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The new Insolvency Law (Law 22/2003 of 9 July 2003) provides for a single legal proceeding for situations of crisis caused by the insolvency of a common debtor. This insolvency proceeding is called “concurso de acreedores” (“creditors’ meeting”). A debtor is in a situation of insolvency if he cannot meet his liabilities on a regular basis.
The creditors’ meeting is the only proceeding that applies to both civil debtors and traders, regardless of whether they are natural or legal persons. Its main purpose is to satisfy the creditors’ claims as far as possible, although to achieve this aim the Insolvency Law encourages solutions that allow the company to continue in business and jobs to be saved.
Once an insolvency proceeding has been ordered, there is always an initial phase in which an inventory is made of the debtor’s assets and a list of the creditors, duly classified, is drawn up. Once the inventory and the list of creditors have been approved, there are two possible legal solutions:
A subjective prerequisite under Spanish law is that the debtor (whether a natural or legal person) must have legal personality. Only government agencies or bodies are exempt from insolvency proceedings.
The objective prerequisite is that the debtor must be in an economic situation of insolvency, defined as inability to pay his liabilities on a regular basis rather than being in a situation of net worth imbalance.
The insolvency proceeding may be applied for by the debtor, his creditors or the shareholders personally liable for the debts of the debtor company. Insolvency proceedings applied for by the debtor are voluntary proceedings, while those applied for by the other parties are compulsory proceedings.
The debtor has the right to apply for an insolvency order not only once he has become insolvent but also beforehand, when insolvency is imminent. Once the debtor actually becomes insolvent, this right becomes an obligation, and a formal application for insolvency proceedings must be made within two months. The application must be accompanied by a legal and financial report, an inventory of assets, a list of creditors and, if the debtor is a trader, the annual accounts for the last three years. The judge examines the documents submitted and if he finds evidence that the debtor is insolvent or about to become insolvent, issues an insolvency order.
If the application for insolvency proceedings has been made by the creditors, the judge grants a prior hearing to the debtor to allow him to contest the application. Under Spanish law, the existence of certain external events (non-payment of certain claims, or most of these claims, or concealment or unsuccessful attachment of assets) is sufficient evidence of insolvency. The debtor may contest the insolvency proceeding either because he denies these facts or because he is genuinely not insolvent. If the application is not contested, the judge opens the insolvency proceeding. If it is contested, a hearing is held in order to examine the evidence before the judge makes his decision.
Under Spanish insolvency law (Insolvency Regulation 1346/00) the judge competent to hear the case is the judge of the commercial court in whose jurisdiction is located the debtor’s main centre of interests, which in the case of legal persons is assumed to be the registered office. However, changes of registered office made in the last six months are not considered to be valid.
If an application is made for insolvency proceedings involving a debtor whose main centre of interests is located abroad, the competent judge is the commercial judge in whose jurisdiction the debtor’s establishment is located.
The decision to open insolvency proceedings must be published and registered. A notice is placed in the Official Gazette and also in a high-circulation daily newspaper in the province in which the debtor is located, and the decision is recorded in the civil and commercial registers and in registers of the debtor’s assets in which any rights of the debtor have been entered.
The judge directs the insolvency proceedings. He opens and closes the proceeding, ensures that the necessary formal procedures are carried out, supervises the actions taken by the administrators and resolves any disputes arising at any stage of the proceeding.
The role of the administrators is a complex one. They have to provide information to and cooperate with the judge while also representing the general interests of all the creditors and supervising the administration and disposal of the debtor’s assets.
Once the insolvency order has been issued, the creditors have a month in which to lodge their claims in writing, attaching the related supporting document for each claim. They may attend and participate in the proceeding in person, although they must do so formally through a court solicitor; however, they may lodge their claims and attend the creditors’ meeting called in order to vote on the creditors’ arrangement without the need for legal assistance and representation by a solicitor.
The creditors’ meeting is called in order to propose an arrangement to the creditors once the inventory and list of creditors have been approved. The meeting is attended by all the unsecured creditors. A quorum of creditors representing at least half the unsecured creditors is required for the meeting to be validly convened.
The debtor represents himself in the proceeding and must assist the administrators when required to do so.
Once the insolvency proceeding has been opened, all the debtor’s present and future assets and rights, except for non-attachable assets and rights, are attached. The opening of the insolvency proceeding is recorded in the registers in which these assets and rights are entered.
In order to prevent any of the debtor's assets being disposed of, the judge may either suspend the debtor's power to administer and dispose of these assets and confer these powers instead on the administrators, or allow the debtor to continue to exercise these powers under the supervision of the administrators.
The debtor’s business or professional activities continue unless the judge decides to close them down on the grounds that they will lead to financial ruin.
Measures that restrict the debtor’s fundamental rights (e.g. interception of correspondence, entry and search, house arrest, etc.) can only be taken if required in order to achieve a necessary objective, and must not be continued any longer than strictly necessary.
All the claims existing prior to the opening of the proceeding are attached. The creditors must lodge their claims so that they can be recognised and classified. Once the proceeding has been opened, the creditors’ claims cease to earn interest unless they are secured by collateral.
Any legal claim relating to the debt claim must be made before the judge in charge of the proceeding, and in such cases the effect of arbitral agreements is suspended. However, legal claims and arbitral proceedings initiated earlier continue until a judgment or award is handed down. This judgment or award can only be enforced through the insolvency proceeding.
Once the insolvency proceeding has been opened, enforcements involving assets and rights of the debtor that have been attached in the proceeding are suspended and no new enforcements can be initiated; the creditors must participate in the insolvency proceeding if they want their claims to be satisfied. As an exception, enforcements relating to labour and administrative matters initiated prior to the insolvency proceeding may continue unless they relate to assets that are necessary for the continuation of the debtor’s business or professional activities.
The opening of the insolvency proceeding does not in itself constitute grounds for the termination of contracts, and contractual causes that authorise the parties to terminate a contract on these grounds are invalid. Contracts may be terminated on other grounds such as breach of contract, but in these cases, once the insolvency proceeding has been opened, requests for terminations of contract must be submitted to the judge in charge of the proceeding.
Employment contracts are affected by the insolvency proceeding only inasmuch as the power to approve labour force reduction schemes and modify working conditions is transferred to the judge, who also has the power to reduce compensation agreed upon in the event of termination of senior management contracts.
In principle, the insolvency proceeding does not affect creditors whose claims are secured by collateral, i.e. who have liens on assets or rights of the debtor. These creditors can participate in the insolvency proceeding, maintaining their preferential claims, or enforce the collateral without participating in the proceeding. The collateral can be enforced at any time, in which case the asset concerned is separated from the assets covered by the proceeding.
However, if the asset in question is used to carry out the debtor’s professional or business activities, enforcement of the collateral is suspended until an arrangement is approved that does not affect it or winding-up proceedings are initiated, either of which must be done within a year. Once the year is up, enforcement proceedings may be initiated or re-initiated, but these must be heard by the judge in charge of the insolvency proceeding.
This suspension also applies to actions for recovery of movable property sold under hire purchase or leasing arrangements, and actions for termination of property purchase and sale contracts owing to failure to make instalment payments.
A creditor’s claims on the debtor may not be offset against debts of the same creditor.
Once the proceeding has been opened, claims cease to earn interest unless they are secured by collateral or are salary claims. However, the latter are classified as subordinated debt.
The Law establishes a suspect period of two years prior to the opening of insolvency proceedings.
Disposals of assets by the debtor during this period may be annulled if they are detrimental. Generally speaking, the burden of proof that an act is detrimental falls on the insolvency administrators.
However, to make it possible to exercise the right to annul a disposal of an asset, the Law presumes, either by rebuttable presumption or “juris et de jure” presumption, that the act in question is detrimental. All donations and disposals between living persons free of charge, and payments of claims falling due after the opening of the insolvency proceeding, are presumed to be detrimental acts without admission of evidence to the contrary. Providing collateral for already existing debts and carrying out business transactions with relatives for a consideration, and in the case of a legal person, with the de facto and de jure director, the main shareholders or the group companies, are also presumed to be detrimental acts, but in this case evidence to the contrary is admitted.
When such an act is annulled, the asset received must be returned, or if this is not possible, its value at the time of the disposal plus any interest earned since then must be reimbursed. However, if the purchaser acted in bad faith, he must also pay damages.
An action to annul an act is compatible with other actions for reimbursement (invalidity, annulment, termination on grounds of fraud by creditors, etc.). All these must be heard by the insolvency judge at an incidental hearing. The incidental insolvency proceeding includes a phase for written submissions (application and reply) and a hearing to examine the evidence proposed and declared to be relevant, after which the judge hands down a judgment. This incidental proceeding, which is held concurrently with the insolvency proceeding, is used to resolve any declaratory lawsuit as part of the insolvency proceeding.
Only the insolvency administrators are authorised to bring this action. If they do not exercise this right, any creditor who has previously requested the administrators to exercise the right may do so himself. The action is brought against the debtor and the purchaser of the asset or right that has been disposed of. If the asset has been disposed of to a subpurchaser and is deemed to be one of the assets covered by the insolvency proceeding, a complaint must be brought against the subpurchaser and, if necessary, evidence provided that he did not act in good faith.
The insolvency administrators must draw up a list of creditors, in which the claims on the debtor are recognised and ranked, within two months of the opening of the insolvency proceeding. Prior to this, the creditors must lodge their claims within the month following publication of the opening of the insolvency proceeding. They must do so by sending a signed letter to the administrators together with the invoice or other document providing evidence of the claim. If the creditor fails to lodge his claim within the specified period it may be demoted from its original classification and classified as subordinated debt.
The administrators must consider not only the claims lodged but also any claims which came to their knowledge during their examination of the debtor’s accounts. Claims recognised by judgments or administrative certificates cannot be disputed, although their classification may be challenged.
The Law makes provision for three types of claim: preferential, unsecured and subordinate. Unsecured claims are claims that are not preferential or subordinate.
The Insolvency Law differentiates between two types of preferential claim: special and general. Claims with special preference are claims on specific assets or rights secured by collateral. Claims with general preference are claims on all the assets of the debtor that are covered by the insolvency proceedings, ranked in the following order:
Payment of subordinate claims is postponed until preferential and unsecured claims have been paid. The following are subordinate claims: claims lodged late, interest, fines and penalties and claims by creditors who have a special relationship with the debtor (in the case of a natural person, relatives, and in the case of a legal person, de facto and de jure directors, the group companies or the main shareholders).
Company reorganisations aimed at enabling the company to continue in business are usually carried out through creditors’ arrangements. After the initial phase during which an inventory is made of the debtor’s assets and liabilities, the debtor may propose an arrangement to his creditors, basically consisting of a debt reduction of not more than 50% and/or an extension of time of not more than 5 years. In addition, the creditors may make alternative proposals for the conversion of their claims into shares, the full or part disposal of the company provided that the acquirer undertakes to comply with the arrangement, or even the merger or spin-off of the company.
The proposed arrangement is accompanied by a proposal for debt repayment and a viability plan for the company, information on which is provided by the administrators.
A creditors’ meeting is called to accept or reject the proposed arrangement. Usually, the arrangement must be approved by at least half the unsecured creditors.
Once the arrangement has been accepted by the creditors it must be approved by the judge, who checks that the content of the arrangement and the procedures for approving it comply with legislation and hears any objections that have been lodged.
The debt reduction and/or extension of time affects unsecured and subordinate creditors, but not preferential creditors.
The insolvency proceeding does not conclude until the arrangement has been fully implemented. If the arrangement is not complied with, the company can be wound up.
During the insolvency proceeding, an application may be made to the judge for a redundancy arrangement (collective termination or suspension of employment contracts) with a reduction in the amount of compensation payable, provided that this is necessary in order to resolve the company’s financial situation. A substantial modification of working conditions can also be requested on the same grounds.
Winding up is the alternative solution to a creditors’ arrangement and is a subsidiary procedure. Winding-up proceedings are only initiated when expressly requested and when the arrangement has not been accepted, approved or complied with.
Winding-up means the dissolution of the debtor company or legal person.
The winding-up system is highly flexible, since it may involve either the sale of the company or of the production units, or the disposal of the debtor’s assets and rights either separately or in lots. The administrators may submit a specific winding-up plan; otherwise, the relevant legislation will apply. The preferred solution under Spanish legislation is the sale of the company or the production units so as to allow the company to continue in business and jobs to be saved. Both the winding-up plan and the disposals must be authorised by the judge.
The acquirer of the company receives it free of debts except for labour debts. However, the judge may waive payment of debts relating to funds paid out of the Wage Guarantee Fund.
The proceeds from the sale of an asset securing a preferential claim are used to pay this preferential claim before any other claims. After this, the proceeds from the realisation of the remaining assets are used to pay claims with general preference in the order indicated above. Any remaining funds are used to pay unsecured creditors, and any funds still remaining after that, to pay subordinate creditors.
However, there are other claims on the assets covered by the insolvency proceeding which arise after the opening of the proceeding. These must be satisfied as they fall due. If there are no funds to pay them, when the assets are realised preference is given to the claims of the creditors participating in the proceeding, except for claims with special preference in respect of proceeds from sales of assets on which there are special liens.
The insolvency proceeding concludes once the arrangement has been fully implemented or the debtor’s assets and rights have been wound up and the proceeds paid to the creditors. However, the insolvency proceeding does not terminate until no assets or rights remain that may be subject to the proceeding and the insolvency has been classified.
The classification is based on the reasons for the insolvency. It may be classified as fortuitous or culpable. An insolvency is fortuitous when it is not culpable. It is classified as culpable if it was brought about or aggravated by wilful misconduct or serious negligence on the part of the debtor and, in the case of legal persons, on the part of the debtor’s de facto and de jure directors or administrators. However, to make it easier to prove whether or not an insolvency is culpable, the Insolvency Law specifies the conduct for which the presumption of culpability does not admit evidence to the contrary and the conduct for which the presumption of culpability admits evidence to the contrary. If an insolvency is found to be culpable, the debtor or, in the case of legal persons, the debtor’s de facto or de jure directors or administrators are disqualified from performing commercial acts and managing the assets of others; in addition, they and their accomplices lose their economic rights in relation to the insolvency proceeding. Also, if an insolvency is found to be culpable, the de jure or de facto directors in the two years immediately prior to the declaration of insolvency may be ordered to pay all or part of the creditors' claims not satisfied in the winding-up.
Only the insolvency administrators and the public prosecutor can propose the classification. The creditors may only appear in court at the beginning in order to submit their pleas. If the proposed classification is “culpable insolvency”, the debtor and the other persons affected by the classification may contest it. If they do contest the classification, a hearing is held to examine the evidence, after which the judge hands down a ruling.
Once the insolvency proceeding concludes, the administrators’ accounts are presented so that they may be contested and, if necessary, approved by the court.
If the proceeding has concluded because there are no realisable assets, it may be re-opened at a future date if new assets or rights come to light. In the case of legal persons, the proceeding may be re-opened whenever this occurs, but in the case of natural persons, they may only be re-opened if the assets or rights come to light within five years following the conclusion of the proceeding.Top
Last update: 31-03-2006