Ignacio Álvarez Rello / Lecturer at CMI Higher Education
In Spain, talking about financial difficulties and the possibility of a company entering insolvency proceedings has traditionally been seen as taboo, and probably still is.
One reason seems to be a lack of understanding of the economic purpose of these proceedings, which is to reallocate resources efficiently. When a business is economically viable but going through financial difficulties, the aim is to restructure its liabilities while safeguarding creditors’ rights; when it is no longer viable, the aim is to extract as much value as possible so that creditors recover the largest possible share of their claims, in the order of priority set by law.
This lack of understanding, together with the difficulty of openly admitting financial problems or that a business has lost its economic viability, means that by the time business owners realise their situation is serious and look for a way out of their financial difficulties (or, if they cannot overcome them, for a second chance), it is too late.
This delay is one of the reasons highlighted by the Spanish legislator in the preamble to the latest law reforming the treatment of insolvency in Spain: Law 16/2022 of 5 September, which amends the consolidated text of the Insolvency Act approved by Royal Legislative Decree 1/2020 of 5 May, in order to transpose Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 on certain aspects of company law (the Directive on restructuring and insolvency).
To give small and medium-sized enterprises tools to help them detect financial difficulties early, and in line with Directive (EU) 2019/1023, Law 16/2022 sets out a series of mechanisms in its additional and final provisions. Some were already in place when the law was published; others are still to be introduced in the near future. They are as follows.
Insolvency prevention mechanisms already in place
Fifth additional provision: a website for business health self-assessment
This tool existed before Law 16/2022 came into force. It is completely free and anyone can use it simply by visiting the business health self-assessment website (in Spanish). It consists of a questionnaire covering six areas:
- Finance and financial management.
- Planning and control.
- Commercial relationships: customers and suppliers.
- Human resources, family and personal life.
- Legal support and advice.
- Social media and e-commerce.
Seventh additional provision: information from commercial registrars
This service did not yet exist when the law came into force; it was developed over the following months and is now fully operational. It issues a Risk Position Report based on the annual accounts filed with the Commercial Register. It is not free, and it can only be requested by a company’s registered attorneys, and solely for their own company.
Fifth final provision: amendment of the Civil Procedure Act (new article 589.3)
If the debtor does not identify assets that can be seized, or the assets identified are insufficient, the court clerk (letrado de la Administración de Justicia) must issue a decree warning the debtor that, in the event of likely, imminent or actual insolvency, they may notify the competent court that they have started, or intend to start, negotiations with their creditors, which stays enforcement proceedings.
Insolvency prevention mechanisms still to be introduced
Twelfth additional provision: advice for companies in difficulty
The Government will promote advisory services for small and medium-sized enterprises at an early stage of their difficulties, with the aim of preventing insolvency.
The service will be provided at the companies’ request, will be confidential, will not oblige the companies that use it to take any action, and will not make those providing it liable in any way.
Conclusions
- In Spain there is a general lack of understanding of the economic purpose of insolvency proceedings, which is simply to allow economically viable companies to continue by restructuring their liabilities while respecting creditors’ rights or, if the company is not viable, to maximise its value so that creditors recover as much of their claims as possible.
- Because of this, help is usually sought late, which makes that purpose harder to achieve in each case.
- The 2019 European Insolvency Directive established mechanisms to encourage the early detection of difficulties and recourse to insolvency proceedings as soon as possible, and some of them have already been incorporated into Spanish law.
- These mechanisms must continue to be developed, and Spanish entrepreneurs need to be made aware of them so that they use them and, at the slightest warning sign, turn to an insolvency specialist who can guide them through the options available to cause the least possible harm to their creditors and, in turn, to the economy as a whole.
About the author
Ignacio Álvarez Rello is a forensic economist, chartered auditor, accounting expert, insolvency practitioner and restructuring specialist. He is an Associate Lecturer in the Accounting Department of the Universidad Autónoma de Madrid and lectures at CMI Higher Education on the Master’s in Sustainable Finance Management, where he teaches Business Restructuring and Turnaround and Sustainable Financial Policy Management. View his profile.
