The reform of Spanish insolvency law – Good news for Spanish companies

At the end of 2021, the Spanish government approved a draft reform of Spanish insolvency laws which transposes Directive (EU) 2019/1023 of 20 June 2019 on preventive restructuring frameworks into Spanish law.

The reform will bring about a complete change in insolvency procedures in Spain. So what are these changes and what effect will they have in practice?

Restructuring plans

Among other objectives, the reform aims to make pre-insolvency processes efficient. Indeed, the current Spanish insolvency system has obvious limitations. In fact, the use of pre-insolvency processes is low. This reduced use has meant that when Spanish companies enter insolvency proceedings, they do so in a situation of very advanced financial deterioration. Moreover, the excessive length of insolvency proceedings, on average 60 months, means that the vast majority of insolvency proceedings end in liquidation.

The first major innovation is the introduction of restructuring plans, which aim to eliminate the currently limited pre-insolvency processes by introducing a single flexible procedure and the possibility of binding dissenting classes, with appropriate safeguards.

The restructuring plans may well replace the current practice in Spain, where pre-insolvency situations are often resolved through refinancing agreements and out-of-court payment agreements.

This reform also aims to reduce judicial intervention, and is based on the majority support of creditors.

New concepts for restructuring

The bill introduces the following different concepts into Spanish restructuring plans:

  • Limited legal involvement

The intervention of the judge-commissioner is very limited, both in the preparation and in the execution of the plan. The court’s involvement in approving the plan is minimal.

It introduces the possibility of liquidation and restructuring plans.

  • Restructuring of part of a company’s liabilities

A restructuring plan will allow a debtor company to compromise all or part of its liabilities (excluding public, food, social and non-contractual debts).

  • Changes in shareholder rights

An important novelty is that shareholders may be forced to increase capital or make structural changes without their consent.

  • Non-consensual restructuring

Even more important is the introduction in Spain of non-consensual restructuring plans, allowing the court to approve a restructuring plan that has not been approved by all types of creditors, including the debtor as a legal entity. , often called cram-down or cross-class cram-down.

  • Challenges and non-compliance

The new process will also make it easier for people who oppose the plan to object to it and will allow non-compliance with the plan to be dealt with more effectively.

Personal insolvency

Changes will also be introduced concerning the insolvency of individuals, making the possibilities for exonerating individuals from unsatisfied debts more flexible, by linking this exemption to a standard of good faith.

Micro-enterprises

A special abbreviated insolvency procedure will also be introduced for micro-enterprises, defined as those with a value of less than two million euros or with fewer than ten employees, in order to reduce the fixed costs of an insolvency procedure. ‘insolvency.

The special abbreviated procedure aims to simplify insolvency proceedings for small businesses.

Efficient insolvency proceedings

The project also aims to improve the handling of insolvency proceedings and their efficiency. Unfortunately, the current insolvency proceedings in Spain lead to delays of several years in insolvency proceedings due to excessive “proceduralism”. The draft law introduces improvements in the procedure, such that the insolvency judge no longer has to wait for the insolvency administration to submit a final report before deciding whether to open the composition or liquidation phase, as this is currently the case, which always leads to significant delays.

Similarly, the obligation for the insolvency judge to approve a liquidation plan is abolished, without prejudice to the possibility for the judge to establish specific liquidation rules if he deems it appropriate.

Finally, an important novelty is the abolition of the meeting of creditors, substituting an agreement approval regime very similar to that envisaged for restructuring agreements.

As for other new features aimed at increasing efficiency, there will be an early warning system for companies that may find themselves in a situation of probable insolvency. These alerts will be issued by the ministries responsible for detecting such situations.

Pre-packages

The bill will also formally introduce into Spanish procedure the practice of “pre-pack” insolvency proceedings. Previously, the courts of Barcelona admitted them in practice without the need to apply for insolvency proceedings, and the courts of Madrid admitted them once the insolvency proceedings were declared, but under the draft law, this practice will now be formalized.

Court winding-up power

Finally, an important and innovative change is that insolvency judges will be able to directly liquidate a company when it is clear from the outset that there are no assets.

Is this a good thing for Spanish companies?

The project proposes what will be a real revolution in the regulation of insolvency in Spain and constitutes the most ambitious reform of insolvency law ever undertaken in this country. It will see a shift from insolvency court proceedings to a process involving far less courts, aimed at finding an effective solution to insolvency.

The new law is expected to be enacted and enter into force in June or July 2022.