Is the insolvency regime failing Spanish business?

Spain's insolvency regime is proving itself inadequate for assisting businesses in
financial difficulties, writes Antonio Fernández of Garrigues.

El sistema español de
insolvencia ha
demostrado tener una
gran inadecuación a la
hora de evitar el cierre
de empresas, escribe
Antonio Fernández, de
Garrigues. Las
estadí­sticas de los
íºltimos cuatro años de
funcionamiento de la
nueva Ley Concursal
indican que el 95% de
los casos terminan en
liquidación. Uno de los
problemas más serios
es que el sistema
español está basado
en un concepto de
insolvencia muy
exigente. En estos
momentos de crisis se
debe prestar especial
atención al aspecto
financiero de la firma,
no sólo el activo sino
también el pasivo, a
fin de iniciar una
financiera preventiva,
antes de que sea
demasiado tarde.

The Spanish insolvency system is
based on a very demanding
concept of insolvency. A debtor is
considered to be insolvent when he
cannot regularly meet payments of his
outstanding debts – ie, when the cash
income raised through his ordinary
activities does not cover payment of both
financial debts at maturity and operative

In such cases, the debtor is supposed to
file for insolvency proceedings within the
following two months after he is
considered to be insolvent, and if he does
not do so, he may be found guilty of
aggravating the insolvency. Under certain
circumstances, he may also be condemned
to pay the creditors whatever shortfall they
suffer in the collection of their credits
through the liquidation of the business. Such responsibility may be extended
to the
directors of the debtor company, including
shadow directors, and those acting as such
within the previous two years to the
insolvency declaration.

Besides such a demanding concept of
insolvency, I believe that the Spanish
insolvency system has proved to be quite
inadequate to preserve businesses from
liquidation. Statistics during the four years
in which Spain’s new insolvency law has
been in place show that 95% of filings for
insolvency proceedings end up with the
liquidation of the business. There are several
factors leading to this result, but I will only
mention the two most significant ones:

(i) The lack of post-petition financing is a
well known decisive factor in many
business collapses. Spanish banking
regulations compel any bank lending
money to a debtor in formal insolvency
proceedings to provision 25% of the
credit as bad debt; regardless of the fact
that a post-petition claim has privilege
over pre-petition claims and that it may
obtain all kinds of guarantees with the
approval of the Judge. Under such
circumstances it is almost impossible to
convince any bank to support with new
financing the reorganisation of the
business once formal insolvency
proceedings have started.

(ii) The timeframe involved in formal
insolvency proceedings is also a key
factor in determining why many
businesses end up in liquidation. The
new law has ignored that short
proceedings are absolutely necessary in
order to preserve value and avoid the
stigma associated with formal
insolvency proceedings; it has
established many side issues,
challenges, and a lengthy way to purge
the creditors’ list where the amounts
and privileges of the creditors are

With such a scenario, Spain is a place
where it is especially relevant for
entrepreneurs to foresee when the crisis
will hit their business and to take
preventive measures in order to try to
avoid formal insolvency proceedings. Implementing controls is essential to such
end. And because there is a very
important financial factor in this crisis – shortage of liquidity controls must
only be aimed at measuring sale decreases
and operational difficulties, but must also
focus on the financial structure and
strength of the business itself.

The most recent reorganisations in
which I have been involved within these
past months have had the financial factor
as their most prominent ingredient. “Refinancing” the long term debt by way of
introducing a waiting period and
enlarging its maturity may help match the
lesser income caused by a drop in
demand, determining the cash needs of
the business for the coming months and
dealing with such needs in the
refinancing” has become absolutely

Business reorganisation is always a
useful option to overcome difficulties, but
in a financial crisis such as the one we are
now living it may not be enough. Special
watch must be given to the financial aspects
of the business in order to start the financial
reorganisation – the sooner the better!

Antonio Fernández leads the Restructuring and
Insolvency Practice at Garrigues where he
specialises in assisting major domestic and
cross-border financial crisis situations. This is
an extract from a recent presentation to
members of Iberian Lawyers’ In-House Club.

He can be contacted at