Vol 12 (2015) - Issue 3

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Too Many Ineffective Amendments to the Spanish Insolvency Law

The Spanish Insolvency Law ('Ley Concursal'), hereinafter referred as 'LC', has been amended three times during 2014, introducing relevant amendments to insolvency regulations. Among other aspects, the amendments have focused on easing the process of restructuring and refinancing potentially viable companies, which had before been obliged to initiate insolvency proceedings, called 'preconcurso', in order to avoid liquidation (Royal Decree Law 4/2014). Other amendments have focused on composition agreements and improving the effect of liquidation, in order to facilitate business unit sales (Royal Decree Law 11/2014). The third amendment of the LC focuses on the 'preconcurso' or pre-insolvency situation; the situation regarding insolvent company goods once the insolvency proceeding is initiated; and new regulation of clawback actions and stimulation of fresh money concessions to facilitate company survival without penalising moneylenders (Law 17/2014).
Each of the Royal Decree Laws and their respective amendments to the LC are discussed below.

Royal Decree Law 4/2014
Royal Decree Law 4/2014 modified four relevant aspects of the LC, namely: (i) pre-insolvency proceedings (i.e. the 'preconcurso'); (ii) refinancing agreements; (iii) the approval process for refinancing agreements; and (iv) amendments to the process for establishing new cash revenue. The effects of these amendments are summarised below.

i. The 'preconcurso' (preliminary insolvency proceedings)
The main development regarding the 'preconcurso' is that, from the date of the notice of insolvency, legal proceedings can no longer be brought against goods that are needed by the debtor to continue its professional or business activity (article 5 bis LC). Ongoing proceedings regarding such goods are to be suspended if the debtor presents the communication as evidence in court.
While this reform is indeed to be applauded, it is difficult to understand why this cessation has not been extended to public proceedings. The Government has demonstrated double standards in this respect, calling for a sacrifice from ordinary creditors, which government bodies avoid, when this sacrifice should be universally applied. For public creditors, the administrative charge proceedings are not paralysed by the 'preconcurso' request and such creditors are not subject to refinancing agreements or even to a court approval. Such privilege for public creditors has received criticism from the International Monetary Fund, who reminded the Spanish Government that most of the debts of small and medium companies are to public creditors.
Under 5 bis LC, a notification must now be published in the Public Insolvency Register, although the debtor can request that this notification be private. Since public law credit proceedings are not suspended, it would be advisable to always request a private notification.
Finally, there is now a limit on the use of the 5 bis LC notification. Once this notification has been delivered, another cannot be made for the same debtor.

ii. Refinancing agreements
Royal Decree Law 4/2014 attempts to relax prepack schemes in Spain in order to achieve the restructuring and refinancing of companies in debt but with viable businesses, and so avoid them filing for insolvency. Such insolvency filings have a great impact on the national economy and cause the loss of many jobs; furthermore, the percentage of insolvency proceedings that result in liquidation in Spain is around 95%, which is much higher than other countries such as the United Kingdom (80%) and France (70%).