How do the changes to the Spanish Consumer and User Protection Act affect you?

Image Article 10 - Changes to the Spanish Consumer and User Protection Act

In 2021, several amendments were made to the recast version of the Spanish General Consumer and User Protection Act. These amendments were due to the need to incorporate several European directives into Spanish law, which involved adapting the legal framework to new forms of consumption in digital content and services, user reviews, and door-to-door selling practices.

Let’s see first the Royal Decree-Law 7/2021 of 27 April, on the transposition of European Union Directives, entered into force on 1 January 2022. Among other aspects, the provisions of this amendment affect consumer protection regarding contracts for the sale of goods and the supply of digital content or services. This is a booming market thanks to the emergence of content platforms. Subscriptions to digital services alone had a turnover of 58 billion euros in the European Union last year.

The European Directives transposed by this Royal Decree-Law established common rules on certain requirements relating to contracts entered into between companies and consumers for the supply of digital content and services, and for the sale of goods. In particular, they stipulated and made available to consumers some rules on compliance with the contract , remedies in the event of non-conformity, and the procedures for enforcing these remedies.

Additional guarantees on digital products and services, including ‘free’ ones

Beyond the inescapable need to transpose these European directives into Spanish law, the health crisis has also highlighted the need to provide concrete and specific regulation for all types of digital services and contracts, which have seen a strong growth in the wake of the pandemic. As a result of the lockdown, many consumers have been forced to make use of multiple digital tools and services, including certain essential products such as food ordered online.

The main amendments provided for in Royal Decree-Law 7/2021 include:

  • Extended scope to include contracts for the supply of digital services where the consumer does not pay a price but obtains the goods or services in exchange for providing personal data. The consumer or user has some basic rights even in connection with this type of ‘free’ services.
  • Compliance with the contract is determined by the fulfilment of subjective and objective requirements. If the good or service does not meet these requirements, the seller is liable to the consumer, who may demand a repair or replacement. The repair or replacement will be completely free of charge and will be carried out within a reasonable time frame. If neither repair nor replacement is possible, then a price reduction or termination of the contract may be demanded.
  • Modification of the statutory warranty period: the warranty period is now three years from delivery for physical goods, and two years for digital content or services. In the case of second-hand products, the warranty period is left to the discretion of the parties but is never less than 1 year.
  • The time limit for presumption of non-conformity of the product is extended from 6 months to two years from the date of delivery for physical goods. In the case of supply of digital content or services, this period of presumption of non-conformity is set at 1 year. This means that the burden of proving that the product, good or service is compliant and not defective is shifted to the trader.
  • For repair and after-sales services, the period within which the stock of repair parts is required is extended to 10 years. The idea behind this amendment is to try to combat so-called planned obsolescence and thus allow consumers to enjoy the product for a longer period of time.
  • The time limit for the consumer to claim that the product is not in conformity, i.e., the limitation period, is extended from 3 to 5 years.
  • That the commercial warranty (offered by the manufacturer) takes precedence over the legal warranty if the latter is more beneficial to the consumer. Until now, the application of one or the other could be left to the sole discretion of the seller of the product.

More information and transparency in online shopping and door-to-door selling

The second major amendment to the General Consumer and User Protection Act this year was the publication of Royal Decree-Law 24/2021 of 2 November. This amendment will enter into force on 28 May 2022 and specifically concerns the regulation of online sales practices and door-to-door selling.

The main changes provided for in this legislative update are as follows:

  • In all cases where search results are provided on goods or services offered by companies, the trader is must provide the criteria taken into account in ranking the results and their relevance (e.g., in the case of an Internet search engine).
  • Obligations have also been added for the trader in terms of information and transparency. Basically, it should be possible to search for goods and services on the basis of a query by keyword, expression, or other data type.
  • If reviews of products or services are provided, it should be indicated whether these are guaranteed to be from consumers who have actually purchased the product (this is intended to address the growing problem of fake reviews on the Internet ).
  • A whole new consumer sanctioning system has been established, which is one of the most extensive amendments, covering the following aspects:
  • New consumer offences have been established, classified as minor, serious and very serious. A distinction has been made between offences that are a health hazard (referred to Law 14/1986 of 25 April 1986, on General Health), and other offences.
  • Penalty amounts have been updated, which can reach 1,000,000 euros for very serious infringements (penalties for minor infringements range from 150 euros to 10,000 euros; penalties for serious infringements range from 10,001 to 100,000 euros; and penalties for very serious infringements range from 100,001 to 1,000,000 euros).
  • The amount of the unlawful profit made as a result of the infringement is estimated in order to determine the penalty applicable. For example, a minor infringement would carry a penalty of between 150 euros and 10,000 euros, but it has been provided that these amounts may be increased to between two and four times the unlawful profit made.
  • The undertakings concerned are obliged to publicise the penalty resolutions. The aim is to promote the dissuasive nature of consumer sanctions.
  • The regulation of the right of withdrawal period has been amended from 14 calendar days to 30 calendar days for contracts concluded in the context of unsolicited home visits or trips organised to promote or sell goods or services.
  • Remedies for consumers who have been subject to unfair commercial practices have also been incorporated, including termination of the contract and compensation, the amount of which varies according to the infringement.

Although these legal changes may initially cause some confusion, they should be warmly welcomed by consumers and businesses alike. Not only do they bring the Spanish legal framework into line with European standards on consumer and user rights, but they also set clearer rules for those products, services and commercial practices that have emerged as a result of the rise of the digital market.

Problems with a purchase made on the Internet? Get information and assert your rights!

Post-pandemic property market trends

Image Article 8 - Real estate trends post COVID-19_EN

The covid-19 pandemic has been a turning point for the property sector. Following a period in which attention was mainly focused on large urban centres, the post-pandemic buyer is looking for a different type of home: larger and quieter, with outdoor spaces, better equipped, more energy efficient... Find out about the main trends in the housing market that could give some insights into post-pandemic prospects.

Home sales and purchases in Spain plummeted by 17.7% in 2020 due to the impact of COVID-19, falling back to 2016 levels, according to data from the Spanish Statistics Institute (INE). However, in the first part of 2021 business has returned to levels similar to those in 2019. There has been less of an impact on prices than was expected. In fact, since the beginning of the pandemic, prices have grown by an average of 2.3% according to  Idealista, although major differences have been identified between the different Autonomous Regions and tourist towns and cities have seen a greater impact.

However, the most important change in property market trends has been in client preferences. The pandemic has led people to rethink what they value most when buying a home. If before COVID-19 the most popular options in the housing sector were flats in big cities, now housing that is ‘lockdown-proof’ is in strong demand. The requirements for this are outlined below. 

Larger homes for the whole family

Spanish people have traditionally spent most of their time outside their homes. An employment model characterised by very long working or study days, together with a climate that encourages people to go out, has meant that homes have been used mainly for resting and sleeping. But lockdown changed everything: suddenly, homeworking and distance learning became the norm, and homes became occupied by the whole family throughout the day.

Faced with the prospect of having to spend more time at home, people are looking for larger properties where they can carry out all these activities at the same time. This has led to the average floor area of homes purchased reaching all-time highs in the third quarter of 2020, with an average of 101.7 m2 , according to data from the   Association of Registrars.

evolution of housing sales and purchases in the pandemic ine 2020
After a sharp downturn during lockdown, house sales and purchases have recovered rapidly (Source: INE).

What is the purpose of the additional square metres sought in new housing? According to a study entitled   ‘The impact of Covid-19 on housing demand’ , those looking to move house would most like to have a terrace or a garden (70%), a larger living room (34%), a more spacious kitchen (29.5%) and a room to work in (23.1%).

Outdoor spaces are becoming essential

Another trend in the post-pandemic property market is that Spaniards have rediscovered their balconies, terraces, gardens, and patios. These outdoor elements, which had been quite common until the 1970s, were no longer included in most of the housing built in later decades for various reasons: they made the final price more expensive, people closed them off to gain additional space, and clients preferred to invest in other property types such as underground parking spaces or storage rooms.

As a result, most of today’s housing stock lacks outdoor space. There are no official statistics for this. But a search of property sales portals such as Idealista shows that of the almost 25,000 homes for sale in Madrid, barely 10% have a terrace, balcony, patio, or garden. In Barcelona, despite having a better climate, the percentage of homes with outdoor spaces is even lower. In contrast, the majority of new developments currently on the market do include a terrace or balcony, as this has become an essential requirement for those wishing to move house.

Proximity to the city centre is no longer so important

A society in which being seen at work for as long as possible is the norm values proximity to work, schools and facilities very highly. Living close to large urban centres was therefore an advantage that was reflected in housing prices. This explains why the price per square metre in cities such as San Sebastian, Barcelona and Madrid is between 30 and 50 % higher than in other towns in the same province. However, this also seems to be changing if we look at the post-pandemic trends in the housing market.

Homeworking has caused many families to consider moving to towns outside the big cities, where they can have larger housing and a better quality of life. 

A reflection of this trend is that in the third quarter of 2020, the sale and purchase of single-family homes accounted for 20.88% of total transactions in some Autonomous Regions (such as Catalonia), according to a report by  the Property Agents Association (API – Colegios y Asociación de Agentes Inmobiliarios ). This has achieved record levels, as confirmed by data shared by the Association of Property Registrars (Colegio de Registradores de la Propiedad) for the whole of Spain. 

Larger, more independent homes with outdoor areas such as gardens or terraces are sought after, something that is expected to push up prices outside large urban centres.

Higher quality and better equipped housing

Spain’s housing stock is ageing. Not so much because of the average age of the dwellings, which is 45 years old, but because of the low quality of the housing built in the 1960s and 1970s, together with the lack of maintenance and refurbishment of many properties. 

During the lockdown, many people realised that their homes are in need of modernisation, which explains the   strong growth in renovations   in the last year. Good acoustic or thermal insulation, systems to ensure indoor air quality and more light are some of the most in-demand aspects in new homes, according to the property market trends in the current post-coronavirus market.

Do you need to buy or sell a property? Entrust your deal to an estate agent who is also a property lawyer!

What is Pre-Packaged Insolvency and what advantages does it have?

Image Article 7 - Pre-packaged Insolvency_ENG

The Barcelona Commercial Courts have established new guidelines for the sale of business units. This is the so-called Pre-Packaged Insolvency, a legal concept designed to speed up insolvency proceedings and avoid the loss of employment and business by using the still viable assets in a company engaged in insolvency proceedings. How does this process work and what are its benefits for creditors and debtors?

The average duration of insolvency proceedings in Spain is four years, although this may be extended further by the moratoria arising from the Covid-19 pandemic, according to the Banco de España. This has resulted in an increasing number of ‘zombie’ companies, i.e., unviable firms with frozen assets and balance sheets that withstand larger and larger losses as time passes without a solution. 

Neither company voluntary arrangements, which require shorter periods of time, nor alternative options such as corporate liquidation with a single creditor, have significantly reduced the number of insolvency proceedings that are being ‘dragged out’ in the courts.

In order to address this situation, the Commercial Courts in Barcelona have provided new guidelines, known as ‘Pre-Packaged Insolvency’, which make it possible to speed up the sale or transfer of the business units of a company engaged in insolvency proceedings.

This option is not provided under Royal Legislative Decree 1/2020, of 5 May, approving the consolidated text of the Insolvency Act. However, according to Directive 2019/2013 on preventive restructuring frameworks, the role of the practitioner in the field of restructuring can be incorporated into the legal systems of the Member States. This is the touchstone of Pre-Packaged Insolvency.

What is Pre-Packaged Insolvency?

The purpose of Pre-Packaged Insolvency is to facilitate and speed up the sale of business units, which is currently regulated under the Insolvency Act. Although the current process is intended to be a streamlined procedure, the truth is that it may become extremely slow and cause the value of the asset to decrease to the point of making the sale unfeasible. 

In addition, sometimes the debtor, prior to insolvency proceedings commencing, has done a great deal of work to find potential purchasers for all, or part, of the company’s viable assets. However, even after the insolvency proceedings have been instituted, the periods required are so long that the regulations themselves (subject to the principles of transparency, openness, and creditor inclusiveness) may cause all this effort to have been in vain due to the deterioration of the units being held for sale. 

So, what is new about this new concept?

Basically, Pre-Packaged Insolvency involves the court’s appointment of an independent practitioner (who will become the future administrator), who supervises the entire operations for the sale of the business unit by the debtor before the commencement of insolvency proceedings. The aim is to verify that the whole process has been carried out in compliance with the principles of transparency and creditor inclusiveness. 

Pre-Packaged Insolvency is a three-part procedure: the application phase, the preliminary phase and the authorisation and implementation phase.

1. Application phase

In the application to the Commercial Court to negotiate with creditors in accordance with Article 583 of the Spanish Insolvency Act, or in a subsequent application within three months after the initial one, the debtor may state that some operations related to the company’s assets (the whole company, production or business units, or a global asset sale) are in progress. These must be specifically reported and listed. 

The debtor may also request that an independent practitioner or administrator be appointed (either in the initial application or at a later stage). This request will be processed and resolved within the file provided for in Article 583 of the Spanish Insolvency Act by the court competent to institute insolvency proceedings. 

The documents that must accompany the application are: 

  • Proof of having completed the online form on the   Canal Empresa  portal  at the Department of Industry of the Government of Catalonia, to report the essential data on the distressed business units or assets.
  • A list of representative sectoral and territorial associations, competitors, or companies in the same value chain, financial or business funds, and/or direct investors (whether Spanish or international), with whom the debtor has contacted and/or intends to contact while searching for potential interested parties, bidders or offerors in the acquisition being prepared. 

 

2. Preliminary/out-of-court phase

Once the application has been filed, the preliminary or out-of-court phase begins.  The debtor may request that the transactions related to the assets for sale be treated as confidential, in accordance with Article 583 of the Spanish Insolvency Act.

The independent insolvency practitioner is responsible for ensuring the transparency of asset transactions. To do so, they must familiarise themselves with the debtor’s business, supervise the sales transactions, inform the creditors and check that they all have equal opportunities. This information is set out in a report that they submit to the court.

The core functions of the independent insolvency practitioner include:

  1. Becoming familiar with the business. 
  2. Assisting and supervising the debtor in preparing transactions. 
  3. Informing creditors of the process and participating in negotiations, especially with preferential and public creditors, as well as with workers’ representatives. 
  4. Verifying and monitoring that the transactions related to the company’s assets are lawfully conducted, based on the principles of openness and transparency, especially ensuring equal access to the information, and equal opportunities for potential interested parties or bidders and fair competition. 
  5. Issuing a final report on their management performance, in particular, on the sales of the company’s assets. 

However, until insolvency proceedings have been instituted, the independent practitioner must always respect the debtor’s powers of administration and disposal of their assets, without any interference. They may record in writing any reservations they have regarding the procedure. The independent practitioner appointed in this pre-insolvency phase will also be the administrator once the insolvency proceedings have commenced, unless there are sufficient grounds to justify appointing a different administrator.

The preliminary phase in pre-packaged insolvency is completed when a final report is issued on the steps taken on the potential sale of the assets. This report is delivered to the debtor, the competent court, the workers’ representatives, and the main creditors, ensuring that preferential creditors have access to the report. 

This final management report should contain an impartial and independent assessment of the following aspects:

  • Whether there has been sufficient openness in ensuring maximum participation of all interested parties, accompanied by evidence as and when required.
  • Whether the information provided to all parties concerned during the process has been consistent with equal opportunities, and evidence has been provided as necessary. 
  • Whether, as a result of the foregoing, free and fair competition between the parties concerned has been ensured.
  • Whether the final price offered for the acquisition of the asset in question is reasonable, considering the individual circumstances. 
  • Whether any stakeholder(s) (e.g., financial or business actors) have made any payments on account of the final price that have been essential for maintaining the business and its value throughout this process.
  • An estimated valuation of the asset(s) in question, once insolvency proceedings have been instituted, if the proposed sale does not take place immediately. 
  • A proposal to implement one or more binding purchase offers of the entire company, production or business units, or global assets. Or the formulation of alternative or complementary proposals, as appropriate. 

The remuneration of the independent practitioner shall be the statutory fees for the liquidation phase, according to the number of months in which the practitioner performed their role. If the company is not considered insolvent, the applicant will be responsible for remunerating the practitioner.

 

3. Court phase: authorisation and implementation

The debtor must enclose the final report by the independent practitioner with the application for insolvency proceedings, as well as the final proposals for the implementation of binding purchase offers for the entire company, production or business units, or the global assets.

The court authorisations of the sales transactions must be processed in accordance with Article 530 of the Spanish Insolvency Act. To this end, the insolvency order must include the proposals, and the creditors and any other interested party may submit allegations within ten days. This period is calculated from the publication of the insolvency order in the Public Insolvency Registry, which must explicitly advise on the existence of a binding offer and identify the offer. 

At the end of the ten-day period, the insolvency administrator must issue a report on the liquidation plan provided for under the Insolvency Act. After this, the judge will issue a decision authorising or refusing the proposed sales transactions on the basis of the documentation provided. Only an appeal for reconsideration may be lodged against this decision.

What are the advantages of Pre-packaged Insolvency?

Although it has so far only been implemented in the Commercial Courts of Barcelona, the Pre-Packaged Insolvency procedure has been welcomed by both the legal community and the business world. At a time when thousands of insolvency proceedings are pending resolution, and with the prospect of the effects of the pandemic driving more companies into insolvency, it has a number of advantages.

For the companies engaged in insolvency proceedings, the new procedure provides a streamlined method to sell viable business units while preserving production and jobs. These assets may also represent an interesting investment and growth opportunity for other companies or entrepreneurs, whose interest could be thwarted if they had to wait for the completion of the insolvency proceedings.

As far as judges and insolvency administrators are concerned, Pre-Packaged Insolvency provides greater assurance that the sale or transfer proposals submitted comply with the requirements of the Insolvency Act. The role of an independent practitioner therefore brings peace of mind to lawyers and administrators, who are perfectly familiar with the legal framework and its attributions but may not be familiar with the functioning of the insolvent company’s sector or market.

Let us hope that this Pre-Pack initiative used in Barcelona will soon be extended to other Commercial Courts and will contribute to expediting insolvency proceedings, while at the same time helping to protect business operations and employment as far as possible.

Are you facing insolvency proceedings? Find legal advice about your options here.

Is seizing assets an effective way of collecting debt?

Image Article 6 - Effectiveness of seizing assets_EN

Having a court ruling that recognizes your right to collect a debt from a debtor does not guarantee that you will be able to collect the amount due, in whole or in part. This means that a situation may arise where, after spending time and money in legal proceedings to claim an outstanding debt, even if the court rules in your favour, the debtor may not want to voluntarily pay the debt as ordered by the judgment. What can you do in these situations?

If a court rules in favour of the debt collector, but the debtor does not voluntarily comply with the resulting obligation, proceedings must be commenced to enforce the judgment. The purpose of this is to collect the debt by seizing (and subsequently liquidating if necessary) any assets owned by the debtor. 

What assets can and cannot be seized?

Judicial seizure is a procedure that follows a court order and allows a debtor’s assets to be seized in order to liquidate them and satisfy a judgment debt previously awarded by a court. In Spain, sadly the best-known type of foreclosure is a home foreclosure in the event of mortgage default. 

Other types of property can also be seized in the scope of Article 592 of the Spanish Civil Procedure Act (‘LEC’):

  1. Cash or current accounts of any kind.
  2. Receivables that can be realised immediately or in the short term, and titles, securities or other financial instruments that can be traded on official secondary markets. 
  3. Jewellery and works of art.
  4. Income in cash, regardless of its source and the reason for its accrual.
  5. Interest, income, and revenue of any kind.
  6. Movable property or livestock, non-listed shares, titles or securities and company shares.
  7. Property.
  8. Wages, salaries, pensions, and income from professional and commercial work carried out on a self-employed basis.
  9. Receivables and securities that can be realized in the medium and long term.

The LEC regulates both the order of the assets that can be seized (preferably cash and bank accounts rather than other types of assets), since these are assets whose seizure affects debtors the least and are easier to turn into cash, so they are sought first; and the limit of the value of the assets that can be judicially seized (assets cannot be seized for an amount greater than the debt). This is intended to prevent, for example, a lien on a property for a negligible amount of debt, considering all the negative consequences that this may have for the debtor. 

The LEC also establishes those assets that cannot be seized under any circumstances:

  1. Non-transferable assets.
  2. Accessory rights that are non-transferable, regardless of the principal.
  3. Intrinsically non-estate assets.
  4. Assets that cannot be seized under any legal provision.

In addition, Article 606 LEC establishes that the following assets cannot be seized:

  1. Furniture and household items, as well as the clothes of the individual facing foreclosure and their family, insofar as they cannot be considered to be superfluous. In general, assets such as food, fuel, and others which, in the opinion of the court, are deemed reasonably essential for the subsistence of the individual facing foreclosure and their dependents. 
  2. Any books and instruments necessary for the individual undergoing foreclosure to engage in their profession, art, or trade, provided that their value is not proportional to the amount of the debt claimed.
  3. Sacred objects and those used for worship in legally recognised religions.
  4. The amounts that cannot be seized by Law.
  5. Any assets and amounts that cannot be seized under Treaties ratified by Spain.

Finally, Article 607 of the LEC regulates the seizure of salaries and pensions, and establishes that ‘the wages, salary, pension, remuneration or any similar sources of income shall not be seized if they do not exceed the minimum wage amount.’

Situations that may arise if assets are seized

The fact that the LEC allows seizure of assets and a court recognises this as a possibility (with the limitations discussed in the previous section) does not always mean that there are any assets to be seized, especially when the debtor is a legal person. 

There are a number of different possible scenarios in this case, which are summarised below: 

  • The debtor does not have any assets or receivables that can be seized. In this case, the creditor’s chances of recovering the debt may be practically non-existent, as the company may even have discontinued its business operations. Therefore, it is advisable to run a brief credit check on the person with whom you intend to enter into a contract beforehand; otherwise, it can be done before filing the claim, to determine if there are actually any assets to secure any possible debts. 
  • The debtor only has current accounts, but no other assets. Initially it would be the best-case scenario because it should be the easiest and fastest way to recover the debt (they owe you cash, and cash can be seized). The problem comes when the current account balance is not enough to cover the debt. In this case it should be analysed and confirmed whether the debtor is engaged in any business operations in order to assess if debt can be collected in other ways.
  • The debtor has different types of assets. If there are any current accounts or cash available, this will be the first thing to be seized, according to the LEC. If this is not enough to cover the debt, then other assets (property, cars, personal property, etc.) will be seized. The problem is that, to convert these assets into money to collect the debt, a petition needs to be filed with the Court requesting that an auction sale of the assets of the debtor be held. This procedure is subject to specific requirements and may take a long time, so it is not easy to collect debts in this way either. 

Ultimately, having a favourable court ruling is not always equivalent to recovering the debt, since the seizure of assets may not be effective. Therefore, it is important to analyse the situation of the debtor both before filing the claim and during the legal proceedings. 

In order to recover the debt, it may even be more effective to try to reach a settlement to collect at least part of the debt than to obtain a judgment and the seizure of some assets… which will not  guarantee that the debt will be fully recovered. 

If you are looking for an expert lawyer in commercial law  and litigation law to advise you on a possible seizure of assets, contact me here. I can help you!

Why is it important to engage a lawyer to draft or review a contract?

draft or review a contract

A contract is a legally binding document that lays out rights and obligations for all the parties involved. Unfortunately, it is very common for a contract to be drafted by a non-professional based on a standard template or, worse still, adapted from an existing contract. This is a highly undesirable practice that can have serious consequences. Do you know why?

A contract is a legal agreement, usually in writing (although it may also be verbal) between two or more parties that must have the legal capacity to be bound by it, which creates rights and obligations for both parties. This is an essential element in the Spanish legal framework, but it is not always given the importance it deserves in terms of its potential legal consequences, which may be detrimental to some of the parties concerned.

When preparing a contract, there are three widespread bad practices:

  1. Entrusting the drafting of the contract to a person who does not have the appropriate legal training or is not a specialist in the field (e.g. commercial law or property law ). A typical case is that of a salesperson drawing up a contract with a customer, or a property salesperson drawing up a lease agreement.
  2. Using an existing similar contract as a starting point and adapting it to the new conditions and needs of the legal transaction to be carried out. For example, a company may use a contract signed with one supplier as a basis and modify it for use with another supplier.
  3. Using a contract template (obtained from the Internet or other sources) which has not been specifically drafted for the case in question. A common example is an online shop or online business that ‘copies’ the terms and conditions of sale from a similar website (and often does not even ensure that all references to the other company have been removed).

All of these practices are mistaken because every legal transaction is different. No two contracts are the same. The parties are often not the same, and there are always variations, however small, in the purpose, the price, the method of payment, or any other of the conditions involved. Therefore, the provisions of a contract created at a given time are only valid for those parties, at that time and under those conditions, but not for other cases. 

Similarly, all clauses in a contract have their meaning and their raison d’être. They cannot be removed or ‘chopped up’ because someone does not understand them or considers that they do not apply to the case at hand. In doing so, an essential clause may be accidentally deleted, or one that is legally required for the contract to be valid may be omitted. As a result, the best-case scenario may that the contract is void because it does not comply with the law; in the worst-case scenario, it may leave your legal interests unprotected.

Why have a lawyer draft or review a contract

When you have a toothache, you go to the dentist and you don’t try to pull the tooth out yourself; if your car breaks down, you take it to the mechanic and you don’t try to repair it yourself. So why is it that if when one needs to sign a contract, such a major legal act, one tends to think that it is not necessary to retain a lawyer? How is this different from other situations where one usually relies on an expert?

The truth of the situation is that by trying to save the money involved in having a lawyer prepare or review a contract, much higher costs may need to be paid later if problems arise. For example, if it turns out that a contract has been poorly ‘done’, essential items are missing, or the terms have not been properly defined. 

If you need to draft a contract, your lawyer will:

  • Carry out an analysis of the legal transaction in order to identify the most important aspects.
  • Take into account all the laws applicable to each individual situation.
  • Draw up a tailor-made contract specifically adapted to the situation.
  • Ensure that your interests are defended.
  • Prevent the inclusion of unfair terms or errors that may invalidate it.
  • Ensure that the contract complies with applicable laws and regulations.
  • Ensure that future contingencies are covered and include the necessary safeguards.

No matter how well you know your sector or how many similar contracts you have seen, a law professional is always aware of all the necessary aspects to be covered and can consider the important factors involved in each specific case that you may not have taken into account. A lawyer will never merely adapt a contract template found on the Internet or ‘copied’ from another existing contract.

Similarly, if you need to have a contract reviewed, your lawyer will:

  • Explain the contents of the contract to you and make sure you understand it.
  • Ensure that the contract is fair to both parties.
  • Identify possible unfair terms, or terms that may be beneficial to the other party and detrimental to you.
  • Confirm whether the contract is lawful and consistent with applicable laws and regulations
  • Propose relevant and properly drafted amendments.
  • Incorporate the necessary safeguards in the event that disputes arise.

A contract should ideally be reviewed prior to signature, as understanding the full content of a legal document is essential before entering into it. Only if you are aware of the legal scope of all the clauses can you make an informed decision as to whether it is appropriate to sign the contract or not. But even if you have already signed a contract but are unsure of its terms, asking a lawyer to review it can help you identify problematic issues and take appropriate steps to defend your interests. 

Do you need a lawyer specialising in litigation, bankruptcy, commercial or property law to draft or review a contract before or after signing it?    I can help you!   

Is it possible to register a company’s liquidation when there is only one creditor involved?

liquidate a company

Every year more than 90,000 companies are incorporated in Spain and about 20,000 are dissolved, according to the Company Statistics provided by the  Spanish Institute of Statistics (INE). One in four liquidations are voluntary, but the rest are the result of insolvency proceedings that attempt, as far as possible, to respect the rights of creditors.  A common question asked is whether it is possible to liquidate a company when there is only one creditor involved and there are not enough assets to pay the outstanding debts. What can be done in these cases?

Corporate liquidation is the process by which a company is wound up by a liquidator. This involves, firstly, conducting an inventory and a balance sheet review to assess the company’s assets and liabilities; secondly, paying debts and collecting receivables; and, lastly, preparing a final liquidation balance sheet, which will include any surplus cash to be distributed to each shareholder.

A basic principle of Spanish corporate law, and therefore a requirement for the liquidation of a company, is that all creditors must be paid in full before any equity holders receive anything and. In other words: no distributions can be made to shareholders unless all existing debts have been paid.

The prerequisite involving paying creditors in full (or consigning or securing their claims) assumes that either there is sufficient equity or there are assets available to satisfy any outstanding debts. The question is, what happens in those cases in which there are no assets to pay the debts? Is the company forced to remain in business indefinitely?

The doctrine of corporate liquidation when only one creditor is involved

If there are insufficient assets available to pay the debts and there are multiple creditors, the procedure to liquidate a company is to commence  insolvency proceedings . However, if there are no assets available to pay outstanding debts and there is only one creditor involved, engaging in insolvency proceedings may not be the right option, since having several creditors is a requirement to initiate and conduct insolvency proceedings.

There may be companies that have only one creditor and insufficient assets to pay their outstanding debts, but cannot commence insolvency proceedings because they do not meet the requirement indicated above. In these cases, the liquidation may not be accepted and entered in Companies House on the basis that it is necessary to have satisfied all the creditors claims for a company to be regarded as having been liquidated.

In these cases, the General Directorate of the Registry and Notaries (DGRN) has established the doctrine of allowing the liquidation to be officially registered and, therefore, cancelling such company’s register entries. The DGRN has held that shareholders cannot be ‘forced’ to keep a dissolved company registered with Companies House once the liquidation procedure has been carried out (even if insolvency prevents the company from satisfying the debts owed to its only creditor).

This doctrine is based on the following:

  • Strictly speaking, for the purposes of registration with Companies House, there is no rule that makes the removal of register entries of a company conditional upon its lack of assets prior to being declared insolvent.
  • In order to remove the company from the register at Companies House, it is an essential requirement to have a liquidation balance sheet that shows the lack of assets to pay the creditor’s claims. These statements are made under the responsibility of the liquidator and, therefore, the liquidator will assume any consequences resulting from the balance sheet misrepresenting the company’s actual figures.
  • The removal of a company’s entries from the register does not harm the creditor, because the company’s ability to hold rights and duties remains. Nor does it prevent any subsequent liability of the company – and of the liquidator – if, after removing the company from the register, new corporate assets emerged that had not been taken into account for the liquidation. Likewise, this does not leave the only creditor unprotected, as the creditor can take legal action against the company, shareholders, administrators, or liquidators if the lack of payment is attributable to any of them.

However, the doctrine of the DGRN does not apply automatically, and there are some registrars who are reluctant to remove liquidated companies when the liquidation balance sheet states that there is only one creditor.

Effects of the new Insolvency Act

Regarding the application of this doctrine, it will be necessary to monitor how the DGRN approaches this type of situation in the light of   Royal Legislative Decree 1/2020, of 7 May, which approved the consolidated text of the Insolvency Act . The new Insolvency Act provides for insolvency proceedings to be terminated when the insolvent debtor’s assets are insufficient. Termination will therefore be simultaneous with the declaration of insolvency.

This means that the Court may decide that the proceedings must be terminated while at the same time declaring insolvency when the available assets are found to be insufficient to satisfy the costs of the proceedings, and when it is not it is foreseeable that actions for reimbursement or for third party liability will be lodged; or that insolvency may be considered fraudulent. It also provides for the termination of the insolvency proceedings when only one creditor appears on the creditors’ list.

Therefore, despite the options provided by the doctrine of the DGRN, it is always advisable to either conduct an orderly liquidation, seeking to pay all creditors involved; or to commence insolvency proceedings to be declared insolvent and have the proceedings terminated. This would be the previous step to the company being registered with Companies House as having been liquidated. In this way, the option of having the process involving a single creditor registered, without engaging in insolvency proceedings, is clearly exceptional and should be used as a last resort if an orderly liquidation has not been possible.

Are you involved in insolvency proceedings or corporate liquidation? Seek legal advice!