Spanish deals

When negotiating pre-insolvency agreements in Spain, lawyers should take into account directors’ liability, say Alberto Núñez-Lagos and Ángel Alonso
With the current financial crisis, many companies are resorting to out-of-court restructurings or renegotiations as opposed to going to court to handle their insolvencies.

Spanish dealsWhen negotiating pre-insolvency agreements in Spain, lawyers should take into account directors’ liability, say Alberto Núñez-Lagos and Ángel Alonso
With the current financial crisis, many companies are resorting to out-of-court restructurings or renegotiations as opposed to going to court to handle their insolvencies.

Pre-insolvency negotiations can be a risky activity for the debtor’s directors.
Under Spanish Insolvency Law, when negotiating an out-of-court pre-insolvency agreement, directors of a borrower need to take into account their duty to file for insolvency within two months from the date on which they became aware (or should have become aware) of the company’s insolvency.

Insolvency is defined as general failure to keep payment obligations as they fall due.

If this obligation is breached, the insolvency could be considered to be ‘aggravated’ by the borrower’s directors. This could lead to the directors being held liable for payment of the liquidation deficit if the insolvency ends as a liquidation as opposed to a creditors agreement.

Spanish dealsTaking into account the existing legal provisions and recent judgments, in our view, directors who renegotiate the company’s debts out of court in the pre-insolvency stages would not have an obligation to file for insolvency in the following scenarios:

1) When the non-payment of obligations relates to specific creditors (regardless of how much their claims represent out of the total liabilities of the debtor), and a renegotiation process has been opened with such creditors, despite the fact that it may not have been coordinated by the creditors but has been impliedly accepted by the creditors;

2) When the amount of the remaining unpaid claims is very low in comparison with the total amount of the liabilities of the company.

The recommendation for directors to be safe during the financial restructuring negotiation is to continue paying trade creditors; and to obtain a waiver of any breach from those entities (normally financial creditors or other relevant creditors by amount) during the negotiation process.

Experience shows that sophisticated financial institutions are granting these waivers in practice in order to give directors the comfort they need to negotiate out-of-court solutions to the crisis.

Alberto Núñez-Lagos and Ángel Alonso are partners at Uría Menéndez