Insolvency or bankruptcy

Who can be declared bankrupt?

All debtors can be declared bankrupt. They may be

• natural
• or legal persons, but must have minimum legal capacity and two or more creditors.

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Who can file for bankruptcy?

The following can file for bankruptcy:

• the debtor;
• the creditors;
• and the mediator, if a ‘second-chance’ procedure fails to reach an out-of-court agreement on payments or the debtor, who is a natural person, does not comply with it.

Who has standing to file for bankruptcy?

• If the debtor is a legal person, the management board or liquidators have standing to file for bankruptcy. The same applies to shareholders or members with personal liability for corporate debts.
• In the case of bankruptcy of a deceased person’s estate, the creditors and heirs of the deceased debtor, and the administrator of the estate, have standing to file for bankruptcy.

When is it compulsory to file for bankruptcy?

• If the bankruptcy petition comes from the debtor, the Bankruptcy Law requires it to be filed within two months of the date on which the debtor became aware, or should have become aware, that it was insolvent.

If the debtor files for bankruptcy, this will be classed as a voluntary bankruptcy. If the creditors present a bankruptcy petition, the bankruptcy will be classed as involuntary.

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When is it compulsory to petition for bankruptcy?

A petition for bankruptcy can be presented

• when the debtor is in a state of insolvency.
• The Bankruptcy Law defines insolvency as a state in which ‘the debtor ... cannot regularly meet their liabilities when due,’ but makes a distinction between current insolvency and imminent insolvency.

Proof required to file for bankruptcy:

• if the bankruptcy is voluntary, the debtor must also prove indebtedness;
• if the bankruptcy is involuntary, the applicant must prove the facts underlying the application.

The creditor must justify the application.

• The creditor must justify it by a certificate of posting of a court order to pay, or execution order, where the attachment yielded insufficient assets to make the payment (fruitless attachment).
• or in any of the following circumstances:
  1. general failure to pay debts when they became due;
  2. creditors unable to exercise their security rights because the debtor’s assets in general have been provisionally attached;
  3. debtor has disposed of or liquidated assets to put them beyond creditors’ reach, or they have been disposed of hastily or ruinously;
  4. general default on tax liabilities, social security contributions or salaries and indemnities relating to employees during the three months prior to bankruptcy being declared.

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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 court finds insolvency proven, it will issue an order declaring bankruptcy, which will state:

• whether the bankruptcy is voluntary or involuntary;
• effects on the debtor’s powers to administer and dispose of its assets;
• appointment of receivers;
• temporary restrictions to freeze assets pending acceptance of the receivers.
• The order will extend an invitation to creditors to prove debts.

The order declaring the bankruptcy must be published

• in the public register of bankruptcies .
• An extract from the order must be published in the national Official Gazette as soon as possible, free of charge, and must include the particulars 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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