Two and a half years after the beginning of the COVID-19 crisis, and on the verge of an economic recession, important developments are emerging in Spanish insolvency law.
The insolvency moratorium, which began in March 2020, has finally been repealed on 30 June 2022. This comes as an amendment to the Insolvency Act has also been approved, which implements the EU Directive on preventive restructuring frameworks and second chance proceedings. This is the biggest reform in Insolvency Law in years and will enter into force 20 days after its publication in the Official State Gazette (BOE).
The purpose of the amendment is to enable the debtor to resort to insolvency law at an earlier stage than was previously possible. Depending on the case, the debtor will have access to new pre-bankruptcy instruments, restructuring plans or, if necessary, insolvency proceedings (whilst this could be a tool for the continuity of the company, it seems more likely to be used in the cases of liquidation of the debtor’s assets).
Both of these updates will entail several changes in our insolvency law. This article summarises the changes that we consider the most significant, and what it means for you.
I – The end of the insolvency moratorium
From the beginning of the pandemic, the obligation to declare insolvency was suspended. This moratorium has been extended several times until it was finally brought to an end on 30 June 2022.
What does the end of the moratorium entail? The main consequence is the obligation of the debtor to apply for insolvency proceedings, or to inform the court that they are in negotiations with their creditors.
From 1 July 2022, applications for insolvency proceedings will be processed. This means that a debtor who is under insolvency and has not applied for insolvency proceedings or has not informed the court of negotiations with their creditors, is exposed to the risk that their creditors may request insolvency proceedings.
The late declaration of insolvency proceedings may determine the liability of the administrator of the debtor company. After over two years of the bankruptcy moratorium, this may give rise to complex cases where detailed analysis is required to identify whether legal requirements are met, in order to classify the bankruptcy as culpable, and to attribute liability to the debtor or its administrator.
In our system of insolvency liability, the company administrator can be condemned to be unable to administer other people’s assets, to lose any rights they should have received from the debtor company, and even to be liable for the assets deficit, i.e. that which could not be paid to the creditors with the liquidation of the company.
Therefore, the prior study of the possible liability of the company director is particularly relevant in the case of companies that are preparing to file for insolvency proceedings.
II – The Amendment of the Insolvency Act
The amendment of the Insolvency Act was motivated by the need to implement Directive (EU) 2019/1023 of 20 June 2019 on preventive restructuring frameworks and second chance proceedings.
The main aspects of the amendment are as follows:
Restructuring plans:
The amendment completely changes pre-insolvency law, Book II of the Insolvency Act. Restructuring plans have replaced refinancing agreements, and their configuration is much more flexible than the previous model. With this scheme, it is no longer just about reductions and waivers, but also transfers of production units, modification to the structure of assets or liabilities, equity, capitalisation of credit, structural modifications, and more. This broader scope will surely facilitate the achievement of more agreements in restructuring plans than under the previous regime.
New issues to be taken into account regarding these plans include:
- Insolvency scenarios: In addition to current and imminent insolvency (that which is foreseen within three months), the amendment adds the “probability of insolvency”, when it is objectively foreseeable that the debtor will not be able to regularly meet his/her obligations due within the next two years.
- Strengthening the position of creditors: (i) by being able to impose plans on the debtor’s partners in actual or imminent insolvency, as well as (ii) by suspending an application for the debtor’s voluntary insolvency proceedings at the request of creditors representing 50% of the affected liabilities, or the restructuring expert, provided that a plan is likely to be approved.
- The restructuring expert: A new professional expert specialising in restructuring. Their appointment, by the judge, will be made in the following ways:
- At the request of the debtor,
- At the request of a group of creditors representing more than 50% of the liabilities likely to be affected by the restructuring plan,
- Upon consideration by the judge.
This will take place either:
- Following the debtor’s request for a general stay of individual executions,
- Following an extension of the stay,
- Following a request for approval of a plan to be extended to dissenting creditors.
The expert’s role will be to assist the debtor and the creditors, both impartially in the negotiations and in the drafting of the restructuring plan, and collaboratively with the judge in the submission of the restructuring reports. The expert, contrary to the insolvency administrator, does not intervene in the company, but only assists creditors and debtors.
- Classes of creditors: Restructuring plans will now involve not only financial creditors, but also trade creditors. Other categories of creditors affected by the restructuring plans may also be formed. These categories will take into account their common interests, based on their insolvency classification (ordinary, privileged and subordinated), their nature (financial, commercial, etc.), and/or the effects that the restructuring plan may have on them.
- Approval by class and computation: The restructuring plan is voted on by creditors according to their class. Different majorities are required to approve the plan (2/3 or 3/4), depending on whether the class of the creditor is privileged or not. The plan will be approved by all classes of creditors, or by a majority of the classes, as long as such majority includes a class with privileged insolvency status, or failing that, a class reasonably presumed to have received any payment from the insolvency proceeding.
- Approval, shielding and dragging: The approval of the restructuring plan by the commercial judge is likely to produce the dragging of dissenting creditors, and even of the partners or shareholders of the debtor company. This will entail the shielding of the plan against possible future rescission actions in the event of a declaration of insolvency after approval of the plan. In particular, interim financing (that granted during the negotiation of the plan, in order to ensure the continuity of the activity) and new financing (that which the plan foresees will be necessary for its own fulfilment) will be protected against future rescission actions. It may also affect enforcement proceedings, depending on the computation of majorities.
- Effects on enforcement: The communication to the court informing about the negotiations with creditors (in order to suspend or avoid the initiation of an enforcement), will no longer only affect necessary assets for the continuity of the company’s activity. It may also affect non-necessary assets, if so requested by the debtor, and if the judge considers that such suspension is necessary to ensure the successful outcome of the negotiations. Personal or real guarantees of other companies in the group may also be affected, as these could cause the insolvency of the guarantor and the debtor, even though they are not included in the negotiations,
- Effects on contracts: Some of the effects of insolvency proceedings on contracts will be extended to the pre-insolvency field, with measures including:
- Prohibition to terminate the contract when one of the parties notifies the court of being in negotiations with creditors,
- Prohibition to terminate necessary contracts for the continuity of the debtor’s activity due to breaches prior to the notification to the court,
- The possibility of terminating the contract in the interest of restructuring, with the compensation payment affected by the plan made possible.
Refinancing of the debt guaranteed by the ICO:
The welcome flexibility offered by the restructuring plans of the insolvency amendment may not be extended, as some had expected, when it comes to applying their effects to the loans guaranteed by the ICO. This may generate some uncertainty on the effectiveness of its practical application in certain cases, especially when, foreseeably, a large number of the debtors who resort to the restructuring plans will have previously resorted to the line of ICO guarantees granted during the pandemic.
As a general principle, the amendment does not allow:
- Change of applicable law
- Change of debtor
- Modification or extinction of guarantees
- Conversion of this type of public credit into shares or participatory credits, loans or participatory credits or any other credit with different characteristics or rank.
What does this mean in practice? In order for financial institutions to be able to vote favourably, in the name and on behalf of the State (whose credit derived from the public guarantee granted will be recognised as a credit of a financial nature and with the status of ordinary credit), on a restructuring plan that includes deferrals, instalments and reductions of the amounts claimed or recognised in this type of credit, they must seek prior approval from the Collection Department of the State Tax Administration Agency. This is in accordance with the eighth additional provision of the Insolvency Law introduced by the insolvency reform.
This declaration of insolvency proceedings will result in the subrogation of the General State Administration (Ministry of Economic Affairs and Digital Transformation) for the part of the guaranteed principal, regardless of whether or not enforcement of the guarantee has been initiated. They thus become the insolvency holder of the credit. Notwithstanding the foregoing, the corresponding financial institution shall continue to represent the financial operation as a whole, including the subrogated part of the principal.
Likewise, and in any case, public law claims must be fully satisfied within a maximum period of eighteen months from the date of notification of the opening of negotiations, in accordance with the new article 616 bis of the Insolvency Act.
Productive units:
The possibility of transferring the production unit will be extended to cases prior to the start of the insolvency proceedings, such as within the restructuring plan or by means of the judicial appointment of an expert who is responsible for collecting bids (known as “pre-pack”). This should encourage the swift sale of the production units of companies in insolvency proceedings, to prevent the deterioration of assets, goodwill, etc.
Qualification of the insolvency proceedings:
The qualification phase will be opened whenever the common phase is completed, regardless of any agreed waivers. Creditors may file a report requesting the guilty classification of the insolvency proceedings if they represent at least 5% of the liabilities or have a claim of more than €1M.
Microenterprises:
The amendment has created a new procedure for microenterprises (less than 10 employees, turnover of less than 700,000 euros and liabilities of less than 350,000 euros) which aims to speed up and streamline insolvency proceedings for this type of company. This new proceeding will come into force in January 2023.
Individuals and second chance:
In the area of individuals, issues relating to the benefit of exoneration of unsatisfied liabilities have been amended, clarifying controversial issues affecting the exoneration of public law debts.
Other relevant changes:
The abbreviated procedures for debt collection disappear. The time limit for rescissory actions will be extended for cases involving notification of the initiation of negotiations, and for those detrimental acts for the assets held two years prior to the request for default or the opening of liquidation. Insolvency without assets will be regulated in greater detail, with modifications to the system of remuneration of the insolvency administration. Finally, the agreement with creditors may be amended after two years in order to ensure the viability of the company. The obligation to present a liquidation plan is eliminated, and the general rules of liquidation, etc. may be applied.
For further information, please contact:
Alfonso Carrillo Cano, Partner, Bird & Bird
alfonso.carrillo@twobirds.com
