What happens with the foreign subsidiaries of a company that goes bankrupt?

Mireia Bosch & Fernando J. García, Dpto. Civil-Mercantil / Socio Director, AGM Abogados – Barcelona

In the current economic context of global crisis, in which applications of bankruptcy have increased dramatically in recent years to almost collapse the daily activities of Commercial Courts, it is appropriate to determine in advance what will be the legal regime applicable to insolvency proceedings, and what will be in each case the effects of the implementation of such a legal regime.

The legal regime applicable to the declaration and conduct of bankruptcy proceedings of a Spanish parent company, whose center of main interests is in Spain, does not necessarily coincide with the legal regime applicable to their foreign affiliates. They are usually constituted as companies under foreign law and they will have a different legal regime than that applied to the Spanish parent company.

If a Spanish society has its center of main interests in Spain or if its domicile is also located in Spain but in a place other than their center of main interests, the creditor will be able to choose a Commercial Court of competent jurisdiction in either place. A center of main interests is the place where the debtor carries the administration of those interests on a regular basis and in a recognizable way by third parties. It is presumed by law that the center of main interests of a society lies in the same place in which the registered office is located at, being ineffective for this purpose the change of address made in the six months prior to the application of insolvency. In this case, if the parent company is declared insolvent, they will face a primary bankruptcy proceeding (concurso principal), whose scope is universal, that is, it reaches out to all the debtor’s assets, whether located inside or outside Spain.

If the company’s center of main interests was not in Spanish territory but they have some of their premises therein, a Mercantile Judge of competent jurisdiction will be appointed. If there are different premises in different Spanish jurisdictions any of the competent Judges will be appointed, at the applicant’s request. Premises (establecimiento) include any place in which the company operates where non-transitory economic activity with goods and human resources is carried out. In this case we are dealing with a territorial bankruptcy proceeding (concurso territorial), which will not be universal in scope so that its effects are limited to the assets of the debtor located in Spain, whether or not are earmarked to their activity.

Therefore decisions regarding the establishment of subsidiaries under certain foreign laws (whether or not European Law) and the location of the center of main interests in one country or another will be key factors to submit the declaration and handling of a bankruptcy proceeding to the jurisdiction that is most beneficial and appropriate for the interests of each and every company.

Mireia Bosch & Fernando J. García
Dpto. Civil-Mercantil / Socio Director
AGM Abogados – Barcelona

The information included in this Newsletter is intended for guidance purposes only and should not be regarded as a substitute for taking proper legal advice.

Author: Mireia Bosch & Fernando J. García, Dpto. Civil-Mercantil / Socio Director, AGM Abogados – Barcelona

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