Alicia Herrador Muñoz Sara Iglesias López Sara Arcediano Mónica Díez Valverde October 7 2022 Main novelties introduced by bankruptcy reform Augusta Abogados | Insolvency & Restructuring - Spain Alicia Herrador Muñoz, Sara Iglesias López, Sara Arcediano, Mónica Díez Valverde Insolvency & Restructuring IntroductionPre-packRestructuring plansSecond-chance mechanismQualification sectionBankruptcy without massInsolvency administrationSpecial procedure for micro-companiesJurisdiction of commercial courtsIntroductionOn 26 September 2022, following the end of the insolvency moratorium in June 2022, and in the midst of a complex scenario, a new law entered into force. Law 16/2022 amends the revised Insolvency Law(1) for the transposition of EU Directive 2019/1023.(2)The new regulation introduces many novelties in order to advance solutions to insolvency, including:pre-bankruptcy centralisation, resulting in less judicial intervention;a new special procedure for micro-companies;a reform of the second-chance mechanism, with greater protection for public credit; anda leading role for the participation of creditors at different moments of the process, such as in the qualification section.This article outlines the main new features.Pre-packThe new law introduces the "pre-pack", a concept widely used by European countries and that has also been applied in practice by the Spanish courts, aimed at preparing the future sale of the productive unit. The new regulation foresees the intervention of an expert to obtain offers for the acquisition of the productive unit in order to anticipate this process to a phase prior to the declaration of the insolvency proceeding itself.Restructuring plans Restructuring plans are introduced as pre-bankruptcy mechanisms to replace the previous refinancing agreements, the purpose of which, as indicated in the preamble, is to avoid the stigma attached to bankruptcy and also to reinforce its effectiveness.The rule defines them very broadly as:those whose purpose is to modify the composition, conditions or structure of the debtor's assets and liabilities, or its equity, including transfers of assets, production units or the entire going concern, as well as any necessary operational changes, or a combination of these elements.Unlike the previous refinancing agreements, the new restructuring plans extend their content, as they may affect not only financial creditors but all other creditors, and may also refer to the structure of the debtor's assets and not only its liabilities.The new applicable regime is based on the principle of minimal judicial intervention, except for in the context of the approval of an already approved plan. This is without prejudice to the possible appointment of a new figure known as a "restructuring expert", when necessary or at the request of the parties.Second-chance mechanismThe second-chance mechanism for granting exoneration of unsatisfied liabilities has been modified in its entirety. The prerequisite of out-of-court payment agreements has been eliminated, and the term "benefit" from the phrase "benefit of exoneration of unsatisfied liabilities" (BEPI) has been removed. The second-chance mechanism is now more restrictive than the previous regulation covering the grant of second opportunities.In this regard, it is important to note that, in order to overcome the limitation of the current exoneration system, the debtor is no longer required to previously liquidate its assets in the insolvency proceeding if it is subject to a payment plan. Thus, the debtor will be able to choose between an immediate exoneration after liquidation of its assets, and an exoneration by means of a payment plan without the need for the realisation of all its assets or rights.On the other hand, the new regulation prevents the exoneration of public law debts, except for a maximum of €10,000 for the Spanish Tax Administration Agency, and the same limit for the Social Security. This is likely to encourage ostracism and the underground economy.Another important novelty is that the new regulation prevents debtors from accessing the second-chance mechanism if, in the 10 years prior to the exoneration, they have been sanctioned by a final administrative resolution for very serious tax, social security or social order infractions. The only exception to this very restrictive rule is if, at the time of filing the application, the debtor has fully paid its liabilities.With respect to bankruptcies declared and being processed prior to the entry into force of the reform, the transitional regime of the new law provides that they will be governed by the provisions of the previous legislation, but with several exceptions. EPI applications filed after the entry into force of the new law must be governed by the new regulation, which is more restrictive for the debtor.Qualification section New features have also been introduced in the sixth qualification section. The qualification must be opened in all insolvency proceedings without exception; therefore, the possibility of not opening this section in the cases of non-burdensome agreement is eliminated. Public Prosecutor's Office reports no longer feature and the qualification is anticipated to the end of the common phase. Creditors will be able to file a qualification report, thus giving them the possibility to participate as a party in this section.On the other hand, the new law already provides for the possibility that the insolvency administration, the creditors and the affected persons may reach a compromise agreement on the economic content of the qualification in the event of a conviction.Bankruptcy without massThe new law introduces a new regulation of bankruptcy without mass that will be applicable to both individuals and legal entities. The possibility of decreeing the declaration and conclusion of the insolvency proceeding simultaneously disappears and is replaced by a system in which the judge may issue up to three orders.The new law defines what is to be understood by "insolvency without assets", indicating that it refers to individuals or legal entities where:there are no legally attachable assets and rights;the cost of realisation of the assets or rights is disproportionate to their value;the assets and rights have a value lower than the foreseeable cost of the proceeding; andthe charges or encumbrances on the assets or rights are higher than their market value.If any situation is fulfilled, a first order is issued, declaring the insolvency proceeding, with an expression of the liabilities. The order is publicised so that creditors representing less than 5% may request the appointment of an insolvency administrator to issue a report on whether there are indications of possible rescindable acts, possible grounds for a liability action against the administrators or possible causes of guilt.If the entitled creditors do not request the appointment of an Insolvency Administrator, the judge will issue an order of conclusion. If, on the other hand, they do request it, the court will issue a second order by which it appoints the Insolvency Administrator, who must draft a report within a period of one month. If any indication emerges from this report, a complementary order will be issued, including the other pronouncements of an order declaring the insolvency proceedings, and the liquidation phase will be opened.Insolvency administration One of the main objectives of the EU directive is to ensure adequate training for professionals. The new regulation continues to require prior registration in the Public Insolvency Register in order to be appointed as insolvency administrator. The novelty it introduces is that in order to be able to register, it will be necessary to pass an aptitude examination. However, the reform has excluded lawyers, economists, business graduates and auditors with previous experience from the requirement to pass an examination.The new law provides that the regulation on insolvency administration will distinguish between three types of insolvency proceedings, as has been the case until now. However, instead of differentiating them according to size, as the revised Insolvency Law does now, the new law provides that they will be differentiated according to the complexity of the insolvency proceedings.The registration shall require specifying the types of competition in which insolvency administrators may be appointed, as well as the territorial scope in which they are able to act.With respect to the remuneration of insolvency administrators, novelties are also introduced. The remuneration will comply with the rules of exclusivity, limitation, duration and effectiveness. Remuneration will accrue as functions are performed, which may be reduced in the event of non-compliance or failure to meet deadlines.Special procedure for micro-companiesThe regulation of a new special procedure for micro-companies is also introduced. This scope of application of this procedure is focused on natural or legal persons that carry out a professional or business activity, have employed less than 10 workers in the last year and have a turnover of less than €700,000 or liabilities of less than €350,000. In other words, it is a special procedure for small companies and self-employed people. It is a new procedure in which the procedural steps are simplified and all the processing is foreseen through standardised forms to be submitted digitally by the debtor. The intervention of the insolvency administrator for this type of proceedings will not be mandatory, but the possibility of appointment will be left to the debtor itself or to the creditors. The intervention of a lawyer and a solicitor for the defence of the interests of the insolvent party, however, is mandatory. The regulation of this special procedure for small companies will not enter into force until 1 January 2023.Jurisdiction for commercial courtsThe jurisdiction to hear insolvency proceedings of non-business individuals, which until now fell to the courts of first instance, returns to the commercial courts, which means that the insolvent party can benefit from the specialisation and experience of these courts. For further information on this topic please contact Alicia Herrador Muñoz or Sara Iglesias López or Sara Arcediano or Mónica Díez Valverde at Augusta Abogados by telephone (+34 933 621 620) or email ([email protected] or [email protected] or [email protected]). The Augusta Abogados website can be accessed at www.augustaabogados.com. Endnotes(1) Approved by Royal Legislative Decree 1/2020, of 5 May 2020.(2) Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency).