I INSOLVENCY LAW, POLICY AND PROCEDURE
i Statutory framework and substantive law
The Spanish Law of Insolvency 22/2003 (SIL), dated 9 July 2003, was published on 10 July 2003 and entered into force on 1 September 2004. It was amended on 27 March 2009 by Royal Decree-Law 3/2009, on 10 October 2011 by Law 38/2011, on 7 March 2014 by Royal Decree-Law 4/2014, on 5 September 2014 by Royal Decree-Law 11/2014, on 30 September 2014 by Law 17/2014, on 27 February 2015 by Royal Decree-Law 1/2015, on 27 April 2015 by Law 5/2015, on 25 May 2015 by Law 9/2015, on 18 June 2015 by Law 11/2015, on 14 July 2015 by Law 20/2015, on 28 July 2015 by Law 25/2015, on 1 October 2015 by Law 40/2015, on 23 October 2015 by Royal Decree-Law 2/2015 and on 30 October 2015 by Royal Decree-Law 8/2015.
Insolvency law encompasses all regulations applicable to court insolvency proceedings as opposed to out-of-court liquidations, which only apply when the debtor is still able to meet all its liabilities.
The main features of Spanish insolvency law are the classification of debts, the challenge of prior transactions, the general effects of the insolvency on debts and bilateral agreements, and the liability regime.
Classification of debts
Secured claims represent attachments on assets (subject to in rem security) and entail separate proceedings, subject to certain restrictions to commence enforcement proceedings (or to continue such proceedings if they have already been commenced). When the secured asset is necessary for the debtor's activities, enforcement by the creditor may be subject to a delay of up to a year from the declaration of insolvency.
These creditors are not subject to the arrangement (see further below), except if they vote in favour of it or certain qualified majorities are met. In the event of liquidation, they will collect payment against the secured assets.
Claims benefiting from general priority include the claims of public authorities (generally, for half their amount), certain labour claims and the claims of the creditor initiating the insolvency proceedings (up to 50 per cent of its claim and 50 per cent of the fresh money received by the company in protected refinancing agreements).
The holders of general privileges are not affected by the arrangement (if they do not consent) unless certain qualified majorities are met and, in the event of liquidation, they will be the first to collect payment.
'Ordinary claims' is the residual category; it includes trade creditors and lenders, when not secured or subordinated.
Subordinated claims are classified by virtue of an agreement or pursuant to law, including debt held by related entities.2 Subordinated creditors may not vote on arrangements and have very limited chances of recovery. When subordination arises from a special relationship, the creditor will also lose any security over assets belonging to the debtor.
There will be other claims that are not subject to the insolvency proceedings and that are, therefore, neither acknowledged nor classified. These include claims accrued after the insolvency proceedings to continue the business, 50 per cent of the fresh money received by means of protected refinancing agreements (100 per cent if fresh money is received before October 2016), as well as other claims prescribed by law, even if accrued earlier (i.e., salaries accruing during the 30 days before the insolvency proceedings were initiated).
Prior transactions: clawback
Under the SIL, there are no prior transactions that automatically become void as a result of the initiation of the insolvency proceedings.
The court receivers may, however, challenge those transactions that could be considered as having been detrimental to the debtor's interests, provided they have taken place within two years of the declaration of insolvency.
Damage exists, in any event, in the case of gifts and prepayment of obligations that are due after the declaration of insolvency, if unsecured. Damage is also deemed to exist in the case of security created to protect already existing obligations and transactions with related entities; however, the defendant may prove otherwise.
Any transactions that can be considered as transactions in the 'ordinary course of business' are not subject to challenge.
To avoid the risk of a challenge, debtor and creditors (by a three-fifths majority) may subject a refinancing agreement to the provisions of Article 71 bis of the SIL. The possibility also exists to apply the terms of such an extension to the dissenting financial lenders if certain conditions are met.3
The rescission of intra-group guarantees is a complex matter. Most courts, applying the individual concept of 'company' as a basis have reached the conclusion that guarantees granted through third-party debt are transactions that are cost-free and, as such, rescindable. Minority case law has considered that the granting of a guarantee through the debt of a company in the group is not a cost-free transaction, with the effect that the insolvency receivers would have to provide evidence of the damage.
Effects on debts: interest and set-off
Following the initiation of insolvency proceedings, interest no longer accrues, with the exception of secured debt (if the proceeds allow it to be settled). Interest already accrued is considered a subordinated debt.
Set-off is applicable provided that the legal requirements have been met before the company was declared insolvent; set-off will no longer be possible after insolvency proceedings are initiated.
Hedge agreements are subject to specific regulations (allowing close-out netting and enforcement of collateral).
Effects on bilateral agreements
The declaration of insolvency does not, per se, allow the parties to terminate a bilateral agreement, notwithstanding what may have been agreed between the parties.
As a general rule, the declaration of insolvency does not alter the general contractual rules on termination, but under the SIL, the judge may decide to remedy an eventual default of the insolvent party by reinstating an agreement, with the effect that any outstanding amounts and further payments under the agreement will be post-insolvency claims. If the court deems it appropriate for the interests of the insolvent party, it is entitled to terminate the agreement, with compensation for damages.
There are specific rules for employment agreements, mainly affecting collective dismissals, which are dealt with by the insolvency judge.
Under Spanish company law (in the absence of an insolvency scenario), directors are liable for damages and for debts, under certain circumstances.
Aside from the insolvency proceedings, a criminal claim may be filed against the directors of the company. In general, criminal liability would not arise as a result of financial distress unless the directors had committed criminal offences in such a context, such as unfair or fraudulent management or false accounting.
In the event of insolvency, as a general rule, incidental proceedings may be initiated to investigate the reasons leading to the insolvency, which may conclude declaring the insolvency as negligent or fortuitous. Negligent insolvency may be based either upon a causal analysis (directors having caused or aggravated the insolvency fraudulently or through gross negligence) or upon certain presumptions, set out by law. In this regard, the status of the accounts and compliance with legal duties (including the duty to apply for insolvency) is essential.
If the insolvency is deemed negligent, the directors or third parties (as accomplices) may be liable for damages covering any losses caused to creditors as a result of their actions. In a case of negligent insolvency leading to liquidation, the directors of the company may also be liable for outstanding company debts – the judge enjoys a wide discretion. The scope of this provision is pending clarification by the courts.
Shareholders may also be held liable when the insolvency is deemed negligent due to their unreasonable refusal to accept a debt-for-equity swap with lenders and this refusal leads to the failure of the refinancing negotiation.
Although the SIL was thought to be a step forward in the development of the Spanish insolvency system, in practice it has not been useful as a restructuring tool. Recourse to the insolvency process is usually triggered by the directors' fear of facing liability if they unduly postpone the insolvency filing when the company is already in financial distress; however, they should try to avoid this by all means, as it is understood in the market that a company that is declared insolvent very rarely survives.
One of the reasons for this negative view of restructuring is that companies usually reach the insolvency stage when the financial position has already deteriorated too far. In this context, lenders are generally unwilling to face further risk, so the debtor's ability to keep on trading becomes subject to its own ability to generate cash.
In addition, while the SIL tried to find a reasonable balance between the different interests involved, in practice, courts and receivers tend to be very debtor-friendly (in particular, when dealing with insolvency clawback claims). This introduces uncertainty as regards the lenders' positions, making them unwilling to expose themselves further. This was the main reason that the legislator introduced a 'clawback shield' in 2009 for certain refinancing agreements, and introduced certain incentives in 2011 for refinancing, such as priority ranking for fresh money or cramdown for dissenting creditors within refinancing agreements.
Still, liquidation is the most likely outcome of insolvency (occurring in more than 90 per cent of cases). In cases of liquidation, recovery is difficult; in most insolvency proceedings usually only post-insolvency debts are settled, as the proceeds of the secured assets are generally not enough to meet the secured obligations. Privileged creditors are usually paid in part, and ordinary creditors are rarely paid a substantial proportion of their debts.
iii Insolvency procedures
A debtor (or in the case of a company, its directors) is legally obliged to file for insolvency when it becomes insolvent (i.e., when it fails to meet its current outstanding obligations on a regular basis). This obligation must be fulfilled within two months of the time the debtor became or should have become aware of the insolvency situation. Failure to comply with this obligation triggers the assumption that the directors have acted negligently (see further below).
A debtor is entitled to apply for insolvency proceedings when it expects that it will shortly become insolvent. In this sense, insolvency proceedings are available as a type of legal protection that the debtor may request to avoid the attachment of its assets by its creditors.
As a general rule, insolvency proceedings are not compatible with other enforcement proceedings or injunctions.
The debtor is also allowed an extra four-month moratorium upon application to the court (Article 5 bis of the SIL), during which it is allowed to continue to do business normally and keep negotiating with its creditors to reach an agreement that will avoid definite insolvency. Insolvency application by creditors is prevented and enforcement of credits against assets necessary for the business is banned.
Although it is difficult to indicate an average time, the insolvency process will rarely last less than 18 months. Liquidation can take longer when there are significant assets to be sold.
iv Starting proceedings
Insolvency proceedings are formally initiated when the court declares insolvency, following an application filed either by the debtor or by its creditors. In the first case, they are classified as 'voluntary insolvency proceedings'; in the second case, as 'necessary insolvency proceedings'.
The application for insolvency proceedings may be filed either by the debtor (in the case of a company, the managing body, not the shareholders) or by its creditors.
When the debtor files the application, it must include several documents (inter alia, a power of attorney, an explanation of the situation of the company and a list of its assets and liabilities).
When a creditor files the application, it must provide evidence of its debt, as well as of the insolvency situation. If the application is dismissed, the creditor has to pay the corresponding legal costs and fees (and eventually, damages caused). If accepted, the creditor who initiated the process has a priority ranking amounting to 50 per cent of its unsecured debt.
Declaration of insolvency
When the debtor files an application, the judge will issue a decision by virtue of which the insolvency proceedings will be initiated – this may take on average two to four weeks. If the court considers that the application does not comply with the legal requirements, the debtor must remedy the deficiency within the time frame specified by the court.
For creditor applications, the debtor must be heard by the court before any declaration of insolvency is made (unless the application is based on an unsatisfied judgment).
The initial court decision will determine the identity of the receiver appointed by the court and the scope of the restrictions imposed on the debtor.
v Control of insolvency proceedings
The general rule is that, in the event of voluntary insolvency proceedings, the court receiver supervises the company's activities, authorising (or refusing to authorise) any payment or transaction. In compulsory insolvency proceedings, the debtor will cease to manage its estate and the court receiver will take control of the company, being in charge of all further decisions.
First stage (determination of assets and liabilities)
The objective of the first stage of the insolvency proceedings is to determine the assets and liabilities of the debtor, leading to the preparation by the court receiver of an inventory and list of creditors.
The insolvency order contains an express request for creditors to give notice of their claims within a month of the insolvency declaration appearing in the Official Gazette. Creditors must then send their statement of claim directly to the court receiver (by email), and original documents are no longer required.
Based on the documentation provided by the creditors and held by the debtor, the court receiver will draw up a list of acknowledged creditors and classify them according to the categories used (privileged, ordinary and subordinated). The court receiver is obliged to inform the creditors of their classification before submitting the report to the court, so that they have the chance to make allegations.
Additionally, creditors and debtor may challenge any details on the list of creditors by appealing before the insolvency judge.
Second stage: arrangement or liquidation
The second stage leads either to an arrangement between the debtor and its creditors, or to the liquidation of the debtor's assets.
As an exception, in certain cases the debtor may propose an advanced arrangement in the course of the first stage of the proceedings. Liquidation may be requested at any time during the proceedings.
An arrangement may be entered into between the debtor and the majority of the creditors, involving a delay in payment or a partial cancellation of debts. It is not effective until the court gives its approval. The court may refuse to do so when there has been a breach of the law or when the parties have shown that the debtor will not be able to fulfil the arrangement.
The arrangement may be imposed on creditors with a general priority, and on secured creditors if certain majorities are met within categories. For this purpose the SIL divides secured creditors and creditors with a general priority into four categories:
- public authority creditors;
- financial creditors (regardless of whether they are supervised by a regulatory body such as the Bank of Spain); and
- any other creditors – mainly commercial creditors.
Although upon approval of the arrangement most of the effects of the insolvency proceedings cease, strictly speaking the proceedings do not terminate until the terms of the arrangement are completely fulfilled.
In the case of liquidation, the debtor ceases to manage its assets (in the case of a company, its directors would cease to act). The court receiver liquidates the debtor's assets by selling them to distribute the money obtained among the creditors according to the priority rules established by the SIL.
vi Special regimes
The same insolvency proceedings apply to both people and entities (excluding public administrations, which cannot become insolvent). These proceedings may lead either to the restructuring of the business or to the liquidation of the debtor's assets.
The SIL is based on the assumption that a company's insolvency does not always imply the insolvency of other companies within the group; however, certain rules try to coordinate the various proceedings being carried out in relation to companies pertaining to the same group.
Financial institutions and insurance companies are subject to specific regulations, in two senses: when insolvency is declared, certain special conditions apply (e.g., regarding the appointment of the insolvency receivers), and they can be subject to intervention by the Bank of Spain to avoid the insolvency process. In practice, only one financial entity has reached the insolvency stage in Spain.
vii Cross-border issues
From 26 June 2017, the new Regulation 2015/848, of the European Parliament and of the Council, of 20 May 2015, on insolvency proceedings (recast) has been applicable to all the EU countries except for Denmark. This means that this new regulation shall be applicable to all those insolvency proceedings that are initiated in an EU country (except for Denmark), when the centre of main interests (COMI) of the debtor is located in such countries.
Aside from new information duties between the countries (e.g., such countries must create an insolvency registry), the most relevant aspects of this regulation are as follows:
The type of proceedings to which this regulation applies has increased, and pre-insolvency proceedings are now included. With regards to Spain, Regulation 2015/848 includes homologation proceedings, extrajudicial payment proceedings, or anticipated arrangement proposals.
The determination on the judicial competence to declare the principal insolvency proceeding is explained in more detail. In this sense, the definition of COMI is now foreseen under an article (not under an introductory statement), and includes a series of presumptions to determine where it is located (in the case of companies, where its main centre is located, and in the case of people, where he or she usually lives).
A new chapter on the insolvency of companies that belong to the same group has been included. Regulation 2015/848 pretends to ensure more cooperation and coordination between the insolvency receivers, courts, etc., in charge of each proceeding, and has even included a new proceeding called 'group coordination proceeding', which is voluntary and enables the insolvency proceedings of group companies to be processed jointly.
II INSOLVENCY METRICS4
Since 2013, the pace of the contraction in Spanish economic activity has eased significantly, and the rate of GDP has increased steadily since then.
The level of unemployment in Spain has also decreased since 2013.
Focusing on insolvency proceedings, 9,937 proceedings were started in 2013; 6.5 per cent more than in 2012. The number of insolvency proceedings that started in 2014 decreased to 7,074, and to 4,916 in 2015. During 2016, the number of insolvency proceedings that were initiated decreased to 4,060, which is significantly lower than the number of insolvency proceedings that were initiated in other European jurisdictions (e.g., in France nearly 58,000 proceedings were initiated). This number kept decreasing in 2017 to 3,943 proceedings in total. Geographically, most of the proceedings are declared in the Mediterranean area (66 per cent), although it must be noted that the number of insolvency proceedings declared in Madrid has increased by 16 per cent.
Real estate and construction have traditionally been the sectors with most insolvency proceedings. Insolvency proceedings in the real estate sector decreased from 603 in 2016 to 568 at the end of 2017. However, the number of insolvency proceedings declared in the sanitary, agricultural, transport and clothing sectors.
The general economic situation and, in particular, the situation in the Spanish financial system have been the common causes underlying the increase in insolvency proceedings in recent years. Refinancing has been complicated, not only for companies struggling with weak accounts, but also for financial institutions facing severe credit restrictions. This is gradually changing, with the financial system enjoying more liquidity and refinancing agreements being more common these days.
III PLENARY INSOLVENCY PROCEEDINGS
In the first semester of 2018, the number of insolvency proceedings declared in Madrid and Barcelona has increased. Although the vast majority of insolvency proceedings declared in the past 12 months in Spain correspond to small or medium-sized companies, some large companies have been declared insolvent or have requested a four-month moratorium (Article 5 bis of the SIL), and most of the major proceedings are still ongoing:
i Financial sector
The most relevant insolvency proceedings declared in 2015 in the financial sector was initiated voluntarily by Banco de Madrid, as a result of the state intervention of BPA, its Andorran mother company. Banco de Madrid requested that liquidation commence within said insolvency proceedings.
The insolvency of said Spanish bank was declared on 25 March 2015 in Madrid, following intervention by the Bank of Spain. In July 2016, the court receivers requested the judge to authorise the initiation of the payment proceeding to creditors.
The proceeding is currently at the liquidation phase.
ii Engineering and renewable energy
In November 2015 Abengoa applied for a pre-insolvency proceeding (Article 5 bis of the SIL).
The company had been struggling for the past year because of its inability to face its financial debt, which amounts to €20.2 billion.
In March 2016, Abengoa signed a refinancing agreement based on a standstill of seven months to allow the company have extra time to reach a definitive restructuring plan. Given that this agreement was approved by more than 75 per cent of its creditors, Abengoa did not have to file for insolvency, thus avoiding what would have been the biggest insolvency proceeding in Spanish history.
However, the ruling that approved the said refinancing agreement was challenged by a number of dissenting creditors. The hearing on this case was held in July 2017. Commercial Court No. 2 from Seville rendered a court resolution on September 2017 partially upholding the claim filed by a series of creditors who believed that the refinancing agreement implied a disproportionate sacrifice.
On 12 July 2017, Isolux was declared insolvent.
iii Spanish toll road sector
In 2013 and 2014, multiple companies in the Spanish toll road sector filed for insolvency. TP Ferro, a company licensed by the Spanish state to build and exploit the high-speed railway between Spain and France, was the last company in the Spanish toll road sector to have filed for insolvency on 17 July 2015, with liabilities over €500 million. TP Ferro is currently undergoing the liquidation phase of the proceeding.
Ultimately the grounds for these insolvencies are: the decision of the Supreme Court to substantially increase the compensation owed to the owners of the land expropriated during the construction period; and the volume of traffic being lower than expected. As of today, seven out of eight toll road companies are already in liquidation because of the impossibility of reaching an agreement with creditors, and the lack of viability of the companies in light of the insignificant volume of traffic.
The total liabilities of the insolvent companies within the toll roads sector currently amount to more than €5 billion, according to the construction syndicate. Most of the debt in these proceedings has been acquired by funds that will litigate over the quantum that the Spanish government will have to pay to the toll road companies because of the liquidation of the companies.
Spain is dealing with these companies through a state company, SEITTSA, in a similar manner to that used with the 'bad banks' in 2011.
The tourism sector is still suffering the consequences of the economic crisis, and its dependence on seasonal revenues. The tour operator Aqua Travel was declared insolvent in 2017.
v Other relevant insolvency proceedings
The insolvency (or pre-insolvency) of the following companies has also been widely disclosed by Spanish media, either because of their relevance to the Spanish economy or because of the social impact:
- Desguaces La Torre has been declared insolvent in 2018. Its debt before the Spanish tax authorities amounts to around €21.9 million;
- Factoo, a company that acted as intermediary between entrepreneurs and Social Security and the Spanish tax authorities, has been declared insolvent in 2018. The case has caused such impact that creditors affected by it asked the European Parliament to create a contribution system based on the real income earned by entrepreneurs; and
- Toys 'R' Us was declared insolvent in 2018.
IV ANCILLARY INSOLVENCY PROCEEDINGS
There is no information regarding relevant ancillary insolvency proceedings pending before the Spanish commercial courts.
The latest reforms of the SIL have resulted in an increase in the number of applications for insolvency proceedings, both from people and companies, as it is considered a better alternative to corporate liquidation and mortgage foreclosure proceedings. These reforms have also resulted in the shortening of their duration, and the number of proceedings that end in liquidation.
It is expected that, as the Spanish economy continues to recover (there has been a slight increase in consumer expenditure), the number of insolvency proceedings to be declared in the coming months will be fewer than in previous months. This decrease may be reinforced by the tendency to reach refinancing agreements (such as Grupo Prisa). However, political uncertainty may lead to the slowdown of such recovery, partly because foreign investors may be reluctant to invest in Spain.
The levels of activity in the distressed loan market have continued to increase, with transactions involving the acquisition of debt held by insolvent companies at a discount, and management of third parties' debt. Although traditionally in these cases the purchaser would not hold voting rights in the event of a creditors' arrangement if it is not a financial institution, an amendment of the SIL removed this provision, clearly with the aim of encouraging the liquidity injection in the Spanish market by foreign investors. This is the case of the Spanish toll roads; thus, the outcome of these proceedings will have an impact on the view international markets have on Spain.
1 Iñigo Villoria is a partner and Alexandra Borrallo is a lawyer at Clifford Chance SLP.
2 Shareholders owning at least 10 per cent of the share capital (5 per cent if a listed company) or group companies.
3 Additional Provision 4 of the SIL.
4 According to the information provided by the National Statistics Institute.