Vol 2 (2005) - Issue 4

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Brief Analysis of the New Spanish Insolvency Code

Introduction

The new Spanish Insolvency Act (the ‘Act’) came into force on 1 September 2004 and replaced the old insolvency regulations from the 19th and 20th centuries. So far, no insolvency proceedings of a substantial company have reached a conclusion and therefore consequences of the new regulation cannot yet be determined. In addition, the new law raises doubts on some important legal issues, especially relevant to financiers.
Nonetheless, the Act has introduced significant changes, namely:
(a) the creation of a single insolvency procedure (concurso), which replaces the old-fashioned multiple proceedings of the former regime (in particular, the so-called insolvency (quiebra) and suspension of payments (suspensión de pagos); and
(b) the duration of the insolvency proceedings has been reduced considerably. For instance, under the old regime certain proceedings were likely to last for several years (i.e. an insolvency was likely to last from 1 to 3 years in some cases and from 3 to 5 or even more years in the most complex cases). With the new regime, the duration of insolvency proceedings could be estimated to be within a range of 1 to 2 years, if an arrangement with creditors is reached, and about 2 years or a little more in the case of liquidation.

The new proceedings are intended to result in a rescue via a compromise with creditors or, failing that, in a liquidation.

Insolvency declaration

The Act envisages two types of insolvency:
(a) Current insolvency: takes place when the debtor is unable to meet its matured obligations; and
(b) Imminent insolvency: takes place when the debtor anticipates it will not be able to meet its obligations regularly and punctually.

Only the company itself can present a petition in the event of imminent insolvency.
The company must present a petition for insolvency within two months from the date it becomes aware, or should have become aware, of its current insolvency. If the directors of the company fail to comply with this requirement, they can face personal liability of up to the aggregate amount of the claims (see ‘Personal liability of Directors’ below). In cases of imminent insolvency this is not a compulsory requirement, but it is advisable to do so to prevent one creditor from petitioning for the insolvency declaration, given that in such a case the consequences of the declaration of insolvency are more restrictive for the insolvent company.
When a company should have become aware of its insolvency has to be proved. There are some rebuttable presumptions in this respect, which are the events or situations allowing creditors to petition (as listed below).
Any creditor can apply for a declaration of insolvency if, inter alia:

(a) there is a general failure by the company to pay its debts when they are due;
(b) the assets seized are not enough to pay the relevant claim; or
(c) the company has failed to pay salaries, tax obligations or social security contributions for a period of at least three months.

The new regime encourages creditors to petition for insolvency by granting preferential treatment to 25% of the first applicant’s claim (i.e. reclassifying their unsecured claim as a priority claim).