chevron-down Created with Sketch Beta.


Developments Regarding the Sale of Business Units by Insolvent Companies in Spain

Lola Tejero, Albert Garrofe, and Idoya Fernandez

Developments Regarding the Sale of Business Units by Insolvent Companies in Spain

The Spanish Insolvency Act is being amended to incorporate the European Union Directive on Preventive Restructuring. The insolvency reform will bring about a complete overhaul of the Spanish insolvency system, particularly with regard to pre-insolvency instruments. It will enter into force on September 26, 2022.

There are some new developments affecting the sale of business units by companies at the pre-insolvency stage or after the declaration of insolvency (particularly the so-called pre-packaged insolvency process or “pre-pack”). These developments bring new opportunities in distressed M&A transactions regarding acquisitions of business units from insolvent companies.

Below is a brief explanation of the sale of business units as part of a restructuring plan and during insolvency proceedings, largely focusing on the pre-pack system.

Sale of business units on implementing restructuring plans

At the pre-insolvency stage, the Spanish insolvency re- form enables restructuring plans to include the transfer of assets, business units or of the whole company, although it does not provide any details regarding the system or enforcement procedure.

The sale of business units set out in a restructuring plan will be protected against clawback actions in cases of later insolvency. Otherwise, transfers will be subject to the general commercial law system for business sales, particularly for the purposes of labor and social security succession, taking on tax liabilities arising from operating the business and the need to seek the consent of the counterparties to agreements transferred as part of the business unit.

Sale of business units in insolvency proceedings

Under Spanish law, the transfer of the company or its business units may occur at three different times during the insolvency proceedings: (i) on submitting the request for opening special wind-up proceedings; (ii) during the liquidation stage; or (iii) through a downstream bid, without making it conditional on the opening of the liquidation stage. Even before filing a request for insolvency proceedings, debtors whose circumstances indicate a likelihood of insolvency or who are in a situation of imminent insolvency or current insolvency may request the court to appoint an independent expert responsible for collecting offers for the purchase of business units (pre-pack).

The main development of the insolvency reform as regards debtors’ sale of business units during the insolvency proceedings is the detailed regulation on the pre-packaged insolvency or pre-pack process to prepare an application for insolvency proceedings, submitting an offer to purchase one or several business units with the help of an expert appointed by the court hearing the proceedings.

Despite there being no specific rules under Spanish law on the pre-pack process, to facilitate these procedures, judges of the commercial courts (particularly those of Barcelona and Madrid) had already approved certain protocols and have applied them in recent months to accelerate the sale process of the business units, avoid the deterioration in economic activity and maximize the recovery for creditors. The reform now establishes a specific procedure to be followed.

No changes are made to the current system that is in force in relation to the minimum content requirement of offers to purchase business units (notably (i) offeror’s identity and solvency; (ii) precise description of assets, rights, agreements and licenses or permits included in the offer; (iii) price, payment arrangements, and price guarantees and details of the different price offered in case any encumbrances over the assets and rights transferred continue to apply; (iv) and how the offer will affect workers); and the effects of the purchase for the acquirer (in brief, the selection of agreements by the offeror and the automatic subrogation of contracts without the need for the counterparty’s consent except for administrative contracts which will be governed by rules on public sector contracts; subrogation of administrative licenses and permits making up the business unit; and the non-assumption of insolvency liabilities, except for labor and social security debts of the workers taken on).

The same rule on the existence of business succession will continue to apply for labor and social security purposes on transferring business units at any stage of insolvency proceedings. The most significant development is that the reform resolves doubts about the question of applicable jurisdiction, resolving that only the commercial courts may hear those cases. This means that these courts will be the only ones competent to declare the existence of labor and social security succession and to identify the workers affected by the sale of the business unit, for which they may request a report from the Labor Inspectorate.

Pre-pack process

As explained above, the reform lays down detailed provisions on preparing, in the pre-insolvency stage, the sale of business units by means of the so-called pre-pack process to facilitate the sale of business units by debtors whose circumstances indicate a likelihood of insolvency or that are in a situation of imminent insolvency or current insolvency at the time at which the proceedings begin.

The main features of this regulation are described below.

System to evaluate offers at the debtor’s request, for which it may ask for an expert’s help.

Debtors whose circumstances indicate a likelihood of insolvency or that are in a situation of imminent insolvency or current insolvency may request the court hearing the proceedings to appoint an expert responsible for collecting offers for the purchase of one or several businesses units before filing for insolvency. On declaring insolvency, the judge may confirm or revoke the appointment of the expert. If ratified, the expert will become the insolvency administrator.

Filing for insolvency with the submission of a binding offer.

On filing for insolvency proceedings, the debtor company will also submit a written binding offer from a creditor or third party to purchase one or several businesses units.

Commitment to maintain the activity.

The offeror must take on the commitment to continue or restart the activity with the business unit or units referred to in the offer for at least two or three years. A breach of this commitment will entitle any affected party to claim compensation from the acquirer for any damages caused that resulted from a breach.

Regulated process.

After the debtor has filed for insolvency proceedings and submitted the binding offer, the judge will follow the process in accordance with the law so that any creditors may come forward and any interested party may submit an alternative binding offer (including company workers), as set out in the following diagram:

Regulated process

Regulated process

Selection of offers.

If several offers are submitted, the judge will select the one that is the most advantgeous to the proceedings. If workers submit an offer that is equal to or higher than the offers submitted by other parties, a judge will give priority to the workers’ offer, as long as it is beneficial to the insolvency, considering, among other criteria, the continuity of the company, the business unit and the securing of jobs.

This article was prepared by the Business Law Section's Mergers & Acquisitions Committee.