Insolvency Law For Foreign Investors
Insolvency refers to the state of a company or a private individual in which it is no longer able to settle outstanding payments because its expenses can no longer be covered by its income. This can be caused by, for example, bad investments, incorrectly assessed business risk or errors in the price calculation. But also a general change in the sales market or economic crises can drive companies into insolvency.
A foreign service recipient may, under certain circumstances, be confronted with the fact that the Spanish service provider chosen by him becomes insolvent. This can, for example, be of importance for still existing repayment claims or open claims for rectification, warranty, or possibly also for outstanding maintenance work.
Against this background, a brief overview of the Spanish insolvency proceedings is important. In addition to the ordinary insolvency proceedings (concurso) explained below, there is also the possibility of concluding a refinancing agreement (acuerdos de refinanciación) or an extrajudicial payment agreement (acuerdo extrajudicial de pago) for the reorganization of insolvent companies in Spain.
The legal framework of insolvency law
The Spanish insolvency law finds its legal basis in particular in the Spanish Insolvency Law No. 22/2003 of 9.7.2003 (Ley Concursal).
If the foreign service recipient is the creditor (acreedor) of an insolvent Spanish debtor (deudor), not only the debtor but also the creditor may file an application for insolvency (solicitud de declaración de concurso) with the court. The debtor is insolvent (estado de insolvencia) if he can no longer properly fulfill his due and enforceable payment obligations. Insolvency may be opened against the assets of any debtor, whether a natural person or a legal entity.
The debtor is obliged to file an application for insolvency within two months of the date on which he became or should have become aware of his insolvency. In contrast to the creditor, the debtor may also apply to open insolvency proceedings if he threatens to become insolvent. Impending insolvency (estado de insolvencia inminente) exists if the debtor can recognise that he will not be able to fulfill his payment obligations properly and punctually.
The requirements to be met by the debtor when filing for bankruptcy are governed by Article 6 of the Bankruptcy Act; those for the creditor by Article 7 of the Bankruptcy Act. Thereafter, the creditor must file the application in writing. It must contain the following information: The origin, nature, amount, date of acquisition, due date and current status of the claim. He shall substantiate the claim and shall specify the evidence he intends to use to substantiate the facts supporting his application. Evidence of witnesses alone is not sufficient. In addition, one of the following circumstances must exist:
- The creditor has a writ of execution on the basis of which enforcement has already been sought without the attachment having produced sufficient attachable assets to settle the debt;
- The debtor has generally stopped fulfilling his current payment obligations;
- Seizures exist on the basis of ongoing enforcement proceedings which comprehensively affect the debtor’s assets;
- The debtor thwarts enforcement or realises assets in a hurry or at a loss;
- In general, the debtor no longer fulfills the following types of obligations: payment of due and enforceable public charges in the three months preceding the filing for insolvency; payment of social security contributions or other obligations arising from government collection during the same period; payment of wages, compensation or other remuneration based on employment relationships relating to the period of the last three months.
The insolvency proceedings are conducted by the insolvency court (juez del concurso), which is a commercial court (juez de lo mercantil). The specific local jurisdiction of the insolvency court depends in principle on the judicial district in which the center of the debtor’s essential interests is situated.
Insolvency proceedings are opened by the insolvency court by order (declaración de concurso). The decision to open insolvency proceedings shall contain, among other things, the following information:
- It determines whether the insolvency is voluntary (concurso voluntario) or necessary (concurso necesario). Voluntary insolvency is defined as when the application to open insolvency proceedings is made by the debtor, necessary insolvency is defined as when the application is made by the creditor.
- It specifies the consequences for the debtor’s authority to dispose of his property and administer it. In the case of voluntary insolvency, the debtor in principle retains the powers of administration and disposal over his property, the exercise of which is subject to the intervention of the insolvency administrator. In the event of necessary insolvency, the administrative and disposition powers of the insolvency debtor in respect of his assets shall be transferred to the insolvency administration.
- The insolvency court also appoints the insolvency administration (administración concursal). This usually consists of a natural or legal person. Only exceptionally is an additional insolvency administrator (administrador concursal) appointed.
- In addition, the insolvency court invites creditors to file their claims.
- The insolvency court decides whether the insolvency proceedings are to be conducted in simplified proceedings (procedimiento abreviado). The simplified procedure is set out in Articles 190 et seq. of the Insolvency Code. Insolvency Act. The procedure itself does not differ from ordinary insolvency proceedings. Only shortened time limits apply.
The insolvency court may order the simplified procedure if:
- the insolvency court can assume that the insolvency is not particularly complex. This can be assumed in the following cases:
- The list submitted by the debtor contains fewer than fifty creditors;
- The original assumed liabilities do not exceed an amount of 5 million euros;
- The value of the goods and rights (of the debtor) does not exceed 5 million euros.
- The debtor submits a proposal for an early insolvency settlement or a proposal for an insolvency settlement which includes structural changes through a full transfer of assets and liabilities.
The insolvency court must order the simplified procedure if the insolvency debtor
- submits a liquidation plan with the insolvency petition, which contains a binding written offer for the acquisition of a production unit in operation, or
- has completely ceased business activities and no valid employment contracts exist.
- Where appropriate, the order contains interim protective measures.
The opening decision must be published in the Spanish Official Gazette (Boletín Oficial del Estado) and in the public insolvency register (Registro público concursal). In addition, the opening will be registered in the Commercial Register for persons eligible for registration and in the Civil Register for natural persons. It is also entered in all registers in which assets and rights have been registered for the benefit of the debtor.
The insolvency proceedings are conducted in four phases:
- general phase (fase común): it lasts from the opening of the insolvency proceedings until the assets involved in the insolvency proceedings have been established. After its appointment, the insolvency administrator must immediately write to the creditors known to it and inform them of the opening of the insolvency proceedings. Foreign creditors must be requested to lodge a claim by means of an information sheet headed in the respective national language. In addition, it must submit an opening report (informe de la administración concursal) to the insolvency court within two months. The submission period may be extended by the insolvency court if necessary. The opening report includes in particular a list of assets (inventario de la masa activa) and a list of creditors (lista de acreedores). The insolvency administrator shall publish the list of assets and the list of creditors by electronic means at least ten days before submitting the report to the insolvency court. The list of assets and the list of creditors may challenge the parties appearing as parties in the insolvency proceedings.
- Insolvency settlement phase (fase del convenio): the aim of this phase is to save the company of the debtor. Therefore, it is explored here whether the debtor and the creditors can conclude a settlement. The court initiates the insolvency settlement phase 15 days after the expiry of the period for challenging the list of assets and the list of creditors, provided that these have not been challenged, the debtor has not requested the opening of the liquidation phase and there is no premature insolvency settlement proposal. In the opening order, the insolvency court orders the convocation of the creditor’s meeting (junta de los acreedores). The insolvency settlement must contain at least one payment plan based on a payment waiver (quita) or deferment of payment (espera). If this is adopted by the creditors’ assembly by the majority prescribed by law, the judge approves the insolvency settlement, provided there is no infringement. An appeal may be lodged against the judgment. The judgment approving the insolvency settlement is published in accordance with Articles 23 and 24 of the Insolvency Act. It shall apply from the date on which the judgment is delivered. The effects of the opening of insolvency proceedings shall cease to have effect; instead, the effects provided for in the insolvency settlement shall apply. If the debtor fails to fulfill his obligations under the insolvency settlement, any creditor may apply to the court for a declaration of default. The liquidation phase is then opened ex officio.
- Liquidation phase (fase de liquidación): The company is wound up during this phase. The assets of the insolvency debtor are realised in order to satisfy the creditors of the insolvency proceedings. The judicial decision to open the liquidation phase is published in accordance with Articles 23 and 24 of the Insolvency Code. After the opening of the liquidation phase, the insolvency administrator shall submit to the insolvency court a plan for the realisation of the assets (plan de liquidación) which constitute the assets of the insolvency. The plan may be inspected at the Registry of the Court and at other places expressly designated by the clerk of the court. The insolvency debtor and the creditors of the insolvency proceedings may within 15 days submit observations and proposals for amendments. Subsequently, the insolvency court shall decide by order on the approval of the plan, if necessary with the proposed amendments. An appeal against the decision is admissible. The insolvency administrator shall submit to the insolvency court a quarterly report on the status of the liquidation measures as from the opening of the liquidation phase. This report shall be filed with the registry of the court. Upon completion of the liquidation of the goods and rights and upon completion of the stage of the procedure for their classification (see below), the insolvency administrator shall submit its final report on the liquidation measures carried out.
- The Phase of qualification (calificación del concurso): This phase is not relevant to all insolvency proceedings. Rather, the requirements of Article 167 of the Insolvency Act must be met. If this is the case, the insolvency court verifies whether the debtor (or, if applicable, his representative (in the case of a legal person, its administrator or liquidator) or general agent) has deliberately or grossly negligently caused or intensified the insolvency. For example, intent or gross negligence is presumed to be rebuttable if the insolvency application is filed too late or if the duty to cooperate with the insolvency court and the insolvency administrator is not complied with. The insolvency administrator, the public prosecutor’s office and creditors may participate in this phase and present relevant facts. At the end of this stage of the proceedings, the insolvency court delivers a judgment in which it qualifies the insolvency as fortuitous or culpable. If the insolvency court finds that the debtor is to blame for the insolvency, it risks a ban of two to 15 years, the loss of any rights in the insolvency proceedings and liability for any damages. The parties at this stage may appeal against the judgment.
Filing of claims
The filing of the claim (comunicación de créditos) shall be made in writing, including by electronic means, with the insolvency administrator within one month of the day following the publication of the order opening the insolvency proceedings in the Spanish Official Gazette. In particular, the claim must state the name, domicile or registered office and other personal data of the creditor, as well as the data of the claim, its content, dates of acquisition, due date, other characteristics and the qualification sought in the proceedings. If a security right is asserted, the assets and property rights concerned and, if applicable, their register data must also be named. The mere filing of a claim is not a legal requirement.
Since 26.6.2017, the EU Regulation 2015/848 of 20.5.2015 on insolvency proceedings has applied. Under this provision, foreign creditors may use the standard form for filing claims provided for in the Implementing Regulation. For foreign creditors, the time limit for filing a claim is at least 30 days from the publication of the decision to open insolvency proceedings in the insolvency register of the state where the proceedings were opened.
If the claim is filed too late, it is likely to be lost. Depending on when it is filed, it may still be recognised and classified as subordinate. This is not the case if the creditor can prove that he had no knowledge of the insolvency proceedings before then.
The insolvency administrator is responsible for the recognition of claims (reconocimiento de créditos) and decides whether the filed claim should be included in the list of creditors. The claims included in the list of creditors are subdivided as follows:
- privileged secured claims (crédito con privilegio especial),
- privileged unsecured claims (crédito con privilegio general),
- simple claims (crédito ordinario) and
- subordinated claims (crédito subordinario).
The Insolvency Act distinguishes between the consequences for the debtor, the creditors, and contracts with regard to the consequences of opening insolvency proceedings. For example, the powers of the debtor with regard to his assets are limited (see above under “Legal framework of insolvency law“). When exercising the powers of management and disposal over the assets, it is necessary to take into account how best to preserve them in the interests of insolvency. The debtor is obliged to cooperate with the insolvency court and the insolvency administration. The insolvency debtor is also obliged to be present at his place of residence; if he does not comply with this obligation or if there is a reason to fear that he will not comply with it, the insolvency court may order the necessary measures – including house arrest. However, the opening of insolvency proceedings does not interrupt the debtor’s professional or business activities.
Spanish law also includes the Institute for the Avoidance of Insolvency. It is governed by Articles 71 et seq. of the Insolvency Statute. Insolvency Act. The insolvency administrator may contest and reverse legal acts that have caused damage to the assets and which the insolvency debtor has performed within two years prior to the issue of the decision opening the insolvency proceedings by means of an action for rescission (acción de reintegración). As a rule, insolvency is announced over a longer period of time and the insolvency debtor may be tempted to favor certain creditors or even to set aside assets. However, fraudulent intent on the part of the debtor is not necessary. The creditor of the insolvency proceedings may bring an action for rescission only in the alternative if the insolvency administrator has not exercised his right of rescission within two months of being requested to bring the specific action for rescission.
Solvency check in advance
Even before concluding a contract, it is advisable to obtain relevant information about the potential business partner in Spain.
On the one hand, the public insolvency register (Registro Público Concursal) can be consulted. Since some of the information in the public insolvency register is published somewhat later than in the Spanish Official Gazette (Boletín Oficial del Estado, short: BOE), it is worth googling for the name of the contractual partner and BOE at the same time.
On the other hand, you can search the central commercial register (Registro Mercantil Central) for various company information. It is also possible to check whether annual accounts have been submitted and what they look like. In the property register (Registro de la Propiedad), one can find out whether the company has real property in its own name.
Finally, you can make use of the paid services of credit reports.
GM Tax Consultancy is here to advise and assist you in terms of insolvency. You can contact us by phone or email.