Reform of the Insolvency Act

The recent Law 16/2022 of 5 September amending the consolidated text of the Insolvency Act, It seeks to address the main limitations affecting our insolvency system; these include pre-insolvency measures, the late filing of insolvency petitions and the excessive length of insolvency proceedings. We are faced with an ambitious reform that aims to tackle these limitations through a far-reaching transformation of the insolvency system. To this end, the reform sets itself some very ambitious objectives, and this has given rise to a degree of caution and misgivings amongst the legal professionals affected by the reform; including solicitors and insolvency practitioners, who believe that the change in the legal framework entailed by the reform may be thwarted unless there is a substantial improvement in human and material resources. Furthermore, the main objective of the reform is the transposition into our domestic legal system of European Union Directive 1023/2019 on restructuring and insolvency.

A key point is that the reform stipulates that Public loans may not be written off. Micro-enterprises may have part of their debt to the Government written off, albeit subject to many restrictions, but this does not apply to other legal entities. This is particularly significant, given that these debts can account for a very high proportion of a company’s total debt.

Among the most notable aspects of the reform are the the emergence of the concept of probability of insolvency; In this regard, it is established that a debtor is deemed to be at risk of insolvency if they are unlikely to be able to meet their obligations falling due within the next two years. The reform also introduces a new role: the restructuring expert, which may intervene during the pre-insolvency phase where:

• If the debtor requests it
• This must be requested by creditors representing more than 50% of the liabilities that may be affected by the restructuring plan.
• The debtor requests a general stay of individual enforcement proceedings, and the judge considers and gives reasons as to why the appointment is necessary to safeguard the interests of those who may be affected by the stay.
• An application is made for the court to approve a restructuring plan, the effects of which extend to a class of creditors or to shareholders who did not vote in favour of the plan.

The reform bill also highlights the changes introduced to pre-insolvency proceedings, as well as the new provisions relating to the special insolvency procedure for micro-enterprises.

With regard to the pre-insolvency proceedings, we should highlight the restructuring plans, which are defined as measures taken at a stage of financial difficulty prior to the application of the aforementioned pre-insolvency instruments, and which possess characteristics that enhance their effectiveness. Another notable aspect introduced by the reform is the the abolition of refinancing agreements and out-of-court settlement agreements, which become restructuring agreements or proposals. Restructuring plans may be implemented from the moment that there is a legal likelihood of the company becoming insolvent. The creditors concerned must be grouped into classes, based on a common interest.

With regard to the special procedure for micro-enterprises, is designed as a unique insolvency mechanism, tailored to the needs of these companies. It is characterised by maximum procedural simplification and by being a fully digital process, which allows for online management and minimal involvement of the court.