‘Financial institutions should have external incentives to help SMEs at likely risk of insolvency’

PradaGayoso partner Félix Salgado participated as a speaker at the Aranzadi Spanish Convention for Insolvency Law

In the opinion of lawyer and PradaGayoso partner Félix Salgado, financial institutions should be given external incentives to help SMEs in a likelihood of insolvency intending to negotiate a restructuring plan with creditors.

As described in the amendment to the consolidated Insolvency Act, a company is in a likelihood of insolvency when it foresees that, in two years’ time, it will be generally unable to pay its debts when due if it does not restructure timely.

In his speech at the Aranzadi Spanish Convention for Insolvency Law, Félix Salgado said that the revised insolvency legislation brings about ‘a change in the rules of the game’ and compels creditors to ‘do their part’ so that debtor companies may arrive at a restructuring plan at an early stage.

However, in his opinion, financial creditors will need ‘external incentives’ to assist SMEs in a likelihood of insolvency, since they ‘will not do that on their own initiative’. In this respect, he suggested making the regulations on bank provisions more flexible, as well as implementing a code of good practice –to which financial institutions may adhere– to be applied to business restructurations.

Félix Salgado also referred to the ‘huge uncertainty’ surrounding the position of bank loans guaranteed by the ICO (Spanish Official Credit Institute) in a business restructuring scenario. ‘Banks will need the approval of the Collection Department of the Spanish Tax Agency in order to be able to resolve to accept a restructuring plan; however, we still don’t know the criteria that this Agency will follow’, he added.

Another subject addressed by PradaGayoso partner is the role to be played by a Court with respect to the new restructuring plans. In his opinion, ‘the Court has a wider involvement than could be expected’, since a court clerk (letrado de la Administración de Justicia) may institute 16 court proceedings (diligencias) and a decree; a judge may issue 8 orders (providencias), 22 rulings (autos) and 6 judgements (sentencias); and proceedings may be escalated to the provincial court in 8 events.

In the opinion of Félix Salgado, such a large number of court decisions may hinder in practice the negotiation of a restructuring plan, in view of the work overload of Spanish courts. As he pointed out, ‘In a worst-case scenario it might well occur that notice is submitted to court of the commencement of negotiation with creditors and the three-month negotiation period set forth by law may elapse without notice be even considered made’.