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COVID-19: PRESSURE POINTS: Measures adopted by Royal Decree-law 16/2020 in relation to insolvency (Spain)

30 April 2020 | Madrid
Legal Briefings – By Javier de Carvajal and Marta Rey

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With the aim of managing the potential ramifications of the measures that have so far been implemented in the context of the COVID-19 crisis, the Spanish Government has approved Royal Decree-law 16/2020, of 28 April, of procedural and organisational measures to tackle COVID-19 connected to the administration of justice.

A package of measures have been implemented in relation to insolvency with the aim of (i) ensuring that companies are able to continue carrying on their business; (ii) offering incentives to finance those companies to cover temporary liquidity needs; and (iii) avoiding a likely increase in litigiousness connected to insolvency proceedings by adopting a set of rules to expedite those processes on a preferential basis. 

The following measures have been approved to ensure that companies are able to continue carrying on their business

  • It is possible to modify creditors’ arrangements, out-of-court payment agreements or scheme of arrangements that are currently in a performance phase for one year after the announcement of the state of emergency; to do so it is possible to file a new application before one year has elapsed since the previous one was submitted. 
  • The obligation to request the opening of the liquidation phase is suspended for one year from the date on which the state of emergency was announced if a creditors’ arrangement is in place and the debtor becomes aware that it will be impossible to meet the payments agreed and obligations undertaken after the arrangement was approved; however, this shall be subject to the debtor submitting a proposal to modify the creditors’ arrangement and it is admitted for consideration within that period. 

As for the measures to boost financing for companies to cover temporary liquidity needs, these are as follows: 

  • Debts resulting from financing commitments or third party guarantees – including parties especially related to the insolvent debtor – contained in the proposed creditors’ arrangement or in a judge-approved proposal for modification of an arrangement, if the approved or modified arrangement is breached within two years from the announcement of the state of emergency, will be classified as debts against the insolvency estate. 
  • In the context of insolvency proceedings that are opened within two years following the announcement of the state of emergency, debts resulting from cash inputs in the form of loans, credit or other analogous transactions, granted to the debtor since the state of emergency was announced by parties that are especially related to the debtor will be classified as ordinary debts. 
  • In the context of insolvency proceedings opened within two years after the announcement of the state of emergency, debts that parties especially related to the debtor have inherited as a result of paying ordinary or privileged debts on account of the debtor after the state of emergency was announced will be classified as ordinary debts. 

Finally, in the case of measures to expedite and give preferential treatment to insolvency proceedings and certain actions that will apply until one year has elapsed after the state of emergency was announced: 

  • Preferential treatment is given to certain actions aimed at protecting workers’ rights, ensuring business continuity of companies and protecting the value of the insolvent company’s assets and rights. These include: the sale of productive units; employment-related proceedings; proposals of creditors’ arrangement or the modification of arrangements that are in a performance phase; clawback actions; the admission for consideration of schemes of arrangement or modifications to those that are already in place; and injunctive relief aimed at preserving insolvent debtors’ assets and rights. 
  • A number of actions and proceedings have been fast-tracked and simplified: auctions will be handled out of court where they are related to insolvency proceedings declared within one year of the announcement of the state of emergency as well as those that are ongoing on the date of the announcement; in the case of challenges against an inventory of the debtor’s assets and list of creditors in the context of insolvency proceedings in which a provisional inventory and provisional list of creditors has not yet been submitted, and those proceedings opened within two years of the announcement of the state of emergency, a hearing will not be necessary; liquidation plans will be approved immediately when, at the end of the state of emergency, 15 days have elapsed since it had been announced at the court’s offices. 

In addition, in order to give companies time to restructure their debt, to generate liquidity and/or offset losses, whether by returning to business as normal or by having access to credit or public grants, the deferral of the obligation to file for insolvency has been pushed back to 31 December 2020, whether or not the debtor has notified that negotiations have been opened with creditors to refinance its debt, to reach an out-of-court payment agreement or accessions to a preliminary proposal of arrangement. 

It has also been established that judges shall not between the announcement of the state of emergency and 31 December 2020 admit for consideration mandatory insolvency petitions; insolvency petitions filed by the debtor will be given preference, even if filed at a later date. 

Equally, as for pre-insolvency notices, if prior to 30 September 2020 the debtor serves notice that negotiations have been opened with creditors to reach a refinancing agreement, an out-of-court payments agreement or accessions to a preliminary proposal of creditors’ arrangement, the general provisions established by the Spanish Insolvency Law 22/2003, of 9 July, will apply. 

In turn, during the year following the announcement of the state of emergency it shall be understood that a debtor has attempted to reach an out-of-court payment arrangement unsuccessfully if evidence is provided that the insolvency mediator has rejected their appointment twice for the purposes of opening subsequent insolvency proceedings (concurso consecutivo), and the court is informed thereof. 

Finally, it has been established that the results of the current financial year will not count in the context of the legal ground for winding up a company due to losses or the mandatory reduction of its share capital; however, that is without prejudice to a company’s obligation to file for insolvency in accordance with the Royal Decree-law.

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