Most Relevant Aspects of the New Insolvency Law
The opportunity to present this article is timely, as an important reform of insolvency regulation recently came into force in Spain.
This regulation is set out in a single text, Royal Legislative Decree 1/2020 of 5 May, which approves the revised text of the Insolvency Law (Texto Refundido de la Ley Concursal or TRLC), and its last amendment introduced by Law 16/2002 of 5 September 2002.
The main objective of the regulation, as stated in the TRLC preamble, is to safeguard businesses and the jobs they support. To this end, the law distinguishes between standard insolvency proceedings and what is termed pre-bankruptcy proceedings. Pre-bankruptcy proceedings allow businesses to address insolvency situations without having to go through the judicial system.
In addition, the aforementioned amendment has introduced a special procedure for entities known as “micro companies” aimed at minimising both the time and costs involved. These entities, either businesses or individuals, qualify for this procedure owing to their smaller size and because they meet certain criteria.
Another novelty contained in the reform is the incorporation into Spanish law of European Union legislation in relation to the insolvency proceedings of natural persons, in particular the regulation of the so-called “Benefit of Exoneration of Unsatisfied Liabilities” (BEPI).
This article will first examine the so-called pre-bankruptcy law. This will be followed by a review of the most relevant aspects of this regulation in relation to the insolvency proceedings of natural persons. Finally, there will be an analysis of the special procedure contemplated for micro companies.
Pre-bankruptcy Law: The Restructuring Plan
The TRLC provides a way for businesses to avoid insolvency by reaching an agreement with their creditors, known as a Debt Restructuring Plan (DRP). A DRP can be approved without the need to file for insolvency proceedings, but it may be preceded by a communication to the court of the commencement of negotiations with creditors.
Once the communication to the court is made, a period of three months begins during which the debtor and its creditors can try to reach a restructuring plan. During this period, no enforcement actions can be initiated or continued against the debtor’s assets and rights that are necessary for the continuity of its business.
If such a restructuring plan is not reached, the debtor must file for insolvency proceedings within the following month.
The essential features of a restructuring plan are as follows:
The Plan must be judicially approved if it is intended to extend its effects to creditors who have not voted in its favor, to terminate contracts in the interest of restructuring, or to protect any transaction carried out under the Plan (financing granted, etc) from possible rescission.
Insolvency Proceedings of Natural Persons
Although there is nothing to prevent natural persons from using the general insolvency proceedings, with the necessary adjustments due to their status as natural persons (including the provision of specific documentation, shorter processing time, etc), the primary motive for natural persons to initiate such proceedings is to get their debts discharged.
This is the so-called “Benefit of Exoneration of Unsatisfied Liabilities” (BEPI), an essential distinguishing factor in the regulation of natural persons’ insolvency compared to legal entities. The latter cannot avail of such an exoneration; as legal entities, they can only approve an agreement and thus continue with their activities, or they face liquidation.
With this in mind, for a natural person to secure BEPI, the following is required:
In both cases, to secure BEPI, a set of subjective requirements are imposed on the personal debtor that centre around their status as a debtor in good faith. This means they must not have been declared bankrupt or have been convicted of crimes against assets, public finances, or against workers in the previous ten years.
In any case, certain credits are not subject to exoneration, including public law credits with a limit of up to EUR10,000, alimony credits, or the expenses and costs for the processing of the bankruptcy.
Special Procedure for Micro Companies
For the first time, a distinct and exclusive regulation has been introduced in insolvency legislation for a specific class of companies, namely micro companies.
The justification for this tailored regulation lies in two factors. Firstly, a majority of companies that undergo insolvency proceedings ultimately face liquidation. Secondly, the economic landscape of Spain comprises a substantial proportion of companies that qualify as micro companies. These factors necessitate a unique treatment for such entities in insolvency proceedings, aiming to reduce procedural costs and duration given their smaller size and structure.
The objective is to expedite the process for a viable micro company to reach an agreement with its creditors, and likewise, for non-viable micro companies to be liquidated as promptly as possible.
The defining attributes of micro companies include having fewer than ten employees, a turnover of less than EUR700,000, or liabilities of less than EUR350,000, all as per the annual accounts corresponding to the last fiscal year.
Initiating the process, any company or individual meeting the aforementioned criteria and experiencing current, imminent (within three months), or probable insolvency (predicted within up to two years) may apply for insolvency proceedings, which will follow this special procedure.
As outlined, this procedure is marked by a streamlined approach, incorporating remote participation (for hearings, appearances and declarations) and electronic communication, along with the use of forms. However, as a counterweight to these simplified formalities, the provision of significantly inaccurate information or documentation is regarded as a cause of fraudulent insolvency.
Similar to the general procedure, the micro-company procedure can be preceded or not by a negotiation period with creditors. This period is capped at a non-extendable three months. After this period, without an agreement, insolvency proceedings must be filed, provided actual insolvency is present (but not if it is imminent or probable).
During the negotiation period,judicial or extrajudicial enforcements against assets and rights vital to ongoing activity (except for public creditors) are suspended, and creditors are barred from filing for insolvency proceedings.
The special procedure for micro companies can be processed in two ways, outlined below.
Continuation plan
For this to occur, a Continuation Plan must gain be approved by creditors, which must be sanctioned in order to affect public law claims, barring certain exceptions. Alongside the application for the Continuation Plan, it is possible to request, among other measures, a temporary hold (maximum of three months) on enforcement against the assets or rights required to maintain business operations.
Liquidation proceedings
This takes place at the debtor’s request when the Continuation Plan is not approved, sanctioned, or complied with. It is very important to note that if the debtor is behind on its tax or social security obligations accrued since the commencement of the insolvency proceedings, liquidation proceedings can also be instigated.
During the liquidation proceedings, specific measures may be requested. The most important of these is a temporary hold (up to three months) on the enforcement against secured claims on assets or rights required to maintain business operations.
Liquidation is carried out through an electronic platform system and cannot exceed three months, although this can be extended by an additional month under certain conditions.