Insolvency Proceedings: Guide for Companies in Financial Difficulty in Spain

Insolvency Proceedings: Guide for Companies in Financial Difficulty in Spain

Insolvency proceedings (concurso de acreedores) are the legal procedure designed to manage a debtor's insolvency in an orderly manner. Regulated by the Consolidated Text of the Insolvency Law (TRLC), approved by Royal Legislative Decree 1/2020, this procedure has undergone deep reforms in recent years.

When Insolvency Occurs

Current insolvency (Article 2.3 TRLC): Generalized inability to pay debts as they fall due. Signs: inability to pay wages/suppliers, multiple seizures, protested notes, pending enforcements.

Imminent insolvency (Article 2.3 TRLC): Foreseen inability to meet obligations within three months.

Probability of insolvency (Article 584 TRLC): Objective probability of future insolvency, enabling pre-insolvency mechanisms.

Voluntary vs Involuntary Insolvency

Voluntary (Article 29 TRLC): Filed by the debtor. Legal obligation to file within two months of knowing insolvency (Article 5.1 TRLC). Advantages: retains administration powers (Article 106), greater credibility, avoids culpability presumption.

Involuntary (Article 29 TRLC): Filed by a creditor. Insolvency presumed from revealing facts (Article 2.4 TRLC): general cessation of payments, generalized seizures, asset concealment, generalized non-compliance with tax/SS/labor obligations. Consequence: administration powers suspended and transferred to insolvency administrator.

Pre-Insolvency (Articles 583-594 TRLC)

Allows notifying the court of creditor negotiations, obtaining temporary protection.

Effects: Stay of enforcements on necessary assets (Article 588 TRLC), suspension of filing duty for three months (extendable one month), no registry publicity.

If three months pass without result, insolvency must be filed within the following month.

Phases

#### Common Phase (Articles 252-352 TRLC)

Asset pool: Inventory plus claw-back actions for harmful acts within 2 years (Articles 226-237 TRLC).

Liabilities: Claims against estate (Article 242, priority), specially privileged (Article 270, secured), generally privileged (Article 280, wages/tax), ordinary (Article 284), subordinated (Article 281, interest/fines/related persons).

#### Settlement Phase (Articles 353-401 TRLC)

Debtor-creditor agreement: haircut (up to 50%), moratorium (up to 5 years), debt-to-equity conversion, asset transfer. Requires qualified majority (Article 376) and judicial confirmation.

#### Liquidation Phase (Articles 402-473 TRLC)

Proceeds when: debtor requests, no settlement, or settlement breach. Liquidation plan within 15 days, asset realization, payment by priority order.

Effects on Contracts and Workers

Contracts: Not automatically terminated (Article 156 TRLC). Termination-on-insolvency clauses are void.

Workers: Employment continues. Administrator may request MSCT, insolvency ERE, or collective termination (Articles 169-176 TRLC). Severance: 20 days per year, maximum 12 monthly payments. FOGASA guarantees within legal limits.

Classification: Fortuitous or Culpable

Culpable (Article 442 TRLC): Intent or gross negligence. Irrebuttable presumptions (Article 443): substantial accounting failures, serious inaccuracies. Rebuttable presumptions (Article 444): failure to file, failure to cooperate, failure to file annual accounts. Consequences: Disqualification (2-15 years), loss of creditor rights, possible estate deficit liability.

Second Chance (Articles 486-502 TRLC)

Natural person debtors (including self-employed) may obtain discharge. Requirements: Good faith, no rejected suitable employment, attempted out-of-court agreement, no culpable classification for intent.

Immediate discharge (Article 489) if estate and privileged claims satisfied. Payment plan (Article 493): 3-year plan (exceptionally 5 years). Non-dischargeable: Maintenance, extra-contractual liability, public claims over 10% of liabilities.

Key Deadlines

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Conclusion

Insolvency proceedings do not have to mean the end of a business. With early action, sound restructuring strategy, and proper use of TRLC mechanisms, many companies can overcome financial difficulties. The key is acting quickly, transparently, and with specialized advice.

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