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Spain

Bankruptcy

Updated 12/2012

Legal requirements

Entrepreneurs may be able to avoid bankruptcy by anticipating difficulties - if they keep a close eye on the financial situation of their business.

Do you know of an enterprise which cannot effectively pay its debts?

Enterprises are a source of wealth and employment. It is in all our interests for them to continue operating, to grow and succeed.

There may come a time in the life of an enterprise when it cannot pay its debts in an effective or regular manner. This situation affects: the business owner in debt, the creditors, the market and the economy.

Regulations govern this situation to cover the general interest and the interests of the individuals affected. The regulations establish a process in order to deal with such circumstances and provide the best possible solution. Given the importance of such cases, they are overseen by a judge.

If an enterprise cannot pay its debts as agreed in Spain, then it will enter a situation known as an "creditor arrangement". This situation is governed by the Insolvency Act, with the following aims in mind:

1. If the enterprise is economically viable, its continuance is facilitated, along with the payment of debts owed to the creditors.

2. If the enterprise is not economically viable, it is wound up in an orderly manner, allowing the creditors to repay their debts. As far as possible.

The Insolvency Act governs every aspect of this situation. In other words, it covers: individuals, enterprises (small, large), natural and legal persons.

The regulations are flexible, and can be adapted to the circumstances of each case.

Procedures are simplified, and processing time is shortened to facilitate collection by the creditors.

A business owner who cannot in a proper, "regular" manner meet his or her debts is obliged to follow the process laid down in the Insolvency Act.

Process for an enterprise creditor arrangement

This is a single, simplified, flexible process. There is a simplified procedure for the smallest-scale cases. The necessary measures are set out to publish the circumstances in order to inform those with an interest that an enterprise has entered the creditor arrangement process.

The process of "creditor arrangement" at an enterprise involves the following individuals:

The debtor. This could be an individual or enterprise, a natural or legal person. The assets from an inheritance. Public organisations belonging to the state cannot be subject to this situation.

The Creditors: the persons owed money.

The Companies Judge: oversees the process, instigating, pursuing and closing the case. The judge enjoys extensive powers and flexibility to adapt the process and the measures decided to the circumstances of each case. With regard to the debtor, creditors and insolvency administration. The judge appoints, supervises and dismisses the insolvency administrators. He settles any disputes which may arise among the parties.

The Insolvency Administrators: answer to the companies judge. They perform the procedures required in order to handle the creditor arrangement and draw up the solution, for example in order to establish the assets of the debtor available for the payment of debts. Supervise or replace this figure in administrating the enterprise, among other activities. Where necessary, the company is liquidated.

The insolvency administrators may be various natural or legal persons. They have the appropriate legal and economic training and experience in this field. Normally one single individual will be appointed. In some cases there may be a representative of the creditors, or a number of assistants may be appointed. They are responsible for their administrative actions. They have civil liability insurance to cover their actions.

Phases of the creditor arrangement

I- Actions prior to the declaration of a creditor arrangement.

An enterprise may be declared subject to a creditor arrangement if it cannot meet its debts in a proper or regular manner.

The debtor is obliged to request the creditor arrangement process within two months after he learns or should duly have learned of the situation, or otherwise when the situation is imminent. This circumstance must be proven.

The creditors may apply for the process if the enterprise cannot pay its debts in a regular manner and the circumstances laid down in law apply. For example, if the debtor has ceased to make normal payment of credits in general. This situation must be proven.

Following the application, the Companies Judge analyses the application and the documents submitted. He holds a hearing with the persons concerned. The debtor may object to the declaration application or deposit the funds required in order to pay the debts.

This phase ends with the creditor arrangement process either being declared or not.

II. Common Procedural Phase.

Following declaration of the fact that the enterprise is subject to a creditor arrangement. This is published by various means: electronic, notices served on the interested parties, Companies Register, other public registers and an excerpt in the Official State Gazette.

The Companies Judge adopts the relevant measures in each case. He appoints the insolvency administrators. He adapts the consequences for the debtor, creditors, enterprise, credits, contracts, etc. A creditor arrangement results in the following key consequences:

  • The ability of the debtor to act may differ in each case: he continues his operations; he requires authorisation from the insolvency administrators for certain actions; he is dismissed from administration of the enterprise and replaced by the insolvency administrators. The debtor may have his communications intercepted, have his ability to travel to other cities restricted, or even be subject to house arrest.
  • Creditors see their credits and their means of collecting them affected. Most credits are incorporated on an equal basis within the body of assets which will be taken into consideration for the payment of debts. Some credits enjoy preferential rights, while others are subordinate.
  • During this phase as a general rule management of the enterprise continues. On an exceptional basis it may continue operating, or it may be ruled that some part of the enterprise is to cease operation.
  • The insolvency administrators decide: the assets of the debtor available to meet the debts Establish the list of credits to be paid. The creditors are listed. A report on the administrative procedures performed is drawn up.

During this part of the process any objections to the decisions adopted are settled, together with any appeals and incidents connected with them.

III- Agreement or Liquidation.

In the following phase there are two possibilities: 1- an agreement between the creditors and the debtors, or otherwise 2- the liquidation of the enterprise.

-The agreement is the preferred solution. The agreement lays down measures to guarantee that the debts will be collected by the creditors, for example an extended repayment term, a partial waiver of credit entitlements. These measures are set out in a payments plan. If the enterprise is economically viable, then its economic viability plan is also included.

The agreement must be approved by the creditors representing a specific proportion of the credits to be collected. The insolvency administrators draw up a report on the agreement. Following this, the judge has the last word in issuing approval or otherwise.

Following approval, a further stage begins for implementation of the agreement. This is normally implemented by the business owner. On an exceptional basis, it may be ruled that the insolvency administrators are to implement the agreement.

In order to speed up the procedure, the debtor may propose an agreement to the creditors at the very start of proceedings.

Creditors representing a given proportion of the credits may likewise propose an agreement from the outset.

- Liquidation of the company: this is considered as a subsidiary solution to the above. In those cases where the enterprise is not economically viable. The debtor or creditors may apply for liquidation at the outset of the proceedings or at any subsequent point. In some cases the judge may rule liquidation ex officio.

The judge approves the liquidation. Liquidation plan is drawn up, and a report on the equity situation of the enterprise. In general, its assets are sold. The money raised is divided among the creditors.

In the sale, preference is given to the transfer of parts of the enterprise, or otherwise the entire business en masse, in order to allow its economic activity to continue.

During the liquidation the debtor temporarily resigns from administration of the enterprise, and is replaced by the insolvency administrators. Following the liquidation, the enterprise is normally wound up.

The regulations for the liquidation of enterprises subject to credit arrangement procedures are different from the general rules for corporate liquidation.

V- Classification of Insolvency.

This is a separate procedure to the above. The purpose is to establish whether the debtor has acted with good intent, in bad faith, or in a negligent manner. In those cases in which actions were taken in bad faith or negligently, with a detrimental effect on others, they may claim compensation or liability for the damages suffered. The judge may, meanwhile, disqualify the business owner from business activities for a number of years. In the event that offences have been committed, the public prosecutor will be informed.

V- Conclusion and Reopening.

The creditor arrangement process concludes in the legally established cases, for example implementation of the agreement through payment of the creditors. Continuance is not possible. These actions are supplemented by the aforementioned classification of insolvency.

The creditor arrangement will subsequently be reopened if the natural person debtor acquires or earns new assets, or others are discovered within five years of conclusion.

The Insolvency Act governs the international implications of insolvency, in particular in the case of enterprises with operations in different countries.

Detailed information may be found via the following link:

Entrepreneurs having experienced bankruptcy should not lose confidence in their ability to embark on a new business.

Administrative procedures

The procedures established in law involve the courts, the Companies Register, other public registers and the Official State Gazette.

Help & advice

Help & advice

E-mail a business organisation near you

The EU runs a network (Enterprise Europe Network) of local business organisations in most European countries that may be able to help you.

Choose your country and town and enter your enquiry below.

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