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

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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?

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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!