Insolvency 2019 Second Edition

Last Updated November 20, 2019


Law and Practice


Alas Legal Advisors, S.L. is a boutique law firm. Its 15 lawyers and experts hold extensive experience in commercial and corporate law with a particular focus on financial restructuring and insolvencies, and mergers and acquisitions. Other practice areas include arbitration, civil procedure, tax, economic criminal procedure and corporate procedure, real estate and urban development. The team at Alas Legal Advisors have acted as receivers in more than 100 insolvency proceedings and participated in many important debt restructuring operations during and after the economic crisis. Clients have included Petersen Energía (owner of the 25% of Repsol YPF) and Cerep Gran Via (Carlyle Group), where the case included the liquidation and sale of its real estate assets.

To know the status of the insolvency and restructuring market in Spain, the statistical data can be consulted in the publications produced by the National Statistics Institute (Instituto Nacional de Estadística) and the General Council of the Judiciary (Consejo General del Poder Judicial).

Through these, we can see how almost 6000 insolvencies have been declared as of June 2019, of which around 10% are necessary. This represents an increase of 23.7% and the highest figure since 2013. Specifically, the insolvent companies related to the industrial sector account for approximately 15% of the total and are located mainly in Catalonia, Madrid, Valencia and Andalusia. The sectors most affected, together with the industrial sector, are commerce and construction. Approximately 90% of insolvencies end in liquidation.

However, there is no statistical data on the restructuring of companies as it is generally subject to confidentiality. Although this absence of data will be mitigated with Directive (EU) 2019/1023 of the European Parliament, and of the Council of 20 June 2019, on preventive restructuring frameworks, discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt. This is further supported by amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency) (the "Restructuring and Insolvency Directive"), specifically Recital 17.

The main triggers for increased bankruptcies are reduced availability of credit, over-indebtedness, provision of collateral and over-guarantees.

Conversely, the triggers that tend to decrease restructurings and bankruptcies would be greater access to credit, greater legal certainty, and financial and political stability.

With the adoption of the new Restructuring and Insolvency Directive, changes are expected in the market for restructuring and insolvency. The approval at Spain’s national level of the Revised Text of the Insolvency Law is also expected, and will lead to profound changes in the sector. However, political instability is delaying the entry into force of the new legal text and it is not known when these legislative changes will take place.

The laws and legal systems applicable in Spanish jurisdiction to financial restructurings, reorganisations, liquidations and bankruptcies of commercial entities and companies are as follows:

The basic regulations on restructurings and insolvencies are the following:

  • Law 22/2003, of July 9th, on insolvency proceedings (LC);
  • Law 9/2015, of May 25th, on urgent measures in tax, financial and insolvency proceeding matters;
  • Law 38/2011, of October 10th, on the reform of the Law on insolvency proceedings;
  • Law on support for entrepreneurs and their internationalisation;
  • Royal Decree-Law 3/2009, of March 27th, on urgent measures in the area of refinancing and restructuring of corporate debt;
  • Royal Decree-Law 11/2014, of September 5th, on urgent measures in insolvency proceeding matters;
  • Law on urgent measures in the area of corporate debt refinancing and restructuring;
  • Law 5/2015, of April 27th, Law on the Promotion of Business Financing;
  • Regulation 2015/848/EU of 20 May on bankruptcy proceedings;
  • Law 1/2000, of January 7th, on Civil Proceedings; and
  • Royal Decree 10/2008, December 12th, on Financial Measures to Improve the Liquidity of Small and Medium-Sized Enterprises.

The types of voluntary and involuntary proceedings can be found in insolvencies as detailed in 7.1 Types of Voluntary/Involuntary Proceedings. In restructurings, the scenarios can be classified as follow:

  • debt restructuring through negotiation processes with the main creditors (mainly financial entities or creditors for commercial operations) that must culminate in a refinancing agreement. Likewise, deferrals can be granted on the maturity of debts through the signing of the corresponding stand-still agreements and thus avoid entering into a situation of bankruptcy;
  • in the event that the debt restructuring measures do not bear fruit, we can turn to the pre-bankruptcy institutes of Article 5 bis LC; and
  • insolvency proceedings.

Any debtor is obliged to file for insolvency proceedings within two months of the date on which they knew, or ought to have known, of their state of bankruptcy. Otherwise, they risk the consequences detailed in 7.1 Types of Voluntary/Involuntary Proceedings.

Companies currently in or for which bankruptcy is imminent have the obligation to resort to the bankruptcy process or pre-insolvency proceeding mechanisms to save their bankruptcy situation.

As a preliminary step to apply for insolvency proceedings, in accordance with the provisions of Article 5 bis LC, the debtor may inform the competent court for the declaration of their insolvency that they have initiated negotiations to reach a refinancing agreement (as provided for in Article 71 bis 1 and in Additional Provision 4) or to obtain adhesions to an early agreement proposal under the terms provided in the LC.

These pre-insolvency proceedings mechanisms may be initiated by communication at any time prior to the expiry of the period established in Article 5 of the LC, ie, within two months following the date on which it would have known or should have known of its state of bankruptcy.

If the pre-insolvency mechanisms or institutes are not initiated, the common debtor may apply directly for a declaration of voluntary insolvency before the Mercantile Court that corresponds to their place of domicile. In this request for declaration of insolvency, the debtor may request the opening of the liquidation.

In the event that the debtor fails to comply with its legal obligation to request the declaration of insolvency, the creditors of the insolvent party may file a necessary declaration of insolvency based on the title by which the execution or enforcement was effected without the existence of free assets sufficient for payment from the embargo, or on the existence of any of the following facts:

  • the general dismissal of the current payment of the debtor's obligations;
  • the existence of embargos for pending enforcements that generally affect the debtor's patrimony;
  • the hasty or ruinous lifting or liquidation of its assets by the debtor; and
  • generalised breach of obligations of any of the following types:
    1. the payment of tax obligations due during the three months prior to the application for insolvency proceedings;
    2. the payment of Social Security contributions and other concepts of joint collection during the same period; and
    3. the payment of salaries and indemnities and other remunerations derived from the work relations corresponding to the last three-monthly payments.

Bankruptcy is required to initiate both voluntary (ordinary) proceedings and involuntary (necessary) proceedings. The LC defines bankruptcy as the state in which the debtor is unable to meet its enforceable obligations on a regular basis.

The Second Additional Provision of the LC establishes the special Regime applicable to credit institutions, investment services companies and insurance companies, determining, in Section 1, that in insolvency proceedings of credit institutions or entities legally assimilated to them, investment services companies and insurance companies, as well as member entities of official securities markets and entities participating in securities clearing and settlement systems, the specialities for insolvency proceedings situations established in their specific legislation shall be applied, except for those relating to the composition, appointment and functioning of the Insolvent Administration (IA).

On the other hand, the Second Additional Provision establishes the special Regime applicable to situations of bankruptcy of companies concessionaires of public works and services or contractors of the Public Administrations, determining that, in the insolvency proceedings of companies concessionaires of public works and services or contractors of the Public Administrations, the specialities established in the legislation of public sector contracts and in the specific legislation regulating each type of administrative contract will be applied.

On 26 June 2019, the Restructuring and Insolvency Directive was published in the Official Journal of the European Union.

This Directive must be transposed by the Member States by 17 July 2021, at the latest, with the exception of the provisions necessary to comply with Article 28(a), (b) and (c), concerning the use of electronic means of communication for claims, submission of restructuring or repayment plans, and notifications to creditors (which has a deadline of 17 July 2024), as well as the provisions necessary to adapt Article 28(d) on the lodging of challenges and appeals by such electronic means of communication, which has a deadline for transposition of 17 July 2026.

The objectives of the Directive are to enable viable companies and entrepreneurs in financial difficulties to have access to effective national preventive restructuring frameworks which enable them to continue their business, to allow insolvent or over-indebted bona fide entrepreneurs to enjoy full discharge of their debts after a reasonable period of time ("second chance") and to improve the efficiency of restructuring, bankruptcy and debt relief proceedings, in particular with a view to reducing their duration (Recital 1).

The new Directive is intended to follow the model of Chapter 11 of the American Bankruptcy Code and the inclusion of consensual agreements "consensual plan" and “non-consensual agreements or cramdown plan" of restructuring. However, it is still too early to answer all these questions.

All these processes should be expressly detailed once the new Directive is transposed.

Notwithstanding the above, the process could be as follow:

Initially, the debtor should communicate to the creditors the necessity of restructuring its debts and the beginning of a fair negotiation in order to settle the situation. Recognising distress and exploring options early is paramount. Significant value enhancement and value loss mitigation strategies can be pursued if recognised sufficiently early.

With the beginning of the negotiations the creditors should signed the consensual “standstills” and credit agreement default waivers as part of an initial informal and consensual process;

During the negotiations the debtor should informed the creditors of the debt situation explaining the viability plan and all the measures which should be adopted by the debtor. In the practice all these negotiations are oriented to obtain a modification of:

  • extension/reduction of the amount of debt: new money/unsustainable debt;
  • modification of quota;
  • interest rate change;
  • vesting periods;
  • modification/extension of warranties; and
  • others including debt capitalisation, structural modifications, etc.

The creditors should co-ordinate together with the debtor the best strategy avoiding any individual actions. The debtor should not take any actions adopting unilateral measures which might adversely affect the prospective return to relevant creditors. They used to constitute steering committees in order to defend their interest. In Spain, there are not a regulation of the committees and their function yet and is expected that this will be settle in the Directive.

See 6.10 Priority New Money.

See 6.3 Roles of Creditors.

See 6.12 Restructuring or Reorganisation Agreement.

Secured creditors can apply to the debtor for personal guarantees, loans with collateral, real guarantees (chattel property or real estate mortgages, pledges with or without displacement, antichresis, etc).

Outside the insolvency proceedings, the secured creditors may enforce their guarantees through enforcement procedures agreed in the various security agreements or through the mechanisms provided by law (enforcement proceedings).

As part of the insolvency proceedings, compliance with the rules relating to the enforcement of guarantees set forth in Articles 8, 55, 56 and 155 of the LC must be verified.

Secured creditors may block insolvency proceedings. A typical example is when credit or guarantee contracts are protected or based on non-national law. For example, where collateral is subject to Luxembourg law (ie, forum shopping).

In Spain, secured creditors cannot enforce their collateral until the approval of an agreement whose content does not affect the exercise of this right or one year has elapsed since the declaration of insolvency without the opening of liquidation (Article 56 LC).

If the secured creditors do not initiate the execution of their assets after the expiry of the one-year period, they must be subject to the liquidation plan presented by the IA.

In the process of restructuring, Article 5 bis LC establishes that, from the presentation of the communication of the commencement of negotiations, single or extrajudicial executions of assets or rights that are necessary for the continuity of the debtor's professional or business activity may not commence until one of the following circumstances occurs:

  • the refinancing agreement provided for in Article 71 bis 1 LC is formalised;
  • the order is issued admitting the application for judicial approval of the refinancing agreement;
  • the out-of-court settlement of payments is adopted;
  • the necessary adhesions have been obtained for the admission for processing of an anticipated proposal of agreement; or
  • the declaration of insolvency takes place.

The special procedures for dealing with/executing/indicating the rights and encumbrances/guarantees of secured creditors are set out in Royal Decree 5/2005, of March 11th, on urgent reforms to boost productivity and improve public procurement (RD 5/2005).

In RD 5/2005, Article 15 establishes that financial guarantee agreements shall not be limited, restricted or affected in any way by the opening of an insolvency proceeding or administrative liquidation procedure, and may be executed immediately separately, in accordance with agreements between the parties and the provisions of this section.

On the other hand, Article 12 establishes the procedure for the execution of pledged financial guarantees, establishing in Section 2 that when the object of the financial guarantee is effective and the settlement of the main obligations and the execution of the financial guarantees have taken place, the creditor may order the cash transfer operations.

Article 8 of the European Bankruptcy Regulation 2015/848 provides that the opening of bankruptcy proceedings shall not affect the rights in rem of a creditor or third party in respect of tangible, intangible, movable or immovable property, whether specific property or a collection of indefinite assets which vary from time to time, which belong to the debtor and which, at the time the proceedings are opened, are situated in the territory of another Member State.

Guaranteed creditors do not have special procedural rights, except for the possibility of initiating or resuming the execution of guarantees before the judge of the insolvency proceeding in accordance with the provisions of Article 57 of the LC, provided that the period of paralysis provided for in Article 56 has elapsed.

However, if the liquidation phase has been opened, creditors who have not exercised the enforcement actions before the declaration of insolvency proceedings will lose the right to do so in a separate enforcement procedure and the actions that had been suspended as a result of the declaration of insolvency proceedings will be resumed, accumulating to the collective enforcement procedure as a separate piece.

The typology of creditors included in the LC would be as follows:

  • Credits against the estate: those established in Article 84 of the LC are considered to be claims against the estate. This states, "credits for salaries for the last thirty days of effective work prior to the declaration of bankruptcy and in an amount that does not exceed double the minimum interprofessional salary" must be paid immediately.
  • Insolvency proceeding credits: the principle of par conditio creditorum or parity of treatment in the payment of creditors applies for credits of the same class. Insolvency proceeding credits can be classified in the following classes:
    1. secured credits, to be paid with the amount obtained of the collateral; and
    2. unsecured credits, both ordinary and subordinated to be paid with the amount obtained of the liquidation of the assets without any priority in the recovery.

Unsecured trade creditors will have their full credit satisfied if the assets of the insolvent party enable it to be covered by agreement or liquidation transactions.

The unsecured creditors could disrupt an insolvency proceeding and achieve a suspension or postponement of the liquidation, by appealing the Order opening the liquidation or even requesting a postponement. In this case it is up to the judge to decide whether or not to grant the postponement.

Unsecured creditors must file a writ before the competent court in order to obtain a ruling against the debtor. Once the creditor obtains the declaratory judgment, which is an enforceable title, the enforcement process against the assets of the debtor may begin. 

Depending on the solution reached, either through the approval of an agreement (maximum waiting period of ten years) or the liquidation of an entity, the creditors, if there is enough left over, can achieve some recovery of their credits in a period of seven to eight years.

In our legal system, there is a deficit in the regulation of the rights of landlords in insolvency matters. Owners of assets as buildings, do not have any bespoke rights and remedies. They need to begin an eviction process.

As already stated, the European Insolvency Regulation 2015/848 provides for special rights or protections applicable to foreign creditors.

Once the credits against the estate have been satisfied, the payment of the credits will proceed with general privilege, in the order established in Article 91 LC and, if applicable, according to a pro rata within each number. Once satisfied, the payment of the ordinary credits will proceed. The payment of the ordinary credits will not be made until the credits against the estate and the privileged credits have been fully satisfied, being satisfied pro rata, together with the credits carrying special privilege, if applicable. The payment of the subordinated credits will be made once the ordinary credits have been fully satisfied, in the order established in Article 92, and where appropriate, pro rata within each number.

The protection of fresh money was one of the novelties the Spanish legislator introduced in the LC through Law 38/2011 establishing that, in accordance with its Articles 84.2.11º and 91.6, 50% of the new treasury income that the company receives thanks to a refinancing agreement, and that meet the requirements of Article 71.6 LC, will be considered as credit against the estate if it is subsequently declared in bankruptcy, and the remaining 50% will be qualified as general privileged credit.

Likewise, the credits for salaries for the last thirty days of effective work prior to the declaration of bankruptcy and in an amount that does not exceed double the minimum interprofessional salary “must be paid immediately".

With respect to professional or legal fees, there are jurisprudential discussions as to whether refinancing fees should be included as claims against the estate and there are contradictory jurisprudential decisions against such recognition.

The portion of the claim recognised as a claim against the estate shall have priority for collection over bankruptcy claims. However, claims secured by special privilege shall be paid out of the affected assets and rights, whether they are subject to separate or collective enforcement.

Prior to a company declaring insolvency, and even before communicating Article 5 bis LC, it may initiate steps to reach a refinancing agreement in accordance with the provisions of Article 71 bis LC that enjoys judicial protection.

This process begins by informing creditors of the need to refinance their debts and presenting a short- and medium-term viability plan. This plan must be analysed and certified by an auditor.

The said agreement cannot be cancelled whenever there is a significant increase in the available credit or modification or extinction of its obligations, either by means of an extension of its expiration period or the establishment of others contracted in substitution of the former.

It is also an essential requirement that the agreement has been signed by creditors whose claims represent at least three fifths of the debtor's liabilities at the date of adoption of the refinancing agreement. For the purposes of calculating this majority of liabilities, it shall be understood that, in agreements subject to a syndication regime or agreement, all the creditors subject to said agreement sign the refinancing agreement when those representing at least 75% of the liabilities affected by the syndication agreement vote in their favour, unless the rules governing syndication establish a lower majority, in which case the latter shall apply.

For the financing agreement to be valid, it is necessary:

  • That they increase the proportion of assets over previous liabilities;
  • That the resulting current asset is greater than or equal to the current liability;
  • The value of the resulting guarantees in favour of the intervening creditors does not exceed nine tenths of the value of the outstanding debt in favour of them, nor of the proportion of guarantees over outstanding debt that they had prior to the agreement. The value of the guarantees is understood to be that defined in Section 2 of the fourth additional provision;
  • That the interest rate applicable to the debt subsisting or resulting from the refinancing agreement in favour of the intervening creditor or creditors does not exceed by more than one third that applicable to the previous debt; and
  • That the agreement has been formalised in a public instrument granted by all the parties involved in it, and with express evidence of the reasons that justify, from the economic point of view, the various acts and business carried out between the debtor and the intervening creditors, with special mention of the conditions provided for in the foregoing letters.

Once the financing agreement has been approved and formalised in a public deed, its homologation may be requested from the court corresponding to the court of the debtor's registered office, both by the debtor and by any of the creditors signing the agreement, provided that it has been signed by creditors representing at least 51% of the financial liabilities, and that the provisions of the preceding paragraphs are complied with.

If the legal requirements explained are met, the court will automatically grant the homologation by means of an order.

The company's governing body, which retains its powers, must maintain a proactive position in order to obtain the refinancing agreement with the creditors by articulating the viability plan.

Unless negotiations are conducted under the mechanism of Article 5 bis LC, or if creditors have granted stand-still agreements to the company, the company does not enjoy moratoriums or suspension of claims filed, although it can continue to operate normally.

The debtor can also negotiate the entry of fresh money, which will enjoy the protection detailed in 5.9 Priority Claims in Restructuring and Insolvency Proceedings.

The financing creditors are usually grouped together in Steering Committees to monitor the correct implementation of the agreed viability plan. It is important that this monitoring is carried out without intervening in the administration of the company in order to prevent refinancers from being considered as de facto administrators and their credits from being subordinated in the event of bankruptcy, as detailed in 12.4 Shadow Directorship.

They must request the maximum accounting information from the company and, in particular, a short- and long-term viability plan duly audited by an auditor.

Dissenting creditors will be able to challenge the order of judicial approval of the refinancing agreement, although it is certainly restrictive as far as grounds for challenge are concerned and only allows them to argue the disproportionate nature of the sacrifice required of dissenting creditors and the failure to comply with the majorities of financial liabilities required by law.

During the negotiation for a refinancing agreement there is autonomy, ie, freedom to negotiate the possibility of transferring the credits by the creditors. Debtors can only assign or transfer their credits with the permission of the creditors.

It is possible to jointly restructure a group of companies through this mechanism. In the case of group agreements, the percentage indicated will be calculated both on an individual basis, in relation to each and every one of the affected companies, and on a consolidated basis, in relation to the credits of each affected group or subgroup, excluding in both cases from the calculation of liabilities the loans and credits granted by group companies.

During this phase, it is possible to liquidate assets according to the viability plan if the creditors have given their permission to reach the refinancing agreement.

The company can dispose of the assets but counting with the agreement with the creditors already indicated in previous answers.

These assets are presumed to have been acquired with fair title unless there is bad faith.

Creditors may bid for the assets of the insolvent company within the same framework as other bidders. However, these bids must be adjusted to market value in order to prevent the IA from cancelling the operation if the company must finally be declared bankrupt.

Guarantees and encumbrances are maintained at this stage and cannot be unilaterally released.

Under refinancing agreements, creditors may make new funds available to the debtor. If the agreement complies with the provisions of Article 71.6 LC, and in the event that the company is finally declared in bankruptcy, these credits will be considered credits with general privilege, except for 50% which will be recognised as a credit against the estate in accordance with the provisions of Article 84.2.11 LC.

Determining the value of claims is done by means of accounting documentation and other evidentiary documents.       

The refinancing agreement, by means of its approval, allows the possibility of extending certain effects of the refinancing agreement to dissenting creditors who opposed it. The accession percentages will determine the intended effects:

On the one hand, when the agreement is supported by 60% of the financial liability (65% in the case of creditors whose claims are secured by collateral), it may be extended to dissenting creditors:

  • Expectations of principal or interest up to a limit of five years; and
  • Conversion of debt into equity loans during the same term.

On the other hand, the following effects may be extended when the majority provided for in the preceding paragraph is 75% (85% for creditors whose claims are secured by a security right):

  • waits with a term of five years or more, but in no case more than ten.
  • removals
  • conversion of debt into shares or participations of the debtor company
  • the conversion of debt into participating loans, convertible debentures or subordinated loans, or other similar instruments.
  • the assignment of property or rights to creditors in payment of all or part of the debt.

If they meet the requirements, the court will automatically approve the agreement.

It will only be possible to release non-debtor parties from liabilities by an agreement with the creditor.

During the negotiation phase, it is possible to negotiate compensation agreements with certain creditors, although these operations must be adjusted to the market since, if the operation is finally declared in insolvency, it could be rescinded by the IA.

In the event that the refinancing agreement is breached by the debtor, creditors may apply for the necessary declaration of necessary insolvency.

Until such time as an arrangement with creditors is declared, the partners/shareholders retain control of the company and its assets.

The types of insolvency proceedings could be divided into two, voluntary (at the request of the debtor) or necessary (at the request of any creditor).

Both are initiated by the presentation of a written request for the declaration of insolvency proceedings before the Commercial Courts.

Creditors' claims are calculated and recognised by the IA in its provisional report together with the inventory of the company and a valuation report of the company as a whole and of its production units under the assumption of continuity of operations and liquidation, and contingent claims may also be recognised in this report. Once the role has been accepted by the IA, the IA will have a period of two months to present the interim report. This period may be extended by the judge due to special circumstances of the insolvency proceeding.

If the creditor does not agree with the recognised amount or with the classification of his credit, he may challenge it by presenting an insolvency proceeding incident, which will be resolved by the judge of the insolvency proceeding.

In the case of voluntary insolvency proceedings, the debtor in their communication shall indicate which executions are followed against their patrimony and which of them fall on goods they consider necessary for the continuity of their professional or business activity.

Regarding the possible compensation of credits between debtor and creditor, this is not possible in accordance with the provisions of Article 58 of the Insolvency Law. The compensation whose requirements had existed prior to the declaration will produce its effects, even if the judicial resolution or administrative act that declares it has been issued after it.

Once the insolvency proceeding has been declared, the IA will inform the creditors in writing of the identification of the procedure, the date of the declaration order, the main or territorial nature of the insolvency proceeding , the debtor's personal circumstances, the agreed effects on the administration and disposition faculties with respect to their patrimony, the appeal to creditors, including those guaranteed with a real right, the term for the communication of the credits to the IA, and the postal address of the court. The IA will also make available to the creditors the interim report according to Article 74 LC detailing the active and passive mass, the definitive texts, and in the event that the liquidation phase is opened, on a quarterly basis, a report detailing the liquidation operations as provided for in Article 152 LC.

In the event that an agreement has been approved, the insolvency proceedings will end with an order of approval, provided that the payments provided for therein are complied with. In the event that the insolvency proceeding has ended in liquidation, once the liquidation operations have begun and the assets of the insolvent party have been sold, the creditors will be paid. In the event that the resulting amount is sufficient to pay all the insolvency credits (which is very unusual), the insolvency proceedings will be concluded. If there is a remainder, it will be delivered to the partners and, in the event that the resulting amount is insufficient, the insolvency proceedings will be concluded due to insufficient assets, as provided for in Article 176 LC.

Characteristics of Voluntary insolvency proceedings: When the creditor requests the declaration of voluntary insolvency proceedings within two months following the date on which they would have known or should have known their state of bankruptcy, the management retains the ability to make decisions and, in general, the initiative in the management of its business.

Characteristics of necessary Insolvency proceedings: If the declaration of insolvency proceedings is necessary, the debtor's Administrative Body is suspended from its powers and is removed from the company's bankruptcy management, which is attributed to the IA. Likewise, those operations carried out in creditor fraud or detrimental to the company's assets during the last two years prior to the declaration of insolvency may be rescinded at the request of the IA, in which case what left the assets unduly must be reinstated, as will be explained below. The request is submitted by a creditor based on the existence of the facts reflected in 2.5 Commencing Involuntary Proceedings.

Once insolvency proceedings have been declared, the powers of the company administrators are supervised or intervened by the IA depending on the type of insolvency proceedings and the stage in which they are taking place. In this sense, in the common phase, any sale of assets must be analysed by the IA and authorised by the judge and, in the liquidation phase, the sales must be made according to the provisions of the liquidation plan once approved by the Judge of the insolvency proceeding.

Any acquisition of assets within the framework of a insolvency proceeding is acquired with fair title and free of charges and encumbrances, if any.

Any negotiation between creditor and debtor prior to the declaration of insolvency proceedings for the sale of an asset will not be valid once the insolvency proceeding has been declared, unless ratified by the court after the approval of the IA.

In Spain, an agreement can only be breached by the debtor who assumes the payment obligations according to it.

In the event of breach of the agreement by the debtor, the Court, at the request of any creditor, will open the liquidation phase.

It is possible for priority new money to be invested or loaned, although it is not usual for money to be lent to companies in insolvency proceeding.

The accumulation of insolvency proceedings is permitted in the case of related companies.

The creditors are grouped according to the classification made by the IA of their claims.

During the common phase, the company will continue to use those facilities that are necessary for the exercise of its activity. Once the opening of the liquidation phase has been agreed, the assets of the insolvent company will be disposed of in accordance with the provisions of the liquidation plan.

In overseas cases, foreign judgments declaring the opening of bankruptcy proceedings will be recognised in Spain by means of the exequatur procedure regulated in the Civil Procedure Act.

Once the exequatur of the opening resolution has been obtained, any other resolution issued in that bankruptcy proceeding and having its basis in insolvency proceeding law will be recognised in Spain without the need for any proceedings, provided that it meets the requirements set out in Article 220 LC.

In the case of member countries of the European Union, the European Bankruptcy Regulation 2015/848 guarantees that the effects of the Spanish main insolvency proceedings are recognised in all the other member states. Likewise, the IA of the declared insolvency in Spain and the administrator or representative of a foreign bankruptcy proceeding relating to the same debtor and recognised in Spain are subject to a duty of reciprocal cooperation in the exercise of their functions, under the supervision of their respective judges, courts or competent authorities. The refusal to cooperate on the part of the administrator or representative, or of the foreign court or authority, will release the corresponding Spanish bodies from this duty.

Insolvency proceedings in Spain are regulated by the provisions of the LC and other provisions indicated in 2.1 Overview of Laws and Statutory Regimes.

Foreign creditors have the same rights as creditors of their class and rank regardless of whether they are foreign or domestic.

In Spain, there are three key figures in insolvency proceedings: the competent judge of the insolvency proceedings; the IA appointed by the competent judge to control and manage the insolvency proceedings; and the Public Prosecutor in charge together with the IA of assessing the culpability, or not, of the company’s administrators in the bankruptcy situation of the insolvent company.

The insolvency judge shall be aware of the civil actions with patrimonial transcendence that are directed against the patrimony of the insolvent party, of the social actions whose object is the extinction, modification or collective suspension of the employment contracts in which the insolvent party is an employer, as well as the suspension or extinction of senior management contracts and the execution against the assets and rights of patrimonial content of the insolvent party ex Article 8 LC.

The IA is responsible for overseeing the success of the insolvency proceedings, faithfully analysing the debtor's financial situation by issuing the required report, as well as managing the liquidation of the company in the event that it is not viable and the liquidation phase is opened. Among the management functions of the insolvent company in liquidation are all those corporate and mercantile tasks such as accounting, labour management in the case of workers, contractual management, etc.

The court, and therefore the competent judge, is chosen randomly from among the existing commercial judges by strict order of distribution.

The appointment of the IA will be made by the natural or legal person listed in the fourth section of the Public Insolvency Registry. The first designation of the list will be made by drawing lots.

However, in large insolvency proceedings, the judge, in a reasoned manner, may appoint an IA different from the one corresponding to the correlative shift when they considers that the profile of the alternative administrator is better suited to the characteristics of the insolvency proceedings.

The main advisors in insolvency proceedings are lawyers and/or economists/financiers.

The fees to be received by the professionals or advisors hired by the insolvent company for their advice are freely agreed, although they are adjusted as required.

No authorisation beyond the need to be a registered lawyer is required in order to be able to submit written pleadings in insolvency proceedings.

The advisors owe duties to the insolvent company, but must always act in accordance with the provisions of the Lex Artis.

Mediation and Arbitration ("Alternative Methods") are used to avoid a conventional judicial process, but it is true that, in practice, it is not often that these Alternative Methods are used.

As we have already said, the Alternative Methods are alternative measures to the resolution of conflicts, therefore, the courts cannot force to resort to mediation or arbitration, unless it has been stipulated in the document that brings about the conflict.

Pre-insolvency agreements to arbitrate disputes will not be enforceable once the insolvency proceeding takes place.

Each of the Alternative Mechanisms has its own regulation in our legal system:

  • Arbitration: Law 11/2011 of May 20th on Arbitration and Regulation of Institutional Arbitration in the General Administration of the State (LA).
  • Mediation: Mediation is regulated by Law 5/2012 of 6 July 2012 on mediation in civil and commercial matters.

Arbitrators are appointed by the parties involved in the controversy and according to the LA no longer requires the status of lawyer, but must be jurist.

If the arbitration is to be resolved by three or more arbitrators, and as long as it is not an arbitration in equity, at least one of them must have the status of jurist (Article 15.1 LA).

With respect to the intervention of mediation, unless the parties agree, the arbitrator cannot have intervened as mediator in the same conflict between them (Article 17.4 LA).

The diligent administrative body must identify the moment when the company becomes bankrupt because since then it has the obligation to file for insolvency proceedings within two months of becoming aware or should have become aware of the bankruptcy situation (Article 5 LC).

Alternatively, within the same period of two months, instead of filing for insolvency proceedings, it could inform the Commercial Court that it has started negotiations with its creditors in accordance with the terms of Article 5 bis, as detailed in 7.1 Types of Voluntary/Involuntary Proceedings.

The main advantages of acting diligently would be the following:

  • the administrative body may continue to exercise its administrative functions, and will only have its powers intervened by the IA; and
  • if it finally goes into liquidation because it was unable to approve an agreement, the insolvency proceeding will probably be declared fortuitous, exempting the administrator from liability, without prejudice to what will be said later with respect to the guilty rating.

In the event that the administrative body does not act with due diligence, any creditor could be expected to institute the necessary insolvency proceedings of the company, provided that the assumptions detailed in the reply provided in 2.4 Procedural Options are met.

The consequences of the declaration of a necessary insolvency are those set out in 7.1 Types of Voluntary/Involuntary Proceedings and failure to comply with the directors' duties may lead to the classification of the insolvency as culpable if, as a consequence, its state of insolvency has been caused or aggravated. Article 164 LC contains the cases or presumptions iuris et de iure for the qualification of the insolvency as guilty, while Article 165 LC regulates the cases of qualification as guilty of the insolvency that admit evidence to the contrary presunciones iuris tantum. The qualification is extended to the administrators in law and in fact, who are at the time of the declaration of the competition or have been so in the two previous years.

If found guilty, the judge may compel those convicted to:

  • pay all or part of the debts of the insolvent company;
  • disqualify them from administering the property of others and from representing any person for a period of two to 15 years;
  • lose any rights they may have as creditors of the insolvent company; and
  • pay damages.

Likewise, and in the event that the judge of the insolvency proceeding becomes aware of any fact of criminal relevance, they shall deduct testimony from the proceedings so that they may be investigated by the criminal jurisdiction.

In 12.1 Duties of Directors, we have explained the claims against the directors by creditors who are able to appear in the voluntary or necessary insolvency proceedings as the case may be, as contained in the sixth section of the insolvency proceeding referring to the processing of the qualification of the insolvency proceeding. The creditors may present the allegations that they consider, taking into account the precepts for the qualification of the aforementioned insolvency proceeding. Likewise, they will have the possibility of initiating the corresponding actions in accordance with the Capital Companies Law.

The appointment of an expert by the debtor company will depend on its profile, its structure and the demands of the creditors, the main ones being that of the financial advisor (preparation of a business plan, cash flow projections, etc) and that of the lawyer (negotiation, drafting of documents, etc).

In our legal system, a de facto administrator is a person who effectively exercises the position of an administrative body outside of a formal and valid appointment, including within this category the "hidden administrator", that is, the person who actually and effectively exercises the functions of administrator of the company, coexisting with a de jure administrator (who appears as such in front of third parties) and in connivance with them, who de facto submits without question to the decisions of the former and, when necessary, formally executes them by signing the pertinent documents.

The essential element of the figure of the de facto administrator is that of autonomy or lack of subordination to a social administration body.

With the reform of the LC following the entry into force of Law 17/2014, of September 30th, which adopts urgent measures regarding the refinancing and restructuring of corporate debt, Article 172 bis was included and, according to its new wording, when the rating section of the insolvency has been "reopened" as a result of the opening of the liquidation phase, they may be condemned to cover the insolvency deficit (ie, to cover the bankruptcy deficit), the part of the insolvency liability not covered in the liquidation), in addition to the administrators or liquidators, de facto or de jure, and the general attorneys in-fact - as has been the case up to now - the partners of the insolvent legal person who have refused without reasonable cause to capitalise credits or issue convertible securities or instruments, frustrating the achievement of a refinancing agreement. The liability of each partner will be determined according to their degree of contribution to the formation of the majority necessary for the rejection of the agreement, the determination of liability will be made by the Judge of the insolvency proceedings depending on their degree of participation.

Now, what about the partner in a preliminary phase? That is to say, if in a guilty qualification of the insolvency, before the opening of the liquidation phase is agreed or an agreement is approved, does the responsibility of the partners exist? In principle, it seems clear that it does not, on the basis of the requirements for the culpable qualification of the insolvency mentioned earlier, since it seems that these requirements are applicable to administrators of law, in fact, proxies and accomplices.

Historical transactions, carried out up to two years before the declaration of insolvency, may be rescinded by the Court at the request of the IA if it is understood that they are detrimental to the estate.

The Rescissory Action (according to Article 71 LC) allows the cancellation of operations carried out up to two years prior to the declaration of insolvency in the case of acts detrimental to the active mass carried out by the debtor, even if there was no fraudulent intention.

Article 71.6 AC exceptionally allows the exercise of other types of analogous actions to the rescission action, such as the Paulian or revocatory Action, thanks to which we can go back up to four years prior to the declaration of insolvency, and the nullity action that does not have a statute of limitations.

The IA has the active legitimacy to exercise the rescissory action and other actions of impugnation.

Likewise, only the IA will be entitled to exercise the rescission action or other similar actions that may be brought against the refinancing agreements.

On the other hand, the creditors that have requested in writing the exercise of any action by the IA, indicating the specific act to be rescinded or contested and the basis for it, will be entitled to exercise it if the IA does not do so within the two months following the request (ex Article 72 LC).

Rescissory actions or acts of similar purpose may only be filed in bankruptcy proceedings governed by the provisions of the Insolvency Proceedings Law.

In the process of restructuring and bankruptcy, the valuations of both the debt and the assets play a fundamental role, given that, depending on the value of the assets of the companies they will be able to make guarantees. Depending on the valuation, the Loan to Value (LTV) will vary. This is a ratio of mortgage information introduced in Spain in 2008, representing the percentage of debt over the value of the property. To be more exact, the value of the property according to the last appraisal.

The initial valuation is carried out by the company in order to clarify the debt map and the value of the assets to reach a refinancing agreement. If the company is finally declared insolvent, the IA will determine the liabilities and assets of the insolvent company in its report.

Valuations, especially real estate valuations, are carried out by independent experts and appraisal companies in accordance with the following: the Restructuring and Insolvency Directive, and the Commission Delegated Regulation (EU) 2018/344 of 14 November 2017, supplementing Directive 2014/59/EU of the European Parliament and of the Council as regards technical regulatory standards specifying criteria relating to the method for valuing differences in treatment in the event of a resolution.

The court may appoint judicial experts to give opinions on valuations.

The jurisprudence is extensive both from the Supreme Court, the Provincial Courts and, above all, Commercial Courts, and at European level, the Court of Justice of the European Union.

Alas Legal Advisors, S.L.

C/ Velázquez 12, 1º

+34 917 819 624

+34 917 819 625
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Law and Practice


Alas Legal Advisors, S.L. is a boutique law firm. Its 15 lawyers and experts hold extensive experience in commercial and corporate law with a particular focus on financial restructuring and insolvencies, and mergers and acquisitions. Other practice areas include arbitration, civil procedure, tax, economic criminal procedure and corporate procedure, real estate and urban development. The team at Alas Legal Advisors have acted as receivers in more than 100 insolvency proceedings and participated in many important debt restructuring operations during and after the economic crisis. Clients have included Petersen Energía (owner of the 25% of Repsol YPF) and Cerep Gran Via (Carlyle Group), where the case included the liquidation and sale of its real estate assets.

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