Vol 8 (2011) - Issue 3

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The Projected Reform of Spanish Insolvency Law

I. Introduction

On 17 December 2010, the Cabinet of Ministers passed the Amendment Draft Project of Insolvency Act 22/2003 of 9 July ('the Project').

The purpose of this article is to highlight the most important changes brought about by the Project, as well as to underline those aspects either not considered under the Project or those aspects which, in our opinion should have been developed to a greater extent.

The starting point of the Project is the practical experience under the existing Insolvency Law ('LC'), which as the Draft Project’s Preliminary Recitals ('PR') acknowledge, has fallen short of the desired results given that its purpose was to provide continuity to companies in crisis and this has not been achieved. This is evident by the fact that most bankruptcy procedures (statistics reflect figures of 90%) end in liquidation, business closure and total employee layoffs.

As stated in the PR, this amendment’s intention is to fix the mistakes made by the current LC in its approach, as well as to fill in the legal loopholes, which, in our opinion, is achieved only in relation to some of its aspects, as explained below.



II. Amended matters

Pre-Insolvency Institutions: One of the aspects which is emphasised in the PR more strongly is the changes brought about by the so-called Pre-Insolvency Institutions. These are the legal institutions whose intended purpose is to prevent a bankruptcy by anticipating company crises and encouraging extrajudicial solutions, thus avoiding work overload at the courts. In our LC, the elements which most resemble such legal institutions are the Refinancing Agreements and the Proposal of Early Agreement with Creditors ('PEA').

Following our analysis of the Project, our conclusion is that the amendment in this field is far too shy and cannot, under any circumstances, acquire the Pre-Insolvency Institutions denomination according to the criteria set forth by other legal systems.

Regarding the Refinancing Agreements (the clauses of which have been incorporated in Section 71.6 of the Project, even though the PR indicate that the deadline to reach such refinancing agreements have been extended, this extension has not been foreseen in such section. These extensions are essential in order to encourage the development of 'alternatives to the bankruptcy procedure'.

However, the new drafting of the abovementioned Section 71.6 and the Fourth Additional Provision (‘AP’) gives rise to a contradiction that must necessarily be corrected. While Section 71.6 talks about 'Creditors whose credits represent at least three fifths of the debt' when establishing majorities, the Fourth AP requires that majority be composed of 'Financial creditors representing at least seventy five percent of the debt'.

The contradiction between both texts is evident and in practice, it implies that only those cases in which the debt is mostly of financial origin, for example, real estate developers, shall be protected in the case of a refinancing, but not most of the industrial insolvencies in which (although the banks are often heavily relevant in the debt structure) supplier creditors comprise a very important part of the overall creditor base. Such restructurings shall be excluded from the amendment’s scope even when the suppliers have accepted the restructuring of their debt in time, without relief, which would fall under the characteristics of an early proposal.

When considering Refinancing Agreements further (and always holding that the financial institutions are their subjects), with the purpose of optimising recoveries for them, the Project implements new fresh money regulations considering 50% of new finanicng provided under such grounds as secured credit in case of a future insolvency, being the rest of the new financing, in the event of a later insolvency considered as unsecured credit. This measure is on the right track, but one must bear in mind that a modification of these characteristics should be accompanied by an amendment similar to that in the Circular 4/2004 of the Bank of Spain, regarding the provisions for bank arrears, for it to be really effective.

As regards the suspension of the obligation to file for bankruptcy due to the negotiation of a new PEA, previously set forth in Section 5.3 of the LC, the amendments are limited to a redrafting, without any significant changes.