The end of the bankruptcy moratorium

More than two years after the start of the pandemic and after successive extensions of a measure approved in the early days of the health crisis, the bankruptcy moratorium came to an end on the 30^th of June 2022.

What happens now? Since the 1^st of July, the obligation to file insolvency proceedings for the insolvent debtor has been reactivated within two months of the establishment of insolvency, a situation which may, of course, have continued since before the 30^th of June. If insolvency is imminent, the debtor may apply for the opening of insolvency proceedings, but will not be legally obliged to do so.

Also, since the 1^st of July 2002, creditors can file for insolvency proceedings against their debtors.

Furthermore, commercial companies should keep in mind that the whole period during which the moratorium has been in force has not meant a 'special favor’ for directors of distress companies, as their management will be evaluated.

The end of the moratorium on insolvency also means that companies and entrepreneurs are faced with a new scenario with a reform of the Bankruptcy law which transposes - the deadline is the 17^th of July - the Restructuring and Insolvency Directive, a transposition which should take effect next July and come into force in August.

With regard to the end of the insolvency moratorium and the feared avalanche of insolvency proceedings, it is to be expected that the proliferation of zombie companies, companies wounded after successive crises, will not be digested by the opening of insolvency proceedings, so that an increase in insolvency proceedings will be a reality.

However, an avalanche of insolvencies should not be expected and the two-month deadline for the commencement of insolvency proceedings can be extended by the use of pre-insolvency mechanisms.

It is logical that from September onwards, corporate insolvencies will start to be prepared by law firms and from January onwards, we will eventually start to see an increase in the number of insolvency proceedings.

What should companies that are already in a difficult financial situation do? If a company considers that it should start voluntary insolvency proceedings, it does not seem wise to wait too long, as the liability of its director is at stake.

The main recommendation is anticipation. To this end, it is essential to have a certain amount of time to work with, not when the company is already in difficulty and overwhelmed. The application of the current text or the one that arrives in August is not relevant. What is relevant is that a strategy is developed as to what is to be done, for what and how. The most important thing in an insolvency procedure is the preparatory work with lawyers and economists specialized in restructuring.

What is clear is that failure to voluntarily file for insolvency proceedings can have negative consequences for the company administrator.

The new text of the reform project of the Bankruptcy law promotes the pre-insolvency phase and introduces the figure of the restructuring expert.

The mission of this restructuring expert is vast: it ranges from collecting offers for the acquisition of the production unit to assisting the debtor and the creditors in their negotiations, including the drawing up of the restructuring plan and the preparation of various reports for the judge. In this way, he will act as a kind of mediator helping the judge to take decisions that will, if necessary, promote the viability of the company.

Restructuring plans replace the current pre-insolvency instruments (refinancing agreement and out-of-court payment agreement) and are seen as an alternative to insolvency proceedings at an earlier stage, avoiding the stigma still attached to insolvency proceedings and helping to relieve the courts.

How does the reform affect microenterprises?

The new text of the draft bill also provides for a special procedure for microenterprises (self-employed persons and companies with less than 10 employees and a turnover of less than €700,000 or liabilities of less than €300,000); the aim is to have an almost entirely telematic, forms-based procedure. A standardized procedure that can be used by small companies and at a very low cost.

The idea sounds good on paper, but it can be very difficult to implement in practice because of the lack of technology available to the courts and to the entrepreneurs and creditors who are called upon to participate.

It is an insolvency procedure that is intended to be faster and low cost: there is no insolvency administration and official standardized forms are available to the debtor and creditors, which are accessible online and free of charge, which even facilitates the sale of assets through an electronic platform. Finally, the need for a lawyer and an intermediary lawyer is included in the special procedure for microenterprises.

With regard to the new developments in business transfers and the sale of production units in insolvency proceedings, priority is given to offers to take over the business made by the workers themselves, organized as a cooperative or worker-owned company, and an electronic auction is established as an ordinary means of disposing of production units, and the figure of the Pre-pack, which was already applied by some courts in Barcelona, is given a new status.

In any case, with the experience of almost 20 years, it is clear that a new insolvency law, however good it may be, will not save any company on its own. Companies are saved if they have a plan and if they have sales. The law is only a tool that allows the company to temporarily suspend certain obligations or reduce the amount of its debts. The viability of a company depends more on its business project than on going through the insolvency procedure. Unfortunately, in Spain, the entrepreneur "holds out" for as long as possible before requesting the opening of insolvency proceedings, making the company's activity even more fragile, and eventually rendering it unviable, and in many cases the company starts insolvency proceedings when it is already "extinct" so that the court and the judicial administrator simply declare its death and proceed to bury it, but there is no longer any room for miracles, or for its possible revival.

In any case, I think that once again a great opportunity to destigmatize insolvency proceedings and to dignify the profession of judicial administrator, whose status is still pending after more than 7 years, is lost.

For further information on the contents of this document, please contact ILLESLEX at info@illeslex.com 

Illeslex Abogados

Javier Blas Guasp

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