Covid-19: Spain unveils urgent insolvency measures to tackle the economic crisis that is to come

Background of the reform

Today, Royal Decree-Law 16/2020, dated 28 April, has been published in the Spanish Official Gazette (RDL). This latest reform prepared by the Ministry of Justice of Spain includes certain measures for the Administration of Justice, taking into account the situation created by Covid-19 in Spain and the potential collapse of Spanish Courts.

According to the RDL, measures affecting insolvency and corporate laws are directed at four different areas. The first one focuses on maintaining the operation of companies, professionals and self-employed persons who, prior to the declaration of the state of alarm, were fulfilling their payment obligations to their creditors and thus avoiding the liquidation of economic units that could be viable under normal market conditions. Secondly, it is also intended to encourage the financing of companies to meet their temporary liquidity needs, including and promoting both intra-group financing and financing from and specially related people by means of payments and the subsequent right of subrogation. Thirdly, additional measures are being implemented to speed up insolvency proceedings in view of the foreseeable increase in the number of proceedings and incidents that can be expected in the coming months. Finally, two additional rules are laid down which seek to mitigate the consequences that could be triggered by the application of the general rules on the winding-up of companies and on the declaration of insolvency by giving companies additional time to restructure their debt until 31 December 2020.

With these measures, the Spanish Government would seek to create a stable restructuring scenario for directors of both companies undergoing insolvency proceedings and those that were not insolvent by 14 March 2020, and to try to save as much as possible the business community.

However, despite what was stated as the rationale of the RDL, the scope of this reform is limited to a temporary neutralisation of the impact of the crisis caused by Covid-19, aiming for the default and illiquidity circumstances and the insolvency of companies to be resolved over time or through the efforts of creditors. Effective incentive measures for the reorganisation of indebtedness, which ease the adoption of pre-bankruptcy agreements that include formulas that facilitate the rapid sale of productive units or business branches, are missing.

The RDL will enter into force on 30 April 2020. The RDL also includes an interim regime for current insolvency proceedings, therefore, the provisions of the RDL will also apply to the necessary insolvency proceeding filings and filings to open the liquidation phase or to declare the breach of a composition with creditors that had been presented during the state of alarm, upuntil 30 April 2020 (date of entry into force of the RDL).

The most relevant insolvency and corporate measures set out in the RDL are as follows.

Measures regarding insolvency composition with creditors (convenios)

RDL allows the insolvent debtor ((which was not previously set out in law) to request an amendment of the approved composition with creditors, within one year from the declaration of the state of alarm in Spain (that is, from 14 March 2020). Such amendment will be passed under the same rules of the original composition, regardless of the content of the amendment and it shall be conducted in writing (i.e. there will be no present creditors' meeting to pass the amendment) regardless of the number of creditors of the debtor. As such, the amendment of the composition shall not affect any claim accrued after the approval of the previous composition or secured claims (including those that were bound by the previous composition) unless they expressly support the amendment proposal.

During the six months following the end of the state of alarm, if any creditor exercises a judicial action of breach of the composition, the Court will only conduct it after three months from the end of the referred six month term and only if during that period the debtor has not filed a request for the amendment of the composition with creditors already in force. This measure will also apply to those judicial requests to open the liquidation phase filed by a debtor by the date of entry into force of the RDL, whenever the debtor submits a proposal to modify the agreement in the terms of the RDL, so that the Court will not rule on such request.

Additionally and regardless the breach of payment obligations under an approved composition proposal or arising after the approval of that proposal, debtors are relieved from their obligation to apply for liquidation, for a period of one year from the declaration of the state of alarm. For such purposes, the debtor must file an amendment proposal of the approved composition and the proposal must be accepted within that one-year period.

Finally, any new money provided within a composition or an amendment to a composition, even if granted by a specially related person, will be considered as super-privileged claims if the debtor finally falls in liquidation within the following two years after the declaration of the state of alarm.

Measures regarding homologación processes (Spanish Schemes)

Within one year after the declaration of the state of alarm, any debtor that has entered into a Spanish Scheme in the past will be able to notify the Commercial Court that it is negotiating an amendment to the scheme or a new one, even if one year since the debtor initiated a former homologación process has not yet elapsed. This one-year term is a mandatory limitation under the Insolvency Act that will not then apply in this case. It is not clear whether in cases such as this some additional protective effects often related to the negotiation of the refinancing agreements set out in the Insolvency Law will also apply.

If any creditor exercises the judicial action of breach of the relevant refinancing agreement approved through homologación within six months from the end of the state of alarm, the Court will not conduct it until one month from the filing of the action has elapsed. If during that month the debtor notifies the Court that it is negotiating an amendment of the refinancing agreement or a new one, the action will not be conducted until three months have elapsed from the filing of the abovementioned notification to the Court.

Directors’ duty to file for insolvency

Until 31 December 2020, those debtors considered insolvent will not have to file for insolvency of regardless whether or not they have notified the Court that they have initiated negotiations with their creditors to restructure their debts. Until that same date, Courts shall not admit 'necessary' insolvency petitions (i.e. insolvency petitions filed by creditors of the debtor) as long as the debtor files for a request for insolvency by 31 December 2020 (this request will be conducted on a preferential basis).

Notwithstanding the above, if by 30 September 2020 a debtor has notified the Court that it has initiated negotiations with its creditors to restructure its debts, the general regime set out in the Insolvency Act shall apply with the exceptions provided for by the RDL for the refinancing processes.

In view of this new regulation, the RDL repeals art. 43 of Royal Decree-Law 8/2020 that suspended the debtor's obligation to request for the declaration of insolvency until two months after the end of the state of alarm. This former suspension has already benefited insolvent debtors or those who, when negotiating a refinancing agreement with their creditors, had exhausted the term set out in the Insolvency Act to reach such agreement.

New money provided by specially related people

In respect of insolvency proceedings to be declared within two years following the date of declaration of the state of alarm (14 March 2020), any new money provided by any specially related person and any claims in which a specially related person is subrogated (as a result of repayment of third party debt), after the date of declaration of the state of alarm, will be considered as ordinary claims (and, therefore, will not be subordinated).

The above will likely be one of the more welcomed measures in the RDL, as it will temporarily allow companies to manage intra-group debt in a more efficient way, for example, in very specific situations of illiquidity of operating subsidiaries.

Measures to speed up insolvency proceedings and the implementation of liquidation plans

Different measures have been taken to speed up insolvency proceedings. In particular, it should be noted that (1) with regard to challenges against the list of creditors or the list of assets, only documentary and expert evidence will be admissible (for those insolvency proceedings opened within two years from the declaration of the state of alarm); (2) for all those undergoing insolvency proceedings at the date of the declaration of the state of alarm and those that are declared within the following year, all auctions shall be made out of court (with the exception of the sale of a whole company or productive units that will be made through court or out of court auctions or by any other sale procedure determined by the Court); and (3) the approval of liquidation plans is expedited.

Directors’ duty in a situation of winding up as a consequence of FY20 results

In order to establish if a company must be wound-up due to losses (art. 363.1 e) of the Spanish Companies Act - SCA), losses corresponding to the financial year 2020 will not be taken into account. If, however, the 2021 financial year result contains losses that imply that the company must be wound-up (that is losses that reduce the net worth to an amount less than half of the share capital), then the administrators must call the meeting (or any partner may request it) to proceed to the dissolution of the company or to remove that winding-up situation. Despite the reference to art. 365 Act, the RDL seems to show some differences in establishing the initial date of the two-month term for the call of the meeting. In any case, this measure is applicable without prejudice to the duty to request the declaration of insolvency in accordance with the provisions of the RDL.

View the Spanish language version of this article here.