Insolvency auctions and the debts of businesses
If a company in an insolvency proceeding is to be sold en bloc, it is customary practice to open a bidding period. If the assets are to be realized separately, the insolvency managers will identify in the Liquidation Plan the liquidation alternatives they consider suitable based on the characteristics of each asset or set of assets (direct sale, auction, restricted auction, among others). The statutory auction system will apply on a secondary basis to any matters not covered in the Plan. In practice, insolvency managers often use specialist companies providing an online platform for publicizing, managing and processing bids online. An electronic auction system has been in place since October 15, 2015, for which the Spanish Ministry of Justice has created a Legal Auctions portal, now up and running and available at: https://subastas.boe.es.
On completion, in each case, of the bidding period, the insolvency managers will review and assess the bids to determine the best in the overall interests of the insolvency proceeding. In a sale en bloc of a company or an independent productive unit, the successful bid will not be determined on a best price basis only. Other factors will come into play such as how far the received bids ensure the continuity of the company (or of the productive units) and of the jobs, together with the best satisfaction of the creditors’ claims. The valid acquisition instrument for the buyer will be the decision approving the award or sale which will be rendered to this end by the insolvency judge, and may, in certain cases, have an equivalent effect, for these purposes, to a public deed of sale.
On the subject of practical implications in the purchase of businesses and companies in insolvency proceedings, the buyer can request to be subrogated in respect of the rights and obligations under the valid agreements and licenses associated with the business, entered into or held by the insolvent debtor, for which the other party’s consent will not be necessary. Productive units, for their part, are not transferred on an automatic liability basis for the buyer concerning the payment of claims not satisfied by the insolvent debtor before the transfer, (including both the pre- and post-insolvency order claims), unless the buyer expressly agrees to do so (the proceeds of the sale will be used precisely for payment of the claims by the insolvency managers).
There are a number of debts, however, for which the buyer is going to be liable as a result of a transfer of undertakings. While the General Taxation Law provides an exemption from the tax debts if the undertaking is acquired in the arrangement or liquidation phase of the insolvency proceeding, as far as the employment-related and social security debts are concerned, the law determines that a transfer of undertakings will be considered to exist for the purpose of the buyer assuming the existing social security debt in the insolvency proceeding with those creditors. The most recent trend among the courts has been to relax the social security debt that the buyer is required to assume by reducing it to the debt strictly associated with the employment contracts being transferred, not any of the others. Additionally, the Commercial Court can render a decision determining that the buyer is not subrogated in respect of the portion of the amounts of unpaid salaries or severance before the disposal which will be assumed by FOGASA (the wage guarantee fund). Similarly, to secure the future of the business and the preservation of jobs, the transferee and the workers’ representatives will be able to sign agreements for the modification of collective working conditions, in line with the rules and procedures set out in the Spanish labor and employment law.
Miguel Costales Portilla and Cecilia Martínez Bárcena
Garrigues Litigation and Arbitration Department