Measures in the field of bankruptcy law approved by the government through RD 16/2020 of 28 April

The measures adopted as a result of the health crisis caused by the COVID-19 pandemic have brought a large part of the Spanish and world economy to a standstill.

Small and medium-sized enterprises have seen almost all of their income disappear. This reduction has not been accompanied, in the same proportion, by a reduction in payment obligations, causing serious cash-flow problems.

The companies are going to face a double problem: the lack of liquidity caused by the fall in income during the state of alarm and the difficulty/impossibility of recovering the losses generated during this period.

The measures agreed by the Government to date have been mainly aimed at facilitating the financing of the economic sector to alleviate these liquidity problems. In this regard, measures have been approved to facilitate tax deferral and the state has agreed to guarantee the financial institutions so that they can facilitate the granting of financing to the private sector.

The measures taken have helped to reduce some of the liquidity needs of those fortunate enough to have access to them. But they are neither going to be sufficient nor do they provide a solution to the biggest problem facing many of this country’s small and medium-sized enterprises: how to recover the losses generated during this period.

Many of the small and medium-sized companies will need the support of partners, clients, suppliers and employees to stay afloat. Either the companies will manage to share part of the losses with their clients, suppliers and workers, or it will be very difficult for the partners to continue betting on their continuity. And for this, a large part of the companies will be forced to reach agreements with their creditors, putting in place the mechanisms currently planned for this purpose.

Our bankruptcy legislation provides for two mechanisms prior to the bankruptcy procedure that are outlined as good alternatives to the insolvency proceedings. We refer to the Refinancing Agreement (individual or collective) and the Out-of-Court Settlement Agreement.

While the Refinancing Agreements are designed and regulated for the restructuring of financial liabilities, the Out-of-Court Settlement Agreement is a mechanism set up for individuals and small businesses.

The agreement of creditors processed within the insolvency procedure is the foreseen way, within the insolvency procedure.

The insolvency procedure was conceived by the legislator with the intention of helping the continuity of the activity of those companies in a situation of insolvency, configuring the agreement of creditors as the natural solution of the insolvency.

However, in practice, it has been found that most of the companies that used to go into bankruptcy have ended up in liquidation and the main way to guarantee the continuity of those activities that were viable has been the transfer of the productive units within the bankruptcy procedure.

The commercial repercussions of being in a situation of bankruptcy (loss of confidence of suppliers and customers) and the slowness of the procedure have been some of the main reasons for this circumstance. The foreseeable collapse of the Commercial Courts in the coming months does not bode well for this trend to change direction.

In view of this, by means of Royal Decree Law 16/2020 of 28 April, the Government has adopted a series of measures in the corporate and bankruptcy field that attempt to provide tools that help reduce the number of bankruptcy proceedings and encourage continuity solutions (either via refinancing agreements, out-of-court payment agreements or creditor agreements) over solutions via bankruptcy liquidation.

The following are the main measures approved by RDL 16/2020 of 28 April and which we consider to be of greater relevance:

Exemption of administrators from the duty to apply for bankruptcy until 31 December 2020 and from the duty to urge dissolution due to loss

Article 5 of the Bankruptcy Law establishes that the debtor who is in a situation of insolvency has a legal obligation to apply for bankruptcy within a maximum period of two months from the date on which he knows or should have known of this circumstance. Failure to comply with the duty to apply for the insolvency proceedings within the deadline constitutes a presumption of guilt of the insolvency proceedings which may lead to personal liability of the administrative body.

Debtors who notify the court within the two-month deadline that they are entering into negotiations on a refinancing agreement, an out-of-court settlement or an advance agreement are given an additional four months to file for bankruptcy (Article 5 bis of the Bankruptcy Law).

Consequently, the administrator of a company that is in a situation of insolvency, if he does not want to incur personal responsibilities, should present the insolvency proceeding within a maximum period of two months, or within the same period, make the communication foreseen in article 5 bis of the Insolvency Law.

In order to avoid an avalanche of applications for insolvency proceedings, RD 16/2020 of 29 April establishes that the debtor who is in a state of insolvency is not obliged to apply for a declaration of insolvency proceedings until 31 December 2020, regardless of whether or not he or she has made the notification provided for in Article 5 bis of the Insolvency Law.

Although it seems that RD 16/2020 extends the protective effects provided for in article 5 bis (suspension of executions on assets necessary for the continuity and inadmissibility of the necessary bankruptcy claims presented during this period of time) until at least December 31, 2020, the wording of point 3 of article 11 of RD 16/2020 raises doubts in this regard since it establishes that communications of the start of negotiations to reach a refinancing agreement, an extrajudicial payment agreement or an advance agreement presented before September 30, “shall be subject to the general regime established by law”.

It should be noted that the initial draft of this Royal Decree provided that this exemption only affected companies that were in a situation of insolvency as a result of the COVID-19 and was regulated when the cause was presumed to be subsequent to the state of alarm. In the RD 16/2020 finally approved, no differential treatment is made, so it seems that the exemption from the obligation to file for bankruptcy until 31/12/2020 would affect all companies, regardless of whether their insolvency situation is well before the state of alarm.

On the other hand, Article 363.1.e of the Law on Corporations (LSC) establishes as a legal cause for the dissolution of the company, when the net worth of the company is reduced below 50% of the share capital. Article 367 of the LSC establishes the personal and joint liability of the directors with respect to debts arising after the occurrence of the legal cause for dissolution, if they fail to comply with the obligation to call a general meeting within two months for adoption, if appropriate, the resolution to dissolve, or do not apply for judicial dissolution or, if appropriate, the company’s bankruptcy, within two months of the date scheduled for the meeting, when the meeting has not been held, or from the day of the meeting, when the resolution would have been contrary to the dissolution.

RDL 16/2020 approved by the Government establishes that exceptionally and for the sole purpose of determining the concurrence of the cause for dissolution provided for in article 363.1.e, the losses for the year 2020 will not be taken into consideration.

Incentive to the financing of companies with liquidity problems by shareholders, directors and related persons

The Bankruptcy Law establishes (as a general rule and with some nuances) that those credits granted by persons especially related to the bankrupt company have the qualification of subordinated credits. This classification prevents persons especially related to the bankrupt company from intervening or being taken into account in the approval of the creditors’ agreements, in addition to placing them in the last place in the credit payment order.

RDL 16/2020 temporarily changes this situation by establishing that in bankruptcy proceedings declared within two years of the declaration of the state of alarm, treasury income from loans, credits or other businesses of a similar nature, granted after the state of alarm by those considered to be especially related to the debtor, will be considered ordinary credits.

The same classification is given to credits in which those considered to be specially related to the debtor have been subrogated as a result of payments of ordinary or privileged credits made on behalf of the debtor.

In other words, shareholders (with or without a relevant participation), directors and companies belonging to the same group that lend money after the declaration of the state of alert or directly pay credits of the insolvent company, if the bankruptcy is declared within two years after the declaration of the state of alert, the credits that for this financing or payment to third parties are generated in favor of the partner, director or company of the group may vote in the proposal of agreement that is presented in the future bankruptcy.

With this measure, the partners who inject financing or pay directly for credits from the bankrupt company may impose an agreement with reductions of up to 50% and waivers of up to 5 years if the financing represents more than 50% of the ordinary liabilities, or even reductions of more than 50% and waivers of up to 10 years if the financing represents more than 65% of the ordinary liabilities.

With respect to refinancing agreements and bankruptcy agreements previously approved and which are in the process of being implemented, or agreements in process for which the necessary majorities have already been reached and are pending approval by the judge:

Possibility of requesting the modification of the agreement or the refinancing agreement

During the year following the declaration of the state of alert, the bankrupt party may present proposals to modify the agreement. In order to approve the modification, the same majorities established for the approval of the original agreement will be necessary. This modification of the agreement will not affect the credits accrued or contracted during the fulfilment of the agreement nor the privileged creditors to whom the effectiveness of the agreement has been extended unless they vote in favour of or expressly adhere to the new proposal for modification.

It is also provided that a debtor who becomes aware of the impossibility of complying with the payments committed in the agreement or the obligations assumed after its approval will not be obliged to request settlement for a period of one year from the declaration of the state of alert.

The same possibility of requesting modifications of the refinancing agreement is provided for those debtors who have an approved refinancing agreement, even if one year has not passed since the previous application for approval.

It is even provided that if, within six months of the declaration of the state of alert (i.e. up to 14 September 2020), any creditor requests the declaration of non-compliance with the agreement or refinancing agreement, the court will transfer it to the bankrupt party, but will not admit it for processing until three months have elapsed since the end of this period in the case of an agreement (14 December 2020) or one month in the case of refinancing agreements (14 October 2020). During this time (three months or one month, depending on the case) the tenderer may submit the proposal to amend the agreement or start negotiations to amend the refinancing agreement.

Incentive to inject liquidity into companies

It is provided that, in the event of liquidation, claims arising from commitments to provide financing or guarantees by third parties contained in the proposal for an agreement or the proposal to amend the agreement shall be deemed to be claims on the estate, provided that the identity of the obligor and the maximum amount of financing committed are stated in the proposals.

This measure does not constitute a novelty since this type of financing, being subsequent to the declaration of insolvency, was already considered to be a credit against the estate.

Measures to expedite certain parts of the procedure

RDL 16/2020 has approved the following measures aimed at speeding up certain procedures in the insolvency proceedings:

• Within the insolvency proceedings in progress and those that will be declared in the next two years, the means of evidence to resolve incidents of impugnation of provisional inventory and the provisional list of creditors (which must be accompanied by the letter of impugnation or the reply that is presented) are limited, in which no hearing will be held unless the judge deems it necessary. The failure of any defendant to respond to the claim is also equated to searches.
• Until a year has passed since the state of alarm has been lifted, the preferential processing of certain bankruptcy proceedings is established.
• In insolvency proceedings declared within one year of the declaration of the state of alert, the auctions of goods and rights that are carried out during the liquidation phase must be out of court, even if the liquidation plan provides otherwise. Disposals of production units may be carried out in the manner authorized by the judge.
• Speeding up the processing of liquidation plans pending approval.

Conclusion

With the approved measures, the Government shields the liability of the directors of companies that are in a situation of insolvency as a result of COVID19 , exempting them from liability for not filing for bankruptcy or not requesting dissolution or liquidation before 31 December 2020.

Although this is good news that may contribute to the continuity of many companies, this measure should not be understood as a blank check for the administrators.

They should bear in mind that personal liability is not limited to the possible liability arising from the presentation of the insolvency proceedings beyond the deadline set out in Article 5 of the Bankruptcy Law, nor to the joint and several liability set out in Article 367 of the Law on Corporations.

Article 236 of the Law on Corporations establishes: “the administrators will respond to the company, to the partners and to the social creditors, for the damage caused by acts or omissions contrary to the law or to the statutes or for those carried out in breach of the duties inherent to the performance of the position, as long as fraud or guilt has intervened”. For its part, Article 164 of the Bankruptcy Law establishes: “the bankruptcy shall be classified as culpable when in the generation or aggravation of the state of insolvency there has been fraud or serious fault on the part of the debtor or, if any, its legal representatives and, in the case of a legal entity, its administrators or liquidators, in fact and in law, general proxies, of those who have had any of these conditions within the two years prior to the date of declaration of the bankruptcy, as well as its partners in accordance with the provisions of Article 165.2 Therefore, the directors of companies that are in a situation of insolvency for a long period of time must be very careful with the new debts that can be contracted during this time.

Finally, the classification as ordinary credits of the financing provided by persons especially related to the debtor constitutes a tool in our opinion of great relevance since it is a really important incentive for the partners, administrators or companies belonging to the same business group to bet on injecting new financing to the company that needs it, since with such financing they will be able to be decisive in a hypothetical future creditors’ agreement.