- What is the primary legislation governing restructuring proceedings in your jurisdiction?
- How are restructuring proceedings initiated?
- Which different types of restructuring proceedings exist and what are their characteristics?
- Are there different types of creditors and what is the significance of the differences between them?
- Is there any obligation to initiate restructuring/insolvency proceedings? For whom does this obligation exist and under what conditions? What are the consequences if this obligation is violated?
- What are the main duties of the representative bodies in connection with restructuring proceedings?
- What are the main duties of shareholders in connection with restructuring proceedings?
- What is the primary legislation governing insolvency proceedings in your jurisdiction?
- How are insolvency proceedings initiated?
- What are the legal reasons for insolvency in your country?
- Which different types of insolvency proceedings exist and what are their characteristics?
- Are there different types of creditors and what is the significance of the differences between them?
- Is a solvent liquidation of the company an alternative to regular insolvency proceedings?
- If a lender wants to monitor its borrower very closely (i.e. more closely than the usual information covenants in the credit agreement require), what options are there?
- What issues arise if a creditor extends credit facilities or offers support conditional on additional or extended guarantees to a company in financial difficulties and/or takes asset security?
- How does a lender sell a loan?
- If the underlying credit agreement prohibits transfer or assignment (i.e. a change in the lender of record), how else – if at all – can a lender transfer the economic risk and/or benefit in the loan? For instance, are sub-participation agreements allowed under the law of your jurisdiction?
- Regulatory issues: is any form of licence or prior authorisation from any regulatory authority required for the purchase, sale and/or transfer of loans? Does it fall within the definition of providing banking or financial services in the territory of the assignor or the borrower?
jurisdiction
Restructuring
1. What is the primary legislation governing restructuring proceedings in your jurisdiction?
The Royal Legislative Decree 1/2020 of 5 May approving the Recast of the Insolvency Act, amended by the Law 16/2022 of 5 September, is the primary piece of legislation governing pre-insolvency restructuring proceedings.
2. How are restructuring proceedings initiated?
Only the debtor is entitled to initiate a restructuring plan, the only available pre-insolvency proceedings (see Q3 below). The procedure starts with submitting communication of the opening of negotiations with creditors (the “Communication”) to the Commercial Court, though it is possible to negotiate a plan without involving a court. If the debtor submits the Communication to the court, it will benefit from a stay of executions (excepting those relating public law claims) and the maintenance of contracts and agreements with mutual obligations. If the request of the debtor is accompanied by an expert report, the stay can be extended by up to an additional 3 months.
The debtor can file the request with the court in any of the following cases:
- Current insolvency, i.e. when the due obligations can no longer be paid regularly
- Imminent insolvency, i.e. when insolvency is foreseen within the next 3 months, or
- Legal situation of probable insolvency, i.e. when it is objectively foreseeable that, without a restructuring plan, the debtor will not be able to meet regularly its obligations falling due within the next 2 years.
The Communication must justify the above condition, list the creditors with whom negotiations have been or are intended to be initiated, the amount of the claims, describe the activity or activities carried out by the debtor, as well as the amount of its assets and liabilities, the turnover, and the number of employees. The debtor can also ask for the appointment of a restructuring expert to help with the negotiations and the drafting of the restructuring plan.
3. Which different types of restructuring proceedings exist and what are their characteristics?
There are two pre-insolvency proceedings: the restructuring plan and the continuation plan for microenterprises (the latter is similar to the restructuring plan although simpler).
Restructuring plans aim to reorganise the assets and liabilities of the debtor or its equity. There is no restriction as to what to agree on for the purpose of restructuring.
The restructuring plan shall be formalised in a public deed by those who have signed it, which must include the certification of the restructuring expert, if appointed, and otherwise of the auditor, on the sufficiency of the required majorities to approve the plan.
Restructuring plans do not need judicial approval. However, if they are not approved, the debtor and the creditors cannot benefit from certain protections (e.g. no clawback, cramdown, recognition of privileges in insolvency proceedings and termination of contracts in the interest of restructuring).
4. Are there different types of creditors and what is the significance of the differences between them?
Creditors holding claims affected by the restructuring plan will vote grouped by class of claims. The formation of classes must take into account the existence of a common interest of the members of each class determined according to objective criteria. A common interest is deemed to exist between claims of equal rank, determined by the order of payment in the eventual insolvency proceedings as follows:
- claims against the insolvency estate
- claims with special privilege
- claims with ordinary privilege
- ordinary claims
- subordinated claims.
Furthermore, secured claims shall constitute a single class, unless the heterogeneity of the secured assets or rights justifies their differentiation into two or more classes.
Also, public law claims shall constitute a separate class among classes of the same insolvency rank.
5. Is there any obligation to initiate restructuring/insolvency proceedings? For whom does this obligation exist and under what conditions? What are the consequences if this obligation is violated?
Yes, the debtor shall file for a declaration of insolvency within 2 months of the date on which it knew or ought to have known of the current state of insolvency. Otherwise the debtor or, if appropriate, its directors or liquidators, shall be deemed to be liable for the insolvency.
In case the insolvency is deemed to be tortious, the persons affected by this qualification might bear the following pronouncements:
- the disqualification of the natural persons affected by the tortious qualification to manage the assets of others for a period of 2 to 15 years, as well as to represent any person for the same period
- the loss of any rights that the persons affected by the qualification or declared accomplices may have as creditors of the insolvency proceedings or of the insolvency estate
- sentencing to return any assets or rights they may have unduly obtained from the debtor’s assets or received from the insolvency estate
- sentencing to pay compensation, with or without joint and several liability, for the damages caused
- sentencing to cover the deficit (a deficit is considered to exist when the value of the assets and rights of the insolvency estate is less than the sum of the amounts of the claims recognised in the list of creditors).
6. What are the main duties of the representative bodies in connection with restructuring proceedings?
Mainly, the law requires that the representative body is always fully aware of the company’s financial situation; and if the company is threatened with insolvency, instead of acting in the interests of the shareholders, it should act in favour of the interests of the creditors as a whole. It may be held liable for compensation for any damage or loss a creditor suffers due to the representative body’s failure to act in the interests of the creditors.
Besides this, the representative bodies of a company have the duty to supervise the existence of a reason for insolvency to ensure that a petition for the declaration of insolvency proceedings is filed in due time. The directors’ failure to comply with the legal obligation to apply for the declaration of insolvency may subsequently lead to liability in the insolvency proceedings (see Q5 above).
Furthermore, in restructuring proceedings the parties may request the appointment of a restructuring expert.
Additionally, in case no restructuring expert has been appointed, creditors representing at least 35% of the liabilities which, at the time of application, could be affected by the restructuring plan, may apply before the court for the appointment of a specific expert, stating in the application the circumstances of the case that make such an appointment necessary.
7. What are the main duties of shareholders in connection with restructuring proceedings?
Shareholders must approve the plan. If there are no shareholders and the plan contains measures requiring agreement of the shareholders, the restructuring plan may be judicially approved if the company is in a situation of actual or imminent insolvency.
In this scenario, the law foresees that when the restructuring plan contains measures that require the agreement of the shareholders’ meeting and the latter has not agreed, the directors and, if they have not done so, the person appointed by the judge at the proposal of any legitimised creditor, shall have the necessary powers to proceed with the plan, as well as the necessary amendments to the articles of association. In these cases, the judicial endorsement shall be enough for the inscription in the Public Commercial Registry of the amendments to the Articles of Association contained in the restructuring plan.
Insolvency
1. What is the primary legislation governing insolvency proceedings in your jurisdiction?
The Royal Legislative Decree 1/2020 of 5 May approving the Recast of the Insolvency Act, amended by the Law 16/2022 of 5 September, is the primary piece of legislation governing insolvency proceedings.
2. How are insolvency proceedings initiated?
Insolvency proceedings are initiated by petition to the court. Such petitions can be filed either by the insolvent debtor, by a creditor or by shareholders who are personally liable for its debts.
It is mandatory for the debtor to file the request within 1 month of becoming aware, or of when it ought to have become aware, of its current state of insolvency.
The creditors or third parties may also file a request for the declaration of insolvency of the debtor if they are able to prove the external fact(s) revealing the debtor’s state of insolvency.
3. What are the legal reasons for insolvency in your country?
The Royal Legislative Decree 1/2020, amended by the Law 16/2022, establishes the following reasons for initiating insolvency proceedings: current insolvency and imminent insolvency. While a debtor’s petition for the instigation of insolvency proceedings can be based on either of these two reasons, a creditor’s petition cannot be based on imminent insolvency.
Current insolvency
Current insolvency occurs if a debtor is unable to meet its due payment obligations regularly. The Spanish Insolvency Act also sets out the following cases under which the debtor is presumed to be aware of its insolvency:
- the existence of a previous final judicial or administrative debtor’s insolvency declaration
- the existence of a title for which an enforcement has been issued without the seizure having resulted in known free assets sufficient for payment
- the existence of seizures or pending foreclosures with an overall effect on the debtor’s aggregate assets
- general suspension of the debtor’s current payment obligations
- unlawful removal or hasty or ruinous liquidation of the assets by the debtor
- generalised breach of obligations of any of the following types:
- tax obligations during the 3 months prior to applying for insolvency
- social security contributions and other joint collection items during the same period
- salaries, compensation and other remuneration arising from the relevant employment relationships, relating to the last 3 monthly payments.
Imminent insolvency
Imminent insolvency means that the debtor foresees the inability to regularly and punctually meet its due payment obligations in the next 3 months.
4. Which different types of insolvency proceedings exist and what are their characteristics?
The types of insolvency proceedings can be classified as follows:
Categorised by the requesting party
- Voluntary insolvency proceedings: the debtor files for insolvency. This is the most common proceeding in which an insolvency practitioner is normally appointed in the form of intervention.
- Compulsory insolvency proceedings: the creditors file for insolvency 3 months earlier than the debtor would be entitled to do so. The court must appoint an insolvency practitioner in the form of suspension and, usually, the debtor’s liabilities are examined closely in the qualification stage.
Categorised by the size of the debtor
- Ordinary insolvency proceedings: in which the regular formalities set out in the Insolvency Act will be followed.
- Special insolvency proceedings for microenterprises: shall be applied to a debtor that carries out a business or professional activity when the following circumstances are present:
- has employed during the year prior to the claim an average of less than 10 workers. This requirement shall be met when the number of working hours done by the whole workforce is equal to or less than that corresponding to less than 10 full-time employees
- has a turnover under EUR 700,000 or liabilities under EUR 350,000 according to the last accounts closed the fiscal year prior to the claim.
This special insolvency proceeding shall be applicable to microenterprises that are in probability of insolvency, imminent insolvency or current insolvency. It should be noted that the liquidation special proceeding without transmission of the operating company requires the existence of current or imminent insolvency if requested by the debtor, or current if requested by other entitled parties. In addition to this, if at least the 85% of the credits belong to public law creditors, the special proceeding shall be processed as a liquidation proceeding only.
5. Are there different types of creditors and what is the significance of the differences between them?
Given that one creditor can be the holder of several claims, the Royal Legislative Decree 1/2020 distinguishes between claims:
- insolvency claims arising from debts prior to the declaration of insolvency
- claims against the estate referring to credits to which the law grants this classification or derived from debts that arise after the declaration of the insolvency.
The claims against the insolvency estate must be paid to their due date.
Within this distinction, there is also another sub-division between insolvency claims:
- claims with special privilege: may be satisfied partly or fully by the proceeds of their privilege
- claims with general privilege: will be satisfied once the claims with special privilege have been paid
- ordinary claims: will be satisfied once the privileged claims are paid
- subordinated claims: will be satisfied last, once other claims have been paid.
Subordinated claims will depend on whether they are secured and who the holders are.
6. Is a solvent liquidation of the company an alternative to regular insolvency proceedings?
The decision between dissolving a company (known as commercial liquidation) and filing for insolvency shall be based on whether the company is only affected by circumstances for dissolution (ruled by the Royal Legislative Decree 1/2010 of 2 July, approving the Recast of the Corporate Enterprises Act), or is also insolvent/soon to be insolvent.
If it is confirmed that there are grounds for dissolution, the directors shall comply with the obligation to call a shareholders’ meeting on the decision to dissolve the company in order to limit their liability. Should insolvency arise after the company is dissolved, the obligation to file a petition for insolvency will fall to the appointed liquidator.
Depending on the result of the relevant analysis based on the current and imminent financial status of the company, the directors should either file a petition for insolvency or bring to the shareholders the decision to dissolve the company and start the relevant winding-up process. Should the directors adopt the decision to file a petition for insolvency, said petition shall be filed before the commercial court of the district where the debtor’s registered office is located.
Notwithstanding the foregoing, if there are losses that reduce the company’s equity to an amount lower than one half of the share capital, the companies shall dissolve, except if the capital is increased or decreased as needed. If directors choose to resort to business dissolution instead of requesting the opening of insolvency proceedings, they will not be protected by the rule.
It is relevant to note that the declaration of insolvency does not, per se, constitute a cause for dissolution according to the Corporate Enterprises Act.
Therefore, dissolving a company is not a real alternative to insolvency proceedings where there are legal reasons to file for insolvency.
Financial restructuring from the creditors’ perspective
1. If a lender wants to monitor its borrower very closely (i.e. more closely than the usual information covenants in the credit agreement require), what options are there?
If a borrower is in financial difficulties, the lender and the borrower often contractually agree to appoint a person to monitor the borrower’s activities. Such person is usually authorised to countersign all of the borrower’s undertakings, to prepare a regular report on the borrower’s activities and to advise how to restructure the company and its debts in order to avoid insolvency. Such person can incur shadow management personal liability if he/she is involved in the borrower’s decision-making process. He/she may also incur corporate personal liability if he/she is appointed to the board of directors/managing directors or supervisory board, and in both cases, he/she votes for the approval of the resolution which results in the insolvency of the company or causes damage to a creditor or the company.
If the company manages to sign a syndication loan with numerous financial institutions, the agent will be the responsible figure for monitoring the payments to be made by the debtor in accordance with the established payment schedule.
According to the new Spanish insolvency regulations, there is no judicial control of compliance with the restructuring plan. Moreover, breach of the restructuring plan does not entitle the affected parties to judicially request its termination or resolution, which makes it more difficult to recover the amounts lent unless the contracts specifically foresee any covenants or warranties.
2. What issues arise if a creditor extends credit facilities or offers support conditional on additional or extended guarantees to a company in financial difficulties and/or takes asset security?
Clawback risk can be an issue if the security is taken at undervalue, or by giving preference to one creditor.
The Insolvency Act protects new and interim financing, if it is reasonably and immediately necessary for the survival of the business, or preserves or enhances its value, provided certain requirements established in the law are met.
This so called “new funding” may be included in restructuring plans and would need to be endorsed judicially to be protected over other classes of creditors.
In addition to the above, when a third party takes out a loan with a company so that he/she acquires its shares, the company would incur a case of financial assistance which is expressly prohibited under Spanish corporate legislation. According to the Spanish Insolvency Act, these kinds of activities may be subject to rescissory actions if they were made within the 2 years prior to the declaration of insolvency.
Non performing loans
1. How does a lender sell a loan?
According to article 1526 of the Spanish Civil Code, the sale of a loan would only take effect against a third party if its date is deemed to be certain based on the date of execution in a public deed or the date when a private document was incorporated in a public registry.
In case the assignment relates to immovable property, it would only take effect against a third party from the date of its entry in the Land Registry.
Furthermore, when referring to secured loans, it needs to be taken into account that the assignment shall be formalised in a public deed and incorporated in the relevant registry (either in the Land Registry or the Registry for Movable Property).
If the aforementioned actions are not carried out, the transmission will only have effect between the contracting parties, but these effects cannot be effective against third parties because the necessary publicity requirements are not fulfilled.
The sale of a loan includes the sale of all ancillary rights, such as a security, mortgage, pledge or privilege.
2. If the underlying credit agreement prohibits transfer or assignment (i.e. a change in the lender of record), how else – if at all – can a lender transfer the economic risk and/or benefit in the loan? For instance, are sub-participation agreements allowed under the law of your jurisdiction?
There are no restrictions on sub-participation agreements. If a true sale is prohibited by the credit agreement, the lender may enter into a sub-participation agreement with sub-participants (i.e. financial institutions) who take over the underlying risks. In this regard, it should be borne in mind that, under Spanish Law, sub-participation agreements are atypical contracts, not subject to any particular regulation or requirement, and therefore governed by the principle of free will of the parties.
3. Regulatory issues: is any form of licence or prior authorisation from any regulatory authority required for the purchase, sale and/or transfer of loans? Does it fall within the definition of providing banking or financial services in the territory of the assignor or the borrower?
In Spain, the activity of purchasing and/or transferring loans is not subject to authorisation yet. However, the European legislator has worked to create a harmonised legal framework resulting in the enactment of the Directive (EU) 2021/2167 of the European Parliament and of the Council on credit servicers and credit purchasers and amending Directives 2008/48/EC and 2014/17/EU of 24 November 2021. The content of this directive is still pending transposition into Spanish legislation.