Your company is still viable: the pre-insolvency that halts seizures

The case, in five lines

What is brought

Notice of the opening of negotiations with creditors and, where appropriate, judicial confirmation of a restructuring plan.

Before which court

The sección de lo Mercantil of the Tribunal de Instancia (the commercial division of the first instance court) competent to declare insolvency, which has exclusive jurisdiction over the notice, its effects, its extension and any challenges on those matters.

Deadline

The court clerk resolves within a maximum of two days, with effect from the date of filing. If the notice is defective there are two days to cure it, and the effects still date back to that same filing date.

Who can bring it

Any natural or legal person carrying on a business or professional activity, subject to the financial sector and public sector exclusions in article 583 TRLC. For legal persons, filing is a matter for the management body.

Financial risk

Any creditor may challenge the decision by way of review within five days arguing that the assets are not necessary for your activity, or raise a jurisdictional objection within ten days. If a compulsory insolvency petition had already been admitted at the date of the notice, the notice produces no effect until that petition is resolved.

You do not have to be broke: seeing it two years out is enough

Article 584.1 TRLC allows the notice of negotiations and the confirmation of a restructuring plan where the debtor faces a likelihood of insolvency, imminent insolvency or current insolvency. All three states, not just the last one. Waiting until you are underwater is not a legal requirement, it is a scheduling error that costs the company.

Paragraph 2 defines the earliest state with a rule almost nobody knows: a likelihood of insolvency exists where it is objectively foreseeable that, absent a restructuring plan, the debtor will be unable regularly to meet obligations falling due in the next two years. A two year horizon, and an objective test proved with projections rather than with impressions.

Article 585 carries that into the moment of filing. Its first paragraph allows notice where there is a likelihood of insolvency or imminent insolvency. The second adds that a debtor already in current insolvency may also file, but only so long as no compulsory insolvency petition has been admitted. The window exists even late, but it shuts when a creditor gets there first.

It is resolved in two days and you do not have to prove you are struggling

Article 588.1 TRLC imposes a maximum of two days: if the court clerk considers the body competent and checks that the notice has no formal defects, it will be held to have been made by decree with effect from the date it was filed. That backdating of effects to the filing date is what makes the mechanism useful.

Paragraph 2 saves curable errors: if there are defects, two days are given to correct them, and once cured the decision treats the notice as made with effect from the date it was filed. Only where nothing is cured is it treated as not made. The risk of a formal defect exists, but it does not drag the date with it.

And paragraph 3 says what most surprises those who arrive frightened: the decision treating the notice as made is issued without the debtor having to prove the state it has alleged. You do not have to prove the likelihood of insolvency in order to file. You have to sustain it afterwards, in the negotiation and, where it comes, against a creditor's challenge.

The seizures that stop are exactly the ones you list

Article 586.1.6 TRLC requires the notice to state the assets or rights considered necessary for the continuity of the business or professional activity and, where enforcement actions are running against those assets, to identify in the notice each one that is under way. It is not an optional annex: it is the content on which the whole practical effect depends.

Article 590.2 provides the other end of the chain: where the notice has stated that enforcement actions are running against assets the debtor considers necessary, or that certain third party guarantees are to be affected, the decision will identify them, and that same day the court clerk will send it electronically to each judicial authority hearing those enforcement actions so that they may be suspended.

The consequence is uncomfortable and has to be said: what is not identified is not sent on, and what is not sent on carries on. That is why the serious work happens before filing, in the schedule of enforcement actions with their case numbers and courts, and in the justification of why each asset is necessary for the business to keep running.

The creditor has five days to say that asset was not necessary

Article 590.3 TRLC gives any creditor a review challenge against the decision on three closed grounds: that the debtor filed a notice within the previous year; that the assets or rights against which enforcement is running, or is intended, are not necessary for the continuity of the activity; or that the effects should not extend to certain third party guarantees.

The period to bring it is five days, counted from the entry of the decision in the Registro público concursal (the public insolvency register) or, where enforcement is under way, from service of the decision by which the enforcing judicial authority suspends it. It is a short period, but enough for a creditor holding attached machinery to react.

To this is added article 592, which allows any creditor to raise a jurisdictional objection on international or territorial competence within ten days of publication of the decision in the public insolvency register or, where the notice was confidential, from the moment it learned of it. Both challenges are anticipated when drafting, not when they land.

Filing the notice does not take the wheel out of your hands

Article 594 TRLC answers the question every business owner asks first: the notice has no effect whatsoever on the powers of administration and disposal over the assets and rights making up the debtor's estate. And the court's appointment of a restructuring expert, where applicable, likewise has no effect on those powers.

On publicity, article 591 lets you choose: the decision treating the notice as made is published in the public insolvency register, unless the debtor asked in the notice itself for it to remain confidential, and the confidentiality can be lifted at any time on request. Confidentiality is requested expressly in the document, under article 586.1.9.

And on who is in charge, article 593 concentrates everything in a single body: the court competent for the insolvency has exclusive jurisdiction over the notice, over those effects requiring a judicial decision, over the extension of those effects and over challenges to judicial decisions on those matters. The extension exists and is applied for there.

The destination of all this is a plan that binds the dissenters

Article 614 TRLC defines a restructuring plan: one whose object is to modify the composition, the terms or the structure of the debtor's assets and liabilities, or of its equity, including transfers of assets, production units or the whole business as a going concern, as well as any necessary operational change, or a combination of those elements.

Article 635 says when the judge is needed. Judicial confirmation is required where the plan's effects are to be extended to creditors or classes of creditors that did not vote in favour, or to shareholders; where contracts are to be terminated in the interest of the restructuring; and where interim and new financing is to be protected against claw back actions and given payment preferences.

There is also a requirement that shapes the design from the outset. Article 586.1.10 requires that, where the plan is intended to affect public law claims, the debtor prove it is up to date with its tax and social security obligations through certificates from the Spanish tax agency and the social security treasury, or else declare that it is not.

How we run the case, step by step

1. 1

   Diagnosing the statutory threshold and the timing

   We determine whether you face a likelihood of insolvency, imminent insolvency or current insolvency, with two year projections. The route depends on that and, above all, whether the window is still open or a creditor can shut it by filing first.

2. 2

   Listing enforcement actions and necessary assets

   We identify every pending enforcement action with its court and its subject matter, and justify why each affected asset is necessary for the continuity of the activity. Whatever does not go into the notice will not later be sent on for suspension.

3. 3

   Drafting and filing the notice

   We cover the ten items in article 586 TRLC, including the creditors being negotiated with and their amounts, the assets, the liabilities, the turnover and the headcount, any request for an expert and, if it suits, confidentiality for the notice.

4. 4

   Decree and transmission to the enforcing courts

   Once the decree is obtained, we check that the decision is sent the same day to every judicial authority hearing the identified enforcement actions and that they are in fact suspended, and we deal with any review challenge or jurisdictional objection from creditors.

5. 5

   Negotiating and designing the restructuring plan

   We negotiate with the notified creditors a plan modifying the composition, terms or structure of the assets and liabilities, or of the equity, with whatever operational changes are needed and, where appropriate, new financing.

6. 6

   Judicial confirmation where creditors dissent

   If the effects must be extended to creditors or classes that did not vote in favour or to shareholders, if contracts must be terminated in the interest of the restructuring, or if new and interim financing must be protected, we apply for judicial confirmation of the plan.

The law that applies

• Art. 584 TRLC. Allows the notice of negotiations and the confirmation of a restructuring plan where there is a likelihood of insolvency, imminent insolvency or current insolvency, and defines likelihood of insolvency as the case where it is objectively foreseeable that, absent a plan, the debtor will be unable regularly to meet obligations falling due in the next two years. BOE-A-2020-4859
• Art. 586 TRLC. Details the ten items the notice must state, including the reasons and the state alleged, the list of creditors with their amounts, assets, liabilities, turnover and headcount, the assets and rights necessary for continuity with identification of the enforcement actions running against them, the necessary contracts, any request for an expert, confidentiality, and, where the plan will affect public law claims, evidence of the position with the tax agency and social security. BOE-A-2020-4859
• Art. 588 TRLC. Requires a decision within a maximum of two days by decree effective from the filing date, gives two days to cure defects while preserving that date, exempts the debtor from proving the state alleged, and provides that where a compulsory insolvency petition had already been admitted at the date of the notice, the notice produces no effect until that petition is resolved. BOE-A-2020-4859
• Art. 590 TRLC. Sets the content of the decision, requires it to identify the enforcement actions over necessary assets and the third party guarantees affected and to be sent the same day to each judicial authority hearing those actions so they may be suspended, and gives any creditor a five day review challenge on three closed grounds. BOE-A-2020-4859
• Art. 593 TRLC. Vests in the court competent for the insolvency, exclusively and to the exclusion of others, jurisdiction over the notice, over the effects of the notice requiring a judicial decision, over the extension of those effects and over challenges to judicial decisions on those matters. BOE-A-2020-4859
• Art. 635 TRLC. Lists the three cases in which judicial confirmation of a restructuring plan is required: extending its effects to creditors or classes that did not vote in favour or to shareholders, terminating contracts in the interest of the restructuring, and protecting interim and new financing against claw back actions while granting it payment preferences. BOE-A-2020-4859

Each article checked against the consolidated text published in the BOE (the Spanish official gazette).

Frequently asked questions