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 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!