Impact on real estate sales
The Insolvency Act (22/2003) provides for a period during which a bankrupt party can be put into receivership with the goal of redressing the financial balance and enabling the business to continue.
However, in the current financial climate - where a faltering property market affords little chance for developers to claw back their investments and a lack of bank financing is curtailing the opportunities of commercial companies - the reality is that a high number of bankruptcies end in closure and liquidation.
Parliament has thus enacted and approved Act 38/2011, which - according to its preamble - seeks to simplify and speed up bankruptcy proceedings, as poor timing is detrimental to creditors and may impair the value of the bankrupt party's assets.
The new act will affect the sale of real estate owned by the bankrupt party in two main ways.
First, in general, a bankrupt party's assets still cannot be sold until the court has approved the general agreement between creditors or until the commencement of liquidation, as the case may be. However, the receiver can now dispose of assets:
- in the course of the bankrupt party's business (eg, to developers);
- if he or she judges this to be indispensable for the subsistence of the undertaking - this must then be reported to the court;
- if those assets are not required for the continuation of the business; and
- if the offer substantially matches the assets' value as inventoried in the receivership report. When dealing with real estate, 'substantially' means within at least 20% of the inventoried value. If the offer is 20% lower than the inventoried value, the law provides for a waiting period of 10 days during which any third party can submit a better competing offer.
Second, certain parts of a bankrupt party's real estate might be subject to 'special privileges', such as mortgages or other security or liens, which give preferred creditors the right to collect their claim from the proceeds of sale of the real estate. In this case, the previous law stipulated that the court could approve the sale if the purchaser agreed to have the mortgage, lien or security subsist and subrogate in the underlying claim, thus releasing the bankrupt party.
The previous law also stated that the sale should take place by way of public auction, unless an offer was made for at least the value initially agreed by the bankrupt party and the creditor, and payment was made upfront.
The new law now allows the bankrupt party and the preferred creditor the option to consent to a lower offer, provided that it matches the market value of the real estate as appraised by an officially certified appraisal agency. The law also provides for a waiting period of 10 days during which any third party can submit a better offer, prior to court approval.
The amendment to the Insolvency Act lifts certain barriers to the sale of real estate in two ways:
- by relaxing the requirements that prevented receivers from selling real estate alone, without court approval; and
- by allowing for the sale of property subject to special privileges (the vast majority of such property) at a price lower than that agreed when the relevant security was created, provided that it matches the market value.
The new law counterbalances these more relaxed requirements with a waiting period for the submission of competing offers, thus avoiding the formalities connected to a public auction while contuining to respect the principle.
For further information on this topic please contact José Antonio Pérez Breva at Garrigues by telephone (+34 93 253 3700), fax (+34 93 253 3750) or email ([email protected]).