period. The secured creditors are unaffected in the event of a liquidation or in case the debtor gets the approval of a composition agreement.
4.3 – Where a debt owed to a secured creditor exceeds the value of the security, is the secured creditor entitled to claim for the shortfall?
Yes, a secured creditor can claim the difference between the fair value (valor razonable) of the security and the total amount of the debt. In this case, the amount exceeding the value of the security is considered an ordinary or subordinated claim in the insolvency, depending on the nature of the debt.
4.4 – Which classes of creditor are given preferential status? Are any classes subordinated?
The Spanish law establishes different classes of creditors as follows:
- Creditors with special privilege: those with a real security interest in a specific asset (such as mortgages or pledges).
- Creditors with general privilege: those that, although without a specific security, have priority over the debtor’s assets (for example, salaries and employee compensations, tax, and social security claims, 50% of claims by the creditor that filed for mandatory insolvency, etc).
- Ordinary creditors: this applies to other commercial claims without any preference, and which are paid after privileged claims.
- Subordinated creditors: Degraded claims (interest, penalties, claims of related parties to the debtor, claims not reported in time, etc).
4.5 – Is there a date by which creditors must make claims in the insolvency proceedings? If so, what are the consequences of failing to claim by that date?
Once the insolvency has been declared, the receiver must proceed with an individualized communication to all creditors, provided this information comes from the debtor’s documentation and information or appears in the proceedings.
Both Spanish and foreign creditors have one month from the day following the publication of the declaration in the Spanish Official Gazette to make the communication of credit, regardless of whether or not they receive the individualized communication referred to in the previous paragraph. In general terms, the communication must be written in Spanish. If it is in another language, the receiver may later require the creditor to proceed with the corresponding translation.
Failure to file a claim within this deadline may result in the claim being classified as late, which generally means it is treated as being subordinated and loses any priority for payment, unless the creditor can prove that it has not been aware of their existence before the end of the objection period, in which case they will be classified according to their nature or, if they are a compulsory or public law claim, that may result from verification or inspection procedures.
4.6 – Are contractual rights of set-off and/or netting effective in insolvency?
According to the Spanish Insolvency Law, set-off rights are subject to specific conditions:
- Before the insolvency is declared, set-off is fully effective if its requirements were met prior to the declaration of insolvency, even if the judicial or administrative resolution that declares it is taken after the declaration of insolvency. The fact that the creditor has notified the insolvency administrator of the claim does not prevent the set-off from being declared.
- Once the insolvency is declared, set-off of the insolvent party’s claims and debts is not allowed, except for claims arising from the same legal relationship. Provisions under private international law remain unaffected.
Any dispute over the amounts to be set off or the conditions for set-off will be resolved by the insolvency judge through the insolvency incident procedure.
4.7 – Are contract terms permitting termination of a contract by reason of insolvency (“ipso facto clauses”) effective?
In general, “ipso facto” clauses—those that allow the automatic termination of a contract solely due to the declaration of insolvency—, are generally considered unenforceable unless the insolvency office-holder, with the approval of the court, considers that termination is in the interest of the insolvency estate (“interés del concurso”).
In the event of a material breach of a contract with outstanding reciprocal obligations, the non-defaulting party may request the termination of the contract. The court may still disregard the breach and force the parties to perform the contract for the remainder of its term regardless of whether the breach occurred before or after the declaration of insolvency. Any obligations arising from the agreement must be paid from the debtor’s insolvency estate.
4.8 – Are retention of title clauses enforceable and (if applicable) what are the main requirements for enforceability?
Yes, retention of title clauses are enforceable if the following requirements are met:
- The clause must be agreed in writing before the delivery of the goods.
- It must be clear and specific, stating that the seller retains ownership until the buyer has fully paid the purchase price.
- The goods must be identifiable and separable from the debtor’s assets.
In the event of insolvency, the creditor with retention of title can recover the goods if these conditions are met, and the goods are not deemed essential to the debtor’s activity.
4.9 – Are foreign creditors treated equally to domestic creditors?
Yes, foreign creditors are treated equally to domestic creditors in Spanish insolvency proceedings.
5. Setting aside transactions
5.1 – What are the main transaction avoidance provisions applicable to the proceedings referred to above?
An insolvency office-holder may challenge certain acts of the debtor that are detrimental to the insolvency estate which have been carried out within the period of two years prior to the ruling declaring the insolvency.
Detriment to the assets of the debtor declared insolvent will be presumed, with no possibility of rebuttal, (i) if the debtor did not receive any consideration in exchange for the act or agreement or (ii) the debtor paid an obligation that was not enforceable until after the declaration of insolvency.
Additionally, there is a presumption of such detriment in respect of (i) any act or agreement entered into by the debtor with a company or individual “specially related”, (ii) any guarantee in rem created by the debtor in relation to prior existing obligations and (iii) any payments or other acts purported to meet obligations the maturity of which is due after the date of ruling declaring the insolvency. This presumption is subject to rebuttal (iuris tantum).
5.2 – Who is entitled to challenge transactions under these provisions?
The insolvency office-holder (or a creditor, should the insolvency office-holder not apply for the rescission within two months of the creditor’s request) is entitled to file before the court a clawback action.
6. Cross-border insolvency
6.1 – Do your courts recognize insolvency proceedings commenced in the courts of other jurisdictions?
Yes, insolvency procedures initiated before the courts of other EU member states are automatically recognized in Spain in accordance with the European regulation on insolvency.
In the case of insolvency procedures followed in non-EU member states, the situation is more complex as it is necessary to analyse exactly which international treaties exist on the matter and assess whether there are issues contrary to public order or other legal limitations that could prevent recognition. In any case, there is specific regulation in Spain for the recognition of foreign judicial rulings, as well as a specific section in the Spanish Insolvency Act for issues related to private international law.
6.2 – If so, what assistance can your courts provide, following recognition?
Assistance may vary to recognize judicial actions from other states, as long as the public order of the Spanish jurisdiction is respected, and any necessary measures are taken in relation to the processing of the insolvency procedure.
6.3 – Is it possible to commence insolvency proceedings in relation to a foreign company?
Yes, generally this is the case when the foreign company has its centre of main interests in Spain.
7. Other matters
7.1 – Please consider whether there is any other feature of your country’s insolvency regime of which a lender, investor or purchasers of distressed debts or businesses should be aware? For example, are there any mistakes that foreign creditors often make?
Insolvency proceedings can be complex and fraught with challenges which means that comprehensive legal advice is required. The negotiation of restructuring plans and ensuring compliance with the state-of-art practices and the most recent case law is key after two years since the introduction of a complete new framework in the Spanish legal system.
The acquisition of a distressed business within pre-insolvency and insolvency proceedings is another critical area. The investors must make a careful due diligence regarding the risks related to the transfer of business undertakings.
7.2 – Are there any other stakeholders or entities (eg governmental or regulatory) which may influence the outcome of any restructuring?
There are no significant reform proposals currently underway as the last major reform took place in 2022 with the approval of Law 16/2022. This reform implemented Directive (EU) 2019/1023 on preventive restructuring frameworks and introduced a complete review of the Spanish insolvency system, particularly regarding pre-insolvency instruments.
It affords new debt restructuring opportunities by introducing restructuring plans as a preventive tool, giving a more prominent role to creditors, who will be able to benefit from this instrument which provides greater speed and flexibility by allowing companies to preserve the value of the business for the benefit of all stakeholders.
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