Some Things To Consider When Buying a Productive Unit in Insolvency Proceedings in Spain

Companies or productive units belonging to a Spanish company in insolvency proceedings are often the subject of interest from foreign investors. The purpose of this post is to clarify some frequently asked questions from these potential buyers.

Firstly, the question that arises is when and how a productive unit (hereinafter sometimes referred to as “PU”) can be purchased within the insolvency proceedings. Actually the answer is that this is possible from the very moment the insolvency proceedings are filed, as this can be accompanied by a binding offer to purchase the productive unit. Although this does not guarantee that the bidder will be awarded the purchase, it does speed up the sale process considerably, with the commercial court ensuring that there is a transparent and competitive sale process before taking a decision. Apart from this, the law also provides for the possibility of any debtor who is insolvent (or close to insolvency) requesting the court to appoint an expert to collect offers to purchase the productive unit (so called ‘pre- packer’), with the logical aim of then filing for insolvency and completing the sale within the insolvency proceedings.

The productive unit may also be transferred during the ‘common phase’ of the insolvency proceedings, once these have been declared, normally through a joint application by the debtor and the insolvency receiver, who will initiate a regulated process for receiving bids, after which the commercial court will award the unit to the highest bidder in the best interest of creditors.

Finally, the productive unit is also the prevailing mode of sale in the liquidation phase, as it allows jobs to be preserved. Therefore, the special liquidation rules must, whenever possible, provide for the disposal of the productive unit as the preferred means of liquidation.

The second question that a potential buyer asks is about the advantages of purchasing a productive unit in bankruptcy. Indeed there are quite a few, starting with the fact that the risks of the buyer being considered the successor to the company and therefore incurring joint and several liability vis-à-vis public bodies and employees for the debts that the company in bankruptcy may have incurred are greatly limited. Under current legislation (and after some years of considerable uncertainty), it can be stated with a reasonable degree of certainty that the purchaser of that PU will only be responsible for the employees included in their bid (those included in the ‘scope of the PU’), which does not have to be all those who were active at that time, and even less so those who had already ceased to provide services. Furthermore, it is clarified that the commercial court in charge of the insolvency will be the only one competent to declare that there is a succession of the company.

Another relevant issue to take into account is that of the specific debts assumed by the purchaser of the production unit. Spanish legislation is clear in stating that the purchaser of a production unit in insolvency proceedings does not face any liability for the unpaid debts of the insolvent party, whether these are insolvency debts or debts against the estate. This is undoubtedly a very favourable rule for purchasers of PUs, who are not obliged to take on any debt of the selling party. However, this rule is not mandatory and the purchaser may voluntarily decide to assume some of these credits (e.g. strategic suppliers), even if they are insolvency debts, without this appearing to cause problems in terms of a breach of the principle of pars conditio creditorum.

Another topic that may concern investors is that relating to workers whose contracts must be subrogated by the purchaser of the productive unit. It should be noted that this issue (job retention) is what justifies giving priority to these solutions to insolvency proceedings over others (such as a piecemeal liquidation). This means that many of these bids choose to retain a large number of employees, even if it involves reducing the amount of cash that would go into the insolvency proceedings (on the grounds that they are assuming seniority in salaries and potentially higher severance pays).

Even though this would be ideal, the purchaser is not necessarily required to retain the entire workforce currently in active service and, in fact, it is not unusual for competing bids to differ in terms of the number of employees whose contracts are transferred to each bidder.

However, the terms and conditions of the employment contracts assumed by the purchaser cannot be modified. To do so, it would be necessary, once the production unit has been acquired, to undertake a collective procedure to modify the working conditions.

What about the other contracts to which the insolvent debtor is a party (e.g. supplies, leases)? The general rule is that the purchaser takes them over, without the need for the other contracting party to give its consent (a logical rule to allow the activity to continue without hindrance). However, once again, Spanish law allows the purchaser to expressly decide to exclude certain contracts from its offer (think of a particularly onerous one), without having to assume any consequences.

Finally, the question arises as to whether the purchaser of the production unit is obliged to make a temporary commitment to remain in business. The answer depends on the route chosen. If we have gone down the pre-pack route, the law requires that the offers obtained include a commitment to maintain production for two years. Something similar occurs when a binding offer is accompanied by the insolvency petition, although in this case the commitment is for three years. On the contrary, when the sale is carried out in the common
phase or in liquidation, the purchaser is not obliged to maintain the activity for a minimum period of time.