1. If insolvency proceedings must be commenced for the family of companies, does your law permit a joint proceeding, ie, a single court file, a single judge, a single list of creditors, single notice list, or must the case for each member of the family proceed separately with no practical acknowledgment of the related proceedings?
Article 3.5 of Insolvency Act 2003 (Ley 22/2003 de 9 de junio, Concursal) sets out that a creditor may request the opening of insolvency proceedings of several debtors when there is a confusion of their assets, or where the debtor is a company if it belongs to a corporate family where the members have substantially the same identity and a single decision-making centre.
On the other hand, Article 6(2) provides that, when the application is filed by the debtor, and the debtor is a legal person, such application must indicate if it belongs to a family of companies (grupo de empresas), and must list the companies.
The Insolvency Act provides that in the case of joint opening of insolvency proceedings against several debtors, the judge who will have jurisdiction shall be the judge of the place where the debtor having more liabilities has its centre of main interests (COMI); and if it is a family of companies the place where the parent company has its COMI (Art 10.4). Therefore, it is possible to file an application for the commencement of insolvency proceedings, either by the debtor or the creditor, concerning all the affiliates in a corporate family before the judge of the place where the parent company has its own COMI.
Moreover, Article 25 provides that in case of insolvency of the parent company of a family, the receivers (administración concursal) may request from the judge, on reasonable grounds, the accumulation of the insolvency proceedings already declared of the affiliate companies belonging to the same family.
Spanish courts have had the opportunity to apply Article 10.4 of the Insolvency Act. In particular, the Court of Bilbao ruled a case in which the main liabilities of the family were held by several companies other than the parent company. The court decided that it had jurisdiction over all the affiliates because the parent company had its COMI in Bilbao notwithstanding the fact that the main operations of the corporate family were not carried out in Bilbao but elsewhere (judgment of 15 November 2004 rendered in the insolvency proceedings of Grupo Carneus SL).
(a) What if the members of the family are organised under, or operate in, different locations within your country? Can a company from a distant location in your country commence its bankruptcy proceeding where its affiliate is located, if the affiliate has already commenced its bankruptcy proceeding?
The fact that the members of the family operate in different locations does not have any impact in insolvency proceedings. In Spain, all companies are incorporated and organised under the same law under a nationwide registry (Registro Mercantil).
The jurisdiction to open insolvency proceedings is granted to the judge in the place where the debtor has its COMI. If the debtor is domiciled in Spain and the domicile does not coincide with the COMI, the creditor may elect between the judge of the place of the domicile or the place of the COMI.
A company from a distant location may only commence its insolvency proceedings where an affiliate (or the parent) is located, where such affiliate (or the parent) has already commenced its insolvency proceedings, if it can prove that its COMI is located in that place. Otherwise, the company must file the application with the judge of the place where its COMI is situated, but may afterwards request of the judge that the insolvency proceedings be consolidated with the proceedings of the other affiliate (or the parent) on reasonable grounds as provided by Article 25 mentioned above. It should be noted that Article 25 refers to the receivers only. However, Spanish courts have held that a creditor is also allowed to request the accumulation of insolvency proceedings (judgment of the Court of Bilbao of 30 December 2004).
(b) To the extent your country has different types of insolvency proceedings (such as Chapter 11 reorganisation and Chapter 7 liquidation in the US), do the members of the corporate family all have to proceed under the same type of proceeding?
Under the Insolvency Act 2003 there are no different types of insolvency proceedings. However, two different outcomes are possible: the creditors’ agreement or liquidation. Additionally, there is an abbreviated proceeding as mentioned in question 2(b) below.
In case of a family of companies, where all companies are subject to insolvency proceedings before the same judge, it is possible that some members of the family reach a creditors’ agreement while the others are liquidated.
2. Does your law permit, or prohibit, a single administrator/trustee/ receiver to administer the assets and the liabilities of the entire corporate family?
Where a judge has jurisdiction over an entire corporate family, or where the insolvency proceedings affecting the members of a corporate family are consolidated before the same judge, the judge may appoint the same receivers to administer the assets and the liabilities of the corporate family included in the proceedings.
(a) If so, is there a hearing for the court to determine whether the administration by a single party is appropriate? Are secured and unsecured creditors or other parties in interest allowed to object or be heard at such hearing?
Upon the request of the commencement of proceedings against an entire corporate family or after the accumulation of insolvency proceedings against companies of the same family, it is possible to request that the administration is carried out by a single party. The judge will decide.
The decision to appoint the receivers may be appealed before the same judge by any party to the proceedings.
(b) What about joint representation by other professionals, such as law firms or accounting or auditing firms?
Under the Insolvency Act 2003 the receiver must be a lawyer, an auditor and a creditor.
However, in the case of abbreviated proceedings the receiver may be only one person, who must be either a lawyer or an auditor. Abbreviated proceedings may be decided by the judge if the company files an abbreviated balance sheet and the initial estimate of liabilities does not exceed €1 million.
A law firm or accounting or auditing firms may be appointed as receiver but they should appoint a natural person to represent them.
3. Does your law encourage or discourage overlapping boards or management teams for separate members of a corporate family?
Spanish law does not expressly encourage or discourage overlapping boards or management teams for separate members of a corporate family.
However, the overlapping of boards of directors or management teams may lead to the conclusion that the COMI is situated where the members of the boards or management teams have their domicile or residence.
(a) If the directors of a parent company are not directors of the subsidiary, but they either directly or indirectly manage the affairs of the subsidiary anyway, do your country’s laws render such people de facto or ‘shadow’ directors of the subsidiary?
Under the Insolvency Act 2003 if the directors of a parent company are not directors of the subsidiary but they either directly or indirectly manage the affairs of the subsidiary anyway, they may be considered as de facto or ‘shadow’ directors of the subsidiary.
Specific references to de facto directors are found in Article 164 regarding the qualification of insolvency proceedings as negligent as well as in Article 164 regarding the accomplices to negligent insolvency.
(b) Do the duties or responsibilities of officers or directors of a family of companies change when the companies become insolvent? For example does their duty shift from a responsibility to the shareholders to a responsibility to the creditors. What if only one of the companies is insolvent?
Article 48 of the Insolvency Act 2003 regulates the effects of the opening of insolvency proceedings with respect to legal persons and more specifically to its directors, auditors or liquidators, as follows:
‘1. The directors of the debtor which is a legal person shall be maintained during the proceedings, without prejudice to the effects made by the intervention or suspension of their powers of administration and sale on its operation, and save if the directors or liquidators cease as a consequence of the liquidation phase of the proceedings, if so declared. The receivers shall have the right to assist and opine in the meetings of the boards of directors.
The affected party may request the replacement of the seizure by a bank guarantee.’
If only one of the companies is insolvent then the above rule only applies to the directors of that company, as explained in question 3(a) above.
4. Are there rules and do they change regarding members of the corporate family transferring assets among one another (such as by way of loans, capitalisation, other transactions) when the members are insolvent?
According to Article 71, once the insolvency proceedings have commenced, the actions taken by the debtor during the two years prior to the commencement of the proceedings, which may be detrimental for the assets of the company, may be rescinded.
Unless proved to the contrary, any actions taken by the debtor in favour of a related party are deemed to be detrimental to the assets of the debtor. In the case of a family of companies, all the members of the family are deemed to be related parties.
(a) Are cash sweep procedures allowed, that is, all cash from all subsidiaries is swept out to one account controlled by one of the family entities and then redistributed among the family members to pay bills?
If all the members of the family are subject to insolvency proceedings before the same judge and all have the same receivers, cash sweep procedures are allowed. If not all the companies are subject to insolvency proceedings such procedures will not be workable.
(b) What if the redistribution results in a healthy subsidiary funding the shortfalls in another subsidiary that is losing money?
It would appear that the ‘healthy’ subsidiary is not subject to insolvency proceedings. In this case, it may fund the shortfalls in another subsidiary that is losing money, either subject to insolvency proceedings or not. However, such funding may be detrimental to the healthy subsidiary and may give raise to the liability of the directors of the healthy subsidiary.
5. How does your law treat claims of one member of a corporate family against other members of the corporate family?
The claims of the member of a corporate family against other members of the corporate family are considered to be subordinated claims under Article 92.5 of the Insolvency Act.
Payment of subordinated claims shall not be effected until all ordinary claims have been paid (Art 158).
(a) Are such claims invalid or unenforceable?
Such claims are not invalid or unenforceable. They are subordinated to all other claims.
(b) If not, are such claims on equal footing with those of third party creditors, or are they subordinated, or is there other treatment required or permitted under your law?
As noted above, the claims between companies belonging to the same family are subordinated.
6. Does your law allow for the pooling of assets and liabilities of all members of the corporate family, so that a creditor of one member becomes, in essence, a creditor of all members?
As noted in question 4(a) above, if all the members of the family are subject to insolvency proceedings before the same judge and all have the same receivers, the pooling of assets and liabilities is possible and in practice a creditor of one member will become a creditor of all members.
(a) If so, is such pooling automatic or does it require a factual showing and court involvement?
Such pooling is not automatic. It will require that the receivers so decide and the court agrees.
(b) What proceedings (motion, request, trial, etc) are required for the court to order the pooling of assets and liabilities?
As noted in (a) above, the receivers should require the pooling if they think that it is convenient for the administration.
(c) Does your country’s law contemplate any partial pooling of assets and liabilities?
Spanish law does not specifically contemplate any partial or total pooling of assets and liabilities.
(d) If the pooling of assets and liabilities is called for, are there any protections for certain types of creditors, such as creditors with a lien or other security interest in particular assets?
Creditors which enjoy ‘special privilege’ may not be affected by any pooling of assets and liabilities. Claims which are secured by means of a mortgage or a pledge are among claims enjoying ‘special privilege’.
7. How are secured creditors treated with respect to a family of companies? For instance, if a creditor has a security interest in the assets of one member of the family, and a guarantee from another member of the family, are both such claims valid in insolvency proceedings of the entire family?
As noted in question 6(b) above, secured creditors enjoy a ‘special privilege’. If a creditor has a security interest in the assets of one member of the family and a guarantee from another member of the family, both claims are valid.
If the secured creditor is a member of a family of companies which is subject to insolvency proceedings, it would appear that the claim should be subordinated, but the law does not contemplate specifically this case and therefore it may be arguable that such creditor will remain as a secured creditor and not subordinated.
8. Do your laws or courts provide for post-insolvency commencement of new financing that allows continued operation of the business and provides adequate protection to the lender who made the loan? Explain.
According to Article 84, the claims which have been validly created during the proceedings by the receivers or with the approval of the receivers are considered to be claims against the assets of the debtor (crédito contra la masa) and therefore are paid before the other claims.
Therefore, if the receivers, or the debtor with the consent of the receivers, obtain new financing that allows continued operation of the business, the lender who made the loan will have a claim against the assets of the debtor and will be paid before any other creditor which does not enjoy a claim against the assets of the debtor, this is to say any other creditor holding a claim against the debtor (crédito concursal).
9. Are directors and officers subject to civil or criminal sanctions if:
(a) Fraud or misrepresentation of a company’s finances are discovered?
Under Article 164.2, the insolvency shall be deemed to be negligent where the debtor, being legally obliged to have accounts, has materially breached that obligation, or has double accountancy or has committed any material irregularity in the accounts that does not permit its financial condition to be ascertained.
The directors or liquidators, whether de facto or not, and other persons held liable for the negligence shall be disqualified from managing assets of third parties for a period of between two to 15 years, and will not be allowed to represent any person during such period.
Such persons will lose any right as creditor and will have to give back any assets or rights they have received from the debtor or its assets, and will be required to indemnify the damages caused.
Furthermore, in certain circumstances, the directors or liquidators may be required to pay the creditors the amounts that they may not recover from the liquidation of the assets of the debtors. The persons who have been directors or liquidators within two years before the opening of the proceedings may also be required to pay the creditors in the same manner.
(b) They allow the company to continue to operate while knowing it does not have the ability to pay the debt being incurred?
If the directors allow the company to continue to operate while knowing it does not have the ability to pay its debts, they breach their obligation to file the application for the opening of insolvency proceedings.
According to Article 165, in the case of breach of the obligation to file the application for the opening of insolvency proceedings, the directors or liquidators are deemed to have acted in bad faith or with gross negligence, unless proved to the contrary.
(c) Same as (b) above but the directors believe that if some event occurs (eg, chance to obtain new contract in prospect, new equity infusion, or new financing) it will be able to save the company and pay its bills?
As noted in (b) above, the directors and liquidators will be deemed to have acted in bad faith or with gross negligence, unless proved to the contrary. If the directors reasonably believe that if some event occurs they will be able to save the company and pay its bills the presumption may not apply.
1. If one or more members of the corporate family is incorporated under or governed by the laws of another country, does that change your answers to any of the questions set forth above?
EC Council Regulation No 1346/2000, of 29 May 2000, on insolvency proceedings is applicable in Spain, and shall apply to all insolvency proceedings where a court of a Member State has jurisdiction in accordance with Article 3 of the Regulation.
The cases of insolvencies of groups of companies are quite well known. The resolutions adopted by Spanish courts in domestic cases follow the guidelines of international cases heard by the courts of Member States.
2. If insolvency/restructuring proceedings are instituted for corporate family members in different countries:
(a) Do the courts attempt to exercise jurisdiction over the assets of the company filing domestically no matter where located (for example, overseas), or do they limit their jurisdiction to only those assets located in your country?
As mentioned above, under Spanish law jurisdiction is granted to the court where the parent company has its centre of main interests (Art 10.4). The rule is applicable to international insolvencies where the Regulation is not applicable.
(b) Do the courts attempt to exercise jurisdiction over the assets of the company filing domestically no matter where located (for example, overseas), or do they limit their jurisdiction to only those assets located in your country?
Insolvency proceedings have universal scope and, therefore, include all assets of the debtor wherever located, without prejudice to the opening territorial proceedings where jurisdiction is limited to the assets located in Spain.
(c) Would your courts enforce a court order from a foreign country that attempted to exercise jurisdiction over assets located in your country but owned by the company that is subject to the foreign insolvency proceedings?
As mentioned in (a) above, the Regulation is applicable in Spain and, therefore, all judgments rendered by EU courts will be recognised in Spain under the terms of the Regulation. Regarding those judgments delivered by non-Member States, it is worth noting that the Insolvency Act follows the Regulation. Therefore, Spanish courts will enforce a court order from a foreign country in terms similar to those laid down in the EU Regulation.
(d) Has your country adopted any procedures (such as the Model Law on Cross-Border Insolvency) to address the various issues that arise in dealing with cases of cross-border insolvency?
As explained in the Preamble of the Insolvency Act, the Act contains rules of private international law which follow, with the necessary adaptations, the model of the Regulation. Thus, the application of the Insolvency Act and the Regulation is facilitated in the EU and the Insolvency Act is also adapted to the model law on Cross-Border Insolvency of the UNCITRAL.
