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 several occasions between 2009 and 2015.2
On 7 May 2020, the Spanish Official Gazette published Royal Decree-Law 1/2020, of 5 May 2020, which approves the consolidated text of the Spanish Insolvency Act (the Consolidated Insolvency Act), which came into force on 1 September 2020.
Furthermore, as a consequence of the covid-19 crisis, a series of measures regarding insolvency proceedings have been put in place by means of Royal Decree-Law 8/2020, of 17 March, on urgent extraordinary measures to address the economic and social impact of the covid-19 pandemic (RDL 16/2020, which has been further amended recently by means of Law 3/2020 of 18 September, on procedural and organisational measures to address the pandemic as it affects Justice Administration – Law 3/2020). The main goals of these measures are to avoid the insolvency of people and companies, and to avoid putting all the weight of the processing of an insolvency proceeding on commercial courts to avoid a collapse of the judicial system.
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 (or specially privileged credits) 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.
Specially privileged creditors are not subject to an arrangement (see 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.
Generally privileged creditors (or 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. They are paid once all post-insolvency debt is paid.
'Ordinary credits' is the residual category; it includes trade creditors and lenders, when not secured or subordinated. Because of the covid-19 pandemic, the aforementioned Law 3/2020 foresees as an incentive that financing granted by an entity or individual specially related to the debtor within a period of two years following the declaration of the State of Emergency will be considered ordinary credit (without prejudice of the privileges that may be acknowledged) instead of as a subordinated credit, as explained below. Ordinary credits are paid once all generally privileged debt is paid.
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. When subordination arises from a special relationship, the creditor will also lose any security over assets belonging to the debtor. Subordinated credits are only paid once all ordinary credits are paid, so the chances of recovery of subordinated creditors are very low.
Finally, there are post-insolvency claims, which are accrued after the declaration of insolvency, and are considered as necessary to keep the debtor's business running. 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). Post-insolvency debt is immediately payable when due.
Prior transactions: clawback
Under the Consolidated Insolvency Act, 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 Articles 598 and 603 and subsequent of the Consolidated Insolvency Act. 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 ordinary interests, up to the value of the security. 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 Consolidated Insolvency Act, 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 Consolidated Insolvency Act now foresees the possibility of declaring general managers liable for the insolvency proceeding.
Although insolvency regulation 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, 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 (now the Consolidated Insolvency Act) 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. 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. Generally 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 – current insolvency). A debtor is entitled to apply for insolvency proceedings when it expects that it will shortly become insolvent ('imminent insolvency'). 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. The obligation to file for insolvency 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 Section I.i).
According to Law 3/2020, during 2020, debtors facing insolvency will not be required to file for insolvency until 31 December 2020, regardless of whether they have filed the notification of pre-insolvency at court established under Article 5 bis of the Spanish Insolvency Act (the '5 bis Communication' – Article 583 of the Spanish Consolidated Act). Consequently, applications for insolvency filed by creditors during the State of Emergency5 will not be given leave to proceed until that date either. In the meantime, those applications for insolvency filed by the debtor itself will be given preference, even if dated later. If the 5 bis Communication is filed prior to 31 December 2020, the relevant debtor will have six additional months as from the filing of such communication to try to reach an agreement with its creditors. Debtors will have to file for insolvency by the end of such six-month term if no agreement has been reached with creditors and the situation of insolvency has not been solved.
Under normal circumstances, the referred Article 583 of the Spanish Consolidated Act foresees an additional four-month period during which the debtor is allowed to continue to do business normally and keep negotiating with its creditors to reach an agreement that will avoid definite insolvency. During this term, insolvency application by creditors is prevented and enforcement of credits against assets necessary for the business is banned (this last measure, for three months only, according to the Consolidated Insolvency Act).
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, which will be classified as a generally privileged credit.
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 the impoosibility to comply with a judicial ruling owing to the lack of assets of the debtors).
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, by replacing its directors, and will be 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 court ruling delivering the insolvency proceeding will contain an express request for creditors to give notice of their claims within a month of the insolvency declaration appearing in the Spanish Official Gazette (BOE). Creditors must then send their statement of claim directly to the court receiver (by email), and original documents are not 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 relevant categories (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 that is formally filed by the court receiver before the court, by filing an incidental plea before the insolvency judge. This will lead to an incidental process that will end with a ruling that is subject to appeal (and even to an extraordinary appeal before the Supreme Court, in certain cases).
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 (i.e., a waiting period) or a partial cancellation of debts (i.e., a write off). 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 Consolidated Insolvencty Act 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.
Law 3/2020 also introduces a series of measures relating to insolvency proceedings which are already underway, aimed at avoiding liquidations and expediting the process. An example would be the possibility to amend the existing arrangement and out-of-court payment agreements.
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 Consolidated Insolvency Act. Law 3/2020 prioritises telematic sales to speed liquidation processes and avoid further delays in the courts in charge of the insolvency proceedings.
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 Consolidated Insolvencty Act 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 was 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. In 2018, the number increased to 4,131. In 2019, the number of insolvency proceedings that were declared increased by 3 per cent in comparison to 2018. During the first quarter of 2020, the number of insolvency proceedings decreased. And after the declaration of the State of Emergency, the number of proceedings has also dropped in light of the moratorium initially given by means of RDL 16/2020 (now by Law 3/2020), that postpones the duty to file for insolvency until 31 December 2020.
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. The numbers of proceedings in these sectors decreased in the last few years but it is likely that covid-19 crisis will entail an increase in the number of real estate and construction insolvency proceedings again.
The improvement in the Spanish economic situation resulted in a reduction in the number of insolvency proceedings overall, and some companies, such as Grupo DIA, avoided being declared insolvent after reaching refinancing agreements with their main debtors. However, it is likely that the covid-19 crisis will entail a new crisis in all sectors, and a corresponding increase in the number of refinancing agreements and insolvency proceedings.
III PLENARY INSOLVENCY PROCEEDINGS
During 2018 and 2019, some of the main insolvency proceedings were those regarding Grupo Isolux, Marme Inversiones 2007 SL (owner of Banco Santander's headquarters) and Zed Worldwide, SA.
In 2020, the tourism sector has been affected by the covid-19 crisis and companies such as the cruise company Pullmantur have filed for insolvency.
IV ANCILLARY INSOLVENCY PROCEEDINGS
There is no information regarding relevant ancillary insolvency proceedings pending before the Spanish commercial courts.
The covid-19 pandemic will surely impact on the number of insolvency proceedings that will be filed during the second half of 2020, and, especially, during the beginning of 2021, once the aforementioned moratorium ends. Until then, we can expect an increase in the number of refinancings and homologation proceedings under Articles 609–617 of the Consolidated Insolvency Act (former Additional Disposition Four of the SIL), to avoid companies becoming insolvent, as well as out-of-court agreements in the case of people. Alternative dispute resolution mechanisms may also be explored to avoid insolvency (efforts are being made to give greater importance to mediation).
It seems that the pandemic will affect the Spanish economy as a whole. Some of the main sectors that are already suffering the consequences of the covid-19 pandemic are tourism, leisure activities, restaurants, construction and retail. Many small businesses have had to close in light of the increasing preference to use online shopping. This will evidently entail an increase in the number of insolvency proceedings of small businesses, and probably their owners.
Although the levels of activity in the distressed market decreased during the first half of 2020 because of the uncertainty that the covid-19 pandemic has created at a global level, we expect that the number of transactions involving the acquisition of debt held by insolvent companies at a discount, and management of third parties' debt will gradually increase. We also expect an increase in the market regarding the purchase of assets and productive units that belong to insolvent companies or companies under financial distress.
Regarding financing, public financial aid is being granted to companies, which – so far – is contributing to refinancing companies under financial distress. However, it is uncertain if this governmental aid will entail a definite surviving tool for such companies or, on the contrary, if such measure will become a mere bandage to a bigger problem that is just being delayed by such initiative.
Other measures have been implemented by the government to help people affected by the covid-19 pandemic (e.g., mortgage moratoriums).
Finally, governmental measures are also being adopted in the real estate sector (e.g., compulsory extension of lease agreements).
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 The State of Emergency officially ended on 21 June 2020.