Restructuring and Insolvency Guide

Spain

Martí & Associates

1. Overview of Statutory Regimes Governing Restructurings, Reorganisations, Insolvencies and Liquidations

The law that applies in Spain to financial restructurings, reorganisations, liquidations and insolvencies of business entities and partnerships is the Royal Legislative Decree 1/2020, of 5 May, by which the consolidated text of the Bankruptcy Law is approved (Spanish Insolvency Act).

The law regulates two main types of procedures: pre-insolvency procedure and insolvency procedure.

The pre-insolvency procedure can be initiated by the debtor in cases of probable, imminent or current insolvency, by communicating to the competent court the existence of negotiations with creditors or intention to start them immediately in order to agree on a restructuring plan (“plan de reestructuración”) and in this way overcome its negative economic situation. The debtor can also directly request the court to endorse the restructuring plan.

This pre-insolvency procedure cannot be applicable to certain types of entities (banks, insurance companies, etc.)

The insolvency procedure (“concurso de acreedores”) can be initiated by either the debtor or any of its creditors in cases of current or imminent insolvency of the debtor. The insolvency procedure can be terminated in two different ways: by reaching an agreement with creditors (“convenio de acreedores”) or by liquidation.

The Spanish Insolvency Act also regulates a specific proceeding for micro companies.

2. Out-of-Court Restructurings and Consensual Workouts

2.1 Out-of-Court Financial Restructuring or Workout

The out-of-court financial restructuring (“Plan de reestructuración”) agreed by the debtor and certain majority of its creditors is binding for all creditors whose credits are affected by the approved plan even though they have not voted in favour, under the condition that the court endorses the plan.

The endorsement of the restructuring plan can be requested by the debtor or any creditor who has voted in favour and is obligatory in the following cases:

When the plan affects the creditors who have not voted in favour or the debtor’s shareholders.
When termination of contracts in the interest of restructuring is expected.
When it is expected to protect the interim cash flow and the new cash flow provided for in the plan, as well as the acts, operations or transactions performed in its framework against the rescissory actions set forth by law and recognize pre-emptive rights of debt collection for this funding.

Once the restructuring plan is endorsed by the court, its effects are applied immediately to all affected credits, the debtor itself and its shareholders.

2.2 Consensual Restructuring and Workout Processes

The consensual restructuring and workout process under the Spanish legislation starts with the communication of the debtor to the competent court of having initiated the negotiations with creditors in order to agree on the restructuring plan and in such way avoid the insolvency procedure.

These negotiations shall be completed in a period of three months with the possibility to extend it for three months more.

The debtor or creditors representing more than 50% of credits which might be affected by the restructuring plan can request the court to appoint an independent expert in restructuring.

Such expert shall assist the debtor and creditors in their negotiations and in preparing the restructuring plan. The expert shall also elaborate and submit to the court the reports required by law, as well as other reports which the judge could deem appropriate.

Neither the opening of the negotiation period with creditors, nor the appointment of the mentioned expert has any impact on the faculties of the management body of the debtor.

The objective of the restructuring plan is to modify the composition, conditions or the structure of assets and liabilities of the debtor, or its equity capital, including transfer of assets, production units, or the whole company, as well as any operative change required, or a combination of the mentioned elements.

The debtor and creditors are free to set forth the conditions of the restructuring plan in compliance with requirements set forth by law. For instance, the restructuring plan cannot affect maintenance allowance deriving from family relation, extra-contractual civil liability, as well as credits related to employment, except for top management.

Once the restructuring plan is elaborated, its proposal shall be communicated by the debtor to all creditors whose credits can be affected by said plan. All such creditors have the right to vote. Voting to the plan is conducted by creditors grouped in separate classes of their credits.

The restructuring plan is considered approved by the certain credits class if more than two thirds of liabilities of this class have voted in favour. Regarding the class of credits secured with real estate, for the approval of the plan a favourable vote of three quarters of liabilities of this class is required.

If the restructuring plan contains measures that shall be approved by the shareholders under corporate law, the plan shall be also approved by the shareholders. If such approval has not taken place prior to requesting the endorsement of the restructuring plan by the court, such approval can be obtained after it under the condition that the General Shareholders Meeting is called no later than the same date of submitting the endorsement request to the court.

The approved restructuring plan shall be executed into a notary document, be accompanied by the independent expert’s certificate and be submitted to the court for its endorsement in the legally determined cases mentioned in the previous point 2.1.

If in the term of three months or six months in case of the term extension, the restructuring plan has not been approved, the debtor is obliged to initiate the insolvency procedure before the court within the following month.

3. Creditors. Rights and Remedies

3.1 Types of Securities

According to the Spanish Insolvency Act credits are classified as privileged, ordinary and subordinated.

Privileged credits, in their turn, can be of special privilege, if they affect specific assets or rights within the insolvency estate, or of general privilege, if they affect total insolvency estate.

This classification determines the preference of the credits collection as per the order below:

Credits against the entire insolvency estate:
Those refer to claims generated after declaring the insolvency by the court (i.e. expenses and costs generated during the insolvency procedure, and certain claims owed to the debtor’s employees).
Credits with special privilege:
These are secured credits as for example, mortgage, pledges, leasing quotas, etc.
They are limited by the value of assets or rights by which they are secured.
Credits with general privilege:
They include special categories of credits, like for example, salaries and employee compensations, with certain limits; tax and social security claims; 50% of claims held by the creditor that filed for mandatory insolvency; claims arising from new cash flow granted under the framework of a refinancing agreement; etc.
Ordinary credits:
This category englobes all commercial credits without guarantee.
Subordinated credits:
They include, for example, claims of managers, directors or shareholders of the debtor; intra-group loans; fines; interest; claims not reported in due time; etc.

Subordinated credits shall be satisfied last, once other credits have been paid.

3.2 Rights and Remedies

Regarding the financial restructuring within the pre-insolvency procedure, as mentioned in the previous point 2.2 all creditors whose credits can be affected by the restructuring plan have equal right to vote on said plan.

If the restructuring plan is eventually endorsed by the court, all credits affected must be subject to the endorsed plan.

However, law entitles those creditors who hold in rem credit, in the case they have voted against the restructuring plan, to demand the sale of the assets or rights which secure their credits within one month since the publication of the court ruling by which the restructuring plan is endorsed.

From the other hand, in the insolvency procedure creditors have the following rights and remedies. The main ones are the following:

Communication: creditors have to be informed of the initiation of the insolvency procedure and the relevant court decisions. Along the procedure they can also request necessary information and clarifications.
Credits classification: creditors have to communicate their credits to the insolvency administrator so that they are correctly classified and paid out. If the creditor does not agree with the elaborated list if creditors or classification of its credit, he can appeal it before the court.
Creditors meeting: creditors have the right to participate in the creditors’ meeting aimed at reaching the creditors’ agreement.

4. Statutory Restructurings and Reorganisations

Having terminated the common phase of the insolvency procedure, as detailed in point 5 below, the agreement phase can be opened.

The objective of this phase is to reach an agreement with creditors which would allow the debtor to emerge from insolvency and to continue its economic activity, as long as it is viable and profitable.

The main milestones of this phase are as follows:

Presentation of the proposed agreement: the debtor and the creditors whose claims exceed one-fifth of the total liabilities may present a proposal for agreement (“convenio de acreedores”) with proposals for a reduction in the amount of the debt (“quitas”), a deferment of the deadline (“esperas”), or both.
Acceptance/opposition to the agreement: creditors may accept or oppose the proposed agreement within two months from the date of its admission for processing. For the agreement to be approved, the law establishes different voting majorities according to the proposed reductions and waivers.
Court ruling: within five days of the expiry of the deadline for opposing the approval of the agreement, if no opposition has been lodged, the judge will issue a ruling approving or rejecting the agreement. The ruling will be published in the Official State Gazette and in the Public Insolvency Register.

The agreement will become effective from the date of the ruling approving it. From that moment, all the effects of the declaration of insolvency will cease, which will be replaced by those which, where applicable, are established in the agreement itself. Likewise, the insolvency administration will cease.

The agreement phase ends when the debtor complies with the arrangement, or when it is declared non-compliant. The liquidation phase is opened in the event that the arrangement is not approved, when the debtor fails to comply with it, or when the insolvent party itself requests the direct opening of the liquidation phase.

The agreement approved by the court is binding for the debtor and the ordinary and subordinated creditors, with respect to the claims of any of these classes that were prior to the declaration of insolvency proceedings, even if they have not adhered to the proposed agreement or even if, for any reason, they have not been recognised.

As for the privileged creditors, they shall be bound by the agreement approved by the judge if they have been the authors of the proposal or if they have adhered to it, with some exceptions set forth by law.

5. Statutory Insolvency and Liquidation Proceedings

The insolvency procedure may be commenced either by the debtor itself or any of its creditors. In the first case the insolvency procedure shall be considered voluntary and in the second case involuntary.

The insolvency can be current or imminent. The insolvency is current when the debtor cannot regularly comply with its obligations. It is imminent if it is estimated that in the following three months the debtor will not be able to regularly and timely comply with its obligations.

If the insolvency request is submitted by the creditors, it shall be based on any of the following circumstances:

There is a prior judicial or administrative declaration of insolvency of the debtor.
The enforcement against the debtor’s assets has been requested but not obtained;
Total failure by the debtor to meet its payment liabilities;
There are pending executions which affect the debtor’s assets on a general basis;
Fraudulent concealment or hasty disposal of assets by the debtor;
General failure to fulfil the following within the three months prior to the filing of the insolvency petition: tax duties; payment of any kind of social security contributions to be made by the company; or payment of salaries, indemnities and any other compensation to employees.

There are four main phases of the insolvency procedure:

Common phase
Agreement phase
Liquidation phase
Qualification phase

1. Common phase

This phase begins with the declaration of insolvency proceedings by the judge and its main objective is to determine the debtor’s assets and liabilities.

The main milestones of this phase are as follows:

a) Notification: notification of the declaration of insolvency to the parties that have appeared at court, as well as to the State Tax Administration Agency and the General Treasury of the Social Security.

b) Publication: the declaration of insolvency is also published in the Official State Gazette (BOE) and in the Public Insolvency Register.

c) Appointment of the insolvency administrator: the judge appoints the insolvency administrator from among the natural or legal persons registered in the Public Insolvency Register, who will be responsible for supervising and managing the debtor’s assets during the insolvency proceedings. In the event of voluntary insolvency proceedings, the debtor will retain the powers of administration and disposal of the assets, but the exercise of these powers will be subject to the intervention of the insolvency administration, which may authorise or refuse authorisation as it sees fit. In the case of involuntary insolvency the management body of the debtor is substituted by the insolvency administration appointed by court.

d) Drawing up the inventory of the assets: the insolvency administrator must draw up an inventory of the assets, which will include a list and valuation of the assets and rights of which the debtor’s assets were composed on the day of the insolvency application.

e) Drawing up the list of creditors: the insolvency administrator must verify the claims reported by the creditors and classify them according to their nature and degree of preference.

f) Submission of the insolvency administrator’s report: within two months from the date of acceptance, the insolvency administrator submits to the court a report containing all the information on the debtor’s assets, the inventory of assets and the list of creditors. It is made available to interested parties, and a period is opened for them to challenge or adhere to it.

Within fifteen days following the filing of the report of the insolvency administration with the attached documents, a decree is issued putting an end to the common phase of the insolvency proceedings. The agreement phase or the liquidation phase is opened, as the case may be.

2. Agreement phase

Please see our comments in the previous point 4.

3. Liquidation phase

The purpose of this phase is to liquidate the debtor’s assets in order to pay creditors according to their order of preference.

The main milestones of this phase are as follows:

a) Special liquidation rules: when agreeing to the opening of the liquidation of the assets or in a subsequent resolution, the judge, after hearing the insolvency administrator, may establish the special liquidation rules that he deems appropriate.

b) Performance of liquidation operations: every three months, starting from the opening of the liquidation phase, the insolvency administrator shall submit a report to the judge on the state of the operations. This report will be accompanied by a list of claims against the estate, detailing and quantifying those accrued and pending payment, with an indication of their respective due dates.

c) Payment to creditors: it shall follow the order of preference established by law: (i) privileged creditors, (ii) ordinary creditors, (iii) subordinated creditors.

The liquidation phase ends when all creditors are paid, or when the assets are exhausted without being able to pay all creditors. In the latter case, the insolvency proceedings are declared closed due to insufficient assets.

4. Qualification phase

The insolvency procedure can be qualified fortuitous or culpable.

The insolvency procedure shall be classified as culpable when in the generation or aggravation of the state of insolvency there has been fraud or gross negligence on the part of the debtor and its administrators or liquidators, de jure or de facto, managing directors, and of those who, within the two years prior to the date of the declaration of insolvency proceedings, have had any of these conditions.

Concerning the legal proceedings and enforcement actions taken against the debtor, they are affected in the following manner since the insolvency procedure is declared open:

Legal proceedings: (i) joinder of civil claims filed against the debtor or its managers with the court conducting the insolvency proceedings; (ii) continuation of previous claims at the same court that was processing them until the ruling is final (except for proceedings claiming damages from the debtor’s directors or auditors); (iii) joinder of labour claims.
Arbitration procedures: (i) continuation of arbitrations initiated before insolvency ruling; (ii)arbitration proceedings may also be initiated against the company declared insolvent, as long as the declaration of insolvency does not ipso facto affect the effectiveness of arbitration clauses (or mediation agreements), provided that such clauses do not block the continuity of the insolvency proceedings.
Enforcement of judgments (or awards): (i) suspension of all the proceedings (including those filed by in rem creditors for at least one year), except very limited cases not affecting the continuity of business.

6. International / Cross-Border Insolvency Issues

The Spanish jurisdiction provides recognition of the foreign judicial resolutions approved in connection with restructuring and insolvency proceedings in another country.

In particular, recognition of judicial resolutions by which the insolvency procedure is declared opened abroad is conducted by way of the procedure exequátur in Spain.

Foreign insolvency proceedings can be recognised as principal or territorial, as per the explication below:

As foreign main proceedings, if they are being conducted in the state where the debtor has the centre of his main interests.
The recognition of a foreign main proceeding will allow a territorial insolvency proceeding to be opened in Spain without the need to examine the debtor’s insolvency.
As foreign territorial proceedings, if they are being conducted in a state where the debtor has an establishment or with whose territory there is a reasonable connection of an equivalent nature, such as the presence of assets involved in an economic activity.
The recognition of a foreign main proceeding shall not prevent the opening of a territorial insolvency proceeding in Spain.
The processing of the exequatur may be suspended when the decision to open insolvency proceedings has been the subject, in the state of origin, of an ordinary appeal or when the time limit for lodging such an appeal has not expired.

Once the exequátur is obtained for the resolution of the insolvency opening, any other resolution passed in such insolvency procedure and which is based on insolvency legislation shall be recognized in Spain without the need of any specific procedure if it meets certain requirements set forth by law.

Regarding international cooperation, the Spanish Insolvency Act contains the cooperation obligation for the insolvency administration in Spain and the insolvency administration or representative of the foreign insolvency proceeding related to the same debtor under supervision of their respective courts or other competent authorities.