The Spanish bankruptcy procedure, alternative solutions and special rules arising from COVID-19
The economic crisis arising from the outbreak of the coronavirus has caused serious trouble to lots of individuals and companies in terms of liquidity. In case a company is unable to obtain the necessary funding or unable to adapt to the circumstances, a bankruptcy procedure (in Spanish: “Concurso de Acreedores”) is a common solution in Spain. This proceeding could end in two different ways:
- an agreement with the creditors so as to decrease and postpone the payment of debts, or;
- the liquidation of the company for the purposes of selling assets and paying debts.
The most of the bankruptcy procedures in Spain end up in liquidation. However, given the extraordinary situation, there are some rules that were established in order to try to avoid this.
Special rules arising from the Covid-19
If the company meets certain requirements, it is then legally mandatory either to start a bankruptcy procedure or to choose between one of the alternative solutions previous to the initiation of the said procedure. Otherwise, the directors of the company could be held personally liable for paying the debts. Several measures were taken in order to protect the directors of such liability. The goal of these measures is also to try to avoid the liquidation of the company.
Hereunder some of the most important measures:
- The legal ground for dissolution of the companies due to revenue losses loss has been suspended, meaning that the revenue loss of the financial year 2020 will not be taken into account.
- The courts will not admit those bankruptcy claims filed by creditors aiming to declare a company bankrupt until 31 December 2020.
- In case a debtor files a voluntary bankruptcy claim for itself before 31 December 2020, this claim shall prevail over previous bankruptcy claims filed by the creditors of the company.
- The obligation to request the liquidation of the company in case of a breach of the bankruptcy agreements approved by companies already involved in a bankruptcy proceeding is suspended.
- Those credits arising from the funding provided by those individuals specially connected to the bankrupt company shall be rated differently as they will have to be considered as ordinary credits instead of subordinated credits.
- It is allowed to modify the refinancing agreements already approved in court and the bankruptcy agreements already approved and in force.
Previous solutions as an alternative to the bankruptcy procedure
The existence of these rules is focused on giving more opportunities than the previous alternative mechanisms set out in the Spanish Insolvency Law (in Spanish: “Ley Concursal”), since it will be possible to enforce them within a longer term. Three are the legal mechanisms that have been set out in order to try to avoid the initiation of a bankruptcy procedure ending up in a company liquidation:
- The non-judicial payment agreement: this is meant for debtors with numbers in terms of assets and liabilities below five million euros and less than 50 employees, counting on enough resources to guarantee the costs arising from the agreement itself.
- The refinancing agreement within the bank field, which suspends the obligation to request the initiation of a bankruptcy proceeding and allows the refinancing of the bank debts.
- The so-called “preconcurso”, which focuses on reaching an agreement with the creditors that will be later accepted in court.
The purpose of these three mechanisms is to avoid the initiation of a bankruptcy procedure ending up in the liquidation of the company.
The Bankruptcy procedure
The bankruptcy procedure is complicated and it is initiated when either an individual or a company becomes insolvent and cannot afford the payment of the debts. The goal of this procedure is to pay, even if partially, the credits against the debtor, avoiding the preferential payment of some credits over others and making a payment distribution among creditors. This proceeding can be initiated in case the debtor is bankrupt, this is to say, when not complying with its obligations in a regular way and on time.
There are two types of bankruptcy procedures: the voluntary bankruptcy procedure (initiated by the debtor) and the necessary bankruptcy procedure (initiated by the creditors or any legitimate party). When the debtor is the one filing the bankruptcy claim (voluntary bankruptcy procedure), its state of insolvency can be “current” or “imminent”, understanding by “imminent” when the debtor foresees “that complying with the obligations on a regular basis will not be possible” (even though the debtor will have to justify its indebtedness and its state of insolvency). When the creditor is the party who requests the declaration of bankruptcy (or any other legitimate party), the creditor will have to base the insolvency on a certain document of enforcement or the existence of some circumstances that prove the insolvency. With regard to the time to request the declaration of bankruptcy, the Spanish Insolvency Law obliges the debtor to request it within short terms, which have been modified while the state of alarm is in force in Spain. It is therefore important to contact a lawyer as soon as possible who can assist you properly and know what to do. At the time the court analyses the bankruptcy claim, it is decided whether it is admitted or not.
The initiation of a bankruptcy procedure affects the debtor in some ways and also the creditors and the pertinent contracts. It is very important to keep in mind that this procedure exists, even in case your company is experiencing some difficulties and foresees that will not be able to comply with its obligations or if you are a creditor and have a credit against a supplier that has not complied with its payment obligations.
The bankruptcy procedure is complicated. The Spanish insolvency Law is applied to several issues, hence the importance to be well advised at the right time. Should you have any query in this matter, please do not hesitate to contact our lawyers specialized in commercial and bankruptcy law.