Restructuring and insolvency law in Spain

1. What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?

The Insolvency Act (22/2003) – to be replaced by its Consolidated text on 1 September 2020 – is the primary legislation governing insolvency proceedings in Spain. In addition, although temporary, Royal Decree Law 16/2020 published on 28 April 2020 affects regulations of an insolvency and restructuring nature and will do so for the next few years.

Pre-insolvency restructuring proceedings are also regulated to a degree by the Insolvency Act. However, restructuring proceedings are generally governed by ordinary legislation.

2. How are insolvency proceedings or restructuring proceedings initiated?

Insolvency proceedings are initiated by petition to the Court. Such petitions can be filed either by the insolvent debtor – voluntary – or by a creditor or other legitimate party –compulsory – and must be based on the existence of a reason for the instigation of the insolvency proceeding. The case for a third party to file for a compulsory insolvency proceeding must be based on one of the facts set out in the Insolvency Act.

Pre-insolvency restructuring proceedings are usually initiated by the debtor contacting its creditors, as they aim at improving its financial situation. Once negotiations have started, the debtor must inform the Court.

The Insolvency Act 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. It is understood that this will be the case if the debtor has stopped making regular payments. The Spanish Insolvency Act also sets out the following cases under which the debtor is presumed to be aware of its insolvency:

  • general suspension of the debtor’s current payment obligations 
  • the existence of seizures or pending foreclosures with an overall effect on the debtor’s aggregate assets
  • unlawful removal or hasty or ruinous liquidation of the assets by the debtor, and
  • generalised breach of obligations of any of the following types:
    • payment of tax obligations during the 3 months prior to applying for insolvency
    • payment of Social Security contributions and other joint collection items during the same period, and
    • payment of salaries, compensation and other remuneration arising from the relevant employment relationships, relating to the last 3 monthly payments.

Furthermore, insolvency is also presumed when a creditor requires the debtor to satisfy a debt and the debtor fails to comply.

Imminent insolvency 

Imminent insolvency means that it is more likely than not that the debtor will not be able to meet its due payment obligations in the near future. In order to prove imminent illiquidity the debtor needs to present a liquidity plan showing a lack of liquidity. Only the debtor may make use of imminent illiquidity as a reason to apply for insolvency as a restructuring measure.

4. Which different types of restructuring / insolvency proceedings exist and what are their characteristics?

Once the Insolvency Court has decided to open insolvency proceedings specifying the types explained below, the right to manage and dispose of the debtor’s assets is transferred to an insolvency administrator who gains full control over the debtor’s business and assets. Enforcement/foreclosure actions remain suspended. Ongoing litigation is automatically suspended but may be continued by the insolvency administrator if appropriate for the insolvency estate. The insolvency administrator will continue the business operations of the debtor if reasonable and possible, or wind up the company. The insolvency administrator is obliged to assert and enforce claims of the debtor. The insolvency administrator is bound to aim for the best possible realisation in the interest of the creditors.

Once the proceeding has been initiated, the Spanish Insolvency Act establishes some stages that will be followed during the insolvency proceeding: 

  • Common stage
  • Agreement stage
  • Liquidation stage
  • Qualification stage.   

These stages are in turn divided into six sections.

Alternatively, as mentioned above, the types of proceedings can be classified as follows:

Restructuring (pre-insolvency) proceedings

Regulated in Article 5 bis of the Spanish Insolvency Act:

  • refinancing agreements with the effects provided for in the Act 
  • out-of-court payment agreements – these agreements are intended mainly for natural persons, and 
  • proposal for an early creditors’ agreement.  

The above are intended to reach an agreement that will prevent the company from having to file for insolvency.

Insolvency proceedings

Categorised by the requesting party or number of creditors:

  • Voluntary insolvency proceeding – the most common proceeding in which an insolvency administrator is normally appointed in the form of intervention
  • Compulsory insolvency proceedings – the Court often appoints an insolvency administrator in the form of suspension, which may lead to the opening of the last stage of the proceedings in which the liability of the debtor is examined
  • Ordinary insolvency proceedings – in which the regular formalities set out in the Act will be followed
  • Simplified insolvency proceedings – halves all terms to be met in the process when the following circumstances are present:
    • the list submitted by the debtor includes less than 50 creditors
    • the initial estimate of liabilities does not exceed EUR 5 million, and 
    • the valuation of the assets and rights does not exceed EUR 5 million 
    • other events specified by the Spanish Insolvency Act.  

5. Are there several types of creditors and what is the effect of a difference?

Given that one creditor can be the holder of several claims, the Insolvency Act distinguishes between claims: 

  • insolvency claims arising from debts prior to the declaration of insolvency
  • claims against the insolvency 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 as they become due.

Within this distinction, there is also another sub-division between insolvency claims: 

  • claims with special privilege – may be satisfied partly or in full by the proceeds of their privilege
  • claims with general privilege – will be satisfied once the assets with special privilege are liquidated
  • subordinated claims – will be satisfied last once the other claims have been paid, and
  • ordinary claims – will be satisfied once the privileged claims are paid. 

These last types of claims will depend on whether they are secured and who the holders are.

6. 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?

Article 5 of the Insolvency Act sets out an obligation to file for the instigation of insolvency proceedings in the occurrence of insolvency (see point 3 above). This obligation, regarding Article 3, falls on the representative bodies of the company.

The obligation arises from the moment the representative bodies/directors are aware, or should be aware, of the insolvency of the company (see point 3 above).

In the event of a pre-insolvency restructuring proceeding that ends up in an insolvency proceeding, the period increases up to 6 months. 

If the representatives fail to file for insolvency in time, they face several risks such as disqualification from administering other people’s property from 2 to 15 years, and the loss of any recovery right against the insolvent company or to cover the liquidation deficit. Each representative can be held personally liable for damages resulting from a late filing of an application for insolvency. Furthermore, the liability extends not only to the current representative bodies, but also to those in place during the 2 years prior to the declaration of insolvency.

There is no obligation to initiate a pre-insolvency restructuring proceeding; this falls on the representative bodies of the company.

7. What are the main duties of the representative bodies in connection with restructuring / insolvency proceedings?

In general, the law requires that representative bodies are fully aware of the financial situation of the company at all times, especially during financial difficulties. They must undertake reasonable efforts to overcome the reasons for insolvency, e.g. by pursuing restructuring measures with immediate effect.

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 institution of insolvency proceedings is filed in due time (see point 6 above).

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 above).

Once insolvency proceedings have been declared, the representative bodies have the obligation to collaborate with the insolvency administrator.

Furthermore, the representative bodies have to ensure that the company is able to fulfil the obligations that they conclude on its behalf. If they enter into agreements in awareness of the fact that the company will probably not be able to fulfil them and without informing the other party about the financial difficulties, they risk being held personally liable for any damages. 

An insolvency administrator is appointed in the court order that opens the insolvency proceedings. In this order, the judge can decide whether to intervene or suspend the representative bodies of the company. From that moment on, the debtor’s right to administer and dispose of assets belonging to the insolvency estate is transferred to the insolvency administrator, except in the case of intervention when the representative bodies of the company still retain some of their powers to administer the company and continue to operate under the supervision/approval of the insolvency administrator.

However, in both scenarios the representative bodies have duties of disclosure and cooperation in order to assist the insolvency administrator with the fulfilment of its duties.

In pre-insolvency restructuring proceedings, it is usually the debtor who conducts the negotiations and it is the representative bodies of a company that notify the court of the outcome. In addition, in out-of-court payment agreements, an insolvency mediator is appointed to conduct the negotiations.

9. What are the main duties of shareholders in connection with restructuring / insolvency proceedings?

Shareholders are under no direct obligation to comply with the duty to file for insolvency (see above). However, if a company has no management, e.g. because all managing directors have resigned or been removed by the shareholders, each shareholder is responsible for the duty to file for insolvency. Also, the Spanish Insolvency Act legitimates shareholders filing a petition when they are liable for the debts of the company.

Personal liability of shareholders may arise if they refuse to capitalise or are de facto administrators. However, the legal hurdles for such liability are rather high. 

10. Are the shareholders of a company involved in restructuring / insolvency proceedings?

In general, shareholders have no right to make decisions on assets belonging to the insolvency estate. The shareholders can cooperate with the management of the debtor, especially in the event of intervention.

Shareholders can be involved in the restructuring process of a company when an insolvency plan is drawn up. This is a type of overall settlement with the creditors which allows for the most varied of provisions, such as determining satisfaction quotas for certain groups of creditors. 

11. Is a solvent liquidation of the company an alternative to regular insolvency proceedings?

The decision between dissolving a company and filing for insolvency shall be based on whether the company is only affected by grounds for dissolution, 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 avoid the liability described above. 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.

Therefore, dissolving a company is not a real alternative to insolvency proceedings.

The current regulation is the one set out in the Spanish Insolvency Act, Article 5 bis. However, the implementation of Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, is still pending.

13. What is the average success rate after completed restructuring / insolvency proceedings?

Creditors have to register their claims against a debtor in the list of creditors and have to trust that the insolvency assets are sufficient for proportional satisfaction. 

Unfortunately, according to information provided by Axesor’s Cabinet of Economic Studies, only around 6% of companies are able to pay the due claim amounts to their creditors and continue with the activity of the company.

Juan Ignacio Fernández Aguado
Carmen Catalá Puente