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Many people confuse Insolvency and Bankruptcy (respectively “insolvencia” and “quiebra” in Spanish) which are two closely related concepts but which are substantially different. In short Insolvency is a legal proceeding that, if accepted by court, protects the company or the individual from its creditors. The interest on debts is frozen and there is the possibility to renegotiate repayments. In most cases normal commercial activities will continue. Bankruptcy is another legal proceeding that involves the cessation of commercial activities and the final liquidation of the debtor’s assets in order to repay creditors.

“Concurso de Acreedores” and Law 22/2003

In Spain Insolvency and bankruptcy are regulated by Law 22/2003 of July 9th 2003 and it subsequent modification in the Royal decree law 3/2009, of March 27th 2009. All cases of insolvency and bankruptcy from individuals to multinationals are included in the same versatile process called “concurso de acrededores”.

“Concurso de Acreedores” (insolvency from now on), is when a company or a self employed worker is declared by court as unable to pay their creditors. When it is the debtor who files for insolvency the procedure is called “concurso voluntario” (voluntary proceeding) otherwise when the creditors are filing the proceeding in order to recoup part of the debt, the procedure is called “concurso necesario” (necessary proceeding).

In most cases it is the debtor himself who initiates the process.

The court process

A court must declare insolvency. Companies or self-employed workers will file it with the Mercantile or Commercial Court located in the jurisdiction of the debtor’s headquarters. The party filing for insolvency will have to nominate a Lawyer and prepare a file that will include financial accounts for the last three years including if possible: an accounting audit, a list of creditors with all the amounts owed and a detailed inventory of the debtor’s assets.

We can see that declaring insolvency at court will require collecting a substantial amount of information. Insolvency can be temporary (the insolvency situation can be recovered) or definitive (the amount of debts and the status of the business cannot foresee any possible improvement).

The court will decide to accept or reject the proceeding. If the court declares insolvency it will initiate actions including:

  • The public declaration of insolvency
  • A call to creditors in order to justify their claims
  • The appointment of a group of inspectors
  • A statement relating to the debtor’s faculties for management.

Voluntary proceeding “concurso voluntario”

The proceedings can be filed preemtively if the insolvency situation can be foreseen, but in any case the debtor has to file for insolvency within two months from the start of the insolvency situation. Delaying the process further will imply increased liability towards the creditors.

The voluntary proceedings will have several effects on the debtor:

  1. The business will be able to continue its normal activities, subject to the scrutiny of the inspectors. Nevertheless if the inspectors can see major signs of mismanagement or irresponsibility they can at any time suspend the current business management and dispose of company assets.
  2. Executions related to financial claims (for example real estate repossessions) will be stopped.
  3. The accruals of interest generated by debt will be stopped.
  4. The Mercantile court can facilitate negotiations with the creditors in order to restructure the debt or to delay payments.

In short the proceeding can have two possible outcomes:

  • An agreement reached between debtor and creditors in order to settle the debts.
  • The liquidation of the debtor’s assets. This could lead to the termination of the business.

Necessary proceeding “concurso necesario”

The great advantage for a creditor filing for insolvency against a debtor is that they will have priority over other debtors in relation to recovering their money and this up to 25% more than the other creditors.

Ask your Spanish Lawyer for advice.

In any case, whether you are a creditor trying to recover your money or you manage a business in a difficult moment, it is always good to consult a Spanish lawyer expert in company law and accountancy, who will be able to help you to choose the best possible course of action.