This article, will show all huge advantages that insolvency proceedings offers to the corporate restructuring in Spain, when it is on time.

In order to bring a wider knowledge over all mechanisms provided by our insolvency Law, we would like to say that in 2002 (record year), an amount of 7,799 insolvencies were declared, however, the “ratio” of insolvency proceedings for every 10,000 companies was 24,7 in Spain, far from the levels of France (178,59), United Kingdom (114,69) and Germany (96,31).

Below are the different main benefits of the referred Law, which will be divided into 5 categories; (i) To guarantee the financing and maintenance of main contracts which are essential to the continuity of the activity, (ii) To ease as fast as possible an increase of liquidity of the company declared insolvent, (iii) To protect the insolvent company assets (through the common known as “protective shields”), (iv) To avoid directors liability derived from structural imbalance for the company equity, and (v) To carry out formal and material solutions provided by the insolvency Law (collective agreements, transfer of productive units…)

1. Inside the first category, to guarantee the financing and maintenance of main contracts which are essential to the continuity of the activity:

1.1- Generally, the company declared insolvent will have more opportunities to get financing once the insolvency proceeding has been declared.

The main advantage for creditor banks will take place when in case of the declaration of insolvency, the new liquidity injections, in any form, (loans, credits, discount lines, factoring, etc,) will be consider claims against the estate of the bankrupt (claims against the bulk), therefore, it will be paid as preferential payments with regard to the whole of the insolvency credits, caused prior to the insolvency declaration.

Another case is the liquidity injection (the duty to send them back) previous to the insolvency declaration which will be consider as insolvency credits, unless it has been granted within a refinancing framework according to the article 71bis or the additional fourth disposition of the insolvency Law. If the above is the case, only the 50% will be consider as claims against the estate and the remaining 50 will be considered as insolvency credits with general preference.

1.2. At the same time, the company declared insolvent will get more possibilities to contract with third parties.

On one side, the credits caused by providers, external partners will have the same consideration as claims against the state and on the other side, the activities carried out by the company will be not terminated due to the insolvency procedure, different case will be whether the activities were carried out prior the insolvency declaration.

1.3. Financing agreements

According to certain requirements, within the three months prior the insolvency declaration, could be restored all loan contracts and credit agreements in favor of the insolvent company, which have already expired for unpaid dues of installments or interests.

1.4. Restore of purchase goods contracts with deferred price

Within the three months prior the insolvency declaration, could be restored all purchase of movable or immovable properties with referred price.   

1.5. Maintenance of immovable lease contracts

The eviction action against the insolvent company prior bankrupt declaration could be weakened and at the same time the lease contract validity could be restored.

2. To ease as fast as possible an increase of liquidity of the company declared insolvent:

2.1. Accrual of interests suspension

With the insolvency declaration the accrual on legal and conventional interests are suspended except those related to the secure loans and to the salary claims, although will have to be considered as subordinated loans.

2.2. Increase of possibilities for recovering insolvent company withheld amounts

Liens over real properties and rights of the insolvent company (retained amounts) will be suspended when the insolvency has been declared, except the liens imposed by the administrative, tax, labour and social security Law.

2.3. More possibilities of charging against the owner of the work that are executed by the insolvent company (engineering company, construction Company)

The insolvency Law rejects the direct action exercised by creditor (provided by the article 1.597 of the civil code) against the owners of the work that are executed by the insolvent company. Thus, the company will cash the outstanding amounts, not its creditors.

2.4. Possibility of early termination of the contract

The insolvent Company will be allowed to request the early termination of the contracts, although there is no breach by the other party.

2.5. Suspension of payments

The payment of claims against the insolvent company caused prior the declaration will be suspended and it will be paid once the proceeding is concluded and there is an agreement over it. Likewise, regarding another contracts, in case of the other party has already fulfilled its obligations (such as, loans, leasing…) and the insolvent company has not fulfilled totally or partially its obligations, the debt will be integrated as liabilities of the proceeding.

3. To protect the insolvent company assets (through the common known as “protective shields”).

The Law provides the suspension of executions, which means it is not possible to start execution actions against the insolvent company assets, and the actions in development at the time of the proceeding will be also suspended, inclusively tax and administrative constraints. In addition, the suspension will cover the executions of guarantees and recovering actions when those are related to the essential assets to the continuity of the activity.

4. To avoid liability directors facing structural imbalance for the company´s operating losses:

Once submitted the insolvency proceeding request, means that the directors, are acting in accordance with the Law of capital companies, and therefore, taking the actions against  the structural imbalance for the company equity (when the company’s net equity to be lower than 50% of the share capital), doing it, the directors are avoiding personal liability for the debts contracted subsequently.

In addition to the above, the judges will not accept new proceedings or the existing procedures shall be suspended, as well as the claims against the company at the beginning and conclusion of the declaration. 

5. To agree to carry out formal and material solutions provided by insolvency Law (agreements, transfer of productive units…)

Those solutions are included, either on creditor agreements or through the sale during the liquidation phase, agreement phase, within the common phase of the insolvency proceeding even before of that, including a binding offer to purchase at the same time of the insolvency request (“pre-pack”).

5.1. The agreement proposal must contain creditor’s reduction debts and/or moratoriums. It could also contain other alternatives such as, conversion of debt into shares, loans, subordinated debts, participating loans or any similar financial instrument, or disposal of properties or rights of the insolvent company or productive units.

5.2. Regarding the productive units transmissions, the Law brings considerable incentives and advantages related to the operations developed out of the insolvency proceeding:

5.2.1. Tax exemption through the exclusion of the acquirer succession debt of the transferring company.
5.2.2. Application of labor succession and social security rules limited by the productive unit staff acquired or transmitted.
5.2.3. Compulsory cession, without previous consent of the other part, of contracts related to the business continuity as well as the licenses or administrative permissions.  
5.2.4. Exemption of payment duties before the transmission, except in the case of the transmission to someone closely related to the insolvent company.
Jose María Dutilh

Jose María Dutilh

Socio Director de la Firma de Abogados LeQuid, especializada en Derecho de los Negocios y de las Empresas Sociales, estoy plenamente convencido de que el desarrollo empresarial rentable y eficiente no sólo es compatible sino que necesita la ética empresarial. En la actualidad, desde LeQuid colaboro con empresarios que necesitan una segunda oportunidad a través de estos procesos; Apoyo legal en el día a día, Re emprendimiento socialmente responsable, Fusiones y Adquisiciones, Reestructuración y Refinanciación de empresas o Concurso de acreedores entre otros.

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