Will the latest reforms affect the number of insolvency cases?
June 2013 saw a record number of formal insolvency proceedings (concursos de acreedores) in Spain. According to the Insolvency Proceeding Statistics of the National Statistics Institute (INE), the second quarter of 2013 ended with 2,614 new cases of technical insolvency (insolvencias), up 12.3% on the same quarter in 2012, with the number of formal insolvency proceedings provisionally standing at 5,468 for 2013. On the eve of publication by the INE of its statistics for the third quarter, Crédito y Caución estimates that there will be more than 7,000 formal insolvency cases, cumulatively speaking. If that figure is borne out, 2013 could end with a record number of formal insolvency orders made in Spain, close to 10,000, as some estimates have already indicated. This would be 14% up on 2012.
The above figures are well known. What is less well known is that although the number of formal insolvencies in Spain has gone up since the start of the economic crisis, the rate of court-ordered insolvencies continues to be very low, far below that observed in other countries. For example, while there were around 15 cases of formal insolvency for every 10,000 enterprises in Spain in 2010, there were 88 in Japan; 89 in Germany; 98 in the US; 137 in the UK; and 217 in France. These figures are taken from one of the Bank of Spain’s latest bulletins, which contains interesting conclusions on why formal insolvency proceedings are not more widely used in this country.
The same study concludes that the lesser use of formal insolvency proceedings is due to the fact that in Spain, a higher proportion of technical insolvency situations are resolved by using alternative mechanisms, such as private renegotiations between debtor and creditor (familiarly referred to as “refinancing”) and asset foreclosures (in the case of mortgage loans).
The importance of refinancing as an alternative to formal insolvency proceedings has again been stressed by us in the Firm’s latest international publication, The Restructuring Review 2012/2013, in which we participated along with prestigious English, U.S., French and Chinese law firms. The chapter on Spain lists some of the most important transactions in which our Restructuring and Insolvency Department has acted and the solutions that were adopted. The chapter is worth reading because, apart from providing a simple explanation of Spanish formal insolvency proceedings, it refers to the latest legal trends which are making the daily headlines (sale of productive units, preservation of the company’s value, approval of arrangements with creditors, etc.).
At the end of the chapter on Spain, we refer to another highly topical subject: the so-called “fresh start” or “second chance” mechanism for releasing the debtor (whether an individual or sole trader) from outstanding debts that he still cannot pay even after liquidating his assets. This mechanism has been enshrined in the recent Law on Support for Entrepreneurs and their Internationalization, with the scope we explained in our most recent newsletter.
This debt release tool, which, in principle, is only meant to be used in the context of a formal insolvency proceeding by a certain type of enterprise, can operate differently (and be used to cancel more debt) if an attempt was first made to reach an out-of-court payment agreement, another alternative solution to formal insolvency which we also explained in our last newsletter.
Whether or not the low rate of formal insolvency proceedings in Spain will increase due to the introduction of these new mechanisms remains to be seen, although the limited scope given to the “fresh start” or “second chance” mechanism might require new reforms to make it even more attractive in the context of a formal insolvency proceeding.
Garrigues Restructuring and Insolvency Department
