Restructuring and Insolvency in Spain 2024

Restructuring and Insolvency in Spain 2024 – Spain’s Supreme Court

RESTRUCTURING AND INSOLVENCY 2024

SPAIN

Silvia Angós

(Freshfields Bruckhaus Deringer)

GENERAL

Legislation

1. What main legislation is applicable to insolvencies and reorganizations?

The Spanish insolvency regime is mainly governed by Royal Legislative Decree 1/2020, of 5 May (the Recast Insolvency Act), in force as of 1 September 2020. The Recast Insolvency Act is a consolidated text of Law 22/2003 (the Insolvency Act), which includes all the amendments the Insolvency Act has been subject to since its publication in 2003. The Spanish government approved this recasting in order not only to incorporate all these amendments but also to clarify and harmonize the Insolvency Act. The Recast Insolvency Act was amended in 2022 by Law 16/2022, of 5 September, to transpose Directive (EU) 2019/1023 on restructuring and insolvency.

The Recast Insolvency Act establishes a single insolvency proceeding applicable to both individuals and corporates, providing for the possibility of a settlement agreement between the debtor and its creditors and, if agreement is not reached, for the liquidation of the debtor’s assets for the payment of creditors.

In addition to the Recast Insolvency Act, the following pieces of legislation, among others, are relevant in the context of an insolvency:

• the Civil Procedure Act;
• the Securities Market Act;
• the Recovery and Resolution of Credit Institutions and Investment Services Firms Act;
• the Supervision and Solvency of Insurance and Re-insurance Companies Act; and
• the Companies Act.

Cross-border EU insolvencies are governed by Regulation (EU) 2015/848 (the Recast Insolvency Regulation).

Excluded entities and excluded assets

2. What entities are excluded from customary insolvency or reorganization proceedings and what legislation applies to them? What assets are excluded or exempt from claims of creditors?

The only entities that are excluded from the Recast Insolvency Act are public administrations and other public entities. Also, there are some particular rules applicable to financial entities and insurance and reinsurance companies that establish specific provisions that affect certain types of transactions and these institutions.

Certain items (eg, furniture, clothes, food, sacred objects or a portion of the salary, where the debtor is a natural person) are excluded from insolvency proceedings. Claims against assets that are encumbered with an in rem security in favor of the secured creditor are limited. Finally, specific rules apply to financial collateral that complies with the Spanish regulation that implements Directive 2002/47/EC (the Financial Collateral Directive).

Public enterprises

3. What procedures are followed in the insolvency of a government-owned enterprise? What remedies do creditors of insolvent public enterprises have?

The determining criterion for entities to be considered immune from insolvency is that they must be deemed to have public legal personality. Therefore, public administrations and other public entities that have such public legal personality cannot be declared insolvent as they exist to serve public interests and their assets are considered unseizable.

However, government-owned entities that do not have the above-mentioned public legal personality (eg, public corporate companies and the majority of foundations) may be declared insolvent irrespective of whether they are government owned or not. For these entities, there is no special regime or procedure to be followed within an insolvency scenario, and the general rules set out in the Recast Insolvency Act apply.

Protection for large financial institutions

4. Has your country enacted legislation to deal with the financial difficulties of institutions that are considered ‘too big to fail’?

Yes. Law 11/2015 on the Recovery and Resolution of Credit Institutions and Investment Services Firms implemented Directive 2014/59/EU (the Bank Recovery and Resolution Directive) and provides the Spanish supervisory authorities with certain tools, powers and procedures to tackle the risk of systemic failures and, more generally, reinforce their ability to deal with Spanish credit institutions in financial distress. Law 11/2015 has been recently amended by Royal Decree-Law 7/2021 of 27 April to transpose Directive (EU) 2019/879 (the Bank Recovery and Resolution Directive II).

Law 11/2015 contemplates two possible procedures – early action and resolution – whose application mainly depends on the viability of the credit institution in financial difficulty and on whether it requires bailout funds to survive. These procedures constitute an alternative to normal insolvency proceedings under the Recast Insolvency Act and ultimately intend to provide a means to restructure or wind down Spanish credit institutions that are failing or are likely to fail and whose failure would create concerns in terms of public interest. In the absence of public interest, Spanish credit institutions may be allowed to fail in the ordinary way, through normal insolvency proceedings.

Law 11/2015, which has been further developed by Royal Decree 1012/2015, also regulates:

• the reinforcement of the preventive phase of the resolution by requiring all credit institutions (and not only those that are not economically viable) to have recovery and resolution plans;
• that the absorption of losses (bail-in) will affect all types of creditors (and not only subordinated creditors);
• a regime of maximum protection of depositors; and
• the creation of a specific resolution fund financed by contributions from the private sector.

Courts and appeals

5. What courts are involved? What are the rights of appeal from court orders? Does an appellant have an automatic right of appeal or must it obtain permission? Is there a requirement to post security to proceed with an appeal?

Commercial courts have exclusive jurisdiction to hear insolvency proceedings. The relevant commercial court to which the insolvency is allocated will retain jurisdiction over most of the disputes that may arise during the insolvency proceedings, for as long as such disputes affect the debtor’s assets and rights. Also, the relevant commercial court will not only hear insolvency claims against the debtor, but also certain labor claims arising from the insolvency (eg, termination, amendment and suspension of labor contracts), transaction avoidance claims, claims for directors’ liability and attachment of the debtor’s assets.

Pursuant to the Recast Insolvency Act, other court proceedings pending in the courts of first instance can be transferred to the commercial court at the time of the filing for insolvency if the dispute is considered to be relevant for the preparation of the assets or creditors list.

An appeal before a second instance court can be brought against a court’s decision accepting or rejecting an insolvency petition. This appeal does not have suspensive effect unless the court resolves otherwise. Other issues contained in the court’s decision that do not relate to the acceptance or rejection of the insolvency petition may be subject to appeal for reversal before the same court that passed the decision being appealed.

There are other types of court order that can arise during insolvency proceedings and that are not related to the acceptance or rejection of the insolvency petition. For non-final court decisions and orders, an appeal for reversal without suspensory effect can be lodged before the same court that passed the decision. For judgments and final rulings, the remedy of appeal can be lodged before a second instance court.

There is no requirement for the appellant to obtain permission to appeal.

TYPES OF LIQUIDATION AND REORGANIZATION PROCESSES

Voluntary liquidations

6. What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

The Spanish Companies Act provides for a voluntary liquidation of the company. This process is different from an insolvency process.

A voluntary liquidation is commenced when the company is solvent, but a winding-up cause occurs. Winding-up causes can be set out in the company’s articles of association or triggered under Spanish corporate legislation. For example, a winding-up cause is established where the company’s losses have reduced its equity to below 50 percent of its share capital (unless the share capital is restored).

If a winding-up cause occurs, directors must call a general shareholders’ meeting to request that a winding-up resolution is passed. Where the directors fail to call the general shareholders’ meeting or the shareholders fail to pass a resolution to wind up the company (and the winding-up cause is not cured) any interested party can, and the directors of the company must, apply to the commercial court to initiate winding-up proceedings.

Suspension of the directors’ legal duty to liquidate as a result of negative net equity applies for a three-month period (extendable to six months in certain circumstances) when a notification to the court of the existence of negotiations or the intention to initiate negotiations with the creditors to agree a restructuring plan has been filed.

The effects of the voluntary liquidation resolution will depend on the type of company concerned. Most Spanish companies are either corporations or limited liability companies. The effects of voluntary liquidation on these two entities are broadly the same: the company’s directors will no longer have authority to manage the company and one or more liquidators will be appointed at the general shareholders’ meeting. The liquidators will be charged with, inter alia:

• collecting the company’s debts and realizing the company’s assets;
• paying the company’s creditors;
• concluding any outstanding commercial transactions; and
• entering any new transactions that may be necessary for the company’s liquidation.

The liquidator must also prepare the liquidation balance sheet, which may be challenged by the company’s shareholders. At the end of the period for challenging the balance sheet, if no challenges have been made, or a challenge has been made and a final judgment has been issued, the company’s remaining assets (after payment of all creditors) will be distributed to the shareholders.

Voluntary reorganizations

7. What are the requirements for a debtor commencing a voluntary reorganization and what are the effects?

Voluntary reorganizations can take place through restructuring plans, a powerful tool introduced by Law 16/2022, of 5 September, that replaces refinancing agreements and out-of-court payment agreements.

A restructuring plan can be used not only when the company is in a situation of present or imminent insolvency (the latter when the debtor foresees its inability to regularly and punctually meet its payment obligations within the next three months) but also when the company faces probable insolvency (when it is objectively foreseeable that, if a restructuring plan is not reached, the debtor will not be able to regularly meet its payment obligations that fall due within the next two years).

The debtor can notify the court of the existence of negotiations with its creditors to agree a restructuring plan or of its intention to start them immediately.

The effects of the above-mentioned notice to the court, which can be extended up to six months in certain circumstances, are, among others:

• suspension of the debtor’s insolvency application at the request of the restructuring expert or of creditors representing more than 50 percent of the debt affected by the restructuring plan. The suspension will be lifted if the creditors have not filed the application for court sanctioning (homologation) of the restructuring plan within one month;
• suspension of the legal duty of the debtor to liquidate as a result of negative net equity;
• ineffectiveness of any contractual clause that establishes the amendment of terms or conditions, including acceleration, as a result of the notice or the homologation (with some exceptions);
• suspension of any enforcement over assets or rights necessary for the debtor’s business activity;
• suspension of enforcement over any assets of the debtor or against one or several creditors or classes of creditors (at the request of the debtor);
• suspension of the enforcement of guarantees or security interest granted by another group company (at the request of the debtor with evidence that enforcement could lead to the insolvency of both guarantor or security provider and debtor); and
• suspension of the enforcement of public claims over assets or rights necessary for the continuity of the business activity.

Subject to the above, enforcement security in rem over ‘necessary assets’ may be initiated but will be automatically stayed. However, neither financial collateral governed by Royal Decree-Law 5/2005 (which implements Directive 2002/47/EC on financial collateral), nor in rem security interests over assets located outside of Spain should be affected by this suspension. However, precautionary measures preventing the enforcement may be requested by the debtor before the insolvency court.

A restructuring plan is a notarized agreement that may consist of changes to the composition, conditions or structure of the debtor’s assets and liabilities or its equity, including transfers of assets, business units or of the entire company, as well as any necessary operational change, or a combination of these elements. A certification issued by an auditor or by the restructuring expert (if one has been appointed), certifying that the legal majorities to support the plan have been reached, is required.

The scope of a restructuring plan is very wide and, in addition to financial debt, public nature claims (to a limited extent and in certain circumstances) and commercial debt may also be subject to it.

Creditors are grouped into classes based on the existence of a common interest. There is a common interest among claims with the same ranking within insolvency proceedings. Different classes may be formed within the same ranking if advisable, for instance on the grounds of the financial or commercial nature of the claim, conflicts of interest or the impact of the restructuring plan (a recent ruling has even accepted the formation of single-member classes).

Secured creditors will be grouped in a single class, unless there are differences between the charged assets and rights that justify secured claims being grouped into two or more classes. Public nature claims will be grouped in a separate class alongside other classes of the same rank. A separate class is established for creditors that qualify as SMEs when the restructuring plan involves relinquishing more than 50 percent of their claim.

The debtor and creditors representing more than 50 percent of the affected liabilities may request judicial confirmation on the correct formation of the classes prior to the submission of the restructuring plan for court sanctioning (homologation). If the court approval to class formation is obtained, the restructuring plan may not be challenged on this ground.

All creditors whose claims may be affected by the restructuring plan are entitled to vote. For the restructuring plan to be approved, more than two-thirds of the liabilities of each class must support it, and if there are secured creditors a minimum of three-quarters of the liabilities of this class is required for approval.

In the case of syndicated creditors, the contractual regime applies if it contains lower majorities than those stated above.

If the restructuring plan contains measures affecting the equity holders such as a debt capitalization or a sale of essential assets, their consent will be required, following the procedure in accordance with the debtor’s legal structure (with certain specific rules). The restructuring plan can be court sanctioned without the consent of the equity holders if the company is under current or imminent insolvency. Equity holders will not have pre-emptive right over new shares in the event of restructuring plan homologation being filed for under current or imminent insolvency.

A restructuring plan must be court sanctioned (homologated) to:

• extend the effects of restructuring plans to creditors or creditor classes who had not voted in favor of the restructuring plan or to the equity holders;
• terminate contracts for the benefit of the restructuring;
• protect and upgrade the ranking of the interim financing and the new financing contemplated in the restructuring plan; and
• protect the acts, transactions or business carried out in the context of the restructuring plan against clawback actions (only when 51 percent of the total liabilities are affected by the restructuring plan).

The grounds for challenging a court-sanctioned restructuring plan have been substantially expanded, including, among others:

• ‘that the reduction in value of the debt is manifestly greater than what is necessary to ensure the viability of the company’: an important limitation is that this may not be alleged if the reduction imposed by the restructuring plan is less than the discount at which the debt was acquired;
• failure to comply with the ‘best interest of creditors test’: when the debts are adversely affected by the restructuring plan in comparison with their treatment in case of liquidation within a Spanish insolvency proceeding, whether individually or as a business unit. To calculate the insolvency liquidation value, the effective payment is deemed to take place two years after the execution of the restructuring plan;
• lack of observance of the ‘absolute priority rule’: in the case of homologation with dissent, no class ranking below the dissenters will receive anything unless each member of the dissenting class has been paid the full-face value of its outstanding claim; or
• that the class to which the dissenting creditors belong will be treated less favorably than another class of the same rank. A recent court ruling has taken the view that unjustified differences in treatment that prove less favorable for the dissenting creditors become unfair when they are disproportionate. According to the court, disproportionality cannot be measured in relation to the convenience or necessity of approving the plan in order to maintain the viability of the company, but must be based on the protection of the dissenting creditor’s economic position in relation to the other creditors of the same rank, even if they are in different classes. To homologate a restructuring plan, it must be approved by all creditor classes and, if it affects the rights of equity holders and the debtor is facing probable insolvency, by the equity holders who are legally liable for the corporate debts (if any). However, if there are no equity holders legally liable for the corporate debts, approval must be given at the general shareholders’ meeting.

Cross-class cramdown is possible in the case that a restructuring plan has not been approved by all creditor classes to bind dissenting creditors (individual creditors, entire classes and the equity holders of the debtor company), if the restructuring plan:

• has been approved by a simple majority of classes, provided that within such majority there is at least one class of claims that within insolvency proceedings would have ranked as special or general privileged claims; or
• has been approved by at least one class that within insolvency proceedings would have obtained, presumably, some payment following a going-concern valuation (in-the-money class). This requires a report from the restructuring expert on the value of the debtor as a going concern.

The appointment of the expert is mandatory where the homologation binds dissenting creditors or equity holders (or both).

Once a company has requested the court to sanction a restructuring plan (homologation), that company must allow one year to elapse before making the same request to the court.

Law 16/2022, of 5 September, approved special rules applicable to debtors:

• with an average of no more than 49 employees; and
• with an annual turnover or annual balance of €10 million or less.

Additionally, neither the foregoing nor the general insolvency regulations will apply to debtors:

• with an average of fewer than 10 employees on their staff; and
• with a turnover below €700,000 or liabilities of less than €350,000 in the financial year prior to the pre-insolvency notice.

Instead, there is a new regime, which aims to reduce costs and to simplify formalities. This new proceeding combines those aspects of the insolvency and restructuring plan procedures that best suit micro-enterprises.

Successful reorganizations

8. How are creditors classified for purposes of a reorganization plan and how is the plan approved? Can a reorganization plan release non-debtor parties from liability and, if so, in what circumstances?

The debtor can make a settlement proposal aiming for a type of ‘prepackaged’ reorganization, which can be filed from the date when the debtor applies for insolvency until 15 days after the receivers submit their report to the court. Creditors holding at least one-fifth of the total debt can also make a settlement proposal that can be filed from the time of the insolvency declaration.

Settlement proposals may consist of:

• a delay in the maturity of debts or a waiver for the company’s debts;
• structural changes (merger, demerger or global assignment of assets and liabilities of the debtor);
• alternative proposals to all or some classes of creditors except for public creditors, such as the conversion of the debt into equity; or
• proposals for the sale of certain assets or business units, but not the winding-up of the company.

Settlement proposals must include a plan for the payment of the debts and, if they foresee the continuation of the business, a business viability plan. The Royal Legislative Decree 1/2020, of 5 May (the Recast Insolvency Act) prohibits any proposals for settlement that amend the priority of the creditors and limits the assignment of assets to the creditors to cases where those assets are not necessary for the debtor’s business and have a fair value (calculated according to the Recast Insolvency Act), equal to or less than the value of the credit extinguished.

The Recast Insolvency Act does not regulate whether the settlement proposal can include a release of third-party liability. Settlements must be approved by a majority of creditors. The majorities required for the approval of settlement agreements and their extension to dissenting and abstaining creditors are as follows:

The following rules apply to the calculation of majorities:

• in the case of syndicated debt, all syndicated creditors are deemed to have supported the settlement agreement if creditors representing at least 75 percent do so (unless the relevant syndication arrangements contemplate a lower majority, in which case the lower majority applies);
• in the case of creditors with a special privilege (ie, secured creditors), majorities are calculated by comparing the proportion that the aggregate value of the security held by all the secured creditors supporting the settlement proposal represents with the total value of the security granted in favor of creditors pertaining to the same class; and
• in the case of creditors with a general privilege, majorities are calculated in light of the proportion that the privileged claims supporting the settlement proposal represents compared to the total amount of the privileged claims of the creditors pertaining to the same class.

The Recast Insolvency Act includes several rules for the calculation of the value of secured assets (which are similar to those for restructuring plans). The portion of secured claims exceeding the value of the underlying secured assets does not qualify as specially privileged.

Upon approval of a settlement, the court grants creditors who have not supported the settlement proposal the opportunity to oppose it. The settlement supported by the relevant majority of creditors and accepted by the court will be binding on the creditors that approved it, on any ordinary and subordinated creditors and on privileged creditors when the majorities set out in the table above are met.

Regarding the release of non-debtor parties, there is no express provision in the Recast Insolvency Act, and so the general regime applies. Therefore, if a creditor agrees to a settlement that foresees a release of a certain amount of debt, such release could also extend, in certain circumstances, to the potential liability of third parties (eg, personal guarantees).

Once a two-year period has elapsed since a settlement agreement has entered into force, the debtor can file for an amendment when there is a risk of breaching the settlement agreement and the amendment is necessary for the continuity of the company.

Involuntary liquidations

9. What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?

Creditors can apply to the court to place a debtor into an insolvency process. For creditors to apply for insolvency they will need to:

• satisfy the court with evidence that they have unsuccessfully attempted execution proceedings against the debtor’s assets (and have found it impossible to attach any assets from which to obtain payment);
• satisfy the court with evidence of a previous judicial or administrative final declaration of insolvency; or
• provide evidence that:
• the debtor has generally ceased making payments;
• the debtor’s assets have been seized;
• the debtor is selling its assets rapidly or in a detrimental way; or
• there has been a breach of certain payment obligations (ie, taxes, social security wages or salaries) for at least three months.

If a creditor files an application for the debtor’s insolvency with the court, the debtor can either agree to the creditor’s request or reject the creditor’s request within five working days. If the debtor rejects the request, it is required to deposit the amount of the debt owed to the creditor applying for insolvency (if it is due and payable) with the court. If the debtor refuses to deposit the amount with the court, the judge will hear representations from the parties on whether the insolvency declaration is appropriate. The parties will then be called to a hearing, after which the court will render a decision on whether to declare the insolvency.

The effects of the creditor initiating insolvency proceedings are broadly the same as where the directors file for insolvency.

A certain percentage (50 percent) of the debt owed to the creditor applying for insolvency will hold a general privilege (provided that such debt does not qualify as subordinated). This may constitute an incentive for an unsecured creditor to apply for involuntary reorganization of the debtor as it elevates 50 percent of their debt to privileged rank.

Involuntary reorganizations

10. What are the requirements for creditors commencing an involuntary reorganization and what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?

Creditors can initiate insolvency proceedings, but also any affected creditor that has entered into a restructuring plan can request the relevant court to sanction it (homologation) without the debtor’s consent.

Proceedings initiated by creditors to judicially sanction a restructuring plan are broadly the same as where the debtor files the application for court sanctioning, but if the plan contains measures requiring the approval of the shareholders’ meeting, creditors can only request the court sanctioning in the event of actual or imminent insolvency (not in a situation of probable insolvency).

Expedited reorganizations

11. Do procedures exist for expedited reorganizations (eg, ‘prepackaged’ reorganizations)?

Procedures do not exist for expedited reorganizations. Nevertheless, the Recast Insolvency Act provides in certain circumstances for summary insolvency proceedings where procedural terms are reduced to 50 percent. There are, however, separate proceedings dealing with a ‘prepackaged’ sale of the business or assets, introduced by Law 16/2022, of 5 September.

Unsuccessful reorganizations

12. How is a proposed reorganization defeated and what is the effect of a reorganization plan not being approved? What if the debtor fails to perform a plan?

Failure to approve a settlement agreement (or the absence of a settlement proposal) will trigger the commencement of the liquidation phase. The purpose of the liquidation phase is to liquidate all the assets of the debtor according to a liquidation plan filed by the insolvency receiver.

The debtor and the creditors can comment on the proposed plan. Also, a debtor’s breach of the settlement agreement duly approved by the court triggers the commencement of the liquidation phase upon a request being made by the creditors to the insolvency court.

Corporate procedures

13. Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

All commercial entities may be dissolved for any of the following reasons:

• expiry of the term fixed by the shareholders or partners in the by-laws;
• completion of the corporate purpose for which the commercial entity was set up; or
• loss of capital.

Most Spanish companies are either corporations or limited liability companies. These companies may be dissolved if:

• it is no longer possible to accomplish the purpose for which the company was incorporated or, as a result of the paralysis of the management bodies of the company, its continued operation becomes impossible;
• the losses have reduced the equity to an amount below 50 percent of its share capital unless:
• the share capital is restored to the necessary amount; or
• the debtor notifies the court of the existence of negotiations or the intention to initiate negotiations with its creditors to agree a restructuring plan;
• the share capital is reduced to below the legal minimum amount;
• there is a merger or split of the company; or
• any other cause established in the by-laws.

Conclusion of case

14. How are liquidation and reorganization cases formally concluded?

Insolvency proceedings are always concluded by an order issued by the relevant court in the following circumstances:

• an appeal against the insolvency order is successful;
• there is only one remaining creditor;
• the debtor has fully complied with the court-approved settlement;
• all claims have been paid or creditors have been fully satisfied;
• there is evidence that there are no available assets to pay the creditors;
• all creditors waive the outstanding claim; or
• the debtor has merged with another company or companies, or has been absorbed by another company, or there is a total spin-off of the debtor or the assets and liabilities of the debtor have been assigned globally.

INSOLVENCY TESTS AND FILING REQUIREMENTS

Conditions for insolvency

15. What is the test to determine if a debtor is insolvent?

Under Royal Legislative Decree 1/2020, of 5 May, the only criterion to determine if a debtor is insolvent is a cash-flow test: a debtor is considered insolvent when it is unable to regularly meet its payment obligations when they fall due.

Mandatory filing

16. Must companies commence insolvency proceedings in particular circumstances?

The company must initiate insolvency proceedings within two months of the date on which it knew or should have known that it was in current insolvency. A debtor is considered to be currently insolvent when it is not able to regularly meet its payment obligations as they fall due. For the debtor to apply for insolvency, it must provide evidence to the court of the amount of its debts and its situation of current or imminent insolvency (imminent insolvency is defined as the situation where the debtor foresees its inability to regularly and punctually meet its payment obligations within the next three months).

When a company in a situation of current or imminent insolvency or of probable insolvency (when it is objectively foreseeable that if a restructuring plan is not reached, the debtor will not be able to regularly meet its payment obligations that fall due within the next two years) commences negotiations with its creditors to agree on a restructuring plan, the company may communicate this fact to the relevant court to obtain a period of three months to negotiate with its creditors.

If the company is in current insolvency, this notification must be filed within the two months referred to above for filing for insolvency. The debtor and creditors representing more than 50 percent of the liabilities, excluding the subordinated liabilities, may request a three-month extension of the effects of the notice. Once that three-month period plus its extension (if applicable) elapses, the company will be required to seek a declaration of insolvency within the following working month, unless the insolvency situation ceases beforehand. During that period, only the company will be entitled to file for insolvency, and no other application for insolvency will be accepted.

DIRECTORS AND OFFICERS

Directors’ liability – failure to commence proceedings and trading while insolvent

17. If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if a company carries on business while insolvent?

Breach of the obligation to commence insolvency proceedings may result in the insolvency being classified as a ‘guilty insolvency’ in the qualification phase of the insolvency proceedings. The consequences of the guilty classification may include:

• disqualification of the directors from managing third-party assets or representing or managing any person or company for a period of two to 15 years;
• removal of the directors’ rights as creditors of the debtor;
• return of the directors’ rights or assets that were unduly obtained from the debtor;
• payment of indemnities for any loss or damage caused; and
• in certain circumstances, the directors being held liable for the payment of any deficit to the creditor.

Additionally, directors can be held jointly and severally liable with the company for the debts if the company ceases to comply with certain subscribed capital-to-equity ratios and such ratios are not re-established. In this case, the directors are under the legal duty to procure the liquidation of the company (unless notification has been filed to the court of the existence of negotiations or the intention to initiate negotiations with its creditors to agree a restructuring plan has been filed). In such circumstances, the liability of directors would be for the debts borne after the breach of the capital-to-equity ratio.

Directors’ liability – other sources of liability

18. Apart from failure to file for proceedings, are corporate officers and directors personally liable for their corporation’s obligations? Are they liable for corporate pre-insolvency or pre-reorganization actions? Can they be subject to sanctions for other reasons?

Directors and de facto directors (which, under Spanish law, includes the concept of shadow directors), and general managers are liable to the company, the shareholders, the company’s creditors and, in some instances, third parties for harm caused as a result of actions or omissions that are contrary to the law or to the by-laws or that are in breach of the duties inherent to their position.

Creditors who have entered into a restructuring plan or a settlement proposal will not be considered de facto directors by reason only of the obligations assumed by the debtor as a consequence of the viability plan within the framework of the restructuring plan.

Spanish corporate law specifically provides for two types of actions for breach of a directors’ duty:

• a corporate action that aims to protect and recover the company’s assets damaged by the actions of the directors; and
• an individual action that aims to protect and recover the personal assets of the claimant to the extent damaged by the actions of the directors.

Furthermore, the insolvency court may declare the director liable for any damage during the qualification phase of the insolvency (ie, the phase that aims to investigate the potential liability of third parties) if the insolvency is classified as ‘guilty’. An insolvency would be deemed guilty when, in the creation or worsening of the state of insolvency, there was willful misconduct or gross negligence by the company or, among others, its directors. Also, the insolvency may qualify as guilty if a settlement agreement is frustrated because of gross negligence or willful misconduct by the directors, de facto directors or general managers.

The judicial decision may order:

• disqualification of the directors from managing third-party assets or representing or managing any person or company for between two and 15 years;
• removal of the directors’ rights as creditors of the debtor;
• return of the directors’ rights or assets that have been unduly obtained from the debtor;
• payment of indemnities for any loss or damage caused; and
• in certain circumstances, the directors can be held liable for the payment of any deficit to creditors.

Finally, the Criminal Code includes several criminal offenses that may apply to a director and a de facto director, for instance, when falsifying the annual accounts in such a way as to cause financial damage to the company, to any of its shareholders or a third party. This offence is punishable by imprisonment from one to three years and a fine with a payment deadline between 6 to 12 months.

Directors’ liability – defenses

19. What defenses are available to directors and officers in the context of an insolvency or reorganization?

Directors and general managers should seek appropriate legal and accountancy advice on a regular basis to ensure that they are complying with their responsibilities as, in general, only an event of a breach of their obligations could result in personal liability for the directors and general managers.

If the court is considering the directors’ liability, the directors will have to prove that they have acted in a diligent way and for the company’s best interests. In the context of a pre-insolvency scenario, board meetings should be held regularly and fully minuted. Regular meetings show the directors’ intent to consider all possibilities to minimize loss to creditors. In the case of joint directors, each director should prove the fulfillment of their own duty of care when a harmful resolution has been adopted, not only voting against the resolution but also expressly disagreeing with such a resolution.

Shift in directors’ duties

20. Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganization proceeding is likely? When?

There are no specific obligations shifted to creditors in these circumstances.

Directors’ powers after proceedings commence

21. What powers can directors and officers exercise after liquidation or reorganization proceedings are commenced by, or against, their corporation?

Depending on the particular circumstances of the case, the court may, in its insolvency order, state that the debtor’s directors are released from their duties or order that the directors continue in office under the supervision of the insolvency receiver.

MATTERS ARISING IN A LIQUIDATION OR REORGANIZATION

Stays of proceedings and moratoria

22. What prohibitions against the continuation of legal proceedings or the enforcement of claims by creditors apply in liquidations and reorganizations? In what circumstances may creditors obtain relief from such prohibitions?

Any declarative proceeding (ie, proceedings that seek an order declaring a certain right, requiring the debtor to pay a certain amount or ordering the debtor to do something or to refrain from doing something) that is pending at the time of the insolvency declaration will continue, except for those proceedings regarding damages caused by the debtor’s directors, liquidators or auditors. These will be accumulated ex officio provided they are at first instance and the hearing has not been held. New declarative proceedings can be initiated but must be filed with the insolvency court.

The enforcement rights of unsecured creditors are suspended upon the court declaration of insolvency (with the exception of certain actions related to enforcement of labor and administrative proceedings that do not concern assets necessary for the continuation of the commercial or professional activity of the debtor). Once the insolvency proceedings are declared open, no new enforcement of unsecured claims can be initiated.

Security over the assets that are necessary for the continuity of the debtor’s business activity cannot be enforced until a settlement agreement that does not affect the security or secured claim comes into effect, or a year elapses since the insolvency declaration without the liquidation phase being opened. The enforcement of security interests over the shares of ring-fenced and self-standing special purpose vehicles is not suspended, provided certain requirements are met.

Also, the moratorium does not apply to secured claims over assets that are not necessary for business continuity or to certain ‘financial collateral’. The determination as to whether the assets or rights encumbered are necessary to the business continuity of the insolvent company will be made by the commercial court in charge of the insolvency proceeding. When it comes to determining which of the debtor’s assets or rights are used for its professional or business activities, courts have generally embraced a broad interpretation and will likely include most of the debtor’s assets and rights.

Commencement of the liquidation phase causes the loss of the right to initiate a separate enforcement process in relation to those secured creditors who did not commence enforcement either before the declaration of insolvency or after one year has elapsed since the declaration of insolvency. The secured creditors recover their enforcement rights if one year has elapsed since the opening of the liquidation phase without the asset or right subject to the security having been disposed of.

Furthermore, during the additional period to file for insolvency following the notification to the court of the existence of, or the intention to immediately begin, negotiations with creditors to agree a restructuring plan, any existing enforcement actions over assets or rights necessary for the continuity of the business will be suspended (excluding certain financial collateral) and the creditors will be prevented from commencing any enforcement action against these assets and rights. Enforcement by public creditors over assets or rights necessary to business continuity will be permitted but suspended during this period.

At the request of the debtor, the court may:

• expand the scope of the prohibition on initiating enforcement proceedings or grant the suspension of those already initiated over any assets of the debtor or against one or several creditors or classes of creditors; and
• suspend the enforcement of guarantees or security interest granted by another group company (with evidence that enforcement could lead to the insolvency of both guarantor or security provider and debtor).

Doing business

23. When can the debtor carry on business during a liquidation or reorganization? Is any special treatment given to creditors who supply goods or services after the filing? What are the roles of the creditors and the court in supervising the debtor’s business activities?

The mere declaration of insolvency does not trigger the suspension of the commercial activities of the debtor. Moreover, Royal Legislative Decree 1/2020, of 5 May (the Recast Insolvency Act) envisages that the insolvency receiver may provide directors with a general authorization to enter into certain operations, notwithstanding their obligation to report all the operations entered into by the debtor to the insolvency receiver.

The debtor or the insolvency receiver (where the debtor’s directors are released from their duties) can sell assets and enter into new transactions if, among others, this is within the debtor’s ordinary commercial activities, or otherwise if the court has authorized such sales or transactions subject to certain exceptions. Several transactions are carved out from this prohibition, including disposals that the insolvency receiver considers indispensable to secure the viability of the company, disposals of assets that are not necessary for the continuity of the company’s activity and disposals of business units, in each case, subject to certain conditions.

Claims in relation to goods supplied or services rendered to the debtor will be considered as debts of the insolvency estate and will have full preference in payment over any other claim, other than a specially privileged claim.

Post-filing credit

24. May a debtor in a liquidation or reorganization obtain secured or unsecured loans or credit? What priority is or can be given to such loans or credit?

The Recast Insolvency Act does not expressly regulate the debtor’s right to obtain secured or unsecured loans but provides that during the insolvency proceedings it is possible to resume loan agreements that have been accelerated in the three months before the insolvency declarations (ie, acceleration will be of no effect and the parties’ obligations under the contract will be restored).

The creditor’s claims will be deemed to be debts of the insolvency estate and will have full preference in payment over any other insolvency debt other than specially privileged claims.

The following will be treated as claims against the estate (in broad terms, ranking alongside the insolvency receiver’s fees and ordinary course of business-related costs of sale of assets the debtor deems necessary to maintain business activity during the insolvency proceedings):

• 50 percent of the principal amount of new money necessary for the fulfillment of a restructuring plan; and
• 50 percent of reasonable interim financing granted during the negotiations and immediately necessary for the continuation of the debtor’s business or to preserve or enhance the value of the debtor within the context of a court-sanctioned restructuring plan.

The remaining 50 percent of the principal amount of the new money and the remaining 50 percent of the interim financing will be treated as generally privileged. The above-mentioned ranking upgrade only applies when the affected liabilities represent at least 51 percent of the total liabilities.

New money and interim financing will also be protected against clawback actions, unless it is evidenced that they were granted with fraudulent intent.

New or interim financing granted by specially related parties will only enjoy protection and upgraded ranking if the total debts affected by the restructuring plan, excluding the financing granted by specially related parties, represent more than 60 percent of the total liabilities.

Sale of assets

25. In reorganizations and liquidations, what provisions apply to the sale of specific assets out of the ordinary course of business and to the sale of the entire business of the debtor? Does the purchaser acquire the assets ‘free and clear’ of claims or do some liabilities pass with the assets?

During insolvency proceedings, both specific assets and business units can be sold. Additionally, pre-pack sales have been introduced by Law 16/2022, of 5 September, allowing debtors to file a purchase-binding offer for one or more business units along with the insolvency filing. Competing bids can be submitted, and the successful offer is selected in the best interest of the insolvency estate.

Debtors in probable, current or imminent insolvency can also request to the relevant court the appointment of an expert to seek bids from third parties to acquire one or more business units, with immediate payment. The appointment of this expert does not remove the debtor’s obligation to file for insolvency. In pre-pack sales, the purchaser is obliged to continue or reinitiate the business activity for at least two years, or for at least three years if the offer has been filed alongside the insolvency filing, the breach of this duty could result in the payment of indemnities for any loss or damage caused to any affected party.

During insolvency proceedings, depending on the phase, the decision as to whether the sale of a specific asset or business unit needs to be disposed of lies with the insolvency administrator (subject, as the case may be, to the approval of the judge) or with the liquidator, in cases where the liquidation phase has been opened, and subject to the terms of the relevant liquidation plan, which has to be approved by the judge.

Both prepackaged sales and sales of business units during the insolvency proceedings are subject to the following rules:

• the sale of a business unit implies the transfer of the rights and obligations arising from any agreements (without requiring the consent of the counterparty) that are attached to the continuity of the relevant professional or business activity (a purchaser can decide not to transfer certain agreements);
• administrative law requirements govern the assignment of administrative contracts;
• the sale of a business unit also implies the transfer of any administrative licenses or authorizations that are attached to the continuity of the relevant professional or business activity, to the extent the purchaser carries on the relevant activity in the same premises; and
• the sale of a business unit does not imply that the purchaser assumes any debt of the insolvent company that remains outstanding at the time of the sale, subject to certain exceptions and unless the purchaser is a related party to the insolvent company.

The following rules apply in respect of secured assets pertaining to a business unit, depending on whether they are transferred free of charges or still subject to the relevant security:

• transfer subject to security: no consent of the relevant secured creditor will be required; and
• transfer free of charges: creditors receive a portion of the purchase price equal to the proportion that the value of the relevant secured asset represents in respect of the total value of the relevant business unit, and if the purchase price to be received is lower than the value of the relevant secured asset, the sale requires the support of 75 percent of the secured creditors pertaining to the same class that is affected by the sale.

Also, where offers do not differ by more than 15 percent, the judge may award the business unit to the lower offer if it secures to a greater extent the continuity of the relevant business and employment, and also better satisfaction of the claims of the creditors.

Negotiating sale of assets

26. Does your system allow for ‘stalking horse’ bids in sale procedures and does your system permit credit bidding in sales?

The Recast Insolvency Act allows for ‘stalking horse’ bids under certain conditions. During the common phase of the insolvency proceedings, the insolvency administrator may dispose of assets that are not necessary for the continuity of the business. The insolvency administrator communicates the offer to the insolvency court and it will be approved unless a better bid is filed within 10 days. Additionally, at any time during the insolvency proceedings, the insolvency court may approve the disposal of assets affected by secured claims, subject to a 10-day period for the potential filing of better bids. Therefore, the insolvency administrator can continue to seek better bids during such time frames.

Additionally, there is a similar procedure for pre-pack sales where debtors file a purchase-binding offer, for one or more business units, along with the insolvency filing. Once the insolvency is declared by the relevant court, a 15-day period commences for the filing of better bids by any interested person. The successful offer is selected in the best interest of the insolvency estate.

The Recast Insolvency Act does not expressly regulate credit bidding. Notwithstanding this, liquidation plans filed by insolvency administrators may include such a possibility and the insolvency court may approve the transfer of an asset in favor of a creditor as a way of payment of such creditor’s claim.

The ability of a creditor to file a credit bid for the purpose of acquiring an asset would be limited to the amount that such creditor would be entitled to directly receive from the relevant sale proceeds in the application of the Recast Insolvency Act, including, in particular, the provisions relating to priority of claims. An assignee would have the same rights as the original secured creditor unless the priority of the relevant claim has changed as a result of the assignment (eg, if the relevant assignee qualifies as a related party of the insolvent debtor).

In assessing any bid, in general, the insolvency court will consider the continuity of the relevant business and employment, and also a better satisfaction of the claims of the creditors.

Rejection and disclaimer of contracts

27. Can a debtor undergoing a liquidation or reorganization reject or disclaim an unfavorable contract? Are there contracts that may not be rejected? What procedure is followed to reject a contract and what is the effect of rejection on the other party? What happens if a debtor breaches the contract after the insolvency case is opened?

The insolvency receiver may ask the insolvency court to terminate agreements under which the debtor had pending obligations to be fulfilled if they consider that such termination is beneficial for the insolvency proceedings. The basis on which such termination can be agreed is quite open and only requires convenience for the debtor. On termination, the non-insolvent party is entitled to claim damages arising as a consequence of the termination, such damages being considered as ordinary debt.

Also, if the debtor breaches the agreement after the insolvency declaration, the counterparty is entitled to ask the insolvency court to terminate it, based on the breach. However, even if a cause for termination concurs, the court may decide not to terminate the agreement in the interests of the insolvency estate. In such a case, the debtor’s obligations that may arise will be considered as a debt of the insolvency estate. The above is without prejudice to other clawback remedies.

Intellectual property assets

28. May an IP licensor or owner terminate the debtor’s right to use the IP when a liquidation or reorganization is opened? To what extent may IP rights granted under an agreement with the debtor continue to be used?

The Recast Insolvency Act does not contain any rule with respect to IP assets or contracts over IP assets. By application of the general rules on contracts:

• the mere existence of the insolvency proceedings does not itself allow for termination of a contract;
• contracts may continue in force during the insolvency proceedings but any obligation arising from such contracts for the debtor will be classified as a debt of the insolvency
• estate and will have full preference in payment over any other insolvency claims (other than specially privileged claims);
• contracts can be terminated in the event of insolvency when one of the parties breaches its contractual obligations; and
• contracts can be terminated by the insolvency receiver if they determine that the termination is beneficial for the debtor.

However, all cases permitting a termination must be approved by the court.

Personal data

29. Where personal information or customer data collected by a company in liquidation or reorganization is valuable, are there any restrictions in your country on the use of that information or its transfer to a purchaser?

Neither the Recast Insolvency Act nor the Spanish Protection of Personal Data and Guarantee of Digital Rights Act (Organic Law 3/2018) contains any rule on the use or transfer of personal information or customer data in pre-insolvency or insolvency proceedings. Consequently, the general regulation for judicial procedures applies.

Use of personal information or customer data in pre-insolvency and insolvency proceedings is permitted, provided this use complies with Regulation (EU) 2016/679 (General Data Protection Regulation) provisions and, in particular, with the principles of lawfulness, fairness, transparency, purpose limitation, data minimization, accuracy, storage limitation, integrity, confidentiality and accountability.

The transfer of personal information or customer data is allowed inside the European Union through applying the following general rules:

• if the personal data has been obtained legitimately, it may be used for the terms and purpose for which they were obtained, having duly informed the data subject;
• if the personal data is going to be used for a different term or purpose than the agreed, consent of the data subject is required, except if processing the personal data is necessary to comply with a legal obligation or processing the personal data is necessary due to public policy or in the exercise of the powers by the public authorities; and
• when consent is required, it must be freely given, specific, informed and unambiguous, except with specially protected personal data, for which consent must also be explicit.

The transfer of personal information or customer data outside the European Union is only allowed to countries considered by the European Commission to offer a sufficient level of data protection or when appropriate guarantees have been provided for that transfer.

Arbitration processes

30. How frequently is arbitration used in liquidation or reorganization proceedings? Are there certain types of disputes that may not be arbitrated? Can disputes that arise after the liquidation or reorganization case is opened be arbitrated with the consent of the parties?

In general terms, arbitration clauses will continue to be effective, with the Recast Insolvency Act not limiting the types of insolvency disputes that may be subject to arbitration. However, the insolvency court may suspend the effect of arbitration clauses if the court considers these to damage the insolvency proceedings.

Ongoing arbitration proceedings will, however, continue, but the insolvency receiver may stand in for the debtor in such arbitration proceedings.

In general terms, cases arising after insolvency has been declared will be arbitrated if an arbitration clause had been entered into between the parties. If one of the parties filed the relevant claim with the insolvency court instead of submitting it to arbitration, the other party could file a plea for a motion of jurisdiction, and the insolvency court would normally instruct the parties to submit the dispute to arbitration.

CREDITOR REMEDIES

Creditors’ enforcement

31. Are there processes by which some or all of the assets of a business may be seized outside of court proceedings? How are these processes carried out?

Seizure of the debtor’s assets can only take place by obtaining a court order. Initiation of insolvency proceedings automatically triggers a moratorium on the seizure of the debtor’s assets.

Unsecured credit

32. What remedies are available to unsecured creditors? Are the processes difficult or time-consuming? Are pre-judgment attachments available?

Creditors may file an application with the relevant court requesting the grant of interim measures for as long as these are deemed appropriate to ensure that the final judgment, should it be in favor of the creditor, can be effectively enforced.

Creditors have access to specific interim measures (eg, seizures, preventive registration of the claim in the relevant public registry and deposit of assets), as well as all the interim measures that are generally available by statute. Often, interim measures are requested by creditors in insolvency situations where there is a concern that the debtor is concealing its assets.

Interim measures can be applied for before, together with or after the filing of the claims and can be granted with or without previously hearing the defendant by providing evidence that the general requirements are met, these being:

• the applicant’s claim appears to have some merit;
• a fear that the delay of proceedings may lead the defendant to conceal or sell its assets; and
• the provision of a cross-undertaking in damages to cover the potential damages that the interim measures may cause.

CREDITOR INVOLVEMENT AND PROVING CLAIMS

Creditor participation

33. During the liquidation or reorganization, what notices are given to creditors? What meetings are held and how are they called? What information regarding the administration of the estate, its assets and the claims against it is available to creditors or creditors’ committees? What are the liquidator’s reporting obligations?

The insolvency declaration is recorded with the relevant commercial registry and the land registries where the debtor’s assets are registered and is published in the Spanish Official Gazette. The insolvency declaration and any other resolution that, according to Royal Legislative Decree 1/2020, of 5 May (the Recast Insolvency Act), must be publicly available, are also recorded in the Spanish Public Insolvency Register. Furthermore, the court is entitled to order additional measures to give sufficient publicity to the insolvency declaration.

Creditors have one month from the publication of the insolvency declaration in the Spanish Official Gazette to notify the insolvency receivers of their claims. The Recast Insolvency Act does not regulate the formation of a creditors’ committee.

During the insolvency proceedings, a creditor has, among others, the right to:

• communicate the amount of the debt and prove it throughout the proceedings;
• request the termination of certain contracts based on breach of the contractual obligations;
• under certain legal requirements, exercise some of the remedies attributed to the insolvency receivers (clawback claims);
• file a settlement proposal;
• vote for or against a settlement proposal; and
• apply for liquidation in the event of a breach of the settlement.

The insolvency receiver has the obligation to prepare, among others, a report on the causes of the insolvency, a list of creditors and a list of assets and rights. The insolvency receiver also must prepare a report on the settlement proposal (if any).

The effects of settlement agreements may extend to non-privileged or privileged creditors or both to the extent that certain majorities are met. In turn, settlement agreements may not affect the relationship between the creditors and third parties who are not part of the debtor group unless otherwise stated in the settlement agreement and provided that such creditors have voted in favor.

Creditor representation

34. What committees can be formed (or representative counsel appointed) and what powers or responsibilities do they have? How are they selected and appointed? May they retain advisers and how are their expenses funded?

The Recast Insolvency Act does not foresee the possibility of forming a creditors’ committee. Creditors are, of course, free to appoint their own counsel or advisers whose fees will be paid by such creditors.

Enforcement of estate’s rights

35. If the liquidator has no assets to pursue a claim, may the creditors pursue the estate’s remedies? If so, to whom do the fruits of the remedies belong? Can they be assigned to a third party?

If the insolvency receiver refuses to exercise a certain remedy, the creditors can exercise such remedy in the interests of the insolvency estate themselves. This means that, if such remedy succeeds, the consequences of the litigation will be attributed to the debtor, but the creditor will have the right to obtain reimbursement of the costs that it incurred against the insolvency estate.

Claims

36. How is a creditor’s claim submitted and what are the time limits? How are claims disallowed and how does a creditor appeal? Can claims for contingent or unliquidated amounts be recognized? Are there provisions on the transfer of claims and must transfers be disclosed? How are the amounts of such claims determined?

Creditors’ claims must be filed within one month after the publication of the insolvency declaration in the Official Gazette. If they are excluded from the creditors’ list, or their claims are not fully recognized, they can file a claim with the court to obtain recognition of their credit claim. An appeal is available in certain circumstances before the relevant provincial court.

Creditors’ claims where the amount of the claim is dependent on future events and those that are litigious are recognized in the insolvency proceeding as contingent claims without any assigned value and under their relevant classification. Contingent claim creditors are legitimate creditors but with the rights of adhesion, vote and collection suspended until their claim is confirmed.

Generally, creditors that have acquired a debt that is due and payable before the insolvency declaration cannot initiate insolvency proceedings until six months have elapsed following the acquisition. Nevertheless, creditors acquiring claims against the insolvent debtor after its formal declaration of insolvency are entitled to vote at the creditors’ meetings, unless they qualify as a related party to the insolvent debtor.

Finally, creditors who acquired a debt at a discount are allowed to file their claim for the full-face value of the credit. Accrual of interest is suspended as of the date of the declaration of the insolvency, except for those credits secured with rights in rem up to the maximum covered by the security.

Set-off and netting

37. To what extent may creditors exercise rights of set-off or netting in a liquidation or in a reorganization? Can creditors be deprived of the right of set-off either temporarily or permanently?

In general, set-off is not permitted in an insolvency proceeding unless the requirements for set-off have been met before the insolvency declaration. However, the Recast Insolvency Act has incorporated the Spanish Supreme Court doctrine allowing set-off after the declaration of insolvency in relation to claims arising from the same legal relationship.

As an exception to the general regime, set-off provisions that comply with the requirements set out in Royal Decree-Law 5/2005 (which implements Directive 2002/47/EC on financial collateral) are enforceable in an insolvency scenario.

Set-off is allowed if the claim is not governed by Spanish law and where the applicable law allows such set-off in insolvency proceedings, subject to certain limitations.

Modifying creditors’ rights

38. May the court change the rank (priority) of a creditor’s claim? If so, what are the grounds for doing so and how frequently does this occur?

The Recast Insolvency Act provides that certain claims are subordinated if, among other things:

• the creditor fails to comply with the obligation arising from contracts with reciprocal obligations pending at the time of the insolvency declaration, subject to certain conditions;
• the creditor is related to the debtor – that is, family members, directors and shadow directors, general managers with general powers to run the insolvent company, shareholders who are liable for the company debts, shareholders holding, at the time the credit was granted, at least 5 percent(if the insolvent company has listed shares or debt) or at least 10 percent(if not) of the share capital of the insolvent company, companies belonging to the same group as the insolvent company and common shareholders of the insolvent company and another company of the same group holding, at the time the credit was granted, at least 5 percent (if the company has listed shares or debt) or at least 10 percent (if not) of the share capital of the company; or
• the claims arise from a transaction that has been rescinded by the court where the court understands that the creditors acted in bad faith.

Priority claims

39. Apart from employee-related claims, what are the major privileged and priority claims in liquidations and reorganizations? Which have priority over secured creditors?

Insolvency debts are classified as follows:

• debts of the insolvency estate, which include, among others:
• debts originating within the insolvency proceedings (eg, judicial expenses and loan agreements that are restored by the court);
• debts originating after the insolvency declaration (eg, debts arising from the continuation of the business);
• salary claims for the 30 days immediately preceding the declaration of insolvency; and
• 50 percent of the new money or 50 percent of the reasonable interim financing, or both, granted pursuant to a court-sanctioned restructuring plan, when the affected liabilities represent at least 51 percent of the total liabilities (60 percent of the total liabilities where the new money or the interim financing is granted by specially related parties); and
• insolvency debts, which are classified into:
• specially privileged debts (including, among others, debts secured with mortgage or pledges, payments arising from financial lease agreements and claims deriving from purchase agreements with adjourned payment, and 50 percent of the fresh money and 50 percent of the reasonable interim financing, or both, granted pursuant to a court-sanctioned restructuring plan when the affected liabilities represent at least 51 percent of the total liabilities (60 percent of the total liabilities where the new money or the interim financing is granted by specially related parties);
• generally privileged debts (including, among others, salaries and severance payments up to certain limits, certain taxes, credits arising from tort liability and 50 percent of the debt of the creditor who applied for the insolvency);
• ordinary debts; and
• subordinated debts (including, among others, debts owed to parties related to the debtor).

Debts of the insolvency estate will be paid out of the debtor’s assets (other than those assets attached to the specially privileged debts) with preference to any other debts. Secured debts are generally paid with the proceeds resulting from the enforcement of the security, although the value of a guarantee may not exceed 90 percent of the reasonable value of the asset minus the amount of the unpaid debts with preferential security in the same asset.

The guarantee value cannot be lower than zero or more than the amount of the privileged credit or the maximum agreed liability. If the secured creditor has not been entirely satisfied from the security enforcement proceeds, they will be considered an ordinary creditor for the remaining unpaid amount.

Employment-related liabilities

40. What employee claims arise where employees’ contracts are terminated during a restructuring or liquidation? What are the procedures for termination? (Are employee claims as a whole increased where large numbers of employees’ contracts are terminated or where the business ceases operations?)

It is very common that, as a result of an insolvency proceeding, a company will start to make redundancies. Collective termination-related disputes due to economical, technical, organizational or productive reasons and suspension or termination of senior management employment agreements are dealt with by the insolvency court rather than by the employment courts.

A termination is characterized as a collective redundancy if the redundancy applies to at least the number of employees within the following thresholds:

• 10 employees in a company with fewer than 100 employees;
• 10 percent of the employees in a company with 100 to 300 employees;
• 30 employees in a company with more than 300 employees; or
• the redundancy involves the termination of the employment contracts of all the staff, because of the closing down of the company’s activities, provided that there are more than five employees.

Apart from termination procedures, employees may initiate claims to request payment of unpaid salaries.

Pension claims

41. What remedies exist for pension-related claims against employers in insolvency or reorganization proceedings and what priorities attach to such claims?

Pension-related claims will be considered as ordinary claims given that they fall outside of what is considered a salary under Spanish law. Any pension-related disputes will be dealt with by the insolvency court.

Environmental problems and liabilities

42. Where there are environmental problems, who is responsible for controlling the environmental problem and for remediating the damage caused? Are any of these liabilities imposed on the insolvency administrator personally, secured or unsecured creditors, the debtor’s officers and directors, or on third parties?

The Recast Insolvency Act does not set out particular rules as regards liability arising in connection with environmental problems. Therefore, the responsibility for controlling the environmental problem will lie with the company’s directors or its insolvency receiver, depending on who is in charge of managing the company.

Liabilities that survive insolvency or reorganization proceedings

43. Do any liabilities of a debtor survive an insolvency or a reorganization?

Privileged creditors will not be bound by the terms of a settlement agreement unless they have approved it (ie, the vote will have the effect of qualifying that creditor’s claim and privilege in the manner provided for in the settlement proposal) or unless the required majority of creditors of the same class voted in favor of the settlement agreement.

Therefore, privileged creditors will be able to enforce their credits against the debtor in accordance with their own terms at the times provided for in the Recast Insolvency Act.

The settlement agreement may also include proposals for the sale of certain assets or business units (but may not consist of a winding-up of the company) where the purchaser is subrogated in full in the related debtor’s obligations.

Additionally, the court may decide, upon the receivers’ request, to sell an asset that is subject to security along with the attached security. In this case, the purchaser is subrogated in full in the debtor’s obligation, which will cease to be a debt within the debtor’s insolvency proceeding.

Distributions

44. How and when are distributions made to creditors in liquidations and reorganizations?

The Recast Insolvency Act provides the following rules on the payment of debts when the proceedings end with the liquidation of the debtor’s assets:

• debts of the insolvency estate will be paid upon their respective maturity dates out of the debtor’s assets (other than those assets attached to the specially privileged debts) with preference to any other debts;
• secured debts are generally paid out of the proceeds resulting from the enforcement of the security. If the secured creditor is not entirely satisfied from the security enforcement proceeds, they are considered as an ordinary creditor for the remaining unpaid amount;
• generally, privileged debts will be paid by segregating those assets covering the aggregate amount of such credits from the debtor’s estate. The Recast Insolvency Act lists the generally privileged debts, each category will have priority over those below it and within the same category payments are made on a pro rata basis;
• ordinary debts will generally be paid on a pro rata basis after the debts of the insolvency estate, the specially privileged debts and the generally privileged debts have been satisfied; and
• subordinated debts will be paid once the remaining debts have been satisfied in full. Again, the Recast Insolvency Act lists the subordinated debts, each category will have priority over those below it and within the same category payments are made on a pro rata basis. Subordinated payments regulated under intercreditor agreements have recognition in insolvency proceedings.

SECURITY

Secured lending and credit (immovables)

45. What principal types of security are taken on immovable (real) property?

A mortgage is an in rem security whereby real estate assets that are subject to registration (and certain transferable rights attached thereto, such as usufruct rights and administrative concessions) are charged as security for the fulfillment of a monetary obligation.

Mortgages must be granted in a public deed before a notary public and must be registered with the appropriate Land Registry. No security that is enforceable against third parties is created until the registration of the mortgage has been completed.

Secured lending and credit (movables)

46. What principal types of security are taken on movable (personal) property?

The main security over movable property is the non-registered pledge, which is regulated by articles 1863 to 1873 of the Civil Code.

A pledge is an in rem security whereby possession over certain movable assets is transferred to the pledgee (or to a third party that acts as depositary) as security for the fulfillment of the secured obligation. Therefore, the owner of the pledged asset, although losing possession, does not transfer title.

To be enforceable against third parties, pledges must generally be granted in a public document (either in an escrituraor a póliza), and possession over the pledged asset must be transferred either to the pledgee or to a depositary. Specific provisions apply to pledges over credit rights and other movable properties.

CLAWBACK AND RELATED-PARTY TRANSACTIONS

Transactions that may be annulled

47. What transactions can be annulled or set aside in liquidations and reorganizations and what are the grounds? Who can attack such transactions?

Rescission is a remedy that allows the insolvency receiver (or the creditors, in the absence of action by the insolvency receiver) to rescind acts and contracts that are harmful to the insolvency estate entered into by the debtor:

• l in the two years before the insolvency filing; or
• l in the two years before the notification to the court of the initiation of, or the intention to initiate, negotiations to agree a restructuring plan, and in the period between the notification and the insolvency declaration, when the restructuring plan has not been approved or homologated and an insolvency declaration takes place within the year after the end of the effects of the notice.

The decision of whether a certain act or contract is harmful to the insolvency estate is to be assessed by the insolvency court in view of the pleadings and evidence put forward by the claimant. Having said that:

• l certain acts and contracts are presumed by law to be harmful to the insolvency estate, without any possibility for the parties to file evidence to rebut this presumption. This is the case for gifts and prepayments of unmatured and unsecured debt;
• l Royal Legislative Decree 1/2020, of 5 May (the Recast Insolvency Act) also presumes (although this presumption is rebuttable), that certain acts or contracts damage the insolvency estate. This is the case for the creation of security for pre-existing obligations disposals in favor of related parties, or prepayments of unmatured secured debt;
• l in the remaining cases, the claimant will have to put forward the arguments and evidence that the alleged act or contract damages the insolvency estate;
• l transactions made within the ordinary course of business cannot be rescinded on the basis of being harmful to the insolvency estate; and
• l acts and transactions subject to foreign law where the beneficiary of the transaction can prove that such transaction cannot be rescinded or challenged by any means and under any grounds whatsoever (ie, not only in insolvency scenarios) under the law that governs it cannot be rescinded.

In addition, certain actions can be subject to a four-year clawback term under the general regime of avoidance in the Spanish Civil Code, pursuant to which the insolvency receiver or any creditor may bring an action to rescind a contract or agreement provided that it is performed or entered into fraudulently and the creditor cannot obtain payment of the amounts owed in any other way.

If the court declares a transaction rescinded, the parties’ reciprocal obligations must be restored, and the credit rights of the relevant creditor (if any) will be classified as a debt of the insolvency estate. This principle does not apply where the court understands that the counterparty acted in bad faith, in which case its claim will be classified as a subordinated debt.

Equitable subordination

48. Are there any restrictions on claims by related parties or non-arm’s length creditors (including shareholders) against corporations in insolvency or reorganization proceedings?

Related-party claims rank as subordinated, with the consequence that these debts will only be repaid once the remaining debts have been satisfied in full.

If the insolvent debtor is a natural person, the following will be considered a related party:

• the spouse of the insolvent debtor or a person who has been such during the two years before the insolvency declaration, or individuals who cohabit with a similar relation of affection or who have done so during the two years before the insolvency declaration;
• the parents, grandparents, children and siblings of the insolvent debtor or any of the aforementioned persons;
• the spouses of the parents, grandparents, children and siblings of the insolvent debtor;
• legal entities controlled by the insolvent debtor or their relatives and the de jure or de facto directors of such legal entities;
• legal entities forming part of the same group of companies as those mentioned above; and
• legal entities in respect of which the individuals or legal entities mentioned above qualify as de jure or de facto directors.

If the insolvent debtor is a company, the following will be considered a related party:

• shareholders and, if they are natural persons, the related parties set out above who are, pursuant to the law, personally and unlimitedly liable for the company debts;
• the insolvent company’s directors and de facto directors, the insolvent company’s liquidators and the general managers with general powers to run the insolvent company, as well as those who have acted as such during the two years before the insolvency declaration;
• shareholders that, when the relevant debt arose, directly or indirectly owned at least 10 percentof the shares of the insolvent company, except when the insolvent company is a listed company or a company with listed debt when this level is 5 percent;
• common shareholders of the insolvent company and another company of the same group, provided that they meet the requirements set out in the immediately preceding point; and
• companies in the same group as the insolvent company.

Lender liability

49. Are there any circumstances where lenders could be held liable for the insolvency of a debtor?

The Recast Insolvency Act does not regulate whether a lender is liable for the insolvency of the debtor. However, some scholars and court rulings have analyzed the possibility of a lender being deemed de facto director due to covenants included in refinancing agreements when the debtor files for insolvency afterwards. Nevertheless, the rulings considering a lender as a de facto director have been very limited.

According to the Spanish Supreme Court, de facto directors are persons:

• l who have not been formally appointed as directors but who in practice manage and represent the company; or
• l under whose instructions the directors manage the company.

Therefore a de facto director does not need to be recognized as such by third parties that deal with the company. If a lender is declared a de facto director:

• l that lender will qualify as a special related party to the insolvent company and, therefore, its claims will rank as subordinated; and
• l if the insolvency is declared ‘guilty’ and that lender is declared a responsible party or accomplice, the consequences may include, among others, the loss of any rights as creditor, an obligation to pay damages or the obligation to settle any deficit with the insolvent company’s creditors.

Consequently, covenants relating to supervision or monitoring in a facility agreement should be very carefully drafted with a view to avoiding any risk to the company management under the instructions of the lenders and, as a result, the lenders being deemed de facto directors.

GROUPS OF COMPANIES

Groups of companies

50. In which circumstances can a parent or affiliated corporation be responsible for the liabilities of subsidiaries or affiliates?

In the framework of an insolvency proceeding classified as ‘guilty’, the parent company would be liable if the parent had given instructions to the insolvent company that caused or exacerbated the insolvency. In such a case, the parent company’s directors could be deemed de facto directors (ie, persons who, without being formally appointed as directors, are acting as such) of the insolvent company who could ultimately be responsible for indemnifying third parties for any loss or damage caused by the insolvent company. Furthermore, if the insolvency proceeding ends with the liquidation of the company, the court may also rule that the de facto directors pay any outstanding amounts upon liquidation to the company’s creditors.

Royal Legislative Decree 1/2020, of 5 May (the Recast Insolvency Act) only envisages that the insolvency of companies belonging to the same group are heard before the same judge, but the different proceedings are not unified or amalgamated. Therefore, each insolvency proceeding follows its own separate regime, with the relevant insolvency estates remaining separate. The judge in charge of the proceedings must seek good coordination of the different proceedings.

Combining parent and subsidiary proceedings

51. In proceedings involving a corporate group, are the proceedings by the parent and its subsidiaries combined for administrative purposes? May the assets and liabilities of the companies be pooled for distribution purposes?

The Recast Insolvency Act contains specific regulations related to groups filing for insolvency and in relation to pre-insolvency filing. In particular, the Recast Insolvency Act allows groups of companies to apply together for insolvency proceedings and to file together the notification to the court of the existence of negotiations with the creditors to agree a restructuring plan or the intention to start negotiations immediately.

The limited liability principle applicable to Spanish companies prevents the assets and liabilities of companies within a group from being combined; although, in some specific cases, it would be possible to perform such consolidation for the purposes of the insolvency receiver’s report. This is without prejudice to the fact that intra-group credits are generally subordinated claims and the possibility of (among others) the insolvency receivers challenging those claims if they prejudice the insolvency estate.

Suspension of the enforcement of guarantees or security interests granted by another group company, when requested by the debtor with evidence that enforcement could lead to the insolvency of both guarantor or security provider and debtor, is possible when the notification of negotiations of a restructuring plan has been filed. Additionally, in certain circumstances, the effects of a restructuring plan of a given company can be extended to guarantees or security interests granted by another group company not affected by the restructuring plan.

INTERNATIONAL CASES

Recognition of foreign judgments

52. Are foreign judgments or orders recognized, and in what circumstances? Is your country a signatory to a treaty on international insolvency or on the recognition of foreign judgments?

Regulation (EU) 2015/848 of the European Parliament and of the Council on insolvency proceedings (the Recast Insolvency Regulation) applies in Spain.

Also, non-EU insolvency proceedings are recognized in Spain through the exequatur proceedings contained in the Civil Procedure Act, provided that the following requirements set out in Royal Legislative Decree 1/2020, of 5 May (the Recast Insolvency Act), are met:

• the foreign decision refers to collective proceedings grounded in the insolvency of a debtor by virtue of which all of its assets and activities are controlled or supervised by a tribunal or authority in relation to its liquidation or reorganization;
• the foreign decision is final;
• the competence of the foreign court is based on the jurisdictional criteria provided by the Recast Insolvency Act (ie, center of main interests or domicile) or there is a reasonable connection equivalent to the aforementioned criteria;
• the decision has not been rendered in the absence of the debtor, or it has been rendered after the summoning of the debtor in due form and with sufficient time for it to properly defend itself; and
• the decision is not against public policy.

Foreign insolvency proceedings will be recognized as main insolvency proceedings (if foreign insolvency proceedings are opened in a country where the debtor has its center of main interests) or as territorial foreign proceedings (if foreign proceedings are opened in a country where the debtor only has an establishment or assets devoted to a certain business activity).

UNCITRAL Model Laws

53. Have any of the UNCITRAL Model Laws on Cross-Border Insolvency been adopted or is adoption under consideration in your country?

The UNCITRAL Model Law on Cross-Border insolvency (1997) was taken into consideration by the drafters of the international conflict rules contained in the Recast Insolvency Act; however, Spain has not formally adopted the UNCITRAL Model Law on Cross-Border insolvency (1997).

Foreign creditors

54. How are foreign creditors dealt with in liquidations and reorganizations?

In general, foreign creditors are subject to the same regulations and have the same rights as Spanish creditors.

Cross-border transfers of assets under administration

55. May assets be transferred from an administration in your country to an administration of the same company or another group company in another country?

There is no provision in the Recast Insolvency Act concerning the transfer of assets from one administration to another.

COMI

56. What test is used in your jurisdiction to determine the COMI (centre of main interests) of a debtor company or group of companies? Is there a test for, or any experience with, determining the COMI of a corporate group of companies in your jurisdiction?

In the case of a legal person, the Recast Insolvency Act establishes that the place of the registered office is presumed to be the centre of main interests (COMI). To this effect, a change of registered office carried out in the six months before the insolvency declaration is ineffective.

Spanish courts have had the chance to examine the COMI of companies on several occasions, in which they have mainly analyzed the location in which the management decisions are taken. In general, factors that have been held to be relevant to determine a debtor’s COMI (in addition to the rebuttable registered office presumption) are:

• location of internal accounting functions and treasury management;
• governing law of main contracts and location of business relations with clients;
• location of lenders and the location of restructuring negotiations with creditors;
• location of human resources functions and employees as well as purchasing and contract pricing and strategic business control;
• location of IT systems;
• domicile of directors;
• location of board meetings; and
• general supervision.

Spanish courts have in the past tended to focus on the location of the principal business operations and the location of assets.

In Spain, there is no specific test to determine the COMI of a corporate group of companies. Hence, in general, the parent company and each subsidiary of a corporate group is subject to an individual and entirely separate insolvency proceeding.

Cross-border cooperation

57. Does your country’s system provide for recognition of foreign insolvency proceedings and for cooperation between domestic and foreign courts and domestic and foreign insolvency administrators in cross-border insolvencies and restructurings? Have courts in your country refused to recognizeforeign proceedings or to cooperate with foreign courts and, if so, on what grounds?

Recognition in Spain of EU insolvency proceedings is available through the Recast Insolvency Regulation, with this recognition being automatic.

Also, the Recast Insolvency Regulation and the Recast Insolvency Act establish the duty of reciprocal cooperation for domestic and foreign administrators. Cooperation is generally focused on the exchange of information, coordination of the administration of assets and the possibility of enacting concrete cooperation rules.

We are not aware of any case where Spanish courts have refused to recognize foreign proceedings or to cooperate with foreign courts.

Cross-border insolvency protocols and joint court hearings

58. In cross-border cases, have the courts in your country entered into cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries? Have courts in your country communicated or held joint hearings with courts in other countries in cross-border cases? If so, with which other countries?

The international rules contained in the Recast Insolvency Act contain specific provisions on the coordination of parallel insolvency proceedings, including duties of cooperation on insolvency receivers (by exchange of information, coordination of administration and supervision and the possibility for the Spanish courts or authorities to render rules on the coordination of proceedings). We are not aware of any public protocols or agreements reached between courts or authorities.

Winding-up of foreign companies

59. What is the extent of your courts’ powers to order the winding-up of foreign companies doing business in your jurisdiction?

Generally, if a Spanish court determines that a foreign company’s COMI is located in Spain, main insolvency proceedings may be opened in Spain, which could ultimately lead to the winding-up of the company if a settlement agreement between the debtor and its creditors is not reached.

Recognition of the Spanish main insolvency proceedings and enforcement of the Spanish courts’ insolvency resolutions is automatic in the member states of the European Union (excluding Denmark) according to the Recast Insolvency Regulation. For non-EU countries, recognition and enforcement would vary depending on whether a convention has been signed with the relevant country or that country’s particular internal legislation.

UPDATE AND TRENDS IN RESTRUCTURING AND INSOLVENCY IN SPAIN

Trends and reforms

60. Are there any emerging trends or hot topics in the law of insolvency and restructuring? Is there any new or pending legislation affecting domestic bankruptcy procedures, international bankruptcy cooperation or recognition of foreign judgments and orders?

The Law 16/2022, of 5 September, for the amendment of the Spanish Insolvency Law that transposes Directive 2019/1023 on restructuring and insolvency entered into force on 26 September 2022 (excluding some articles).

The Law 16/2022 sets out structural reforms in pre-insolvency and insolvency regulations to achieve the following goals:

• with respect to viable companies facing financial difficulties, to facilitate debt restructurings that guarantee the rights of creditors and the continuity of the company through restructuring plans, which replace refinancing agreements and out-of-court payment agreements;
• with respect to non-viable companies, to extract the highest value of the assets to satisfy creditors following a defined ranking of claims; and
• with respect to natural persons facing insolvency, to offer good faith debtors a partial discharge of their liabilities and a second chance.

There is no new pending regulation affecting pre-insolvency or insolvency procedures in Spain at this moment.

* The information in this chapter was accurate as at September 2023.

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