Fire Sale or Strategic Move? Navigating the Minefield of Productive Unit Transfers in Spanish Insolvency Law

The alienation of a productive unit from an insolvent debtor is considered a preferred option for the continuity of all or part of a company. It is based on the prior delimitation of a perimeter of assets and rights that form part of the company, but, and this is the relevant part, which by themselves are sufficient and suitable to allow their independent business exploitation.

The best way to favor this continuity is for the acquirer to know exactly, at the time of submitting their acquisition offer, the real scope of the liabilities they assume, and in particular, the labor liability they will have to face after the award.

1.- What is a productive unit?

A productive unit is considered to be the set of organized means for the exercise of an essential or accessory economic activity.

How is the perimeter of a productive unit delimited?

Without prejudice to the minimum content of the offers that we will see later, these are the parameters for delimiting the perimeter of the productive unit, namely:

(i) the identification of the establishment where the business activity is carried out;

(ii) the adequacy of the productive unit to current regulations;

(iii) the identification of the number of jobs, category, seniority, and gross salary relationship.

2.- What is the ordinary way to alienate a productive unit? When is a productive unit alienated through electronic auction?

Until the approval of the agreement or until the opening of the liquidation phase, the alienation of the whole of a company or of one or several productive units will be done through electronic auction, unless the judge authorizes another mode of realization.

3.- But how can a productive unit be sold through an auction process if bidders have the possibility to delimit the perimeter of what they wish to acquire and the offers, therefore, are normally heterogeneous? How to auction heterogeneous assets?

Indeed, the idea of the auction is not 100% compatible with the transmission of the whole company or productive units, since given that the law allows the bidder the possibility of delimiting the assets, liabilities, and contractual relationships that will form the perimeter of what is transmitted, this determines that the offers competing in the auction will almost always be heterogeneous.

However, the judge may also authorize any other mode of realization other than the auction, and, even when this is deserted, may also, by order, in the event of failure of this mode of sale, authorize the direct alienation of the whole company or of one or several productive units, or the alienation through a specialized person or entity. There are specialized entities in the market that have platforms to auction assets and are accepted by Spanish Judges.

In any case, it is worth remembering that the auction system is provided only until the approval of the agreement or until the opening of the liquidation phase.

4.- What role does the Insolvency Receivership play in this entire process?

For this judicial decision, the opinion of the insolvency receivership will undoubtedly weigh heavily, as they will be the one who must justify to the judge the need to resort to a mode of alienation other than the auction.

Moreover, and this is very important, in the case of direct alienation, the insolvency receiver must explain to the judge the reasons of urgency, opportunity, market, deterioration of activity, and even risk of paralysis of the same, which advise the use of this mode of transmission not subject to any competition.

5.- Who determines the deadline for submitting offers?

In case of alienation of the whole company or of one or several productive units, the insolvency receivership, whatever the system of alienation, must determine the deadline for the submission of offers and specify, before the initiation of that period, the expenses incurred for the conservation in operation of the activity of the whole company or of the unit or productive units object of alienation, as well as those foreseeable until the final award.

6.- What is the minimum content of the offers for the acquisition of a productive unit?

Whatever the system of alienation, the offers must have, at least, the following content:

1. The identification of the offeror and information about their economic solvency and the human and technical means at their disposal.
2. The precise determination of the assets, rights, contracts, and licenses or authorizations included in the offer.
3. The price offered, the payment terms, and the guarantees provided. In case of transfer of assets or rights subject to credits with special privilege, the offer must distinguish between the price that would be offered with subsistence or without subsistence of the guarantees.
4. The impact of the offer on the workers.

7.- What rules should the Judge follow when authorizing the alienation of a productive unit?

The Judge must set all the requirements to participate in the process and the rules that will be followed for its realization (identification of the offeror if any, consignment, starting price, minimum bid, deadlines, etc.). Likewise, the Judge will proceed to the precise delimitation of what will be the object of sale, that is, the perimeter of the productive unit, regardless of the fact that, subsequently, each of the bidders may delimit at will, in their specific acquisition proposal, the assets, liabilities, and labor relations that compose it.

8.- Can the Judge authorize the alienation to an offer that is not the one offering the best price?

Yes. Even in the case of alienation by means of auction, it is perfectly possible for the judge to decide, when choosing between one offer or another, for one that is lower in price, precisely on the basis of its greater convenience or opportunity for the general interests of the insolvency proceedings. In fact, the Insolvency Law itself expressly refers to the minimum content of the offer, so it is perfectly possible for the offeror to include in it other additional data that can serve as a guide to the Judge for making their decision, beyond the price itself, a determining element of any auction.

In other words, it is allowed to value in a very special way the savings that the non-termination of employment contracts can represent for the active mass, together with the price that is offered. This is what is called “the preference rule”, which will only come into play in the auction alienation mechanism, because if the sale is direct, in the Order itself that authorizes it, the judge must include a reasoned and sufficient justification of the causes that lead to attributing the productive unit to one or other of the bidders, setting out which were the criteria and valuation rules taken into account to determine the best offer.

This same “rule of preference” will also apply to offers from workers interested in the succession of the company through the constitution of a cooperative or labor society.

9.- Does the alienation of a productive unit require that unions or worker representatives give their opinion on the offers presented?

The resolutions that the judge adopts in relation to the alienation of the company or of one or several productive units must be issued after a hearing, for a period of fifteen days, of the workers’ representatives, if they exist.

In the event that the alienation operations involve substantial modification of working conditions, transfer, dismissal, suspension of contract or reduction of working hours of a collective nature, the provisions of this law regarding employment contracts shall apply.

 10.- Are workers subrogated in the productive unit that is the object of alienation?

1. In case of alienation of a productive unit, it will be considered, for labor and social security purposes, that there is a succession of company.
2. The insolvency judge will be the only one competent to declare the existence of company succession, as well as to delimit the assets, liabilities, and labor relations that compose it.

11.- Given that the Social Jurisdiction in Spain is quite protective towards workers, can a Labor (Social) Judge consider that there is a succession of company, despite there being an award that excludes certain workers?

No. The insolvency judge will be the only one competent to declare the existence of this situation, as well as to delimit the assets, liabilities, and labor relations that compose it. The jurisdiction of the insolvency judge will be exclusive and excluding, among other aspects, for “the declaration of the existence of company succession for labor and social security purposes in cases of transmission of unit or productive units, as well as the determination in these cases of the elements that integrate them”.

In fact, for a better knowledge of the liabilities assumed by the acquirer, it is foreseen that the judge will request a report from the Labor and Social Security Inspection, which must be issued within the non-extendable period of ten days, regarding the labor relations affected by the alienation of the productive unit and the possible social security debts related to these workers. With this, it is intended that, without excessively delaying the processing of the alienation process, the judge can limit and define, with sufficient knowledge of the cause, the labor liability that will accompany the productive unit object of transmission.

12.- What happens with workers who provide their services indistinctly for several business units, when the alienation affects only some of them?

In these cases, the courts have rejected the application of proportionality criteria, which would imply the transfer of a proportional number of workers to each specific unit. And so, the Courts have opted to understand as affected by the succession only those workers who provide their services exclusively or prevalently in the business unit that is transferred.

13.- Is the acquirer of the productive unit subrogated in the existing contracts that the entity in insolvency has, without the consent of the other party? And is the acquirer of the productive unit subrogated in contracts or concessions with the Public Administration? And is the acquirer of the productive unit subrogated in the licenses?

In case of transmission of one or several productive units, the acquirer will be subrogated in the contracts affected to the continuity of the professional or business activity that is developed in the unit or productive units object of transmission, without need of consent of the other party.

As an exception to what is established in the previous section, the assignment of administrative contracts will take place in accordance with what is established in the legislation on public sector contracts.

When the acquirer continues the activity in the same facilities, they will also be subrogated in the licenses or administrative authorizations affected to the continuity of the business or professional activity that form part of the productive unit.

14.- Can the acquirer of a productive unit force the client to maintain existing contracts even in case of breach of contract?

No. What the rule allows is the subrogation in client contracts, without them having to authorize it. This only means that the acquirer is placed in the position of the debtor in insolvency proceedings. But that does not mean that the client is authorized to keep them in force in case of breach of contract. If there is a breach, the client can terminate them.

This prevents the client from hindering the success of the realization of that productive unit. At the same time, it introduces an element of agility and simplicity.

15.- Can the acquirer exclude workers, licenses, or contracts from the perimeter of the productive unit they wish to acquire?

The transmission of a productive unit will not imply the subrogation of the assignee with respect to those licenses, authorizations, or non-labor contracts in which the acquirer, when formulating the offer, has expressly manifested their intention not to be subrogated.

However, it is advisable to clearly delimit the perimeter of the productive unit, with exact identification of the contracts that are to be transferred, and what is more important, that the acquirer clearly manifests in their proposal or offer the contracts in which they are not willing to be subrogated.

16.- Can the acquirer be subrogated in the licenses without the consent of the Public Administration?

For this type of contract, automatic subrogation does not apply.

The assignment of administrative contracts will always be carried out in accordance with the provisions of the legislation on Administration contracts.

According to said regulations: “in cases of division, contribution or transmission of companies or branches of activity thereof, the contract will continue with the entity to which the contract is attributed, which will be subrogated in the rights and obligations arising from it, provided that it meets the conditions of capacity, absence of prohibition to contract, and the solvency required when agreeing to the award or that the various beneficiary companies of the aforementioned operations and, if subsisting, the company from which the assets, companies or segregated branches come, are jointly and severally liable with those for the execution of the contract”.

17.- Can the acquirer of a Productive Unit not be subrogated in payment obligations?

The transmission of a productive unit will not entail the obligation to pay the credits not satisfied by the insolvent before the transmission, whether they are insolvency or against the estate, except in the following cases:

1. When the acquirer has expressly assumed this obligation.
2. When established by a legal provision.
3. When there is a succession of company with respect to labor and social security credits corresponding to the workers of that productive unit in whose contracts the acquirer is subrogated. The insolvency judge may agree with respect to these credits that the acquirer is not subrogated in the part of the amount of salaries or compensation pending payment prior to the alienation that is assumed by the Wage Guarantee Fund in accordance with the Workers’ Statute.

The provisions of the previous section will not apply when the acquirers of the productive units are persons specially related to the insolvent.

18.- How does the acquirer of a productive unit ensure that it is free of charges and encumbrances?

In the ruling of the Clerk of the Court of Justice approving the auction or in the order of the judge authorizing the transfer of assets or rights, whether separately, in lots or as part of a company or productive unit, the cancellation of all charges prior to the insolvency constituted in favor of insolvency credits will be agreed. The cancellation expenses will be borne by the acquirer.

As an exception to what is established in the previous pagraph, it will not proceed to agree on the cancellation of charges when the transfer of assets or rights affected to the satisfaction of credits with special privilege has been carried out with subsistence of the encumbrance.

19.- What is the destination of the money obtained from the sale of a productive unit? What happens if the productive unit had a debt with a privileged creditor?

Whatever the mode of realization of the affected assets, the privileged creditor will have the right to receive the amount resulting from the realization of the asset or right in an amount not exceeding the original debt, whatever the value attributed in the inventory, in accordance with the provisions of this law, to the asset or right over which the guarantee had been constituted. If there is a remainder, it will correspond to the active mass.

20.- How is the company or a productive unit transferred in the liquidation phase?

The transfer of the company or its productive units will be carried out subject to the above rules, with the following specialties:

1. The transfer will be carried out by direct sale in favor of the third party that offers at least fifteen percent more than the agreed value and maintains the rest of the conditions.
2. The direct sale will be carried out in accordance with the principles of competition and transparency. To this end, the general conditions and the price fixed in accordance with the valuation will be notified to the creditors and published in the Public Insolvency Register.
3. If direct sale is not possible, the transfer will be made by auction.
4. The award price of the auction may not, in any case, be lower than the sum of the value of the debtor’s assets and rights included in the inventory.
5. When more than one offer is received whose contents objectively differ in the way in which the continuity of the company or the commercial establishment, the maintenance of jobs or the satisfaction of credits is guaranteed, the debtor or the insolvency administration, having heard the representatives of the workers, will present a report to the judge, with a proposal for resolution, for the judge to resolve in accordance with the article that regulates the preference rule established in the first book.

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