Garrigues: Spain's restructuring and insolvency measures

Tuesday March 31, 2020


1. Public health crisis and assumption of new credit by businesses. The Covid-19 crisis is causing liquidity pressures at many companies. The government has implemented facilities to alleviate this situation (more information, here). However, this aid is not on a non-refundable basis, but rather involves the assumption of new indebtedness by the companies (see here).

2. New indebtedness, payment to the various creditors and business judgment rule. The assumption of new indebtedness seems a priori a reasonable and necessary course of action to preserve the continuity of business activity. However, the assumption of new indebtedness and how the sums are to be used should be decided by the managing body in line with the business judgment rule (more information, here), in particular if such decisions may be subject to scrutiny in the future.

3. Adaptation of business plans to the post Covid-19 context. In relation to the business judgment rule, managing bodies should consider the advisability of revising and, if necessary, updating business plans with the assumptions which may be applicable in the new context.

4. Potential additional restructuring or insolvency actions. If the new credit available through conventional channels is insufficient, the business may sound out the conditions of lenders of last resort and/or adopt other additional operational restructuring measures (employment, adaptation or termination of commercial contracts, liquidation of the company and sale of the production unit as a going concern to a third party, etc.) or financial measures (debt reductions, deferrals, debt conversions, etc.).

Ideally these measures will be adopted on a consensual and negotiated basis with the relevant parties involved. If it is not possible to adopt additional restructuring measures on a consensual basis and judicial intervention is necessary: (a) if the necessary measures are urgent and the failure to adopt them may cause irreparable harm, they may be sought from the competent court while the state of emergency is still in place; (b) if, on the other hand, those measures do not meet such requirements, the business may start diligently preparing the appropriate application during the state of emergency so as to file it immediately after it ends.