Pre-pack insolvency proceedings: the Spanish approach

A pre-pack insolvency proceeding is a sale of the still-viable production unit of an insolvent company, negotiated before the formal judicial declaration of the insolvency process, by the judicial appointment of an expert and executed immediately after a Commercial Court declares the insolvency proceeding.

With the publication of the Law 16/2022 on 6 September 2022, Spain put an end to a thorough review of insolvency law, thus transposing European Directive (EU) 2019/1023 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on improved procedures for restructuring, insolvency and discharging debt, in which the regulation of the sale of production units is highlighted. In early stages, the regulation gives a company the status of insolvency “pre-pack”, thus making this process an integral part of the restructuring plans. During the processing of insolvency proceedings, these regulations create a disciplined process, which in the past was widely applied and allowed favourable solutions to be found to many situations.

Thus, Spanish insolvency regulations have incorporated in advance the rules suggested by the Commission on the proposal for a directive to harmonise aspects of insolvency law, published on 7 December 2022, including a requirement for introducing pre-pack insolvency proceedings into their national insolvency laws.

The following are answers to the major questions surrounding pre-pack insolvency proceedings in Spain under the new legislation:

What is the purpose of pre-pack insolvency proceedings?

To help an insolvent entity sell off a still-viable production unit in order to avoid its economic and reputational devaluation, obtaining the best sale price in order to pay more debts and keep the business on going in order to save more jobs.

Must an expert on pre-pack insolvency proceedings intervene?

A ruling court is requested to appoint an expert to collect third-party cash payment offers for one or various production units owned by the petitioner, even if the units are no longer active.

To request the appointment of the expert:

• The debtor must either be insolvent, imminently insolvent or likely to be insolvent.
• A viable production unit must exist, even if it has ceased to be active.
• It does not matter what activity the production unit undertakes.

Who appoints the expert?

The ruling judge with jurisdiction to decide over the debtor’s insolvency proceedings. The appointment decision will be confidential.

Who can be appointed an expert?

Any natural person who or legal entity that meets the conditions for appointment as a restructuring expert or insolvency administrator.

What is their mission?

To collate offers from third parties to purchase one or various production units with a cash payment. The judge will decide how long the expert will stay in this post.

How will the expert be paid?

The judge will decide upon payment when making the appointment. The price of the production unit or units will be taken into consideration when deciding upon such remuneration. Retribution could be partially or wholly tied to the outcome of the sales.

Does the appointed expert remain in post after the debtor makes a formal request for insolvency proceedings?

When announcing the insolvency proceedings, the judge (who will be the same one that appointed the expert) can either cancel or reappoint the expert. If the latter, the expert will then become the insolvency administrator.

What should be the content of the offers on pre-pack insolvency proceedings?

Any party interested in the acquisition of a production unit should include the following basic information:

• The identification of the offeror, as well as the information on its economic solvency and on the human and technical resources at its disposal.
• The precise scope of the assets, rights, contracts and licences or authorisations included in the offer.
• The price offered, the methods of payment and the guarantees provided. In the event that assets or rights affected by credits with special privileges are transferred, a distinction must be made in the offer between the price that would be offered with or without subsistence of the guarantees.
• The effects of the offer on the employees.
• The obligation to continue or restart the activity with the production unit to which the offer refers for a minimum of two years. Failure to comply with this commitment will result in anyone affected being able to claim compensation from the purchaser for damages caused.

Is a report from the insolvency administrator mandatory?

Yes. In this mandatory report, the insolvency administrator will assess the proposal presented based on the interest of the insolvency proceedings and will report on the effects that the resolution of the contracts resulting from the proposal could have on the creditors.

The representatives of the employees and the creditors would also intervene making allegations when necessary.

Is a court sanction required?

Yes. In Spain, a pre-pack insolvency proceeding requires court sanction. The competent court would be the commercial court that will be handling the insolvency proceedings of the insolvent company.

Can company succession take place during pre-pack insolvency proceedings?

Yes. Company succession will be considered for labour and social security purposes.

The commercial court will be the only one competent to declare the existence of company succession, as well as to delimit the assets, liabilities and labour relations that result from it.

The court may request a report from the Labour and Social Security authorities regarding how labour relations have been affected by the sale of the productive unit and potential social security debts related to the employees.

Will the purchaser be subrogated on contractual relationships?

Yes. The purchaser will be subrogated in the contracts related to the continuity of the professional or business activity carried out in the production unit subject to transfer without the need for the consent of the other party.

It is expected that this new regulation could be partially amended in the near future when the incorporation of the future Directive to harmonise aspects of insolvency law will take place.

For more information on the Spanish´s pre-pack regulations, contact your CMS client partner or these local CMS experts.

This article is part of our Law-Now blog series "Harmonisation of Insolvency Laws in the EU", which will provide an overview of the EU Commission's draft directive, including the most important objectives and planned measures. The series itself will deal with the two exciting topics of the draft directive, "pre-pack proceedings" and "insolvency avoidance actions" and show how these topics are being discussed in the Member States and what the situation is like in individual non-Member States.