I. INTRODUCTION - PURPOSE OF INSOLVENCY REGULATION IN RESPECT OF COMPANIES AND INDIVIDUALS
The regulation of insolvency in Spain is contained in a single legal text, Royal Legislative Decree 1/2020, of 5 May, approving the recasted text of the Insolvency Law ("TRLC"), which, as its name indicates, is the result of consolidating in this legal text the numerous reforms carried out in this area over the last twenty years.
The objective pursued by this law, as stated in its preamble, is to preserve business and the underlying employment, for which the regulation distinguishes between the insolvency proceeding per ser and what it calls pre-bankruptcy proceeding, which allows the insolvency situation to be dealt without the need to become immersed in the judicial procedure what is the insolvency proceedings.
The insolvency proceeding is regulated by a system of phases, with a first phase called "Common Phase" (Fase Común), and two subsequent phases depending on whether the debtor is viable or not. If the debtor is viable, it will enter the so-called "Agreement Phase" (Fase de Convenio), and if not, the "Liquidation Phase" (Fase de Liquidación).
Likewise, in parallel with the processing of the previous phases, the Law regulates the so-called "qualification of the insolvency proceedings", the purpose of which focuses on analysing whether the insolvency situation has been caused or aggravated as a result of the guilty or negligent actions of the directors.
With regard to pre-bankruptcy law, the TRLC contemplates two access routes, the so-called "refinancing agreements with creditors" and "out-of-court payment agreements".
Having established the above, we will now analyse the most relevant aspects of the insolvency proceedings and of each of the two ways of access to pre-bankruptcy law for legal persons, to finally refer to the most relevant aspects of said law in relation to individuals.
II. THE INSOLVENCY PROCEEDINGS OF LEGAL PERSONS
II.1. Commencement of the proceeding and declaration of insolvency.
From a subjective point of view, any legal person may apply for insolvency proceedings, with the sole exception of entities belonging to the territorial organisation of the State, public bodies and public entities.
From an objective point of view, only one condition will be required: that the debtor is in a "situation of insolvency", understood as the impossibility of regularly complying with its enforceable obligations. This insolvency may be current, when such default occurs at the time of filing for insolvency proceedings, or imminent, when the debtor foresees that default is imminent.
The insolvency proceeding begins with the filing of a lawsuit for insolvency before the Commercial Court of the province where the debtor has the main centre of management and administration of the company.
The lawsuit may be filed by the debtor itself, in which case we will be dealing with voluntary insolvency proceedings, or by the creditors, in which case we will be dealing with necessary insolvency proceedings. The most relevant consequence between the two cases is that, as a general rule, in the case of voluntary insolvency proceedings, the administrative body will be maintained, whereas if insolvency proceedings are filed by the debtor, they will be dismissed and replaced by the Receiver. However, as we have said, this is not an imperative consequence.
Certain legal and financial documents must be attached to the lawsuit, the most relevant of which are as follows:
- The so-called "Legal and Economic Report" in which the debtor must justify its insolvency situation; describe the legal and economic background; identify the administrative body and partners; express the causes of the insolvency; and whether or not it considers the insolvency to be viable;
- A "List of Creditors" in which the debtor shall duly identify each of its creditors, contact details available to him and the specific debt owed and its status;
- An "Inventory of assets and rights" of which it is the owner with the identification, location and value attributed to each of them.
The insolvency proceeding shall be declared by means of an order issued by the Commercial Court, which shall contain, among others, the following pronouncements:
- The appointment of an Receiver to manage the proceeding:
- The commencement of the "Common Phase", as well as, in the event that the debtor has requested it in the lawsuit for insolvency proceedings, the simultaneous commencement of the "Liquidation Phase"
- An appeal to creditors to communicate their credits.
II.2. Processing of insolvency proceedings
As mentioned in the introduction, the procedure is structured and developed in three phases, the Common Phase, the Agreement Phase and the Liquidation Phase
Without prejudice to the foregoing, for organisational purposes of the procedure, it should be noted that the insolvency proceeding is divided into six sections within which all the procedure are integrated. Thus, the proceedings pertaining to the common phase are included in Sections 1, 3 and 4, and those relating to the Agreement Phase and Liquidation Phase in Section 5.
Having established the above, in the following points we will first analyze the most relevant aspects of each of the three phases, as it is through them that the bulk of the procedure is carried out, referring finally to section 6, known as "Qualification Section", as this is a very relevant aspect of the procedure whose regulation is outside the three phases mentioned above.
II.2.2. Common Fhase: This is the first phase of the insolvency proceeding and its essential objective is to determine the debtor's situation, for which the Receiver must draw up a report containing the following elements:
- An analysis of the "Legal and Economic Report" submitted by the debtor with the lawsuit asking for its insolvency proceeding;
- A statement of the state of the debtor's accounts;
- An explanation of the main decisions and actions taken by the Receiver itself.
- A reasoned statement of the debtor's assets and any other elements that may be relevant to the proceedings.
The report must also be accompanied by an Inventory and a List of Creditors drawn up by the Receiver itself. The List of Creditors will include a classification of the creditors' claims according to their characteristics, which will determine their collection preference and their rights within the Agreement or Liquidation Phase.
Finally, in the case of a company, a valuation must be provided for the company as a whole and for each of the production units that make up the company, both in the hypothesis of continuity of activity and in liquidation.
Once the report has been issued by the Receiver, the creditors and the debtor himself may object both the Inventory and the List of Creditors if they do not agree with what is reflected in either of these documents.
In the event that no objections are filed or once those filed have been resolved, the Receiver will make the Inventory and the List of Creditors definitive, which may no longer be subject to variations.
II.2.2. Agreement Phase: The purpose of this phase is to process a payment proposal to creditors.
The proposal may be made either by the debtor or by all the creditors representing one fifth of the debtor's assets.
The presentation can be made at two different times:
i. From the filing of the lawsuit until the end of the period for notification of claims (one month from the publication of the declaration of insolvency proceedings in the Official State Gazette), which is then referred to as an "early" proposal for an agreement, and this phase is opened and processed simultaneously with the Common Phase;
ii. From the end of the period for notification of claims until forty days before the date set for the meeting with the creditors, in which case this phase will be opened once the Common Phase has been completed.
As for the content of the proposed arrangement, it must include proposals for a debt reduction, a waiting period, or both, as well as the conversion of credits into shares in the bankrupt company or the transfer of assets in payment of debts.
Together with the agreement proposal, a Viability Plan must be presented, specifying the resources with which the payments will be met, which must also be reflected in a Payment Plan that will be provided with the agreement proposal.
The proposed arrangement must be evaluated by the Receiver before being submitted to the creditors for approval at the relevant creditors' meeting.
Depending on the content of the proposal, its approval will require the favourable vote of between 50% and 65% of the ordinary credits.
Once the creditors have voted in favour of the arrangement proposal, the judge will review compliance with the corresponding formalities and requirements and, if such compliance is verified, will issue a judgement of approval.
The judgement approving the agreement will entail the cessation of the effects of the insolvency proceeding and the dismissal of the Receiver, which will only be authorized to continue with the processing of any incidents that may be pending and to process the section on the qualification of the insolvency proceeding, which we will refer to later.
II.2.3. Liquidation Phase: Although the objective of this phase is to achieve the liquidation of the debtor's assets with the greatest possible degree of satisfaction for creditors, the truth is that the trend in recent years has been to sacrifice this objective in favour of any operation that allows the business activity and employment to be maintained, which is achieved through the creation of viable production units within the insolvent company.
The opening of the Liquidation Phase may be initiated at the same time as the insolvency proceedings are declared, if the debtor so requests in its claim, and it is then processed simultaneously with the Common Phase, or subsequently when an agreement is not approved or the approved agreement is not complied with. In addition, the debtor may request liquidation at any time, and the Receiver may also do so in the event of total or partial cessation of the company´s activity.
The opening of the Liquidation Phase will entail the dismissal of the company directors, who will be replaced by the Receiver.
The liquidation operations must be subject to the Liquidation Plan presented for this purpose by the Receiver, which must be approved by the judge.
In addition, every three months the Receiver must submit a report on the state of the liquidation.
Once the liquidation has been completed, the Receiver must submit a final report with the result of the liquidation and a rendering account of its actuations, together with a request for the termination of the insolvency proceeding.
If the rendering accounts of the Receiver are approved, the judge will issue an order terminating the insolvency proceedings.
III. PRE-BANKRUPTCY LAW
There are two ways that the TRLC contemplates to save the insolvency situation without the need to file for insolvency proceeding: reaching a refinancing agreement with the creditors, or an out-of-court payment agreement.
Both routes are preceded by a communication from the debtor to the Court informing the commencement of negotiations with the creditors, from which moment the three-month period to try to reach the respective agreement begins. If no agreement is reached, the debtor must file for insolvency proceeding within the following month.
From a practical point of view, the most relevant effect of the above notification will be the prohibition to initiate enforcement actions against the debtor's assets within three months of the notification.
We now turn to the processing of each of these routes.
III.1. Refinancing agreement.
Two types of refinancing agreements can be distinguished:
III.1.1. Collective Refinancing Agreement. The essential notes thereof are as follows:
- It must have been agreed with at least 3/5 of the debtor's liabilities according to an auditor's certificate;
- It must respond to a viability plan that allows the continuity of the debtor's activity in the short and medium term;
- It must at least have as its object the significant extension of the available credit, or the modification or extinction of the debtor's obligations.
- It must be formalised in a public deed.
Likewise, only collective refinancing agreements can be judicially approved, for which, in addition to the above, 51% of the financial liabilities must vote in favour of the agreement. The purpose of the judicial approval of the agreement is to extend its effects to the remaining creditors who have not voted in favour of the agreement, for which certain majorities will be required depending on the percentage of reduction or waiting period contemplated in the agreement.
III.1.2. Single Refinancing Agreement. The essential notes of this agreement are as follows:
- Can be agreed with one or more creditors;
- It must respond to a viability plan that allows the continuity of the debtor's activity in the short and medium term;
- Must entail to an increase in the ratio of assets to liabilities existing at the date of adoption of the resolution;
- The proportion of the credits with personal or in rem guarantees of the creditors subscribing to the agreement, must not be greater as a result of the agreement than that existing prior to the agreement, nor greater than ninety per cent of the total credits affected by the agreement.
- The interest rate applicable to the credits existing or resulting from the arrangement in favour of the intervening creditor(s) does not exceed by more than one third the average interest rate applicable to the credits prior to the arrangement.
- It must be formalized in a public deed.
In the event that any of the aforementioned agreements are not complied with, the agreement will be terminated and the creditors may file for the insolvency proceeding of the debtor.
III.2. Out-of-court agreement
It may be initiated by any company in insolvency whose assets or liabilities do not exceed €5,000,000, or has fewer than 50 employees.
The procedure begins with the application to the Commercial Registry for the appointment of an insolvency mediator, enclosing an Inventory and List of Creditors, all in accordance with legally approved forms, as well as annual accounts.
Once the mediator has accepted his appointment, he shall call the creditors to a meeting to be held within two months of the call, where the out-of-court payment proposal issued by the mediator with the debtor's consent shall be vote. The proposal may include waiting periods of no more than ten years, reductions of amount, the conversion of credits into shares or participations or the transfer of assets or rights in payment of debts.
The proposal shall be accompanied by a payment plan and a viability plan.
When the proposed agreement contains wait periods for a term not exceeding five years or the conversion of the credits into participating credits for the same term, or reductions not exceeding twenty-five per cent of the amount of the credits, sixty per cent of the computable liabilities shall be necessary for the adoption of the agreement.
If its content is any other, seventy-five per cent of the ordinary liability shall be required.
Public-law claims are not affected by the agreement and any possibility of deferral or instalment payment is subject to administrative law.
If the agreement is not approved, or if the approved agreement is not complied with, consecutive insolvency proceeding of the debtor shall be declared.
IV. QUALIFICATION SECTION OF THE INSOLVENCY PROCEEDING
The purpose of the qualification section is to determine whether the insolvency situation was generated or aggravated by the wilful or culpable conduct of its directors or ghost directors.
The qualification section will be opened whenever the Liquidation Phase is opened or within the Agreement Phase a payment proposal to creditors with a reduction of more than one third or a wait period of more than three years is approved.
For an insolvency to be classified as guilty, the Spanish Insolvency Law (LC) requires that there has been an aggravation of the willful and / or culpable insolvency of the Debtor, establishing two types of factual assumptions: (i) assumptions that, if concur, determine guilt of the bankruptcy without the need to prove that insolvency was caused or aggravated as a result (called “iure et de iure” assumption) where no proof to the contrary is admissible); (ii) and assumptions that, although they concur, must cause or aggravate the insolvency (“iuris tantum” assumption) and where contrary evidence is permissible. Likewise, the consequences that for the affected persons may derive from the characterization of the contest as guilty are several, from the disqualification to manage assets and rights, to the liability to cover the deficit of assets not satisfied in the insolvency proceeding.
V.INSOLVENCY PROCEEDINGS OF INDIVIDUALS
Although there is nothing to prevent individuals from using the insolvency proceedings referred to in the previous sections, with the necessary differences derived from their status as individuals (documentation to be provided, shorter processing time, etc.), the fact is that the vast majority of insolvency proceedings for individuales in Spain begin with an out-of-court payment agreement followed by a consecutive insolvency proceeding in liquidation.
And the only reason for individuals to initiate it is that through it they can get their debts discharged.
This is the so-called "Benefit of Exoneration of Unsatisfied Liabilities”, which is the essential differentiating element in the law of the insolvency of individuals with respect to legal persons, since the latter will not have the option of obtaining such exoneration insofar as, as legal persons, they only are able to approve an agreement and thus continue with their activity, or they are liquidated and extinguished.
Having established the above, in order for a individuals to achieve "Benefit of Exoneration of Unsatisfied Liabilities” the following is required
- The prior conclusion of the insolvency proceeding due to the end of the liquidation phase or insufficient assets to pay the so-called credits against the mass (those generated after the declaration of the insolvency proceeding).
- Be a bona fide debtor, i.e. not have been declared culpable or been convicted of offences against assets, public finances or workers in the previous ten years;
- Have satisfied the credits against the mass and privileged credits;
- Have reached or attempted to reach an out-of-court payment agreement, or alternatively, have paid twenty-five percent of the ordinary credits.
Only public law and maintenance credits are exempt from exemption.
⃰As a consequence of the pandemic, Royal Decree-Law 8/2020 of 17 March on extraordinary urgent measures to address the economic and social impact of COVID-19, has established a moratorium that exempts the debtor from the duty to file for insolvency proceedings until 30 June 2022, even if the debtor is currently insolvent.
⃰A Draft Bill for the Reform of the Insolvency Law is currently being processed, which will entail an important reform of the current law that is expected to come into force in June 2022.