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 has undergone a series of amendments between 2009 and 2015.2 At the time of writing, the Spanish legislator is working on a new reform.
Insolvency law encompasses all regulations applicable to court insolvency proceedings as opposed to out-of-court liquidations, which only apply when a 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 creditors may be subject to a delay of up to a year after the declaration of insolvency.
The creditors are not subject to an arrangement (see further at Section I.v, 'Second stage: arrangement or liquidation'), 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 those 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 an 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 claim' 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.3 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), and 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 insolvency proceedings. However, the court receivers may challenge those transactions that could be considered as having been detrimental to a 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 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, a debtor and its creditors (by a three-fifths majority) may subject a refinancing agreement to the provisions of Article 71 bis of the SIL. It is also possible to apply the terms of such an extension to the dissenting financial lenders if certain conditions are met.4
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 is 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 an insolvency judge.
Under Spanish company law (in the absence of a case of insolvency), 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 by 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 an insolvency is deemed negligent because of 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 at all costs, 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 their 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 has 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 why 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). Recovery from liquidation 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 regularly to meet its current outstanding obligations). 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, Section I.i, 'Directors' liability').
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 a 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.
A 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 by either a debtor or its creditors. The application is classified as 'voluntary insolvency proceedings' when filed by a debtor, and as 'necessary insolvency proceedings' when filed by creditors.
An application for insolvency proceedings may be filed either by a debtor (in the case of a company, the managing body, not the shareholders) or by its creditors.
When a debtor files an application, it must include several documents (including a power of attorney, an explanation of the situation of the company, and a list of its assets and liabilities).
When a creditor files an application, it must provide evidence of its debt, and 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 a 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 limit 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, the creditors and the 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, the proceedings do not terminate until the terms of the arrangement are completely fulfilled.
In the case of liquidation, a 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 (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (the Recast Insolvency Regulation) has been applicable to all the EU Member States except Denmark. This means that this new Regulation shall be applicable to all those insolvency proceedings that are initiated in an EU Member State (except Denmark), when the centre of main interests (COMI) of the debtor is located in one of those countries.
Aside from new information duties between the countries (e.g., those that must create an insolvency registry), the most relevant aspects of this regulation are as follows.
The types of proceedings to which the Recast Insolvency Regulation applies have increased, and pre-insolvency proceedings are now included. With regard to Spain, the Regulation includes homologation proceedings, extrajudicial payment proceedings and 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. The Recast Insolvency Regulation pretends to provide for improved cooperation and coordination between the insolvency receivers, courts, and others in charge of each proceeding, and has even included a new 'group coordination proceeding', which is voluntary and enables the insolvency proceedings of group companies to be processed jointly.
II INSOLVENCY METRICS
Since 2013, the number of insolvency proceedings steadily decreased until 2018, when the number increased slightly as compared with 2017.
In 2013, 9,937 proceedings were filed; 6.5 per cent more than in 2012. The number of proceedings declared decreased to 7,074 in 2014 then dropped 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 corresponding numbers in other European jurisdictions (e.g., nearly 58,000 in France). In 2017, just 3,943 proceedings in total were filed. However, in 2018, the number increased to 4,131. Geographically, most of the proceedings are declared in the Mediterranean area (mainly in Barcelona and Valencia), followed by Madrid.
Real estate and construction have traditionally been the sectors with most insolvency proceedings. However, the numbers of proceedings in these sectors are now lower compared with those declared in the service sector (27 per cent), and the distribution and commerce sector (22 per cent).5
The improvement in the Spanish economic situation has resulted in a reduction in the number of insolvency proceedings overall, and some companies, such as Grupo DIA, have avoided being declared insolvent after reaching refinancing agreements with their main debtors.
III PLENARY INSOLVENCY PROCEEDINGS
During 2018 and 2019, insolvency proceedings have continued to progress; they include the proceedings relating to Grupo Isolux, Marme Inversiones 2007 SL (owner of Banco Santander's headquarters) and Zed Worldwide, SA.
Other companies that have been declared insolvent are Bultaco Motors, SA (motorcycles and accessories), Home Meal Replacement, SA (owner of the food chain Nostrum), the political party Iniciativa Per Catalunya Verds and Pili Carrera (children's clothing).
IV ANCILLARY INSOLVENCY PROCEEDINGS
There is no information regarding relevant ancillary insolvency proceedings pending before the Spanish commercial courts.
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 being declared in the coming months will stabilise as compared with 2018, or at least not increase dramatically. This situation may be reinforced by a growing tendency to arrange refinancing agreements (such as Grupo Prisa). However, political uncertainty may lead to a slowdown in the economic 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 (when not a financial institution), an amendment of the SIL removed this provision, clearly with the aim of encouraging an injection of liquidity in the Spanish market by foreign investors. This has been the case in respect of Spanish toll roads and Marme Inversiones 2007, SL. The outcome of these proceedings will affect international markets' view of Spain.
1 Iñigo Villoria is a partner and Alexandra Borrallo is a lawyer at Clifford Chance SLPU.
2 The Spanish Law of Insolvency [SIL] has been 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.
3 Shareholders owning at least 10 per cent of the share capital (5 per cent if a listed company) or group companies.
4 Additional Provision 4 of the SIL.
5 All figures quoted in Section II are according to information provided by the National Statistics Institute.