Your micro business cannot pay: the special route is compulsory

The case, in five lines

What is brought

Opening the special procedure for micro businesses under book three, either as a continuation procedure or as a liquidation procedure with or without transfer of the business as a going concern.

Before which court

The sección de lo Mercantil of the Tribunal de Instancia (the commercial division of the first instance court) with insolvency jurisdiction, where the debtor is a legal person or a business, under the applicable insolvency jurisdiction rules.

Deadline

There is no limitation period running against you, but there is a duty to file for insolvency in good time whose breach is presumed a ground of culpability. Delay also shrinks the assets you have left to negotiate with.

Who can bring it

Natural or legal persons carrying on a business or professional activity who meet both characteristics in article 685.1 TRLC. Where the entity belongs to a group, the criteria are computed on a consolidated basis.

Financial risk

The procedure reaches all your present assets and those you acquire during it, save legally unattachable assets, and all creditors whatever the origin of the debt. Where the debtor is married, the matrimonial property regime comes into play.

The article 685 thresholds are measured in hours, not in contracts

Article 685.1 TRLC requires two characteristics at once. The first is having employed, in the year before the application, an average of fewer than ten workers, and the provision itself explains how that is counted: the requirement is met where the number of hours worked by the whole workforce is equal to or lower than that which would have corresponded to fewer than ten full time employees.

That hours rule changes many cases. A business with twelve part time contracts may fall inside, and one with nine full time contracts plus overtime may fall outside. The measurement is made on the real figures for the year before the application, not on the headcount as at the day the decision to file is taken.

The second characteristic is alternative and worth reading slowly: annual turnover below seven hundred thousand euros or liabilities below three hundred and fifty thousand euros, according to the last accounts closed in the year before the application is filed. One of the two suffices, both are not required. And where the entity belongs to a group, paragraph 2 requires the criteria to be computed on a consolidated basis.

If you are within book three, that book applies and only that book

Here is the sentence that decides the whole strategy, and it is not in book three but in book two. Article 583.4 TRLC provides that debtors falling within the scope of book three are subject exclusively to the provisions of that book. Exclusively. It is not a preference, nor a recommendation about procedural efficiency.

The practical consequence is direct: whoever meets the characteristics in article 685 does not choose between the special route and the ordinary one. Nor can they simply resort to the instruments that book two reserves for debtors falling within its own subjective scope, because that same article expressly excludes them.

That is why the first task in the case is not to draft anything: it is to measure. The workforce hours for the previous year are calculated, the last closed accounts are taken and any group is checked. That calculation, done in advance and in writing, is what stops the case from starting down the wrong road.

The procedure reaches everything you own and everyone who claims

Article 685.3 TRLC delimits the assets affected and does so in the broadest terms: the special procedure affects all of the assets and rights forming part of the debtor's estate at the date of opening, and also those reintegrated into it or acquired by the debtor during the procedure, with the exception, where applicable, of assets and rights that are legally unattachable.

The same paragraph adds a rule that matters greatly to the sole trader: where the debtor is married, the articles on the matrimonial property regime in chapter I of title IV of book one apply. In other words, the couple's financial position enters the analysis from day one and not as a later problem.

And paragraph 4 closes the perimeter on the creditor side: the procedure affects all the debtor's creditors, regardless of the origin and nature of the debt. No creditor stays outside the procedure because of the kind of claim it holds, which does not mean that all of them receive the same treatment within it.

Continuation or liquidation: the decision that orders everything else

Article 685.5 TRLC sets out the two routes: the special procedure for micro businesses may proceed as a continuation procedure or as a liquidation procedure with or without transfer of the business as a going concern. There are three possible outcomes, not two, because liquidation with a transfer of the going concern is a different thing from plain liquidation.

The choice is not a preference, it is an analysis. You look at whether the business generates enough cash to sustain a plan, whether there are contracts and an order book that are only worth anything with the business running, and whether a realistic buyer for the activity exists. A business with no cash but with an order book may be worth more transferred as a going concern than broken up.

That decision conditions everything that follows, including the position of the employees and that of the secured creditors, and the order in which assets are realised. It also conditions the sole trader's own personal way out, because article 700 TRLC opens the discharge of unpaid liabilities only in those cases where the continuation plan has been frustrated.

If the plan fails and you are an individual, discharge remains

Article 700 TRLC is short and decisive: in all cases where the continuation plan fails, if the debtor is an individual they may seek the discharge of unpaid liabilities under book one. For the sole trader, therefore, attempting continuity does not close the personal door if the plan does not end up working.

The reference to book one means its rules apply. Article 486 allows an individual debtor, whether or not a business owner, to seek discharge provided they are a good faith debtor, either under a payment plan without prior liquidation of the estate or with liquidation of it. And article 487 defines that good faith by exclusion, through six listed circumstances that bar it.

It is worth knowing from the outset how far it reaches. Article 489 TRLC extends discharge to all unpaid debts save a list of exceptions, and caps public law debt at ten thousand euros per debtor for tax agency debts plus the same amount, on the same conditions, for social security, and only in the first discharge.

How we run the case, step by step

1. 1

   Measuring the thresholds with last year's real figures

   We calculate the hours worked by the whole workforce during the year before the application and take the last closed accounts of the previous year for turnover and liabilities. The result of that calculation determines which route applies.

2. 2

   Checking for a group and computing on a consolidated basis

   Where the entity belongs to a group, the article 685.1 criteria are computed on a consolidated basis, so a small company inside a larger group may fall outside the special route. This check comes before anything else.

3. 3

   Listing the assets affected and the matrimonial position

   We identify the assets and rights in the estate at the date of opening, those that may be reintegrated or acquired during the procedure, and the legally unattachable ones. Where the debtor is married, the matrimonial property regime is analysed from the outset.

4. 4

   Choosing between continuation, liquidation and going concern sale

   We contrast the cash the business generates with the debt, value the order book and the contracts that are only worth something with the business running, and explore whether there is real interest in acquiring the activity. The route requested follows from that.

5. 5

   Preparing the sole trader's personal exit

   If the debtor is an individual and the continuation plan fails, we prepare the application for discharge of unpaid liabilities under book one, checking from the outset that none of the listed circumstances barring it applies.

The law that applies

• Art. 685 TRLC. Defines the scope of the special procedure for micro businesses: natural or legal persons carrying on a business or professional activity who employed on average fewer than ten workers in the previous year, measured in hours, and have annual turnover below seven hundred thousand euros or liabilities below three hundred and fifty thousand. It is computed on a consolidated basis where there is a group, reaches the whole estate save unattachable assets and all creditors, and may run as a continuation or as a liquidation. BOE-A-2020-4859
• Art. 583 TRLC. Delimits who may notify the opening of negotiations or seek confirmation of a restructuring plan, excludes financial and insurance entities and public law bodies, and provides that debtors falling within the scope of book three are subject exclusively to the provisions of that book. BOE-A-2020-4859
• Art. 700 TRLC. Provides that in all cases where the continuation plan fails, if the debtor is an individual they may seek the discharge of unpaid liabilities under book one. BOE-A-2020-4859
• Art. 486 TRLC. Allows an individual debtor, whether or not a business owner, to seek discharge of unpaid liabilities provided they are a good faith debtor, either under a payment plan without prior liquidation of the estate or with liquidation of the estate. BOE-A-2020-4859
• Art. 489 TRLC. Extends discharge to all unpaid debts save the exceptions it lists, and caps public law debt at ten thousand euros per debtor for debts collected by the tax agency, with the same amount and on the same conditions for social security, and only in the first discharge. BOE-A-2020-4859
• Art. 10 TRLC. Regulates the handling of an insolvency petition filed by the debtor itself in the ordinary procedure: allocation the same day or the next working day, immediate examination by the judge, and declaration of insolvency on the next working day where the court considers itself competent and the documents show the subjective and objective requirements. BOE-A-2020-4859

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

Frequently asked questions