Spain: Acquiring "production units" in times of crisis

The restrictions on the Spanish economy caused by the Covid 19 crisis have led to an increase in bankruptcy petitions there, although the requirements for filing a bankruptcy petition have been relaxed also in Spain.

Building on the financial crises in Spain in 2007 and 2013, Spanish insolvency law is now considered technically advanced as well as practice- and needs-oriented.

One of the legal novelties introduced in Spain at the end of the last crisis (specifically in September 2015) is the regulation of the sale of the so-called "production units" by insolvent companies. In this context, "production unit" means the entirety of assets and third-party contractual relationships and, if applicable, administrative permits, organised for the exercise of the core or a subordinate economic activity.

The aim of this regulation is to make the acquisition of production units of insolvent companies attractive and feasible to solvent investors, in order to maintain the business operations of the "healthy" part of the insolvent company, while preserving the right of the creditors of the insolvent company to enforce the largest possible portion of their claims. The purpose was to avoid liquidation of the individual assets forming part of the insolvency estate, as this usually leads to job losses and the generation of very little or no income.

To win potential investors for this type of business acquisitions, it is important that they have exact knowledge of the type and amount of liabilities they will have to take on when buying the production unit before the actual transaction takes place. There has been no such certainty so far as there was no regulatory framework in place. Contradictory case law caused great legal uncertainty, which has led to dramatic situations, e.g. the buyer of the production unit was ordered by a court to assume further liabilities – especially those arising from employment and social security obligations – even several years after the acquisition of a production unit, part of which were two or three times higher than the obligations to be assumed as part of the acquisition planned in the initial budget.

On 1 September 2020, a "systematised" version of the Insolvency Act came into force in Spain, which now precisely regulates the rights and obligations of the buyer of the production unit of a Spanish company in insolvency proceedings. The main features and advantages of the legal framework for this particular type of "asset deal" can be summarised as follows:

It is a process supervised by an insolvency court judge and controlled by an insolvency administrator.
The investor can limit the scope of the production unit he intends to buy.
The acquisition has a "universal succession" effect, so consent of the respective other contracting party to the transfer is actually not required. This can be particularly useful for production units that hold licences or require official approvals for their business operations.
The buyer does not take on any tax liabilities.
The buyer does not take on any liabilities arising from financing arrangements or commercial relationships.
Outstanding social security obligations are assumed by the buyer only to the extent that they are connected with the employment contracts of the employees who are part of the production unit to be taken over.
This also applies to "liabilities arising from employment relationships" (salaries and severance payments): the buyer takes over only those liabilities that are attributable to the employees assigned to the production unit. In addition, the insolvency court may decide to grant an exemption for liabilities assumed by the so-called salary guarantee fund.
When evaluating production unit takeover bids, the court should give preference to those bids which, from a qualitative point of view, offer a greater guarantee for the continuation of operations of the company and the maintenance of jobs.

Overall, it can be said that from the perspective of investors interested in this type of transactions, the recent amendment to Spanish insolvency law has removed many uncertainties. As the number of insolvency proceedings is, unfortunately, expected to grow in Spain, this alternative way of acquiring companies will probably become more attractive, especially to investors in the automotive supply or the hospitality industry.

Conclusion

With the amendment to the Insolvency Act coming into force on 1 September 2020, the acquisition of production units of Spanish companies in insolvency proceedings has become an interesting alternative for solvent investors who can successfully integrate these units into their own companies.