Creditors may force the shareholders of large- or medium-sized corporations to sell a productive unit through the restructuring plans

PradaGayoso partner Guillermo Prada participated as a speaker at a conference on the insolvency law amendment hosted by Afi

The insolvency law amendment projected by the Spanish Government enables the creditors of a company to force the shareholders to sell a productive unit by means of a restructuring plan. For this purpose, two requirements are to be met: the company must be a large- or medium-size enterprise, and in addition, it must be facing the risk not to be able to pay its debts when due in three months time.

This is one of the aspects of the insolvency legal system amendment presently under way in Parliament –and expected to be enacted in June– that economist and PradaGayoso partner Guillermo Prada reviewed at a conference on such amendment hosted by Afi (Analistas Financieros Internacionales).

As put by Guillermo Prada, the new legislation will encourage companies to ‘act on an anticipative basis’ in order not to lose control of the restructuring plan for the benefit of the company’s creditors.

In his statement, he also referred to a new concept that will allow to elect to arrange the sale of a productive unit -or pre-pack– before the insolvency petition is filed.

In this respect, the company in distress may file a petition with the court for appointment of an expert specialising in requesting bids for the purchase of the productive unit. Subsequently, once the insolvency petition is granted by court, this individual may become the insolvency practitioner, ‘the benefit being that he will not terminate the sale based on an avoidance action,’ as he explained.

However, Guillermo Prada also advised that the pre-pack arrangement will not allow to avoid the evaluation of the bankrupt’s degree of fault (fase de calificación), that will be inherent to every insolvency proceeding. The so-called fase de calificación is the period when an assessment is made of the extent to which entrepreneurs or managers are accountable for the financial distress of the company and may be ordered to pay at their own expense any debts not covered with the proceeds from the insolvent company liquidation.

Also, the new legislation will enable certain creditors, including governmental authorities, to submit their report of accountability as an instrument to transact with the company in distress.

As far as the purchasers of a productive unit are concerned, Guillermo Prada underlined that they are obliged by the insolvency law amendment now being drafted to maintain the company as a going concern for three years. In his opinion, the aim is to avoid the ‘abuse’ of selling a productive unit with the purpose of extending the continuity of an unviable project. ‘A company may not be maintained sine die at the expense of creditors not being paid their debts,’ he argued.