Developments related to Insolvency and Restructuring: The End of the Moratorium and the Amendment to the Insolvency Act

The insolvency moratorium, which began in March 2020, has finally been repealed on 30 June 2022. This comes as an amendment to the Insolvency Act has also been approved, which implements the EU Directive on preventive restructuring frameworks and second chance proceedings. This is the biggest reform in Insolvency Law in years and will enter into force 20 days after its publication in the Official State Gazette (BOE).

The purpose of the amendment is to enable the debtor to resort to insolvency law at an earlier stage than was previously possible. Depending on the case, the debtor will have access to new pre-bankruptcy instruments, restructuring plans or, if necessary, insolvency proceedings (whilst this could be a tool for the continuity of the company, it seems more likely to be used in the cases of liquidation of the debtor's assets).

Both of these updates will entail several changes in our insolvency law. This article summarises the changes that we consider the most significant, and what it means for you.

I - The end of the insolvency moratorium

From the beginning of the pandemic, the obligation to declare insolvency was suspended. This moratorium has been extended several times until it was finally brought to an end on 30 June 2022.

What does the end of the moratorium entail? The main consequence is the obligation of the debtor to apply for insolvency proceedings, or to inform the court that they are in negotiations with their creditors.

From 1 July 2022, applications for insolvency proceedings will be processed. This means that a debtor who is under insolvency and has not applied for insolvency proceedings or has not informed the court of negotiations with their creditors, is exposed to the risk that their creditors may request insolvency proceedings.

The late declaration of insolvency proceedings may determine the liability of the administrator of the debtor company. After over two years of the bankruptcy moratorium, this may give rise to complex cases where detailed analysis is required to identify whether legal requirements are met, in order to classify the bankruptcy as culpable, and to attribute liability to the debtor or its administrator.

In our system of insolvency liability, the company administrator can be condemned to be unable to administer other people's assets, to lose any rights they should have received from the debtor company, and even to be liable for the assets deficit, i.e. that which could not be paid to the creditors with the liquidation of the company.

Therefore, the prior study of the possible liability of the company director is particularly relevant in the case of companies that are preparing to file for insolvency proceedings.

II - The Amendment of the Insolvency Act

The amendment of the Insolvency Act was motivated by the need to implement Directive (EU) 2019/1023 of 20 June 2019 on preventive restructuring frameworks and second chance proceedings.

The main aspects of the amendment are as follows:

Restructuring plans:

The amendment completely changes pre-insolvency law, Book II of the Insolvency Act. Restructuring plans have replaced refinancing agreements, and their configuration is much more flexible than the previous model. With this scheme, it is no longer just about reductions and waivers, but also transfers of production units, modification to the structure of assets or liabilities, equity, capitalisation of credit, structural modifications, and more. This broader scope will surely facilitate the achievement of more agreements in restructuring plans than under the previous regime.

New issues to be taken into account regarding these plans include:

• Insolvency scenarios: In addition to current and imminent insolvency (that which is foreseen within three months), the amendment adds the "probability of insolvency", when it is objectively foreseeable that the debtor will not be able to regularly meet his/her obligations due within the next two years.
• Strengthening the position of creditors: (i) by being able to impose plans on the debtor's partners in actual or imminent insolvency, as well as (ii) by suspending an application for the debtor's voluntary insolvency proceedings at the request of creditors representing 50% of the affected liabilities, or the restructuring expert, provided that a plan is likely to be approved.
• The restructuring expert: A new professional expert specialising in restructuring. Their appointment, by the judge, will be made in the following ways:
  • At the request of the debtor,
  • At the request of a group of creditors representing more than 50% of the liabilities likely to be affected by the restructuring plan,
  • Upon consideration by the judge.

This will take place either:

• Following the debtor's request for a general stay of individual executions,
• Following an extension of the stay,
• Following a request for approval of a plan to be extended to dissenting creditors.

The expert’s role will be to assist the debtor and the creditors, both impartially in the negotiations and in the drafting of the restructuring plan, and collaboratively with the judge in the submission of the restructuring reports. The expert, contrary to the insolvency administrator, does not intervene in the company, but only assists creditors and debtors.

• Classes of creditors: Restructuring plans will now involve not only financial creditors, but also trade creditors. Other categories of creditors affected by the restructuring plans may also be formed. These categories will take into account their common interests, based on their insolvency classification (ordinary, privileged and subordinated), their nature (financial, commercial, etc.), and/or the effects that the restructuring plan may have on them.
• Approval by class and computation: The restructuring plan is voted on by creditors according to their class. Different majorities are required to approve the plan (2/3 or 3/4), depending on whether the class of the creditor is privileged or not. The plan will be approved by all classes of creditors, or by a majority of the classes, as long as such majority includes a class with privileged insolvency status, or failing that, a class reasonably presumed to have received any payment from…