Top Ten Considerations When Buying a Business From a Bankrupt Seller in Spain
Sep 29, 2015 Top Ten Download PDF
By Rubén Ferrer, Gómez-Acebo & Pombo, New York and David Riopérez, Gómez-Acebo & Pombo, New York
When a Spanish company is going down the route of insolvency proceedings and the process cannot be settled by means of an arrangement with creditors that would allow the relevant company to remain in business (which unfortunately occurs in around 95% of cases in Spain), selling its production unit is an alternative to liquidating the assets, ceasing the business activity and making employees redundant.
This article is intended to help foreign investors navigate the key issues that a purchaser of a Spanish production unit will face when buying a business from a seller subject to insolvency proceedings, taking into particular consideration the recently revised Spanish Insolvency Act (the "IA") and decisions of the Spanish Commercial Courts.
1. Understand the process
The sale of the production units of a company subject to insolvency proceedings has become common practice in the Commercial Courts. This procedural solution allows such production units to continue as a going concern, ensuring the preservation of jobs and avoiding the destruction of the business landscape. From the buyer's perspective, it will be able to define and isolate the acquisition target (one, several or all of the production units within the company) without incurring all the liabilities or contingencies that might be outstanding or hidden in the transferor company.
In general, the sale of an insolvent company as a whole or, in the case at hand, through the sale of production units is carried out by auction. However, the Court may agree to a sale by direct divestiture or through a specialized person or entity where an auction sale is unsuccessful or when, in the light of the relevant insolvency administrators' report, the Court considers it more appropriate in the interests of the insolvency proceedings.
The sale of the production unit will be the preferred option if it appears to the Court that the company's value as a production entity is in the better interests of the insolvency proceedings than the division and isolated realization of the company's component parts. Moreover, special summary liquidation proceedings may be opened when, together with the petition for insolvency proceedings, the debtor presents a liquidation plan that contains a binding written proposal to purchase the production unit in operation or where the debtor has ceased business altogether and has no employment contracts in place. Within the initial common stage of insolvency proceedings, a Court-sanctioned sale of the production unit prior to the liquidation stage is also possible.
In an acquisition scenario, the main players involved will be: the insolvency administrators, who will play an essential role representing the general interest of the relevant creditors, as well as that of the insolvent company; the insolvent company itself through its directors, whose governing capacities will be either supervised by the insolvency administrators or replaced by the insolvency administrators depending upon the type of insolvency proceedings (i.e. in general terms, voluntary or involuntary); the buyer or transferee of the production unit, who will try to avoid and control the liabilities attached to the production unit to the extent possible; any specially ranked creditors (i.e. employees and Social Security); and the Court, as guarantor of the legality of the process.
It is worth noting that for reasons of speed and legal certainty, in accordance with the IA, the awarding Court decision cannot be appealed, at best only an administrative review of a final decision is allowed within five days before the same Court.
2. Ascertain the position of the relevant Court
Regarding the sale of a production unit within insolvency proceedings, the Commercial Court will be the authority of competent jurisdiction to decide whether or not there is a transfer of undertaking and the conditions under which such undertaking is disposed of.
However, it is worth noting that Spanish Commercial Courts have issued contradictory judgments in recent years regarding the application of the IA, in connection particularly with the obligations undertaken by the purchaser in the framework of an acquisition of a production unit from an insolvent seller. While it may be sanctioned by a Court decision, such a transaction is however not entirely free from doubt or risk.
3. Consider the employment obligations
If there is a transfer of undertaking, the transferee will be jointly and severally liable for three years – along with the transferor – for any defaulted employment obligations arising prior to the transfer, in accordance with the Spanish Workers' Statute (the "WS"). However, there is the legal possibility for the judge to rule that the transferee not be burdened by part of the wages and compensations outstanding prior to the disposal of the production unit, which are instead assumed to a limited amount by the Spanish Wage Guarantee Fund (FOGASA in its Spanish acronym) in accordance with the WS. Likewise, in order to secure the future viability of the production unit, as well as the preservation of employment, the transferee and the workers' representatives may agree to an amendment of any collective employment conditions. There has been a number of judgments by the Commercial Courts to this extent, ratifying judicial decisions to limit the transferee's liability.
4. Doubts and risks over Social Security obligations
With regard to any debts outstanding to the Spanish Social Security (contributions and benefits), some Commercial Courts are prone to disregard the transferee's joint and several liability with the transferor employer arguing that, if the Social Security claims were guaranteed by the transferee, this would be an "almost insurmountable obstacle in the market to achieve the sale of the company as a whole".
The most recent reform of the IA obliges the buyer of a production unit from an insolvent company to take on the entire Social Security debt accrued by such company. Albeit, the Commercial Courts have as a result considerably reduced the purchase price of companies in liquidation by ruling that the buyer will only inherit the Social Security debts of those employees it retains.
Where the debts are privileged due to the Social Security holding security over the relevant assets of the production unit, the transferee will exceptionally not subrogate the transferor with regard to existing debts even though the security may remain in place. The Commercial Courts will thus have the last word as to the interpretation of this latest amendment to the IA.
5. Assets vs. liabilities
With regard to any other debts of the company subject to insolvency proceedings, the general principle is that the sale of production units within the insolvency proceedings involves the transfer of the debtor's assets, but not of its liabilities unless otherwise expressly stated. There is now a number of judgments from the Commercial Courts supporting this approach.
6. Tax liabilities
With regard to tax liabilities and penalties, the Spanish General Tax Law contains an express provision exonerating the "purchasers of economic undertakings or activities belonging to an insolvent debtor when the purchase is made in insolvency proceedings". Therefore, the transferee of a production unit within insolvency proceedings will generally not acquire any tax liabilities or related penalties.
7. The application of Value Added Tax (VAT)
In accordance with Spanish VAT regulations, the sale or transfer of the entire business or professional assets in favor of a single purchaser may not be subject to VAT, provided that such business or assets are effectively transferred and qualify as a transfer on "a going concern basis". Therefore, it will be essential to fully analyze the assets to be transferred within the insolvency proceedings and to determine whether the same genuinely constitute a line of business of the transferor, in order for the transferee to benefit from the non-application of VAT when acquiring the production unit.
8. Assignment of contracts
As a rule, the assignment of contracts (e.g. leases, supply, distribution, licensing, insurance, etc.) requires the consent of all the parties to the contract, especially of the in bonis contracting party (the other, non-insolvent, party to the contract). However, pursuant to the IA, in the context of the purchase of a production unit, the consent of the creditor or in bonis contracting party to take on any existing agreements related to the production unit activity is not required and the transferee, unless the termination of the relevant agreement is required, will subrogate such agreements without the need to obtain the counterparty's consent.
9. Assignment of permits and administrative authorizations
Similarly, permits and administrative authorizations attached to the production unit will also be assigned to the transferee, again unless the transferee has expressly stated its intention otherwise and provided that the transferee further continues the activity in the same facilities of the transferor.
10. Cancellation of seizures
The Spanish IA also provides for the cancellation of any seizures arranged in the order approving the auction or transfer of the production unit's assets and, again, there are now a number of judgments from the Commercial Courts ratifying this point.
In summary, the transfer of a production unit will not imply the payment by the transferee of any amounts due by the insolvent company prior to the transfer of the same, unless such amounts have been expressly assumed by the transferee or there is a legal provision to the contrary, for example, employment and Social Security liabilities.
The above highlights a few of the key issues foreign investors and their legal counsel must bear in mind when considering the acquisition of a business from an insolvent seller in Spain. Experienced and specific Spanish legal counsel is, therefore, imperative in order to know how to approach and best deal with such issues as and when they arise.
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