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Restructuring And Insolvency In Spain.

Article Excerpt
When the new Insolvency Law came into force on September 1 2004, the framework for resolving business crises in Spain changed significantly - although the most frequently affected stakeholders (debtors, creditors, employees, judges and advisers) may not be fully aware of the magnitude of the change. The new law provides for the application of a single procedure in the event of insolvency, although the eventual outcome could be recovery or winding-up.

No official English translations of the Insolvency Law are currently available.

The new text seeks to overcome problems caused by archaism, imprecision and a lack of harmonisation. As stated in the preamble to the law, it clearly aims to support the future viability of businesses, as opposed to promoting lengthy and convoluted legal procedures that serve only to aggravate the situation and often leave liquidation as the only solution. Nonetheless, the law also protects creditors by providing a more professional, rapid and secure proceeding (involving specialised judges who deal exclusively with insolvencies, as well as specialised trustees), and new debt preferences that void certain longstanding privileges which are no longer appropriate in Spain's current business framework.

From a commercial viewpoint, the most relevant changes introduced by the new Insolvency Law, which endorse the objective to secure the future viability of businesses, are as follows:

A debtor company must now apply for a declaration of insolvency in certain specified circumstances (eg, current or imminent insolvency, nonpayment of taxes or social security contributions for three months). In the event of non-compliance, the directors may incur serious liability, including disqualification from holding office. However, a debtorinitiated proceeding can be advantageous to the company.

In general, the company's incumbent management is not prevented from controlling or administering the business, but is supervised by the trustee. This allows individuals with in-depth knowledge of the business to remain in positions of responsibility, as long as there are no circumstances that would necessitate their removal from office, such as fraudulent activity, misappropriation or false accounting. Accordingly, voluntary filings are likely to increase.

Certain creditors lose priority. For example, the claims of creditors classed as related parties (eg, group companies, shareholders, directors and their relatives, shareholders of group companies) become subordinated debts (loans from shareholders, de facto or de jure directors or other group companies).

The guarantees of debts secured by real estate may be provisionally suspended during the insolvency process, thus avoiding the division of the debtor's assets.

The privileges of tax and social security creditors have been substantially reduced - such debts, in general terms, will be privileged only up to 50 per cent of their amount.

In certain cases contracts extinguished prior to the declaration of insolvency may be reinstated and valid contracts may be terminated, depending on which solution is of greater benefit to the business.

Credit and financing of any kind do not mature automatically or accelerate when insolvency is declared. All such clauses contained in the relevant agreements are deemed to have been omitted.

New financing may be obtained, to be repaid in accordance with the payment and viability plan approved by the creditors.

Employment relations may be extinguished and altered or suspended, and layoff proceedings may be initiated.

Timeframes for the completion of insolvency and liquidation processes are shorter.

In the final provisions of the law, provision is made for the preparation of new laws or the modification of existing ones on the existence and priority of credits in the case of specific executions, or in relation to corporations and limited liability companies.

However, while the new Insolvency Law is much more specific as regards liquidation processes, the viability plan procedure is mentioned just three times and the applicable criteria do not always favour the future viability of the business undergoing the insolvency process. The law states that the approved creditors' agreement can provide only for a maximum 50 per cent debt waiver and a maximum five-year term of the debt, unless liquidation of the company would have a significant impact on the economy. In addition, the business will be liquidated in case of failure to meet the payment schedule set out in the viability plan. These criteria appear to be excessively restrictive.

1 The Legal Framework And The Effectiveness Of Court Processes/ Legal Remedies

1.1 Describe The Nature And The Effectiveness Of The Following:

(a) Debt recovery remedies where the...