The Reform Of The Spanish Insolvency Act – Positive News For Spanish Companies
At the end of 2021, the Spanish government approved draft reforms of the Spanish insolvency laws that transposes Directive (EU) 2019/1023 of 20 June 2019 on preventive restructuring frameworks into Spanish law.
The reform will bring about a comprehensive change in insolvency proceedings in Spain. So what are these changes and what effect will these have in practice?
Among other objectives, the reform aims to make pre-insolvency processes effective. Indeed, the current Spanish insolvency system has obvious limitations. In fact, the use of pre-insolvency processes is low. This reduced use has meant that when Spanish companies go into insolvency proceedings, they do so in a situation of very advanced financial deterioration. Moreover, the excessive duration of insolvency proceedings, averaging 60 months, means that the vast majority of insolvency proceedings end in liquidation.
The first major innovation consists of the introduction of restructuring plans, which aims to eliminate the current limited pre-insolvency processes by introducing a single flexible procedure and the possibility of binding dissenting classes, with appropriate safeguards.
Restructuring plans may well replace current practice in Spain, where pre-insolvency situations are often resolved by refinancing agreements and out-of-court payment agreements.
This reform also aims to reduce judicial intervention, and relies on the majority support of creditors.
New concepts for restructuring
The draft law introduces the following different concepts to Spanish restructuring plans:
Limited judicial involvement
There is very limited intervention by the insolvency judge, both in the preparation of and execution of the plan. The intervention of the court in the approval of the plan is minimal.
It introduces the possibility of liquidation restructuring plans.
Restructuring part of a company’s liabilities
A restructuring plan will enable a debtor company to compromise all or part of its liabilities (except for public, alimony, labour and non-contractual claims).
Changes to shareholder rights
An important new feature is that shareholders can be obliged to increase capital or make structural changes without their consent.
Even more important is the introduction in Spain of non-consensual restructuring plans, making it possible for the court to approve a restructuring plans that has not been approved by all types of creditors, including the debtor as a legal entity, often referred to as cram-down or cross-class cram-down.
Challenges and non-compliance
The new process will also make it easier for those opposed to the plan to raise objection to it, and will enable non-compliance with the plan to be dealt with more efficiently.
Changes will also be introduced concerning the insolvency of individuals, making the options for individuals to be exonerated from unsatisfied liabilities more flexible, linking such exoneration to a standard of good faith.
A special abbreviated insolvency procedure will also established for micro-companies, defined as those with a value of less than two million euros or with fewer than ten employees, in order to reduce the fixed costs of an insolvency proceeding.
The special abbreviated procedure is aimed at simplifying insolvency proceedings for small companies.
Efficient insolvency processes
The project also aims to improve the processing of insolvency proceedings and their efficiency. Unfortunately, the current insolvency procedures in Spain result in insolvency proceedings being delayed for years due to excessive “proceduralism”. The draft law introduces improvements in the procedure, such as the insolvency judge no longer having to wait for the insolvency administration to submit a final report before deciding to open the composition or liquidation phase, as is currently the case, which always leads to significant delays.
Likewise, the requirement for the insolvency judge to approve a liquidation plan is eliminated, without prejudice to the judge establishing special liquidation rules if deemed appropriate.
Finally, an important new feature is the abolition of the creditors’ meeting, substituting a regime for the approval of the agreement very similar to that envisaged for restructuring agreements.
With regard to other new features aimed at increasing efficiency, there will be a system of early warnings for companies that may be in a situation of probable insolvency. These alerts will be issued by the ministries responsible for detecting such situations.
The draft law will also formally introduce into Spanish procedure the practice of “pre-pack” insolvency proceedings. Previously the Barcelona courts have admitted these in practice without the need to apply for insolvency proceedings, and the Madrid courts have admitted these once insolvency proceedings have been declared, but under the draft law this practice will now be formalised.
Court’s power to liquidate
Finally, an important and novel change is that the insolvency judges will be able to directly liquidate a company when it is clear from the outset that there are no assets.
Is this a good thing for Spanish companies?
The draft proposes what will be a real revolution in the regulation of insolvency in Spain and is the most ambitious reform of insolvency law ever undertaken there. It will see a change from judicial driven insolvency procedures to a process with much less court involvement, aimed at achieving an effective solution to insolvency.
It is expected that the new law will be enacted and come into force in June or July 2022.