The sale of the production unit in companies in crisis perhaps constitutes the lesser evil of the solutions available for liquidation and the best hope for the continuity of the commercial activity, together with the conservation of jobs, if not completely, then in part. This may be so, but it must not be forgotten that the process is almost always to the serious detriment of the claims of creditors, especially ordinary claims which are as a general rule those most adversely affected by the insolvency of the debtor. Even so, the sale of the production unit brings a remedy to the economy as a hole and a possible reimbursement for the creditors through future commercial operations with the acquired production unit, naturally, without being free of the danger of being trapped in a new insolvency situation. Another argument in favour of the sale of the production unit when feasible, is that the fragmented sale of assets usually has a mediocre or disappointing result for the creditors, while with the former option, added to the sum of the tangible and intangible assets as separate production factors, is the added value of a “functioning establishment”, whereas with a dispersed sale, the assets have a significantly lower market value, derived from their state of use and their displacement from the productive set of assets which they formed a part of when the company was active.
The Spanish insolvency law has already undergone numerous modifications which have gradually transformed its nature, from its original focus on the closure and liquidation of companies in crisis in order to satisfy creditors’ claims, to currently converting into a tool for commercial and employment rehabilitation rigged to the optimisation of net asset value. This perspective has been considerably inspired by community directives and regulations. The proposal directive of 7th December 2022 continues along these lines, pursuant to which in title IV insolvency proceedings known as “pre-pack” are regulated and certain regulations establish a process of preparation for the sale of production units, with the objective that their sale reaches a greater number of potential purchasers and at the same time transparency is guaranteed.
Taking into account the forthcoming passing of the directive and the transposition thereof into the Spanish legal framework, the Commercial Courts of Barcelona have jumped ahead, publishing in December 2023 a set of general rules for the sale of production units within insolvency proceedings and special rules as a guide in relation to the handling of “pre-pack” insolvency proceedings, which we shall comment upon and summarise as follows:
I.- General Rules
A) Procedures for processing the sale of production units. The consolidated text of the Insolvency Act (Texto Refundido de la Ley Concursal – TRLC) provides for 5 channels:
- Within a restructuring plan
- Within a continuity plan (for micro-enterprises)
- Via the appointment of a supervisory expert (“pre-pack” cases)
- Through a binding offer formulated before filing for insolvency
- During the common, agreement or liquidation phase of the insolvency proceedings
The judges of the commercial courts of Barcelona consider that preparing the sale through the appointment of a supervisory expert is fundamentally incompatible with the application for filing for insolvency with a binding offer. However, it is compatible and combinable with the communication of the opening of negotiations with creditors (formerly called “pre-insolvency proceedings”) regulated in articles 585 and thereafter of the TRLC.
B) Requirements and compromise for continuity.
The prior condition that the bidder undertakes to continue or restart the activity and be responsible for damages before any third party in such a case is common to all of the channels for the sale of the production unit. Nevertheless, the reasonable question arises as to how long the purchaser is obliged to sustain the production unit in order for it to be considered that the obligation has not been breached; determining this must give rise to conflicts in cases of an undefined profile, which are the majority. In any case, the insolvency judge will be competent to hear a liability action for such a cause.
C) Accreditation of the best interest of the creditors.
The insolvency administrator or the supervisory expert must reason that the sale of the production unit responds to the best interest of the creditors as opposed to a fragmented liquidation. Regarding this point, we must be aware that this task may be extremely difficult and delicate when the options between one and the other are on a par, or it is difficult to get a glimpse of the financial viability of the production unit. In the “pre-pack” process it seems that the accreditation is incorporated into the final judgement, but it is more coherent for it to take place before initiating the sale process, which would be subjected to a procedure of information and possible opposition by the interested parties, and not at the end of the process.
D) Bidders: parties closely related to the debtor
For the purposes of articles 224.2 and 224 septies of the TRLC, the legal and natural persons closely related to the debtor may present acquisition offers, when three requirements are fulfilled:
- The type of relationship is disclosed
- That the rest of the parties interested in the sale process are informed of their existence and the type of relationship
- That the parties who are not closely related have sufficient time to present a purchase offer
E) Publicity and confidentiality
In any of the 5 sales channels, the insolvency administrator or the supervisory expert shall give the sale process the necessary publicity, whether it be through the website of insolvency liquidations on the Public Insolvency Registry or through another channel which allows the purchase opportunity to reach a greater number of bidders. That said, the publicity may not harm the value of the production units. This latter affirmation may be slightly puerile in so much as the disclosure of information on the production unit will include some positive aspects and other negative aspects, which may be the cause of a certain negative impact, although their disclosure may be necessary for the sake of the principle of transparency in the process. And although the withdrawal of information of a damaging nature is allowed, the cure is purely cosmetic given that once such information has come into the public eye, the damage has already been done.
F) The right of preferential acquisition
Preferential rights of bidders will not be granted or accepted.
G) Intellectual property rights
The insolvency administrator or the supervisory expert will endeavour that the sale of the production unit does not depend on a judicial resolution regarding contracts for intellectual property rights. And if in spite of everything, this was the case, they would seek to ensure that the debtor negotiates with the licensees of the rights.
H) Control of concentrations
The offers of the bidders who require an authorisation from the competition authorities cannot be taken into account when choosing the best offer, especially when the risk of rejection of the authorisation implies a relevant risk for the production unit itself and the recuperation of the creditor’s claims.
I) Appeals
No appeal shall be allowed against the order authorising the sale of the production unit or part thereof.
II.- Special rules for the insolvency “pre-pack” procedure
The following shall be taken into account in the “pre-pack” procedure:
A) The supervisory expert will be appointed by the insolvency judge through an order, at the proposal of the debtor or the judge him/herself, using the selection criteria of an insolvency administrator. This expert will become the insolvency administrator, once the insolvency proceedings are declared.
Their functions are monitoring and alerting, except in a few cases, and they are not able to interfere in the faculties of the debtor’s administration and disposal of its equity. The insolvency administrator must also issue a final opinion as to whether the best offer obtained complies with the best interest of the creditors as opposed to a fragmented liquidation, and whether the sale has come about in a transparent manner, with equal conditions for the bidders and appropriate for assuring that the accepted offer is reasonably the best offer available on the market. As an exception, they may be able to carry out the sale process directly.
B) Procedural formality
The process of preparation of the sale will finish with the issue of the aforementioned judgement. Subsequently, the insolvency proceeding will be declared, upon the request of the debtor, which must contain the opinion of the supervisory expert. In the court order declaring the insolvency proceeding or in another immediately subsequent one, the judge will open the judicial authorisation procedure, in which no new bids will be accepted and will grant a period of between 3 and 10 days for creditors and workers to present their arguments. The authorisation for sale is conditioned to the verification that the sale has been competitive, transparent and fair, and that it complies with insolvency regulations. The treatment of the company employment legacy is of particular interest, given that commercial judges refer to the criteria established in the Judgement of the High Court of Justice of the European Union of 28th April 2022. Said judgement sets forth the possibility to exempt maintaining the rights of the workers, with a view to the double objective of obtaining the highest possible reimbursement for the creditors with the sale of the production unit and preserving jobs, but always under the condition that the procedure has operated in accordance with regulations and the legal provisions in force and applicable to the “pre-pack” procedure.
It is to our understanding that, this possibility would fall under what we may call exceptional circumstances, where maintaining employment rights would constitute a substantial detriment to the market value of the production unit or a practically insurmountable obstacle for the presentation of the offer given the unbearable burden which maintaining labour rights would imply in the continuation or the resuming of the commercial activities of the production unit. In this regard it is important to emphasise the duty of analysis on the part of the supervisory expert when gauging the real conditions of the sale of the production unit, and their ability to discern market conditions and the general or economic situation at the time. A large part of the success of the process will lie in the professional competence of the supervisory expert or the insolvency administrator.
Eduardo Vilá
Vilá Abogados
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16th February 2024
