l12 pre insolvency law anf special procedure for micro enterprises

pre insolvency law

the legal regime contained in book 2 of the spanish insolvency law LC/TRLC which restructures debts before formal insolvency proceedings begin avoiding bankruptcy althogether

• helps debtors who

  • are still econocically viable

  • face financial difficulties

  • are at risk at becoming insolvent

• traditional inoslvency proceedings are expensive slow and involve siginficant judicial intervention

  • pre insolvency law was devdeloped to create a collective decision making process similar to these proceedings but without the costs and procedural burdens of formal bankruptcy

• following reform book 2 now contains 2 procedures

1. communication of the opening of negotiations with creditors

2. restructuring plans

functions

the primary purpose is

• facillitating negotiations between d and cs

• approving a restructuring plan

• ensuring continutation of business activity if viable

• avoid insolvency and bankrutcu proceedings

rather than requiring agreement from every creditor indidually, decisions can be imposed through majority voting

• the majority of creditors can bind minority creditors

• collective interests prevail over indidual creditor objections

spanish pre insolvency law

spain adopts a hybrid procedure

• outside the court

  • negotiation

  • voting

  • drafting plan

• inside the court

  • approval of plan

  • protection of minority rights

  • extension to dissenters (minority creditors)

main principles of pre insolvency law

principle of minimum judicial intervention= courts only intervene when absolutely necessary

• most of the process occurs outside a court

  • negotiations occur privately

  • voting occurs privately

  • agreement is reached privately

• the judge generally intervene only at the end to approve the resturing plan and extend its effects to dissenting creditors

• why?

  • reduces delays

  • reduces costs

  • increases efficiency

felxibility= parties are free to adapt the process according to the needs of the business

• there is no rigid procedurl framework

• no detiled statuayory voting processes

• no mandatory negotiation structure

  • the legilsator recongises that not 2 restrucurings are the same so stakehoders are given broad freedom to tailor solutions

requirements of the debtor

subjective requirement= any natural or legal person provided they carry out business/ professional activity

• included= companies, sole radors, professionals, entrepreneurs

• not included=

  • financial insitutions (incurance companies, credit insitutions, investment service firms)

  • public bodies= government entitites

  • micro enrerprises= governed by book 3 not book 2

objective requirement= law is designed for debtors who are

• economically viable= business still has value as a going concern and could potentiallu survive

• financially unviable= in excessive debt or facing financial problms

  • business struggles to pay obligations when due

insolvency cases covered

probability of insolvency=it is objectively forseable that without a restructuring plan the debtor will be unable to meet obligations due within the next 2 years

• probability= bankruptcy is the most likely outcome if restrucring fails

• time= the inability to pay is expcted within 2 years

imminent insolvency=

• debtor anticipates inability to pay obligations due within 3 months

current insolvency= the dbtor is already unable to meet obligations regularly

• however restrucutirng is still possible until a compulsory insolvency petition has been admitted

communication of the opening of nwgotiations

gives the debtor space to negotiate with the creditors

• faciliate restructring negotiations

• preserve busines value

• prevent insolvency

• protect debtor and creditors collectively

key benefit=

• temporary suspenon of judicial and extra judicial enforcement actions against assets necessary for contuniong business operations

presntation of communication

to inform the competent court that negotiation have started or will begin immediately with the aim of a restrucring plan

• only the debtor can file not creditors

  • if the debtor is a legal person the adminstrative body files it

• the debtor must be in

  • probabililty

  • imminent

  • current insolvency

• there is no substantive prior review= the court only checks

  • formalities

  • juristiction

• the competent court is the could that would hear the insolvency proceedings

• the communication must be published in the public bankruptcy registry

effects= effects are retroactive to the filing date

• no aceleration of debt= the communication does not trigger early maturity of debts

  • contractual clauses accelerating repayement are ineffective

• contracts remain valid= does not automatically effeect existing contracts

• limited protection= protection apples only to the debtor and their assets

  • it does not protect

    • guarantors

    • third party security providers

    • non debtor mortgagors

• suspension of judicial/extra judicial enforcement actions

  • against assets necessary for continutation of business actviity

duration of phase2= 3 months

• can be extended another 3 months with a maximum of 6 months

• requres

  • majoirty creditor support

  • positive opinion of a restrucuring expert if appointed

restructuring plans

a collective agreement based on majority voting

• capable of binding dissenting creditors=

• plan can be approved by one class and imposed on others

content= modifications of debt

• wrote offs/haircuts= reduction of debt amoint

• waits= extention to payement deadlines

• change in debt instrument= alteration of loan structure

• change of debtor= debt trasnfer

• debt tp equity conversion= converting debt into shares/capital

scope

• extending affects to dissenters

  • minority creditors

  • entire creditor classes

  • shareholders/partners

• termination of contracts= where restructuring requires conteact termination to preserve business assets

• obtaining special insolvency protection= special privileges against ordinary insolvency rules

process

identify affected credits=

• determine which debts are affected

create classes= creditors are grouped into classes

• ensure similar interests

• legitimate majority voting

voting= each class votes seperately

• no formal stat procedure exists

• debtor usually organises the proces

• voting rights are based on the amount of credit held

  • the larger the claim the larger the voting weight

judicial approval

judicial approval verifies legal compliance of the restrucuring plan

• required when

  • extending effects of plan to dissenting creditors

  • binding dissenting classes

  • obtaining protections

  • terminating contracts

protection awarded to creditors who finance restrcuring recieve

• protection from recission actions= transactions are shielded from later change

• insolvency preferences= financing recieves favourable treatment in later insolvency

breach

unlike an insolvency agreement breach does not automatically terminate the plan and reverse its effects

• unless the plan itself says otherwise

• instead the remedy is to demand performance

  • if performance if imposible judicial inslvency proceedings commence

restructuring expert

acts similar to a mediator

• facilitiates negotiations

• assists unexperienced debtors

• supports judicial decsion making

appointment= normally optional and can be requested by

• debtor

• majrity of creditors

key function= prepares valuation reports for non consensual plans imposed on

• entire creditoe classes

• shareholders/partners

special procedure for micro enterprises book 3 lsc

created as ordinary insolvency rocedures have been inefective for micro enterprises

• simplicity

• lower costs

• greater business continutiy

• faster resolution

scope of application

• subjective=

  • employ fewer than 10 workers avarage during previous year

  • annual turnover bellow 700000 euro or liability below 350000 euros

• objective= microenterpsie is insolvency

  • probabale (2 years), imminent (3 months) , current

• applictions must be made within 2 months after knowledge of current insolvency

assets and liabilities

• assets= all assets and rights

  • existing when proceedings open

  • aquired during proceedings

    • exception= legally non seizabe assets

• liabiltiies= all creditors are affected regardless of origin or nature of debt

main features

cost reduction= achieved by

• eliminating unceccesary procedures

• limting proffessional involvement

  • mediators, IPs, lawyers, restrucring experts

procedure simplificiation= includes

• electronic forms instead of paper

• limited Judicial intervention

• mainly written procedures

• virtual hearings

• restricted appeals mechanisms

  • appels generally non suspensive

modular system= professionals participating only when

• necessary

• requested by the parties

unitary system= micro enterprises cannot use

• ordinary insolvency procure

• restruring plans under book 2 (only book 3 applies)

party proactivity= interested parties must request

• information

• protective measures

• additional interventions

effects

• debtor= retains management and disposal powers

  • dispoitions of assets must support business continuity

• creditors executions are generally suspended

  • no judicial enforcement

  • no extrajudicial enforcment

    • exception=for secured assets suspension requires debtor request

• contracts= do not autatmically affect reciprical contracts

continuation plan procedure

a simplifed business rescue proceduring allowing agreement between debtors and creditors regardless of insolvency stage

• can be proposesed by debtors or creditors

• a mediator or restrucring expert may assist negotiations

• debtor inactivity suggests lack of commitment and may lead to closure and liquidation

mandatory content of plan

1. list of affected credits

2. amount of credits

3. efects on credits ie haircuts/waits

4. creditor classes

5. detailed payemen plan

6. effects on contracts

7. financing sources

8. available guarantees

9. operational restrucuring measures

10. viability report

11. worker information and consultation measures

optional content

1. datation in payement

2. other restrucring mechanisms

prohibited content for public law credits

1. change of applicabke law

2. change of debtor

3. modification/extinction of guarantees

4. conversion into shares or partiicpations

winding up liquidation procedure

provides microenterprises with simple fast and fexible methods to close unseccesful businesses

• opened at

  • request of debtors or creditors

  • where continutation plan fail and the debtor is currently insolvent

• wherever possible sell the business as :

  • a going concern (entire operation )

  • or sell a productive unit

liquidation olan= central document of liquidation proceedings

• submitted by the debtor unless an IP is appointed

• required content=

  • timing of asset sales

  • method of sales

  • treatment of each asset or asset cstegory

• duration= 3 months

  • possible extention of 1 month

• creditors and workers may

  • submit objections

  • make allegations

• judges may modify or confirm the plan

conclusion of the special procedure

the procedure ends when

1. conutation plan is fulfilled

2. assets are liqudiated and final report submitted

3. assets are insufficient to satisfy estate claims

4. all recognised creditors are fully satisfied or withdraw claims

summary book 2 pre insolvency law

book 2 pre insolvency law

• rescues viable businesses before bankrupcy

  • in probability of insolvency

  • imminent insolvency

  • current insolvency

• procedures

  • communication of neogtiations to the courts

  • restrucuring plans

• principles=

  • minimal judicial intervention (hybrid model)

  • flexibility (no formalities by law)

communication of negotiations= stoppage of judicial/extra judicial enforcement

• no acceeration of debt

• contract validity preserved

• 3 months extandable to 6 months

restruvtring plans= collective debt restructring

• majority voting

• creditor classes

• judocial approval of plans

• protection of creditors for restructuring finance

summary micro enterprise insolvency procedure book 3

requirements

• under 10 employees

• turnover of 700k or liabilities under 350k

paths

• continuation plan= business rescue

• winding up plan = liquidating assets

characteristics

• electronic

• simplified

• cheap

• fast

• modular

• limited court involvement