Stuck in the interval between the end of the insolvency moratorium and the entry into force of the Insolvency Law Reform
Commentaries on the Spanish Insolvency Law Reform
“The story of the Insolvency Law is the story of its reforms”. This is how the explanatory memorandum of Royal Legislative Decree 1/2020 of 5 May approving the consolidated text of the Insolvency Law begins. In fact, there are few, very few, articles that have retained their original numbering and text from 2003. One of them is article 5.1, regulating the debtor’s duty to request the declaration of insolvency “within two months following the date on which it knew, or should have known, of its state of actual insolvency” (the only addition to this provision was the inclusion of the adjective “actual” with the text’s consolidation in 2020).
The importance of this duty is partly explained by the consequences of not fulfilling it. A late filing for insolvency will result in the insolvency being presumed negligent (culpable), unless proven otherwise. When the debtor is a legal person, this classification can render its directors personally liable for the insolvency debt, among other possible effects. If the debtor is a natural person, this can prevent them from accessing the discharge of non-paid debt, unless the judge decides otherwise because of the circumstances in which the delay occurred.
It is known that the legal duty to request the declaration of insolvency was suspended after the proclamation of the state of emergency in Spain in March 2020. The so-called “insolvency moratorium” was a measure that was intended to last solely for the duration of the state of emergency. However, its effects were later extended until 30 June 2022, since it was to be used so as to prepare the transposition of the EU Restructuring Directive.
The lifting of the moratorium in late June meant that, for those debtors in a state of actual insolvency, the two-month term to request the insolvency declaration finished in late August (leaving aside —in this Part II of the Commentaries— the possibility of extending this term with the debtor’s communication of the opening of negotiations with creditors).
Shortly after, on 25 August, a plenary session of Spanish Congress passed the insolvency law reform that, after it was published in the Spanish Official Gazette (Boletín Oficial del Estado) as Law 16/2022 of 5 September, will enter into force, mainly, on 26 September.
Even though the legislator wanted the end of the moratorium to coincide with the entry into force of the insolvency reform, this has not been the case, and an impasse existed between both events. This circumstance bears the following question: what consequences may this impasse have had for those debtors that were already insolvent on 30 June 2022?
Firstly, they had to face a complex decision before 30 August: whether or not to file for pre-insolvency or insolvency —to avoid a formal breach of the duty to request the declaration of insolvency within a two-month period (per article 5.1 Insolvency Law)—, when it was already known that the insolvency reform had been approved, but not yet in force (will be on 26 September).
In this context, it does not seem unreasonable to consider the possible repercussions for the insolvent debtor who, in view of its particular circumstances, has waited for the reform to enter into force before opting for filing a pre-insolvency request or requesting a declaration of insolvency. In the coming months the situation will become clearer. This question, in any event, will have to be analysed on a case-by-case basis.
Similarly, the aforementioned impasse will create a wide array of scenarios, in which it will be necessary to determine if the insolvency reform is applicable, and on what terms. We are now referring to the requests for pre-insolvency and insolvency that have been filed before the entry into force of the reform.
In the case of requests for pre-insolvency filed before the reform enters into force, its transitional provisions stipulate that it will not apply to the communications of the opening of negotiations with creditors that are made before it enters into force (first transitory provision 1.4), or to restructuring plans negotiated before it enters into force (first transitory provision 1.5). Could the communications of the opening of negotiations with creditors, for instance, be subject to an extension —as foreseen in the insolvency reform— if they are made before 26 September?
In contrast, with regards to insolvency proceedings, the reform establishes that the key date is that of the date of declaration of insolvency, not the date of its request (first transitory provision 1.3). Therefore, if the insolvency is declared after the entry into force of the reform, even if the request for insolvency was submitted before that date, the amended Insolvency Law will be applicable. On the other hand, if the insolvency is declared before the entry into force of the reform, the old provisions will apply, albeit with a wide array of -important- exceptions (first transitory provision 1.3). The exceptions apply to matters such as the insolvency administrator’s report, the claw-back claims, the composition agreement’s proposal and amendment, the liquidation phase and the classification phase. This therefore represents an important exception from the general principle of non-retroactivity of procedural rules.
The interpretation of this transitory regime will, in turn, pose different kinds of questions. For instance, in terms of classification: can the creditors submit the classification report foreseen in article 449 of the Insolvency Law (in its reformed version) if they have not previously made any statements on this at the time of credit communication? We must bear in mind that the possibility of making those statements at such stage is a new addition by the reform that does not seem to be retroactively applicable.
Now that the legislator has laid down the rules it is time for the legal community to put them into practice. We can, of course, expect challenges and difficulties in this process, but this is precisely what has always driven the evolution of our insolvency law.
In our next commentary we will cover some of the novelties introduced by the legislator in order to improve efficiency in the processing of insolvency proceedings. As per usual, it will be available on our website and LinkedIn profile.