The sale of a production unit in the Revised Text of the Spanish Bankruptcy Law (TR LC)

Definition of production unit (UPA in its Spanish acronym)

UPA means a "set of organised means necessary for the exercise of an essential or ancillary business activity" (sec. 200.2 TR LC). If there is one or more UPAs of goods or services within the bankruptcy assets, these shall be detailed in an annex to the inventory, with a reference to the goods and services of the bankruptcy assets comprised thereunder (sec. 200.1 TR LC).

If a company forms part of the bankruptcy assets, the report by the receivers shall contain an assessment of the overall company and of each of the UPAs therein, both in the case of business continuity and in the event of liquidation (sec. 293.2 TR LC).

The special rules on the disposal of UPAs or of the overall company are mandatory, whether or not the liquidation plan is approved (sec. 415.3 TR LC).

Ordinary method and procedural stage for the disposal of a UPA

A UPA can be realised in a single common stage, as part of the agreement or as part of the liquidation plan.

The ordinary method of disposal is by means of a judicial or extrajudicial auction, including by electronic means (sec. 215 TR LC). However, the disposal of the UPA, either directly or through the relevant specialised person or entity, may be authorised by the judge where the auction is void or at any stage of the bankruptcy proceedings (sec. 216 TR LC). The application shall be filed in writing by the receiver, following the procedure under sec. 518 TR LC (as provided for the obtaining of "judicial authorisations").

Despite of the fact that the current text of the TR LC expressly allows the sale of the UPA at any time during the bankruptcy proceedings, subject to judicial authorisation, case-law deems that the sale in a common stage requires a special justification. For example, the integration of the elements of the UPA in multiple bankruptcy proceedings of the group companies, which very much delays the management of the sale of the UPA, and places the maintenance of its operations at risk (order of the Madrid Commercial Court No. 8, of 20 December 2013); or that the foreseeable future of the company under bankruptcy proceedings suggests its deterioration and loss of value, aggravated by the delay in the bankruptcy proceedings’ schedule, and the need to cover the costs of maintaining it in operation (order of the Castellón Commercial Court No. 1, of 1 February 2016).

The application will be forwarded to all the parties to be heard in relation thereto, and they will have a period between three and ten days to produce their allegations. The judge shall rule on the application within five days following the relevant deadline. No appeal shall be possible against the order granting or denying the authorisation requested other than that of reinstatement.

Pre-packaged bankruptcy

The notion of “pre-packaged bankruptcy” has its origin in comparative law, and consists of the sale of a distressed company, which is set prior to the application for the opening of the bankruptcy proceedings. The operation is supervised by an expert, and its main purpose is to optimise and speed up the search for a potential buyer, maximising the sale price.

Although the pre-packaged bankruptcy is not considered as an option under Spanish law, it is worth mentioning the order of the Barcelona Commercial Court No. 7, of 29 July 2020 which, in the framework of the pre-packaged bankruptcy of the former section 5 bis of the Bankruptcy Law, resolves on the appointment of an expert to supervise the search for any parties interested in the acquisition of the company, the negotiation and the final report on the sale of the UPA, so that the application for bankruptcy proceedings is submitted together with the purchase offer. The judge states that this option may maximise the assets, and is to the creditors’ interest. However, the judge adds that the possibility to speed up the sale can only be considered if linked to some argument that leaves no doubt on the impossibility to take any other particular legal measures, without causing an actual or potential irrevocable damage to the company.

Disposal of the UPA as part of the agreement (proposed agreement with takeover)

The proposed bankruptcy agreement may consist of the acquisition by an individual or legal person, as designated in the proposal itself, either of all the assets and rights of the bankruptcy assets linked to the professional or business activity of the bankrupt company, or of certain UPAs, with the purchaser undertaking to continue with the relevant activity for, at least, the time provided for in the proposal, and the obligation to pay, in full or in part, for all or some of the claims existing against the bankrupt company (sec. 324 TR LC).

The rule does not establish a minimum period of continuity of the activity, and it only indicates that the duration of the undertaking provided for in the proposal must be complied with. It should be noted that this continuity commitment is not required if the sale of the UPA takes place during the liquidation stage.

The disposal of the UPA by means of an agreement requires compliance with the rules for the negotiation of the agreement and the approval thereof by the required majority.

Application for bankruptcy proceedings with simultaneous submission of the liquidation plan and proposed sale of the UPA

The debtor may apply for insolvency by simultaneously submitting a liquidation plan containing a binding written proposal for the acquisition of the operating UPA. In this case, the judge will necessarily apply the abbreviated procedure (sec. 523 TR LC).

The advantages of this are the reduction of time frames and more autonomy to negotiate the agreement of sale. It is the debtor itself who draws up and presents the liquidation plan and not the receiver, although the debtor will be required to report on the plan presented, and shall submit such plan to the creditors so that they can make allegations (sec. 530 TR LC). Nevertheless, the proposal will not require the approval by the majority of creditors, as in the case of the bankruptcy agreement.

General rules

Mandatory nature of the special rules in the context of bankruptcy liquidation

The special rules on the disposal of UPAs or of the overall company are mandatory, whether or not the liquidation plan is approved (sec. 415.3 TR LC).

Subsidiarily, in the absence of relevant provisions in the liquidation plan, the assets and rights of the bankruptcy assets will be realised, based on their nature, under the provisions established in the Civil Procedural Law for the enforced collection procedure (sec. 421 TR LC).

Grouping rule

All the premises, businesses and any other UPAs of goods or services of the bankruptcy assets will be realised as a whole. However, when the judge deems it appropriate in the bankruptcy’s interest, the judge may order, further to a report issued by the receiver, that the separate sale of premises, businesses or any other UPAs or some of them, or the elements thereof, be performed. There shall be no appeal against the resolution ordering the individual sale (sec. 422 TR LC).

Description of the expenses necessary to keep the UPA operational

Regardless of the conveying method used, the receiver shall determine the term for the submission of offers, and specify, before the start of such period, any expenses paid from the bankruptcy assets for keeping operational the overall business or that of the UPA or UPAs being conveyed, as well as any estimated expenses to be paid until final awarding (sec. 217 TR LC).

Minimum content of the offers

Regardless of the conveying method, the offers shall contain, at least, the following details (sec. 218 TR LC):

• Identification of the offeror and information on its financial solvency and on the human and technical means available thereto.
• Detailed description of the assets, rights, contracts and licences or permits included in the offer.
• The price offered, the methods of payment and the guarantees offered. Should any assets or rights attached to credits with special privileges be transferred, the offer shall differentiate between the price to be offered with and without continued effectiveness of the relevant securities.
• The impact of the offer on workers.

Possible awarding of the UPA to a lower offer

In the event of a sale by auction, the judge may award the UPA to an offer that would not differ by more than fifteen percent from the highest offer, where the judge deems that the former best guarantees the continuity of the overall company or, as applicable, of the UPA and the jobs therein, as well as the best and quickest settlement of the creditors' claims (sec. 219 TR LC).

Prior hearing of the workers

Prior to the judge issuing a decision on the sale of the company or of one or more UPAs, the workers’ representatives, if any, will be granted fifteen days to make any allegations they may deem appropriate (sec. 220 TR LC).

Company succession

For employment and social security purposes, where a UPA is sold, a business succession is deemed to take place. The judge of the bankruptcy proceedings shall be the only competent authority to declare there is company succession (sec. 221 TR LC).

Subrogation of the purchaser to contracts, licences and permits

In the event of transfer of one or more UPAs, the acquirer will be subrogated to the contracts affecting the continuity of the professional or business activity carried out in the UPA or UPAs being transferred, without the consent of the other party being necessary (sec. 222.1 TR LC).

Where the acquiror continues business in the same premises, it will also be subrogated to the administrative licences or permits related to the continuity of the business or professional activity of the UPA (sec. 222.3 TR LC).

However, the assignment of administrative contracts will take place in accordance with the provisions contained in public procurement laws (sec. 222.2 TR LC).

The transfer of a UPA shall not imply the subrogation of the assignee with regard to any licences, permits or non-employment contracts where the acquirer, on making the offer, has expressly stated the intention not to be subrogated (sec. 223 TR LC).

Effects on outstanding credits

The transfer of a UPA will not entail any obligation to pay any credits not settled by the bankrupt company before the transfer, whether such claims are against the bankrupt company or the bankruptcy assets, except under the following circumstances (sec. 224.1 TR LC):

• Where the acquirer has expressly undertaken such obligation.
• Where a legal provision so establishes.
• Where there is a company succession with regard to employment and social security credits regarding the workers of the relevant UPA, the contracts of whom the acquirer is subrogated to.

If the purchasers of the UPAs are persons especially related to the bankrupt party, then there will be an obligation to pay any credits that were outstanding prior to the transfer (sec. 224.2 TR LC).

Conveying of any UPAs comprising assets attached to credits with special privileges

If the overall UPAs being transferred include assets and rights of the bankruptcy assets attached to credits with special privileges, the following rules shall apply (sec. 214 TR LC):

Transfer without continued effectiveness of the security

If there is no continued effectiveness of the security in the transfer, the preferential creditors shall be entitled to a share of the price obtained equivalent to the value of the asset or right for which security is provided in relation to the overall value of the UPA being transferred.

If the price to be paid would not reach the value of the security, the consent to the transfer by the preferential creditors entitled to separate enforcement, shall be required, provided that they represent, at least, seventy-five percent of the liabilities with special privileges affected by the transfer. The part of the secured credit that is not paid for will be acknowledged in the bankruptcy proceedings with the relevant rating.

If the price to be paid is equal to or greater than the value of the security, the consent of the affected preferential creditors will not be required.

Transfer with continued effectiveness of the security

If there is continued effectiveness of the security in the transfer, with the acquirer subrogating to the obligation to pay from the bankruptcy assets, the consent of the preferential creditor shall not be necessary, and the credit will be excluded from the bankruptcy liabilities. The court shall ensure that the acquirer has the economic solvency and the means necessary to undertake the obligation being transferred.

Tax and social security credits

For this type of credits, there will be no subrogation by the purchaser even where the security would remain effective.