Since the economic crisis hit Spain, numerous property developers have filed for insolvency in the commercial courts. A key issue is the continuity of the contracts that were in the course of being performed at the time when the petition for insolvency was filed. The problem is particularly serious for property companies with houses or flats under construction for which they have signed contracts of sale with buyers.
The Cabinet has approved the draft bill reforming the Insolvency Act. The reforms will encourage banks to refinance debts and provide liquidity for businesses in difficulty so that they can avoid bankruptcy, thus reducing the workload of the commercial courts. The reforms also aim to streamline and improve procedures in order to reduce costs.
The Ministry of Justice recently drafted new legislation to amend the Insolvency Law. Although this reform bill is still at an early stage, if adopted the new legislation will introduce more flexibility in key areas of insolvency law and will modify provisions based on the experience developed by local courts.
The principal aim of the Insolvency Act is the survival of a company - although in 95% of cases this is not achieved. The only way for an insolvent company to continue in business is to come to an agreement with its creditors on the payment of its debts. This is known as a scheme of arrangement. If no arrangement can be agreed, the company must be wound up.
The financial crisis has resulted in new litigation involving derivatives, including a significant number of related issues arising in the context of Spanish insolvency proceedings. Derivatives products were sold widely by banks during the prolonged period of prosperity and highly leveraged companies were encouraged by banks to enter into swaps as part of the overall bank financing of their projects.
An important innovation of the Insolvency Act was to give commercial courts handling insolvency proceedings exclusive powers over employment matters to the exclusion of the social courts, which normally deal with such matters. One particular employment aspect which the act attributes to the insolvency courts relates to the suspension and termination of senior management contracts.
The 2003 enactment of the existing insolvency law transformed Spain into a pro-creditor country, the aim of which was to clear the large number of insolvent businesses. However, the present financial crisis has led to a rethink of the insolvency process and its impact on debtors.
The Insolvency Act gives the creditor petitioning for the insolvency of its debtor a privileged position in the recovery of its debt: one-quarter of the amount is considered to be a general privileged debt. In principle, general privileged debts will be affected by the agreement with the creditors only if they voted in favour of it.
The recent insolvency law reform, in addition to establishing a new regime for refinancing agreements and clarifying certain types of subordinated debt, has introduced other significant changes. Insolvency proceedings will be speeded up, since the notice making public the declaration of insolvency and other related communications will in future be electronic, although this innovation will require enabling regulations.
A new law aimed at exempting certain refinancing agreements from review by insolvency courts has recently been approved. However, the modifications also clarify other aspects of the Spanish insolvency law, which was first approved in 2004 in an era of prosperity quite different from the present economic crisis.
One of the most hotly debated provisions of the Insolvency Law - and perhaps all Spanish law - deals with whether a debt of an insolvent entity which is guaranteed by a third party that is deemed to be 'especially related' to the insolvent debtor is classified as subordinate and thus placed in the lowest category for payment out of the insolvent debtor's assets.
The survival of businesses is one of the main goals of the Insolvency Act. The act states that an acquirer must necessarily assume the obligation to pay creditors on the terms they agreed with the debtor, but it does allow the modification, suspension or extinction of employment contracts to be dealt with at the same time as the transfer of business.
The new Insolvency Law clarifies the rules on notification of claims. It also allows creditors to notify their claims without having to retain legal counsel and a court agent, thus saving them the cost of professional fees during the initial stages of insolvency proceedings. In this respect, Spanish law has followed the trend set by several other European countries.
The recent filing for insolvency of Martinsa Fadesa, the largest Spanish property developer, is a sign that the Spanish property sector is in deep trouble. Spain has modern insolvency legislation but its commercial courts are not well equipped in terms of manpower, resources and expertise to deal with the sudden avalanche of insolvencies affecting large real estate companies.
Traditionally, distressed debts have been defined as the corporate loans of companies that either have filed for bankruptcy or appear likely to do so shortly. Having registered significant growth rates over the past decade, Spain is now likely to face record levels of distressed debt. Distressed debt trading and investment will create exit solutions for banks and bondholders in difficulty.
The Barcelona Court of Appeal has ruled on an appeal filed by the director of a bankrupt company against a resolution ordering the seizure of his goods. The court found that the director's conduct could not have generated or aggravated the state of insolvency. Therefore, the court held that the seizure of the goods was without effect.
Two mercantile courts have recently ruled on the issue of joint declarations of insolvency under Section 3(5) of the Insolvency Law. According to the two judgments, whether there is a mix of assets is a crucial issue when ruling on petitions for a joint declaration of insolvency: creditors must prove the existence of an asset mix for the petition to be admitted.
Mercantile courts have ruled on three occasions - two of them very recently - on Section 43(2) of the Insolvency Law in relation to Sections 149(1) and 155(4). In each case the court authorized the companies to sell their assets freely, and no auction was required. This interpretation of the law is positive for insolvent companies and their creditors, as it makes the procedure more flexible.
Madrid Mercantile Court No 5 has recently interpreted Article 87(6) of the Insolvency Law on guaranteed claims in favour of financial entities, in contradiction to the provision's literal wording. The court held that the choice in qualifying a claim as ordinary or subordinate may proceed only upon payment by the guarantor.