On 25 August 2022, the Spanish Parliament approved the reform of the Insolvency Act, which entered into force on 26 September 2022. The reform was approved to transpose Directive (EU) 2019/1023 on insolvency, which aims to facilitate the preventive restructuring of viable companies and increase efficiency in insolvency procedures.
The amendment is far-reaching and aims to save companies rather than liquidate them, which is what currently happens in 90% of insolvency procedures. The following is a summary of the main novelties of the new law:
New pre-insolvency mechanism: the restructuring plan
A new pre-insolvency restructuring mechanism is introduced to replace the existing ones: the restructuring plan. The restructuring plan is aimed at ensuring the continuity of viable companies and avoiding insolvency.
The new mechanism enables companies to adopt virtually any restructuring measure, where each plan can be tailored to each company’s circumstances. Changes to the composition, terms and conditions or structure of both the assets and liabilities of the company or its own funds may be agreed. There may even be transfers of assets, production units or the entire going concern, as well as any necessary operational changes, or a combination thereof.
If certain majorities are obtained, the content of the plan can be applied to all types of creditors (financial, commercial, etc.), regardless of whether they have accepted the agreement, without the need for insolvency procedures.
A Restructuring Expert is established to assist the parties during the restructuring process and help draft the plan. Such experts must have specialised knowledge (legal, financial and business) as well as previous experience in restructuring processes.
They will be appointed voluntarily as a general rule, although they must attend in order to extend the effects of the restructuring plan to creditors who have voted against. Therefore, such experts are seen as a key figure in most restructuring procedures.
Relaxation of the requirements for restructuring procedures
Under the current rules, companies must be in a situation of current or imminent insolvency in order to resort to insolvency mechanisms. Under the new law, the new preventive restructuring mechanisms can be used in the likelihood of insolvency.
The likelihood of insolvency is considered to exist when it can be estimated that the company will become insolvent within the next 2 years. This is a very positive feature since it will enable companies to get a head start on restructuring without having to wait for cash-flow problems to occur.
Creation of pre-packs and simplification of the sale of production units
Until now, some courts had adopted their own agreements to establish common criteria for processing a pre-pack of production units, which consists of filing an insolvency application with the submission of a bid to buy one or several production units. The new law introduces an express regulation, which will provide greater legal certainty to the process. Rapid implementation is also sought by setting short deadlines for each step.
The reform allows for the possibility of requesting the judge to appoint an expert to collect bids from third parties to buy one or several production units, prior to the application for and commencement of insolvency procedures.
Whether or not the appointment of an expert has been requested, the bid to buy the production unit (or several of them) must be submitted together with the application for insolvency procedures. Subsequently, deadlines are envisaged for any interested parties to submit improvements to the bid submitted and for the insolvency practitioners to report on the bid(s), after which the court approves the sale to the highest bidder. That procedure could be processed within 5 weeks of filing the insolvency application.
Moreover, although the new law maintains the existence of company succession in the transfer of production units for employment and social security purposes, the aim is to put an end to the doubts as to which court has jurisdiction to declare its scope, which is currently disputed between the labour courts and the commercial courts. Thus, the new law establishes that the commercial court will have sole jurisdiction. In addition, the Constitutional Act on the Judiciary has been amended to give that jurisdiction to the commercial court judge.
Creation of a special procedure for micro-enterprises
The reform creates a specific procedure that will apply to micro-enterprises as from 1 January 2023, aimed at simplifying the judicial procedure in order to gain efficiency. Micro-enterprises are those which employ fewer than 10 persons and have an annual turnover not exceeding €700,000 or liabilities not exceeding €350,000.
Within that special insolvency procedure, continuation plans may be chosen, which is an instrument similar to the current creditor agreements but with a fundamental novelty: to facilitate their approval, creditors who do not vote against the proposal will be deemed to vote in favour of the plan. This is envisaged as a key for obtaining the necessary majorities for approving the continuation plans.
If liquidation is chosen, the assets will be realised through an electronic asset liquidation platform, although this platform is currently pending creation by the Ministry of Justice.
Changes to the determination of guilt
In addition to the insolvency practitioners’ qualification report, the new law will enable creditors to submit a reasoned report with a proposal to qualify the insolvency as culpable, when they represent at least 5% of the liabilities or hold claims for more than one million euros. That reform will make it easier to pursue the liability of the directors and managers of insolvent companies since, until now, creditors could only bring to the attention of the insolvency practitioners the facts of which they were aware.
AGM Abogados has a team of lawyers and economists with experience in restructuring procedures, which is why they can provide all the necessary services that the new law requires to successfully carry out the restructuring of any difficult business situation. Please contact AGM Abogados if you need any help.
Gustavo García Calbó, Lawyer
Crisis Management Area