Insolvency or bankruptcy

Who can be declared bankrupt?

Any debtor, whether a natural person or a legal entity, can be declared bankrupt provided that they have legal personality and that there are two or more creditors.

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Who can file for bankruptcy?

The following parties can file for bankruptcy:

• the debtor;
• the creditors; and
• in the case of consecutive bankruptcy proceedings, the mediator, after an out-of-court agreement on payments has been unsuccessfully attempted.

If the debtor is a legal entity, standing to file for bankruptcy lies with the receivers or liquidation body and is also granted to shareholders, members or participants who are personally liable for the company’s debts.

If the bankruptcy proceedings concern an estate (inheritance), standing lies with the creditors of the deceased debtor, the heirs of the deceased debtor and the administrator of the estate.

In the case of the debtor, the Bankruptcy Act prescribes that the debtor must file for bankruptcy within two months of the date on which they became aware, or ought to have become aware, of the insolvency.

If the debtor is the one who files, the bankruptcy proceedings are classified as voluntary bankruptcy. If it is the creditors who file, the bankruptcy proceedings are classified as a involuntary bankruptcy.

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When can someone file for bankruptcy?

Bankruptcy proceedings can be initiated when the debtor is in a situation of insolvency, which the Act defines as the situation of ‘a debtor who cannot regularly meet their enforceable obligations’, but makes a distinction between actual and imminent insolvency.

If the bankruptcy is voluntary, the debtor must also prove their indebtedness. In the case of involuntary bankruptcy proceedings, the applicant must prove the facts on which their application is based.

If the application is made by a creditor, it must be based on an enforceable instrument under which enforcement or distraint proceedings have begun, without the attachment yielding sufficient unencumbered assets to satisfy the debt (unsuccessful attachment), or on one of the following circumstances:

1. general failure to meet pay debts as they fall due;

2. existence of attachments arising from pending enforcement proceedings which generally affect the debtor’s assets;

3. concealment of assets or hasty or ruinous liquidation of assets;

4. a general failure to comply with tax obligations, Social Security obligations or obligations to pay employment-related debts in the three months preceding the bankruptcy order.

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Who hears the bankruptcy case?

• If the debtor files for bankruptcy, the commercial court of the centre of main interest will be competent.
• If the petition is presented by a creditor, and the debtor is domiciled in Spain (and its centre of main interests and domicile do not coincide), the creditor has a choice between the commercial court of the centre of main interest and that of the domicile.
• If the debtor is a legal person, its centre of main interest is presumed to be the place of the registered office. Any change of domicile made in the six months prior to the bankruptcy petition is ruled invalid.

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How is bankruptcy declared?

If the judge finds that the insolvency has been established, they will issue an order for bankruptcy proceedings. The bankruptcy order will indicate:

• whether the bankruptcy is voluntary or involuntary;

• the effects on the debtor’s powers of administration and disposal in respect of their assets;

• the appointment of bankruptcy receivers;

• interim measures to ensure the preservation of the assets until the bankruptcy receivers accept their appointment; and

• a call on creditors to notify their claims.

The order declaring the bankruptcy must be published

• in the Public Bankruptcy Register
• In addition, an extract from that order must be published as a matter of urgency and free of charge in the Boletín Oficial del Estado, and must contain the information necessary to identify the bankrupt.

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Effects of declaration of bankruptcy

Effects on the debtor personally

Bankruptcy affects the debtor in person

• with possible restrictions on their rights and freedoms.
• The bankruptcy may also lead to the bankrupt being debarred permanently from conducting business. The judge may agree to this debarment in the judgment determining the degree of fault on the part of the bankrupt

and may also impose any of the following measures on the debtor:

• interception of the debtor’s communications (content unrelated to the bankruptcy interests must remain secret);
• obligation to reside in the debtor’s home town;
• access to the debtor's home and registration of their address.

Effects on the debtor’s assets

If the bankruptcy is voluntary

• the debtor retains powers of administration and disposal of the assets subject to receivership, and must obtain the authorisation or consent of the receivers in order to exercise them.

If the bankruptcy is involuntary

• the debtor’s powers of administration and disposal of its assets are suspended and exercised, instead, by the receivers.
• If the bankruptcy is voluntary, the debtor retains powers of administration and disposal of its assets subject to receivership, and must obtain the authorisation or consent of the bankruptcy administration in order to exercise them.
• If the bankruptcy is involuntary, the debtor’s powers of administration and disposal of its assets are suspended and exercised, instead, by the bankruptcy administration.
• The judge may nevertheless grant a suspension in a case of voluntary bankruptcy or simple receivership in a case of involuntary bankruptcy.

If the debtor is a legal person, the members of its organs continue to serve until opening of the winding-up stage, which brings the role of the directors or liquidators to an end.

Effects on creditors

Main effect of declaration of bankruptcy on creditors

• If bankruptcy is declared, the proven claims of all creditors, irrespective of nationality and domicile, are added to the liabilities of the bankrupt estate, with the exceptions allowed by the law.

Pending actions for declaratory judgment:

• these can continue until judgment is given, unless the bankruptcy court agrees to a joinder of pending proceedings for which it is competent, as the court of first instance, to the bankruptcy proceedings and provided that the decision is of fundamental importance to the compilation of the inventory or ranking of creditors.

New actions for declaratory judgment for which the bankruptcy court is competent:

• the civil or labour courts before which the action is brought must decline to have cognisance of the matter.

Enforcement after declaration of bankruptcy:

• single enforcements, in or out of court, and proceedings for collection of tax and imposition of late payment penalties cannot be opened against the debtor’s assets. Enforcement actions which are pending remain suspended.

Realisation of collateral interests secured against assets necessary to the debtor’s occupation or business:

• a period of grace applies to these assets under the Bankruptcy Law on the following conditions:
  • that no new security interest can be added;
  • and that those which are pending are suspended until a debt restructuring plan (convenio) is approved or until one year has elapsed since the bankruptcy declaration, without opening of winding-up proceedings.

Effects on contracts

The validity of contracts with reciprocal obligations

• remains unaffected in principle, pending performance by both parties.
• Nevertheless, in the interest of the bankruptcy, and subject to guarantees of the other party’s rights, the court may terminate the contract, of course where ordinary grounds of termination do not exist.

Employment-related contracts:

• the Bankruptcy Law makes the bankruptcy court competent for employment relations in which the bankrupt is the employer, when the following points are fulfilled:
  • the petition for bankruptcy has been filed;
  • the formalities for major changes to terms of employment have been completed; and
  • the employment relations in which the bankrupt is the employer have been collectively suspended or terminated.

Effects on transactions prejudicial to the bankrupt estate: rescissory action due to bankruptcy

A rescissory action in bankruptcy enables the bankruptcy administration to review transactions entered into by the debtor in the two years prior to the declaration of bankruptcy.

Transactions prejudicial to the bankrupt estate which were entered into during that period, not necessarily with wilful deceit, may be rescinded.

The following have standing to bring a rescissory action:

• the bankruptcy administration;
• in the alternative, the creditors.

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Who manages the bankruptcy?

The Bankruptcy Law places the bankruptcy court in charge of the bankruptcy proceedings, with the assistance of the bankruptcy administration, to which management of the bankruptcy is assigned.

Title II of the Bankruptcy Law concerns administration in bankruptcy. It governs:

• the subjective conditions for appointment of the administration;
• the rules on unfitness to serve, conflicts of interest and debarment.
• Acceptance of office: acceptance must be given within five days of notification. If the bankrupt is a legal person, the name of the physical person who is going to represent it must be notified. If this person is a lawyer, auditor, business economist or commercial graduate, an address must be designated for service within the jurisdiction of the bankruptcy court.
• The bankruptcy administration’s key functions are:
  • to support the debtor in receivership; or to take over when the debtor is suspended from exercising its powers of administration and disposal;
  • to draw up the report and annex to it the inventory of the bankrupt estate and ranking of creditors.

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How does the bankruptcy proceed?

One of the bankruptcy administration's key functions is

• to establish the bankrupt’s assets and liabilities, i.e. the goods and rights which make up the bankrupt's assets, its debts and liabilities.

The administration relies on the following information to draw up its report:

• the documentation furnished by the debtor;
• and the information submitted to it by the creditors via the process for proving of debts. If a court becomes aware, via other sources, of a debt which the creditor has not proved, it may still recognise it, but this may mean the value of the debt is reduced.

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