Green light for the Draft Law amending the revised text of the Insolvency Act

Published on 18th Jan 2022

On 14 January 2022, it was published in the Official Journal of the Spanish Parliament, the draft law of the Insolvency Act for the transposition of Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, debt waivers and disqualifications, and on measures to improve the efficiency of restructuring, insolvency and debt waiver procedures, and amending Directive (EU) 2017/1132 (Restructuring and Insolvency Directive) (hereinafter, the "Draft Law").

This reform of the Insolvency Act aims to ensure that viable companies in financial difficulties have access to an effective preventive restructuring procedure that allows them to continue their activity; that insolvent entrepreneurs and consumers can have their debts exonerated after a reasonable period of time, favouring second chance; and that the insolvency procedure increases its efficiency by reducing its duration.

Without prejudice to the fact that the Draft Law is subject to amendments and modifications during its parliamentary processing, the main reforms it seeks to introduce are the following:

  • Restructuring plans instead of refinancing agreements and out-of-court settlements. The aim of these restructuring plans is to ensure the continuity of companies and businesses that are viable but are in financial difficulties that may threaten solvency and lead to bankruptcy. Companies will be eligible for restructuring plans in a situation of probable insolvency, prior to the imminent insolvency required for recourse to the current instruments.
  • A single insolvency procedure specially adapted to the needs of micro-enterprises (defined as "companies with fewer than ten employees and annual revenues of less than two million euros"), characterised by maximum procedural simplification. This single procedure is intended to deal with both insolvency situations (actual or imminent insolvency) and pre-insolvency situations (probability of insolvency). In these cases, the appointment of the insolvency director will only be effective when requested by the debtor or a percentage of creditors.
  • Setting up a more effective second chance procedure. It introduces the possibility of exoneration without prior liquidation of the debtor's assets and with a payment plan for creditors; allowing the debtor to keep his or her habitual residence and business assets. This possibility is extended to individuals whose debts do not arise from business activities.
  • A new figure is introduced: the restructuring expert, who, among other functions, will assist the debtor and the creditors in the negotiation and preparation of the restructuring plan. In no case will the expert intervene in or supervise the debtor's power of administration and disposal of assets.
  • Substitution of insolvency proceedings without mass that are born and end at the same time by a system that is more open to creditor control. This new system allows the creditor or creditors representing at least five percent of the liabilities to request the appointment of an insolvency director to submit a report on whether there are sufficient indications that the debtor has carried out acts detrimental to the active mass that can be rescinded, for the exercise of the liability action against directors or liquidators or if there are indications that the insolvency proceeding could be classified as guilty.
  • Reduction of the insolvency director's remuneration and incentives for the prompt resolution of the proceedings to encourage speed and agility in the procedure. The remuneration will accrue as the functions attributed by the Insolvency Act and the judge are fulfilled. The incentives will refer to the prompt execution of the liquidation plan, the transfer of production units or the realisation of assets and rights in liquidation for a value greater than the percentage determined by regulation of their final value.
  • Early warning tools to enable the debtor, once the probability of insolvency has been detected, to act promptly to prevent the probability of insolvency from turning into actual insolvency, encouraging the adoption of reorganization or restructuring measures when it is still possible to avoid insolvency.

Notwithstanding the above, it should be noted that the Draft Law is being criticized by various sectors, such as the Registry of Forensic Economists (REFOR), a body specialized in restructuring and insolvency matters of the General Council of Economists, which has expressed its disappointment with the Draft Law, as it considers that it "ignores" the experts, leaving creditors unprotected and denying a real second chance to businessmen and individuals.

The approval of the Draft Law is expected to take place during the first half of 2022. In this respect, it is intended to extend the insolvency moratorium (currently extended until 30 June 2022) until the entry into force of the Draft Law.

The Draft Law is complemented by an Organic Law amending Organic Law 6/1985, of 1 July, on the Judiciary, to improve the distribution of jurisdiction currently established for the Commercial Courts and for the specialised sections of the Provincial Courts and, correlatively, that of the courts of first instance and the other sections of the Provincial Courts.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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