Spain: Incentives for business units within insolvency proceedings

The Consolidated Text of the Spanish Insolvency Act (the "Recast Insolvency Act") makes significantly easier the acquisition of business units on companies declared insolvent, what, together with the economic crisis caused by means of the Covid-19, will lead to an increase in these kind of corporate transactions.

Legal change

September 1, 2020, the Recast Insolvency Act will come into force containing some changes in relation to the current version of the Spanish Insolvency Act dated 2003 and its subsequent amendments.

In fact, the Recast Insolvency Act introduces innovations in the wording of various sections of the Insolvency Act and, in particular, on the transfer of business units which in the future will receive a more attractive treatment within the insolvency proceedings of viable but highly leveraged companies.

Business Unit definition

The Recast Insolvency Act defines, for the first time, the concept of business unit as "an organised whole of resources to carry out an essential or secondary economic activity."

The offer filed for acquiring a business unit will include the precise determination of the assets, rights, contracts and licences or authorisations which the offeror will acquire and of the employees who will be kept within the business unit, whose labour contracts will be assumed by the offeror (the "Scope of the Offer").

The purchaser of the business unit acquires the assets, rights, contracts and licenses or authorizations contained in the Scope of the Offer but it does not subrogate: (i) in general, in the insolvency debts and debts of the estate pending before the acquisition of the business unit; (ii) in the mortgages and pledges on assets included in the business unit when 75% of the corresponding creditors so accept it; (iii) in the tax claims; (iv) in the labor and social security claims of employees not included in the Scope of the Offer.

Transfer of Undertakings

The existence of a transfer of undertakings is confirmed, for labour and social security purposes, when business units of an insolvent company are transmitted.

The Recast Insolvency Act gives the judge who is conducting the insolvency proceedings, on an exclusive basis and therefore excluding other jurisdictions, the power to declare the existence of a transfer of undertakings, what will undoubtedly generate greater legal certainty in this kind of transactions.

In fact, the Recast Insolvency Act gives the judge of the insolvency proceedings the exclusive faculty to decide the Scope of the Offer, which includes delimiting the employees for whom the transfer of undertakings will take place.

Consequently, with the approval of the judge conducting the insolvency proceedings, the purchaser of the business unit will assume the outstanding labour and social security claims only with respect to those employees included in the Scope of the Offer.

Therefore, the Recast Insolvency Act eliminates the risk, which previously existed, that the purchaser of the business unit had to assume the labour and social security liabilities for employees not included in the Scope of the Offer, which, in practice, discouraged potential purchasers from executing this type of transactions.

Additionally, the Recast Insolvency Act establishes that the decision of the judge of the insolvency proceedings approving the transfer of the business unit is not appealable.

Priority proceedings

For one year from the declaration of the state of alarm, i.e. until 14 March 2021, the transfer of business units within insolvency proceedings will be considered priority proceedings in the Mercantile Courts, as foreseen in Royal Decree Law 16/2020, of 28 April, on procedural and organisational measures to deal with Covid-19 in the area of the Administration of Justice.

Foreign investment in strategic sectors

Foreign investments in strategic sectors are subject to a particular legal regime in Spain. The recent Royal Decrees-Law 8/2020 and 11/2020 have modified the Law 19/2003, which regulates the foreign investment regime, establishing the requisite of administrative authorization for investments made by foreigners residing in countries outside the European Union and the European Free Trade Association, when the investment consists in the acquisition of relevant stake in the capital share of Spanish companies that operate in certain strategic sectors.

Although the acquisition of business units of insolvent companies does not imply the acquisition of a stake in the capital share of a Spanish company to which the regulation on foreign investments refers, it should be analysed on a case-by-case basis whether the acquisition of a business unit is subject to administrative authorization.

Conclusion

The Recast Insolvency Act substantially facilitates the acquisition, within insolvency proceedings, of business units of companies.