Vol 3 (2006) - Issue 3

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Spain: Understanding the New Insolvency Law (II)

1. Introduction
In previous issues of International Corporate Rescue (Volume 2, Issue 4, 2005, and Volume 3, Issue 2, 2006) we summarised the most significant changes in Spanish insolvency law as a result of the new Law 22/2003, of 9 July 2003, which entered into force as of 1 September 2004 (the ‘Insolvency Law’), and commented on some particular aspects of the Insolvency Law which have changed the way insolvency proceedings work in Spain.
In this issue, we will discuss the new rules under the Insolvency Law on company voluntary arrangements (‘Company Voluntary Arrangement’ or ‘CVA’) which have again significantly changed insolvency practice in Spain.

2. New Rules on Company Voluntary Arrangements in the Insolvency Law

Under the Insolvency Law, the outcome of insolvency proceedings will ordinarily be either a CVA or a formal insolvency liquidation process. However, the recitals in the Insolvency Law clearly set out that one of the most significant goals of the new law is the preservation of companies, i.e. the continuance of their commercial and industrial activities in spite of the insolvency situation.
This principle, which has a reflection throughout the provisions in the Insolvency Law, serves a number of different purposes: it benefits the creditors, suppliers and customers (who have a better chance to fully recover their money from a trading company), the direct and indirect employees of the insolvent company (who, to a significant extent, would remain employed) and, more generally, it is better for the economy.
Under the Insolvency Law the CVA has been designed as the preferable outcome of insolvency proceedings since, unlike liquidation, it seems that only a CVA can allow for the continuance of the debtor’s business. For this reason, the Insolvency Law provides several opportunities for the debtor to reach an arrangement with the creditors during the course of the proceedings.
However, when one looks into the Insolvency Law in detail, one finds that it presents a blatant contradiction: while it allegedly aims to facilitate the reaching of an arrangement, it also applies a rigid set of limits and restrictions on such arrangements which, in our opinion, will make reaching agreement on CVAs much more difficult.
These restrictions refer (i) to the content of the CVA where the Insolvency Law imposes restrictions, inter alia, on the extent to which the parties may agree on a certain stay or a discharge of the debt, and (ii) to the process through which the final CVA is approved by the court, where the insolvency Law imposes restrictions on the parties’ ability to negotiate and include any amendments to the CVA as the insolvency proceedings develop.