In late August 2022, the Spanish Parliament passed the transposition into Spanish law of the Directive (EU) 2019/1023 of the European Parliament and of the Council, of June 20th 2019, on Preventive Restructuring Frameworks. The draft of this new Act was subject to multiple amendments and created great local expectations (also considerable controversy). The text finally enacted in Law 16/2022 introduces major reforms in the insolvency field which we hereby depict.
Introduction of the so-called “Restructuring Plans”
The transposition of the Restructuring Directive has entailed the abolishment of the preexisting pre-insolvency instruments (“Refinancing agreements” and “Out-of-Court Payment Agreements”) and their substitution by the so-called “Restructuring Plans” as the one and only pre-insolvency mechanism. The main feature of Restructuring Plans is their flexibility, as they can include virtually any restructuring measures affecting assets, liabilities or both. They can also foresee the sale of the company as a going concern.
In accordance with the wording of the Directive, the law allows debtors to resort to Restructuring Plans at an early stage (the likelihood of insolvency), sufficing that it is objectively foreseeable that, if no measures are adopted, the debtor will not be able to regularly comply with its obligations within the following two years. This amendment intends to make this instrument more effective, allowing for an earlier restructuring and, therefore, with a greater likelihood of success.
Some of the new features of these Restructuring Plans are the following:
- With few exceptions, they may affect all types of creditors, not only financial ones;
- Once the plan has been confirmed by the Court, it may extend its effects to dissenting creditors within the same class, to entire classes of creditors or even to dissenting shareholders of the debtor company;
- Creditors vote divided in classes that must be formed according to the criteria set forth in the law;
- Executory contracts can be terminated in the interest of the restructuring;
- Contracts with directors or officers can be suspended or even terminated if necessary for the successful completion of the restructuring;
- The legal duty for the company’s directors to promote dissolution due to losses is suspended while the effects of the communication of the opening of negotiations to reach a restructuring plan are in force;
- The operations that are necessary for the success of the negotiation of the plan are protected from possible future clawback actions;
- An expert in charge of the restructuring must be appointed in certain circumstances, while in others his/her appointment is voluntary.
Creation of a special mandatory procedure for SMEs
This special procedure aims at reducing costs, eliminating unnecessary formalities and reducing the participation of professionals and institutions that are not essential, or whose cost is not voluntarily assumed by the parties. For insolvency purposes, SMEs are those that have employed, during the prior year, less than 10 employees on average and have an annual turnover of less than 700,000 euros or liabilities of less than 350,000 euros, according to the last annual accounts. Individuals may also be considered SMEs and will in turn be able to access the “fresh start” procedure.
The following features characterize this procedure:
- Except for the debtor, the parties do not need to be assisted by a lawyer or represented by a court liaison (procurador);
- The Law sets forth a preference for the use of standardized predetermined electronic forms that are accessible online and free of charge;
- In-person hearings are replaced by virtual ones. In order to speed up the procedure, controversies will be resolved, with few exceptions, by a written procedure and will not be suspensive;
- Special emphasis is put on the proactivity of the parties, in the sense that the adoption of specific measures or the access to certain information must be expressly requested by the interested parties; and
- The winding-up is performed through electronic platforms with free and universal access.
This special procedure envisages a three-month non-extendable negotiation period during which individual foreclosures are suspended. Within the special procedure it is possible to opt for a continuation plan or for the fast liquidation of the company (provided, in this last case, that it is in a situation of imminent or current insolvency). If the appointment of an insolvency administrator is not requested, the liquidation may be carried out by the debtor itself.
The qualification section (aimed at determining whether the insolvency was guilty or fortuitous) can only be opened if the SME is liquidated and not even in all cases, but only upon request from the persons entitled to do so. The qualification section may be carried out in parallel with the liquidation proceedings. The basic foundation of this procedure is the veracity of the information provided. Its concealment or manipulation, or the provision of incorrect documentation, will therefore determine the guilty qualification of the insolvency.
Due to the need to develop the elements on which this special procedure is based, its entry into force is expected in January 1st, 2023.
Amendment of the fresh start procedure
The Law envisages a merit-based discharge system in which the good faith of the insolvent debtor is the cornerstone for the discharge of all debts – except for those that are exceptionally considered non-dischargeable – and in which (in contrast with the former version of the Law) the discharge is not conditioned upon the satisfaction of certain claims or upon the fact of having unsuccessfully attempted an out-of-court payment agreement. Therefore, with some exceptions (e.g., claims for alimony, public claims or claims derived from criminal offenses), the discharge is extended to all claims.
The discharge can be granted either with the prior winding-up of the debtor’s estate or without said winding-up, provided that a payment plan is reached.
Enhancement of the procedure for the sale of production units
Productive units can be sold both in the pre-insolvency phase (as part of a Restructuring Plan) and whenever during the insolvency proceedings. In particular, the Law expressly regulates the so-called “pre-pack” which consists on the application for the commencement of insolvency proceedings together with the presentation of an offer for the acquisition of one or more production units. Some of the features of this “pre-pack” that are worth highlighting are the following:
- The debtor may request from the Court the appointment of an independent expert to collect offers for the acquisition of one or more production units.
- The debtor may submit the application for the commencement of insolvency proceedings together with a binding written proposal for the acquisition of one or more production units. The Law establishes a regulated procedure allowing any interested party to submit alternative proposals to the initial offer.
- Any offer must contain the commitment from the bidder to continue or restart the activity of the production unit or units for at least two years. In the event of failure to comply with this commitment, any affected party may claim compensation from the acquirer for the damages caused.
- Were several offers to be submitted, the court would then select the most advantageous for the interest of the insolvency proceedings. Workers’ bid may be prioritized provided that it is in the best interest of the insolvency proceedings.
Measures to streamline and make the insolvency proceedings more efficient
In order to streamline general insolvency proceedings and improve their efficiency, the Law has adopted a number of measures:
- The reduction of procedural terms for the processing of applications for the commencement of insolvency proceedings;
- The establishment of legal rules for the winding-up that eliminate the obligation to draft and approve a liquidation plan;
- The introduction of the “pre-pack” procedure as mentioned above;
- The enhancement of creditors supervision in insolvency proceedings without valuable assets;
- The extension of operations subject to clawback actions; and
- The clarification of the claims that are essential for the preservation and liquidation of the estate and therefore must be paid preferentially.
Early Warning Measures
Finally, the Law has created a number of early warning tools aimed at encouraging the debtor’s proactivity. For example, the law envisages the creation of self-diagnosis systems that allow companies to confidentially determine whether they are susceptible to evolve towards a situation of insolvency. Similarly, the Law foresees the establishment of public, free and confidential counseling services for distressed companies.