Navigating the Labyrinth: Unraveling Spain’s Complex Insolvency Proceedings

The structure of Insolvency Proceedings in Spain, inspired by Directive 2019/1023 (and therefore by the Anglo-Saxon Chapter 11 of the USA), is somewhat more complex, and it’s worth taking a few minutes to understand it better.

In Spain, the declaration of insolvency initiates the common phase. The so-called “common phase” is the one in which the future of the insolvency proceedings is not yet defined. When the common phase concludes, the insolvency proceedings opt for an alternative: Either it aims to reach an agreement with creditors (in which case the “common phase” becomes the “agreement phase”), or it aims to liquidate and dissolve the company. In that case, the “common phase” mutates into the so-called “liquidation phase”.

Let’s look at the procedure in more detail through some simple Q&As:

1.- How are Insolvency Proceedings structured in Spain?

Insolvency proceedings in Spain are structured in three blocks or milestones and in six sections.

Phases and sections of Insolvency Proceedings in Spain:

2. The first block or declarative milestone encompasses sections 1 and 2. We will explain below what each section regulates.
3. The second block refers to the so-called “common phase”: The common phase encompasses sections 3 and 4. It is called the common phase because it precedes the Insolvency being processed either through an attempt to reach an Agreement with Creditors or through liquidation of assets due to the impossibility of reaching or fulfilling the Agreement.
4. The third block or “resolution” milestone in which the path (between the two options) that the insolvency proceedings will follow is defined. It encompasses sections 5 and 6. Section 5 regulates the Agreement with Creditors and also the Liquidation Phase. Finally section 6 regulates the liabilities raised from the insolvency proceeding.

2.- What aspects does each Section develop?

Let’s briefly look at each section, one by one.

First Section: This section covers from the declaration of insolvency to its conclusion. It deals with the declaration of insolvency, (eventual) precautionary measures, the final resolution of the common phase, and finally, the conclusion and reopening, if applicable, of the insolvency.

Second Section: Related to the Receivership. This section develops the role of the Receivership and how it intervenes in the insolvent company.

Third Section: Regulates the active mass, how the active mass is determined, and how, if applicable, the Receiver exercises the reintegration and disposal actions of the active mass.

Fourth Section: Regulates the passive mass. That is, how the passive mass is configured, regulates judicial proceedings against the debtor and judicial and extrajudicial executions that are initiated or resumed against the insolvent.

Fifth Section: Regulates the Agreement with creditors and Liquidation.

Sixth Section or qualification section: Here, the possible liability of the directors derived from the debtor’s culpability in the insolvency situation is regulated.

In this colaboration, we will only focus on the phases called “Common”, “Agreement” and “Liquidation”.

Common Phase

1.- When does the common phase begin?

The judicial resolution that declares the insolvency opens the common phase of the insolvency.

If the debtor had requested liquidation in the application for declaration of insolvency, the judge will agree to it (the liquidation) in the same judicial resolution in which he declares the requested insolvency, with simultaneous opening of the liquidation phase.

2.- When does the Judge agree to open the Insolvency Sections?

On the same day of the declaration of insolvency, the Court will proceed to form the first, second, third and fourth sections, each of which will be headed by a judicial resolution.

If the debtor had requested the liquidation of the active mass, the Court will proceed to form the fifth section, which will be headed by the request for liquidation.

3.- What is the so-called “Insolvency without mass (or without assets)” and what influence does it have on the processing of the insolvency?

An insolvency without mass (without assets) is considered to exist when the following assumptions concur in this order:

a) The insolvent lacks legally attachable assets and rights.

b) The cost of realizing the assets and rights of the insolvent is manifestly disproportionate to the foreseeable market value.

c) The assets and rights of the insolvent free of encumbrances are of lower value than the foreseeable cost of the procedure.

d) The encumbrances and charges existing on the assets and rights of the insolvent are for an amount higher than the market value of those assets and rights.

4.- At what point should the insufficiency of the active mass be communicated?

As soon as it is evident that the active mass is insufficient or is likely to be insufficient for the payment of claims against the mass, the Receivership will communicate this to the insolvency judge. The Court will notify this communication electronically to the parties appearing.

Claims against the mass include – among others – all claims, labor and of any nature that are generated after the declaration of insolvency by the Court.

5.- What happens when the debtor meets the requirements of “Insolvency without Mass”?

If in the report the Receiver appreciates the existence of indications of “Insolvency without Mass”, the judge will issue a complementary judicial resolution with the other pronouncements of the declaration of insolvency and opening of the liquidation phase of the active mass, continuing the procedure as established in this law.

If the Receiver notices that actions that have harmed creditors can be initiated, he must exercise the rescission actions and social liability actions before two months have elapsed from the presentation of the report referred to in the previous article.

6.- Is the company in insolvency obliged to formulate annual accounts?

Yes, the legal obligation to formulate and submit to audit the annual accounts will correspond to the insolvent and to the directors of the insolvent legal entity under the supervision of the Receivership.

7.- Is the company in insolvency obliged to settle tax self-assessments during the insolvency proceedings?

Yes, the legal obligation to present tax declarations and self-assessments will correspond to the insolvent under the supervision of the Receivership.

8.- Does the Board of Directors subsist during the insolvency proceedings?

Yes, during the processing of the insolvency, the organs of the insolvent legal entity will be maintained, without prejudice to the effects that the intervention or suspension of the powers of administration and disposition over the assets and rights of the active mass produce on the functioning of each of them. Therefore, the directors or liquidators of the insolvent legal entity will continue with the representation of the entity within the insolvency, even during the liquidation of the active mass.

9.- What is the first task that the Receiver must carry out after the declaration of insolvency?

The Receivership must prepare an inventory of the active mass, which will include the list and valuation of the assets and rights that comprised it on the day of the insolvency application. The inventory will indicate if any of those assets or rights that appear in it had ceased to belong to the insolvent or had changed in value between the date of the application and the day immediately prior to the presentation of the Receivership’s report.

10.- How are assets and rights valued?

The appraisal of each of the assets and rights included in the inventory will be carried out according to the market value they have.

11.- What requirements must the Receiver’s report contain?

Within two months following the date of acceptance, the Receiver will present to the court a report with the content and documents established in the following articles. In case of dual administration, the deadline for the presentation of the report will be counted from the date on which the last of the acceptances occurs.

The Receivership report will contain:

14. The analysis of the report accompanying the application for declaration of insolvency or, in the case of necessary insolvency, had been presented by the insolvent at the request of the judge.
15. The exposition of the state of the insolvent’s accounting and, where appropriate, the judgment on the accounting and complementary documents.
16. A report of the main decisions and actions of the Receivership.
17. The motivated exposition about the patrimonial situation of the insolvent and of all data and circumstances that could be relevant for the processing of the insolvency.

12.- Does the common phase conclude after the presentation of the Receiver’s report?

Within fifteen days following the presentation of the Receivership report with the attached documents, the Court will issue a decree ending the common phase of the insolvency, with simultaneous opening of the liquidation phase if it was not yet open.

The opening of the liquidation phase will not proceed if a proposal for agreement had been presented, whether or not it has been admitted for processing.

13.- When is the sixth section or qualification section of the insolvency formed?

In the same order by which the common phase is ended, the judge will order the formation of the sixth section.

14.- How does the Receiver process their initial report?

On the same day of the presentation of the definitive documents, the Court will send them electronically to the Public Insolvency Register. The Public Insolvency Register (open and free at the following link https://www.publicidadconcursal.es/consulta-publicidad-concursal-new) publishes the procedural resolutions that are adopted throughout the insolvency process. It is the instrument that ensures transparency and coordination between the Commercial Courts and the different public registers.

The Receivership will also send them electronically to the debtor and to the recognized creditors whose electronic address it has and to those who were appearing in the insolvency, even if they were not creditors.

Agreement Phase

1.- Who can present or propose an agreement with creditors?

The debtor, and creditors whose claims exceed one-fifth of the passive mass may present a proposal for agreement under the conditions of time, form and content established in this law.

In no case may a proposal for agreement be presented if the insolvent had requested the liquidation of the active mass.

2.- Can a proposal for Agreement with creditors be presented if the debtor has requested liquidation?

No, if the insolvent had requested liquidation, the admission for processing of the proposal or proposals that had been presented will not proceed.

3.- Is the favorable opinion of the Receivership necessary for the Agreement proposal to be processed?

The Receivership will evaluate the content of the agreement proposal in relation to the payment plan and, where appropriate, with the viability plan that accompanies it.

The evaluation must necessarily contain a favorable judgment, with or without reservations, or unfavorable, about the viability of compliance with the proposed agreement.

4.- What deadline do creditors have to adhere to the Agreement proposal?

Creditors may adhere to or oppose the proposal or proposals of agreement during the two months following the date of admission for processing of each of them. If the final term expires after the legal deadline for the presentation of the provisional list of creditors by the Receivership, the deadline for adhesion or opposition will be automatically extended until fifteen days following the date of presentation of the provisional list.

If the adhesions presented were sufficient to consider the agreement proposal presented by the insolvent accepted, the latter may terminate the adhesion period at any time by simple communication to the court, even if the adhesion period for another or others that had been presented by the creditors had not ended.

5.- Does the Receivership cease after the approval of the Agreement?

Yes, from the effectiveness of the agreement, the Receivership will cease.

The Receivership will render accounts of its action before the insolvency judge within the period that he indicates.

Notwithstanding the cessation, the Receivership will retain full legitimacy to continue ongoing incidents as well as to act in the sixth section, with powers to request the provisional or definitive execution of the sentences that are issued in these incidents and of the qualification sentence.

6.- What happens if a creditor considers that the Agreement is being breached?

Any creditor who considers the agreement breached in what affects them may request from the judge the declaration of non-compliance.

The infringement of the prohibitive or limiting measures of the exercise by the debtor of the powers of administration and disposition over assets and rights of the active mass during the period of compliance with the agreement will constitute non-compliance with the agreement, whose declaration may be requested from the judge by any creditor.

Liquidation Phase

1.- Can the insolvent debtor request liquidation at any time?

The debtor may request liquidation at any time and the judge, within ten days following the request, will issue an order opening the liquidation phase.

2.- Does the insolvent debtor have the obligation to request liquidation from the moment they know the impossibility of fulfilling the payments committed in the agreement with creditors?

During the validity of the agreement, the insolvent must request liquidation from the moment they know the impossibility of fulfilling the payments committed in this and the obligations contracted after the approval of that.

3.- Can the Receivership request the opening of the liquidation phase at any time?

The Receivership may request the opening of the liquidation phase in case of total or partial cessation of professional or business activity. The request will be transferred to the insolvent for a period of three days. The judge will resolve on the request by order within the following five days.

4.- Can the Judge agree to liquidation without any of the parties to the insolvency requesting it?

1.-The opening of the liquidation phase will proceed ex officio in the following cases:

1. No proposal for agreement having been presented within the legal deadline or the proposals that had been presented not having been admitted for processing.
2. None of the proposals for agreement having been accepted by the creditors.
3. The agreement accepted by the creditors having been rejected by final judicial resolution.
4. The nullity of the agreement approved by the judge having been declared by final judicial resolution.
5. The non-compliance with the agreement having been declared by final judicial resolution.

2.- In cases 1 and 2 of the previous section, the opening of the liquidation phase will be agreed by the judge without further procedures, at the time it proceeds, by means of an order that will be notified to the insolvent, to the Receivership and to all parties appearing in the procedure.

In any of the other cases, the opening of the liquidation phase will be agreed in the same judicial resolution that motivates it and will become effective once it becomes final.

5.- What effects does the opening of the liquidation phase have on the insolvent debtor?

The ruling that opens the liquidation phase will contain the declaration of dissolution if that legal person was not dissolved and, in any case, the cessation of the directors or liquidators, who will be replaced for all purposes by the Receivership, without prejudice to continue those in representation of the insolvent in the insolvency proceedings and in the incidents in which it is a party.

6.- Can the Judge establish special liquidation rules?

When agreeing to the opening of the liquidation of the active mass or in a subsequent resolution, the judge, after hearing or report from the Receiver to be evacuated within a maximum period of ten calendar days, may establish the special liquidation rules that he considers appropriate, as well as, either ex officio or at the request of the Receivership, modify those that he had established.

The special liquidation rules established by the judge may be modified or left without effect at any time, either ex officio or at the request of the Receivership.

The judge may not require prior judicial authorization for the realization of assets and rights, nor establish rules whose application involves delaying the liquidation for a period longer than one year.

The special liquidation rules established by the judge will be left without effect if creditors whose claims represent more than fifty percent of the ordinary liabilities or more than fifty percent of the total liabilities so request.

7.- What happens if the Judge does not establish special rules regarding liquidation?

If the judge has not established special liquidation rules, the Receiver will realize the assets and rights of the active mass in the most convenient way for the interest of the insolvency.

8.- What is the so-called “Set Rule” in terms of liquidation?

1. The set of establishments, exploitations and any other productive units of goods or services of the active mass will be alienated as a whole, unless the judge, when establishing the special liquidation rules, had authorized individualized alienation.

2. In any case, the Receivership, when it deems it convenient for the interest of the insolvency, may request from the judge the authorization for the individualized alienation of the establishments, exploitations and any other productive units or some of them, or of the elements of which they are composed.

9.- What does the so-called “Auction Rule” consist of?

1. The realization during the liquidation phase of the active mass of any asset or right or set of assets or rights that, according to the last inventory presented by the Receivership, had a value higher than five percent of the total value of the inventoried assets and rights, will be carried out through electronic auction, unless the judge, when establishing the special liquidation rules, had decided otherwise.

2. The electronic auction of assets and rights must be carried out by including those assets or rights or part of them, either in the auction portal of the State Agency Official State Gazette, or in any other electronic portal specialized in the liquidation of assets.

10.- Can the Receiver be dismissed for undue prolongation of liquidation? What is considered an undue prolongation of the liquidation?

If one year has elapsed since the court decision that initiated the liquidation phase without it having been completed, any interested party may request the insolvency judge to remove the insolvency administration and appoint a new one.

The judge, after hearing the insolvency administration, will order the removal if there is no justifiable cause for the delay and will proceed to appoint a replacement.

11.- What are the consequences of dismissing the Receivership for undue prolongation of the liquidation phase?

Insolvency administrators removed for undue prolongation of the liquidation will lose the right to receive accrued fees and must reimburse to the asset pool any amounts they have received in this capacity since the opening of the liquidation phase.

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Necessary Insolvency Proceedings and the hasty or ruinous liquidation of assets by the debtor.