What you need to know about buying assets and companies in Spanish insolvency proceedings
According to the 2014 Statistical Yearbook on Insolvency Proceedings, published by the Association of Registrars for the land, movable property and commercial registries in Spain, in fiscal year 2014, 92.47% of companies that went through insolvency proceedings and initiated the successive phase did so to enter into the liquidation phase. This is very similar to the figure observed in the 2006–2013 period (since official records began, in other words), and corroborates that insolvency proceedings continue to have a visible propensity to end up in liquidation. The sale of the assets of companies in insolvency proceedings does not, however, only take place in the liquidation phase (alternative to the Arrangement with Creditors or consecutive with that arrangement if it is breached). A “direct sale” of the whole company or of business operations and other profitable assets may occur at any stage of the insolvency proceeding, in an attempt to keep it trading or prevent a fire sale of its assets.
The purpose of asset sales in the liquidation phase is to realize the debtor’s assets and obtain as much cash as possible to be used to satisfy creditors, in the legal order for payment. A crucial document for these purposes is the Liquidation Plan which will have to be prepared by the Insolvency Manager. Briefly, it will use the Inventory of Assets and Rights to determine both the assets to be liquidated and their values and define the procedure for realizing them. After being approved by the judge hearing the insolvency proceeding, the plan will be made available to interested parties at the Court Office (it is not notified to creditors personally unless they have appeared as parties in the insolvency proceeding). Its role is to set out the guidelines for the realization (principally via sale) of the assets of companies in insolvency proceedings, under the principles of seeking maximum value and of preserving the enterprise.
Where practicable, it must contemplate the disposal as a whole of the establishments, operations and any other of the debtor’s business operations for goods and services. If considered to be in the interests of the insolvency proceeding, however, it may contemplate the isolated disposal of all or some of the component elements. It must be in sufficient detail, and for all matters not covered by it, the legal rules on liquidation in the Insolvency Law will apply secondarily.
The latest amendments to the Insolvency Law in connection with liquidation are designed to favor the sale en bloc of the company, or of its independent business units, to encourage the purchaser to keep them operating to the benefit of the company itself, of its employees, of the workers and of the economy as a whole.
This alternative appeals mainly to companies wishing to grow their businesses or entrepreneurs thinking of starting their foray with the protection afforded by the support of an organized business structure.
The enticement of a potential acquisition at below the market price, however, should not make anyone forget the importance of taking the appropriate precautions. It is highly recommendable to carry out a due diligence examination into the company, as complete as the circumstances will allow (in other words, reviewing the status of debt, supervising and taking an inventory of the assets, and checking their actual condition, the existence of disputed assets and the potential inclusion in the lot of assets provided as security for the payment of specially preferred claims (mortgages, for example) which may imply the transferee being subrogated in respect of the debtor’s obligations, and, from a labor standpoint, determining the workforce to be transferred and the status and circumstances of the outstanding salary and social security debts, among other factors).
Miguel Costales Portilla and Cecilia Martínez Bárcena
Garrigues Litigation and Arbitration Department