Vol 6 (2009) - Issue 3

Article preview

Lessons from the Spanish Experience

Insolvency is often said to be the acid test of any legal system. Well, the economic crisis is the acid test of the insolvency system itself. From a regulatory perspective, the crisis reopens the debate about which objectives should be pursued and how best to fulfil them. From a pragmatic point of view, the crisis requires a reevaluation of the actual operation of the insolvency system in place.

Establishing the aims and means of an efficient insolvency law is not a straightforward task. With the world changing at an astonishing rate, it is irrational to expect, as has happened with traditional codes, laws to remain unchanged for decades. In this respect, legislators are expected to react promptly to any problems that may arise.

The Spanish insolvency law is relatively recent: it was enacted in 2003 and came into force on 1 September 2004. During this fairly brief period of time, the strengths and weaknesses of the Spanish insolvency law have begun to emerge. Insolvency statistics show a steep increase in the number of insolvency proceedings filed in recent months in Spain. In the last quarter of 2008 these increased by 265% as compared to the previous year, and this trend is continuing according to recent 2009 data. Therefore, it seems like a good time to re-examine some policies.

This is not merely a personal reflection, the Spanish government is well aware of the need to reform the insolvency law. It has announced that in the following weeks it will introduce a set of measures to deal with the crisis, among which the amendment of some of the feeble aspects of the insolvency law is included.
That said, we shall now refer to the policies that, in our opinion, should be re-examined.

First, facilitating an earlier response from creditors in order to minimise costs and delays associated with formal proceedings. Enabling early reorganisation of companies in difficulty implies favouring genuine clean-up attempts. However, Spanish law does not facilitate work-outs and refinancing of debtors in difficulty to the extent that seems currently necessary. Some examples should make this point clearer.

The insolvency law establishes that acts that result in a decrease of the assets available to the general body of creditors, carried out by the debtor in the two years prior to the opening of insolvency proceedings, may be set aside, regardless of the existence of a fraudulent intention. The law does not require that the debtor be insolvent at the time of the transaction, or that the decreasing results from the transaction confer an unfair advantage on the participant creditors, or any other express condition. This rule targets transactions that are reasonably functional to the reorganisation of the company; even refinancing transactions in which security interests are provided in exchange for new value may be targeted. Transactions entailing a reorganisation plan, where the implementation of the plan fails, call for a more considered treatment.

Furthermore, Spanish law grants no priority claim for company refinancing (although the creditors may agree to it through a composition) which does not help viable companies in difficulty obtain much needed refinancing. This is another area requiring careful deliberation: new capital provided to a company to recover should enjoy some kind of priority if the aim is ensure the granting of finance.

The Spanish rule of automatic subordination of claims by parties that have a special relationship with the debtor is making things even more difficult. This rule affects shareholders, whose claims against the company will always be subordinated (e.g., company partners’ loans are treated as equity in insolvency proceedings). An exception to this rule seems sensible when the lender has acquired a stake in the company for reorganisation purposes.

Secondly, should insolvency proceedings be filed, prioritising and speeding up arrangements negotiated with the creditors prior to their commencement is very important. Timing is of the essence. Insolvency proceedings can be speeded up through pre-arranged formulas in which a plan is agreed by the affected creditors prior to the commencement of the proceedings and then submitted concurrently to the petition of commencement of insolvency proceedings (rationale: according to insolvency law, the plan agreed by the majority of creditors can be imposed on the dissenting minority). Insolvency proceedings are then conducted on the basis of such agreement.