Insolvency Proceedings and Out-of-Court Payment Options in Spain

Insolvency Proceedings: Pre-Insolvency Proceedings and Out-of-Court Payment

In Spain, when a debtor faces a plurality of creditors and cannot fulfill their obligations, the law provides a judicial process known as insolvency proceedings. Once insolvency is declared, the debtor loses the freedom to choose which creditors to pay and must request the formal declaration of insolvency.

The primary objective of insolvency proceedings is to salvage viable businesses. However, this process has its drawbacks. As an alternative to filing for insolvency, Spanish law allows debtors to notify the court of their intent to negotiate a refinancing agreement. If an agreement or out-of-court payment is not reached within three months of this notification, the debtor must apply for a formal declaration of insolvency.

Out-of-Court Agreements

Out-of-court agreements are applicable to both insolvent individuals and legal entities. The debtor must request the appointment of an insolvency mediator (through the Business Registrar or a Notary). The mediator verifies the necessary requirements. Once the out-of-court payment agreement process begins, the debtor can continue their business operations.

Refinancing Agreements

Debtors can negotiate refinancing agreements with creditors. If insolvency proceedings are ultimately initiated, these agreements may not be revocable under the following conditions:

1. Significant Extension of Credit or Amendment/Extinction of Obligations: The agreement must provide a significant extension of available credit or modify/terminate existing obligations.
2. Conditions Prior to Insolvency Declaration: The following conditions must be met before the court declares insolvency:
   1. A signed agreement between the creditor and creditors representing at least 60% of the liabilities.
   2. Certification from the debtor's auditor confirming the sufficiency of liabilities covered by the agreement.
   3. Formalization of the agreement in a public document.

The Individual Entrepreneur

In Spain, the legal framework for individual entrepreneurs, particularly concerning married individuals engaged in business, presents unique considerations.

Commercial Dealings by Married Persons

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The married entrepreneur is discussed as a special case exclusively as far as patrimonial issues are concerned. This becomes particularly meaningful if the previous regime concerning a married woman wishing to participate in trade is taken into consideration.

The commercial law provisions dealing with the patrimonial schemes of marriages of entrepreneur stem by default from the legal system applicable in private law, that is, joint ownership upon marriage.

According to this regime and pursuant to commercial law , in the case of engagement in business by a married person, the assets pertaining only to the spouse engaging in business and those assets acquired with the process shall be held subject to liability.

By effect of implied consent of the other spuse, the patrimonial scope for liability for business debt may be extended to cover the whole of joint posessions.