Insolvency and bankruptcy in Spain: how do the proceedings work?

Spain’s new Bankruptcy Law: how does the spanish bankruptcy process work?

Understanding the insolvency and bankruptcy laws in Spain can be a daunting task for any business, particularly during unprecedented times of economic stress. This article aims to provide an insightful journey into the intricacies of bankruptcy proceedings in Spain. The recent global events, most notably the COVID-19 pandemic, have placed significant financial strain on businesses in Spain, amplifying the importance of understanding the legal landscape surrounding insolvency and bankruptcy. We will delve into the specifics of these procedures, their advantages to debtors and creditors alike, and the impact of Spain’s new bankruptcy law.

Bankruptcy in Spain

Bankruptcy, also known as “concurso de acreedores” is a legal status of a person or entity that cannot repay the debts it owes to creditors. It is a legal process initiated either by the debtor (concurso voluntario) or by the creditors (concurso necesario), wherein attempts are made to resolve the debtor’s financial troubles, usually through restructuring of debts for both individuals and businesses. This allows for a controlled, court-supervised mechanism of debt repayment.

Under Spanish legislation, bankruptcy proceedings are guided by the Spanish Bankruptcy Act of 2003, a comprehensive framework established to manage such insolvency scenarios. The Act helps to ensure that the assets of the insolvent are fairly distributed among the creditors and to provide a fresh start for the debtor.

In September of 2022, however, Spain implemented significant reforms to its insolvency regulations with the introduction of the Spanish Law on Insolvency. This new law transposes the European Directive UE 2019/1023, adopted in 2019, and aims to address the limitations of the existing insolvency system in Spain. The primary intent of this legislative update is to streamline filings and introduce new rules for managing bankruptcy proceedings, reflecting the evolving realities of business and financial distress.

Why does somebody file for bankruptcy?

Filing for bankruptcy is typically a last resort for individuals or businesses facing insurmountable financial difficulties. There are several reasons why someone might choose to file for bankruptcy, as well as advantages for both debtors and creditors in engaging in the process.

Filing for bankruptcy in Spain is not what entrepreneurs think about when starting a company in Spain, can be a strategic move for both debtors and creditors in the face of insurmountable financial challenges. For debtors, be they individuals or businesses, the decision to file for bankruptcy often comes when liabilities significantly outweigh assets and there is no foreseeable way to meet financial obligations. Bankruptcy can provide a fresh start by eliminating debts or constructing a realistic plan to repay them.

From a creditor’s perspective, supporting or initiating a bankruptcy process can be a way to recoup at least a portion of owed debts. In a bankruptcy proceeding, assets of the debtor are liquidated under court supervision, and the proceeds are used to repay the creditors. In cases where the debtor is a business, the company can be restructured to become profitable again, ultimately enhancing the chances of debt recovery for creditors.

Advantages for the debtor

• Debt relief: The main advantage of bankruptcy is that it provides a legal process to eliminate or reduce certain debts. This can offer the debtor a fresh start financially.
• Protection from creditors: Bankruptcy proceedings automatically stay, or stop, the collection efforts of creditors. This provides temporary relief to the debtor while the bankruptcy process is ongoing.
• Organized debt repayment plan: Bankruptcy can help organize a more manageable debt repayment plan for the debtor.
• Exemption from personal liability: A diligent manager who applies for bankruptcy proceedings is exempt from any type of personal liability. This means they cannot be held personally responsible for the debts of the company.

However, there’s a catch. If the manager does not apply for bankruptcy within two months from when the situation of insolvency is apparent, or such insolvency is anticipated, they could be held personally liable. This two-month timeline is a crucial window for the manager to act and safeguard their personal assets from being targeted for debt repayment.

Advantages for the creditors

• Early initiation of insolvency proceedings: In Spain, the necessary Bankruptcy Procedure (Concurso necesario) has a dual objective. On one hand, it allows the initiation of insolvency proceedings before the debtor has the chance to “organize” their assets, potentially safeguarding more of the debtor’s resources for repayment.
• Rewarding diligent creditors: On the other hand, it rewards the diligent creditor by classifying 50% of their claim as privileged over ordinary claims. This means that these creditors have a higher priority in the repayment queue, increasing their chances of recovering more of the debt.
• Protection of claims: Bankruptcy proceedings can help protect the claims of creditors by ensuring a legal and structured process for the distribution of the debtor’s assets.
• Equal treatment: The bankruptcy process ensures that all creditors are treated fairly according to the legal priorities of their claims.

Spain’s new Bankruptcy Law: what does it mean for restructuring plans?

In September 2022, a reform of the Spanish Bankruptcy Act entered into force, transposing into Spanish law the EU Directive 2019/1023 of the European Parliament and Council on preventive restructuring frameworks, debt discharges and disqualifications, and measures to increase the efficiency of restructuring, insolvency, and debt relief procedures.

This reform, as explained in the preamble of the Spanish Bankruptcy Act 16/2022, was ambitious in its scope, aiming to address the limitations of the existing insolvency system in Spain that affected both pre-bankruptcy tools, as well as the excessive duration of bankruptcy procedures or the scarce use of the “second chance” provision.

In response to these issues, the law approved in September proposed a significant reform that:

• Introduced restructuring plans as a pre-bankruptcy instrument, aimed at preventing or overcoming insolvency. This allows for measures to be taken in the face of financial difficulties of an individual professional or a company earlier than previous pre-bankruptcy instruments allowed. This helps to avoid the stigma associated with bankruptcy and increases its effectiveness by incentivizing earlier restructuring of liabilities and contributing to the decongestion of the courts.
• Abolished the current pre-bankruptcy instruments to which the debtor can only resort in a situation of imminent insolvency.
• Reformed the bankruptcy procedure to increase its efficiency, introducing procedural changes to make it more agile, facilitate the approval of an agreement when a company is viable, and achieve a quick liquidation when it is not.

This new law was a response to the increase in business bankruptcy declarations, especially small-sized companies affected by the lockdown measures during the coronavirus pandemic. By introducing restructuring plans, it provided these struggling businesses with an early intervention tool to manage their debts and potentially avoid bankruptcy.

Acquiring a Business Unit During Bankruptcy Proceedings

When filing for bankruptcy in Spain, a company can opt to sell a business unit or a part of its assets to offset the debt. This process is typically overseen by a court-appointed trustee or administrator who ensures that the sale is carried out transparently and that the proceeds are used to pay off the creditors.

This process, known as asset liquidation, involves identifying business units or assets that are saleable, valuing them appropriately, and then marketing them to potential buyers. These assets could include real estate, machinery, inventory, intellectual property, or even entire operating divisions of the company.

The objective of selling assets during bankruptcy is to generate funds to repay creditors, and it can also allow the company to eliminate unprofitable segments and focus on profitable ones. This strategy can be a part of a broader restructuring plan, with the goal of enabling the company to emerge from bankruptcy in a more stable financial position.

Who can file for bankruptcy in Spain?

In Spain, both individuals and businesses can file for bankruptcy if they are unable to meet their financial obligations or are facing insolvency. The Spanish Bankruptcy Act, or Ley Concursal, governs the bankruptcy process in Spain and outlines the different types of bankruptcy available to debtors.In Spain, the following entities are entitled to file for bankruptcy:

• Individuals: This can be a self-employed person, also known as an ‘autónomo’, or a private individual who is unable to meet their financial obligations.
• Companies: Any commercial or civil company registered in Spain can file for bankruptcy. This includes small and medium-sized enterprises (SMEs), large corporations, and family businesses.
• Legal Entities: This can be non-profit organizations, associations, or foundations that are insolvent and cannot meet their financial obligations.
• Entrepreneurs: This category includes any individual who carries out business activities, whether they’re self-employed or operate through a company structure.

Remember, the key requirement to file for bankruptcy is insolvency in Spain – the inability to meet financial obligations when they are due. Regardless of the type of debtor, when insolvency arises, the Spanish Bankruptcy Law mandates that the debtor must file for bankruptcy.

Procedure for Filing for Bankruptcy in Spain: A Step-by-Step Guide

The process of filing for bankruptcy in Spain comprises a series of steps, each essential in its own right.

• Preparation of Necessary Documents: The process starts with the preparation of necessary documents. These include financial statements, a detailed list of assets, a comprehensive list of creditors with corresponding claims, active contracts, and a thorough report delineating the causes of insolvency.
• Submission of the Bankruptcy Petition: Following this, the debtor or the creditor presents the bankruptcy petition to the commercial court, backed by all the relevant documents.
• Court’s Review: The court then proceeds to review the petition, aiming to affirm the state of insolvency. If the petition stands its ground, the court officially declares bankruptcy of the debtor.
• Appointment of Bankruptcy Administration: Subsequent to the declaration, the court appoints a bankruptcy administrator. The administrator’s role is to manage the debtor’s assets and liabilities effectively.
• Development of a Bankruptcy Plan: In the next step, the debtor or the bankruptcy administration formulates a bankruptcy plan. This plan provides a detailed outline of the debtor’s approach towards debt repayment. It is within the creditors’ rights to either agree or disagree with this plan.
• Implementation: Upon the creditors’ acceptance of the plan, the latter is implemented. The execution could involve a series of actions such as business restructuring, asset selling, or complete liquidation of the business.
• Closure: After all the actions prescribed in the plan are duly carried out, the court announces the bankruptcy closure.

An essential part of the procedure is the “Qualification of the Bankruptcy”, also known as “Concurso culpable,” which includes the phase “pieza de calificación”. It’s a process where the court determines whether the bankruptcy is culpable or fortuitous. If the bankruptcy is declared culpable, the court could impose certain disqualifications or penalties on the debtor, its administrators, or those who have contributed to the insolvency.

Under the new Spanish Bankruptcy Law of 2022, there is an “express process” available for small-sized companies with lower levels of assets and debts. The goal is to make bankruptcy proceedings more efficient and quick. The procedure is less formal and typically concludes within a shorter period.

Moreover, the new law has introduced digital forms to facilitate the bankruptcy filing process. These forms are designed to make the process standardized and more accessible to debtors, contributing to a more efficient handling of bankruptcy applications.

When Should One File for Bankruptcy?

Determining the right time to file for bankruptcy depends on various factors. Below is a concise guide for both debtors and creditors:

For the debtor:

• Income vs. Debt Payments: If your mandatory combined debt payments are surpassing your typical monthly income, considering bankruptcy may be a suitable step towards resolving your debt issues.
• Multiple Debts in Collections: Should you find yourself with more than one debt currently in the collections phase, bankruptcy may become an important consideration. This signifies that you’re lagging behind your minimum loan payments, and you might be exposed to legal repercussions from your creditors.

For the creditor:

• Non-Payment of Debts: If a debtor has consistently failed to pay their debts and appears insolvent, the creditor might contemplate filing for bankruptcy on their behalf (read more in our page dedicated to debt collection in Spain). This can safeguard the creditor’s rights and potentially recover part of the outstanding debt.
• Signs of Future Non-Payment: If the debtor’s financial status indicates a substantial risk of future non-payment, initiating bankruptcy proceedings could be the right move. This step might prove beneficial if the debtor’s financial condition is likely to worsen over time.

Bankruptcy is a serious decision that has profound financial and legal implications, so it’s advised to seek professional advice before deciding on this course of action.

Consequences of Failing to Request Bankruptcy for Companies in Spain

A company that fails to initiate insolvency proceedings when facing insolvency in Spain can encounter significant consequences.

• Late Filing: Spanish legislation imposes a duty on the company directors to file for insolvency within two months from the time they became aware or should have been aware of the company’s insolvency. Failing to do so can have serious implications.
• Personal Liability: The directors may be held personally liable for the company’s debts if they fail to file for insolvency in a timely manner. This is particularly true if, as a result of this delay, the company’s assets are insufficient to cover the company’s debt.
• Compulsory Insolvency Proceedings: In some cases, creditors, workers, or even public prosecutors can force the company into compulsory insolvency proceedings (concurso necesario). This occurs if they can demonstrate that the company is unable to meet its regular payment obligations. The creditor who initiates the compulsory insolvency proceeding is also granted preferential status for 50% of its claim, compared to other ordinary claims.
• Sanctions: Besides, the late initiation of insolvency proceedings could lead to sanctions, disqualifications, and even potential criminal liability for company directors in certain circumstances.

Therefore, initiating bankruptcy proceedings on time is not just a necessity for struggling companies, it’s a legal obligation that, if neglected, could have far-reaching implications.

Filing the Petition for Bankruptcy

The process for filing a petition for bankruptcy in Spain is systematic and clearly laid out:

1. Commercial Court: The petition for bankruptcy, or concurso de acreedores, is to be filed at the Commercial Court (Juzgado de lo Mercantil) in the province where the debtor has their principal place of business. It is this court that hears the bankruptcy case.
2. Legal Representation: The company should confer power of attorney to a law firm that specializes in insolvency proceedings. This is a critical step as insolvency procedures are complex and require expert knowledge to navigate effectively.
3. Document Submission: Along with the petition, several key documents must be submitted. These documents typically include the company’s balance sheet, a profit and loss statement, and a comprehensive list of creditors and the respective amounts owed to each.
4. Spanish Insolvency Register: Following the court’s declaration of insolvency, the decision is published in the Official State Gazette (Boletín Oficial del Estado) and is also recorded in the Insolvency Public Registry (Registro Público Concursal). This registry is a public platform providing detailed information about insolvency procedures in Spain. By offering transparency and traceability in insolvency proceedings, it serves as a vital resource for creditors and debtors alike.

Requirements for Filing for Bankruptcy in Spain

In Spain, the process of filing for bankruptcy, or concurso de acreedores, is governed by strict requirements set forth in the country’s insolvency laws. These requirements aim to ensure that bankruptcy is an option only for those in severe financial distress. Here are the main prerequisites:

1. State of Insolvency: The most critical requirement for filing for bankruptcy is the state of insolvency. This state can be either current or imminent. Current insolvency means that a debtor is already unable to fulfill their financial obligations. On the other hand, imminent insolvency refers to a situation where a debtor is anticipated to be unable to meet their financial obligations in the near future.
2. Voluntary or Necessary Bankruptcy: In voluntary bankruptcy, it’s incumbent on the debtor themselves to file for insolvency within two months of becoming insolvent. In contrast, necessary bankruptcy can be instigated by a creditor if they can convincingly demonstrate the debtor’s insolvency.
3. Legal Representation: The entity or individual declaring bankruptcy must be legally represented. Given the complexity of bankruptcy procedures, it is recommended that the debtor confer power of attorney to a law firm specialized in insolvency proceedings.
4. Detailed Documentation: Filing for bankruptcy requires exhaustive documentation reflecting the debtor’s financial status. This includes a comprehensive list of assets and liabilities, a list of creditors along with the amounts owed to each, an inventory of goods, financial statements, and a statement outlining the reasons for the insolvency.
5. Operating Entity: The debtor must be an operational entity, which could be an individual who is a professional or a trader, or a legal entity such as a company or corporation. This stipulation excludes individuals who do not conduct any business activities.

Once the bankruptcy process has been initiated, a commercial court oversees it, managing and distributing the debtor’s assets under court supervision.

How is Bankruptcy Declared?

When bankruptcy is declared in Spain, the process that follows is structured and systematic. If the insolvency of the debtor is proven, a legal administrator is appointed by the court to take control of the debtor’s assets. The administrator’s role is to ensure that the debtor’s assets are fairly distributed among the creditors according to the priority established by Spanish insolvency laws.

First, the administrator prepares an inventory of the debtor’s assets, including properties, accounts receivable, cash, investments, and any other valuable items. Simultaneously, a list of the debtor’s debts is compiled. This list includes all creditors, the amount each creditor is owed, and the nature of each debt.

After this, the assets are sold off, usually through a liquidation sale. The process of liquidation involves converting the debtor’s assets into cash, which is then used to repay the creditors.

The priority of debt repayment is set out in the Insolvency Act and typically follows this order: secured creditors, preferential creditors (including employees and tax authorities), unsecured creditors, and finally, shareholders or owners of the company.

It’s important to note that declaring bankruptcy doesn’t necessarily mean the immediate end of a business. In some cases, a reorganization can occur where the business continues to operate while repaying its debts under a court-approved plan. The aim here is to allow the business to recover financially while also repaying its debts in a manner that is more manageable.

What Happens After the Declaration of Bankruptcy?

After the declaration of bankruptcy in Spain, both the debtor and the creditors are impacted in several ways:

Effects on the Debtor:

• The court appoints an ‘administrador concursal’. This appointed official manages the debtor’s assets to maximize their value for creditors.
• The initiation of the bankruptcy proceedings is published in the BOE (Boletin Oficial del Estado). This registry publicity enables the creditors and other authorized entities to understand the state of the process and its effects on the debtor.
• From the declaration of bankruptcy, the debtor’s right of retention over assets included in the active mass is suspended. This means that the debtor can no longer withhold assets from being used to satisfy creditors’ claims.
• Additionally, the bankruptcy declaration interrupts the statute of limitations for actions against the debtor concerning debts prior to the declaration. This ensures that the debtor cannot escape their liabilities due to the passage of time.
• The debtor is protected from legal action by creditors seeking to collect on discharged debts. Creditors cannot sue or demand repayment from the debtor during the bankruptcy proceedings.

Effects on the Creditors:

• The initiation of the bankruptcy proceedings is published in the BOE (Boletin Oficial del Estado). This allows creditors to communicate their claim or formally join the proceedings.
• It’s important to differentiate between communicating a claim and joining the proceedings. When a creditor communicates a claim, they are simply notifying the administrador concursal of an outstanding debt owed by the debtor. However, formally joining the proceedings involves becoming a part of the bankruptcy process and being involved in significant decisions like asset liquidation and payment acceptance.
• Once the debtor’s assets have been liquidated by the administrador concursal, payments are made to the creditors. This repayment follows a hierarchy of priority, as outlined in the bankruptcy law.
• With the bankruptcy process published in the BOE, creditors have the opportunity to either communicate their claim or join the proceedings. Communicating a claim involves notifying the administrador concursal of the outstanding debt, while joining the proceedings requires participation in significant decisions regarding the bankruptcy process.

In summary, the bankruptcy declaration process significantly impacts both the debtor and the creditors. The goal is to manage the debtor’s assets efficiently to settle their debts and ensure a fair outcome for all parties involved.

How Lawants Can Assist with Insolvency and Bankruptcy Proceedings in Spain

Navigating insolvency and bankruptcy proceedings can be complex and fraught with challenges. Lawants can serve as an indispensable ally during these trying times, providing comprehensive services tailored to your specific needs in Spain:

1. Refinancing Agreements and Bankruptcy Avoidance: Lawants has expertise in strategizing and reaching refinancing agreements to help stave off bankruptcy. Their attorneys can negotiate on your behalf to secure agreeable terms with your creditors, potentially avoiding the need for insolvency proceedings.
2. Assistance with Restructuring Plans: If your business is struggling, but has a viable path to solvency, Lawants can provide guidance and assistance in formulating restructuring plans. They can offer you the best strategies to maximize your business’s potential, helping to put your company back on solid financial ground.
3. Sale of Production Units/Assets: Lawants can aid in the optimal liquidation of assets or sale of production units, ensuring your business gets the best possible return. They can guide you through every stage of the process, ensuring legal compliance while optimizing financial outcomes.
4. Reaching Agreements with Creditors to Restructure Debts: Lawants can facilitate the negotiation of agreements with creditors to restructure debts, aiming to reach satisfactory arrangements for both parties. Their attorneys can employ effective strategies to negotiate with creditors, potentially securing reduced payments or extended terms.
5. Business Viability Studies: Lawants can provide comprehensive business viability studies, offering in-depth analysis and insights that can inform critical decision-making processes. These studies can provide a clear picture of your business’s health and future prospects, helping guide your decisions and strategy.
6. Bank Negotiations: When it comes to discussions with banks, having Lawants on your side can make a significant difference. They can assist you in negotiating favorable terms for loans or other financial arrangements, potentially saving your business substantial amounts.

By partnering with Lawants, you can rest assured that you are availing of comprehensive, expert services designed to help you navigate the complex world of insolvency and bankruptcy proceedings in Spain.

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