## EXECUTIVE SUMMARY

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---

### Executive summary — key findings
- This technical note analyzes selected issues related to four areas of the legal system for insolvency and creditor rights with particular relevance for financial stability and the resolution of legacy assets: creditor/debtor rights, corporate workouts/out-of-court regimes, the legal framework for insolvency, and institutional frameworks.
- The regime for creditor/debtor rights is largely in line with international best practices.
- Registration of real estate mortgages:
  - Efficient, reliable and cost effective.
  - Real estate collateral plays a critical role in Spain because a very large percentage of loans are collateralized with real estate.
  - Mortgages are generally full recourse mortgages in Spain.
- Due to nonperforming loans (NPLs), real estate foreclosure has been extensively used in Spain.
  - Stakeholders reported that the duration of foreclosure has increased to around 24 months recently.
- There is a register for security rights over movable assets which is computerized and efficient; due to the focus on financial collateral it is limited to such purpose.
  - Enforcement on movable assets is reportedly somewhat lengthy.
- Pre-insolvency out-of-court mechanisms, in particular the homologated refinancing agreements, have been well accepted and used by the market and have increased the use of out-of-court pre-insolvency mechanisms facilitating restructurings (including some high-profile cases).
  - To enhance out-of-court workouts, public creditors in pre-insolvency out-of-court procedures should also be stayed and affected by those processes.
- SME-specific out-of-court debt restructuring process (OCAP):
  - OCAP agreements on payment for SMEs have not been used frequently and therefore have not sufficiently facilitated restructuring of distressed but viable SMEs.
  - They should be strengthened by facilitating coordination and promoting unified approaches among banks (for instance with respect to viability) and by including the possibility to stay and restructure public claims.
  - SMEs form a significant share of businesses in Spain and thus mechanisms benefiting such segment should be fast, government supported, and cost effective.
- The revised Spanish insolvency law, with eight reforms since 2009, has substantially improved the regime to restructure viable firms and resolve and liquidate nonviable firms:
  - Reforms introduced hybrid pre-insolvency restructuring procedures, streamlined in-court processes, and addressed substantive shortcomings.
  - Stakeholders continue to note lengthy processes and limited recovery for creditors due to some remaining obstacles.
  - A modern creditor class voting system (in accordance to economic value/hierarchy of claims) with a cram down mechanism should be introduced in all in-court and out-of-court procedures to ensure creditor equity and the restructuring of only viable firms (those whose restructuring value exceeds their liquidation value).
  - The (albeit limited) mandate from Congress to finalize the insolvency reform (ongoing), and the need to transpose the EU Insolvency Directive, once adopted, are opportunities to refine Spain’s legal insolvency framework.
- Institutional framework:
  - Has been strengthened but requires further reinforcement and more resources.
  - Commercial courts need more resources in terms of support staff and judges; electronic justice systems should be fully implemented.
  - The profession of insolvency practitioners needs to be fully developed including their framework for supervision, appointment and remuneration.

### Main Recommendations
- Enable the stay and involvement of public creditors’ claims in all pre-insolvency out-of-court procedures (including the OCAP process).
  - Time line: Short term/Medium term
  - Institution: Ministry of Finance, Economy and Justice, Congress
- Fully adopt a class voting system including a cram-down for all in-court and out-of-court processes.
  - Time line: Short term/Medium term
  - Institution: Ministry of Economy and Justice, Congress
- Enhance the SME out-of-court agreement on payment (OCAP) by promoting it, giving guidance on viability and facilitating coordination among banks.
  - Time line: Short term
  - Institution: Ministry of Economy and Justice
- Strengthen and resource better (including by use of electronic justice) the commercial courts in terms of support staff and more judges.
  - Time line: Short term
  - Institution: Ministry of Justice

### Introduction — context and business demographics
- The note assesses the Spanish system of insolvency and creditor rights against international best practices such as the World Bank Principles for Effective Insolvency and Creditor/Debtor Regimes and the UNCITRAL Legislative Guide on Insolvency Law.
- An emerging European body of law is relevant, including the 2014 Recommendation on a New Approach to Business Failure and the Proposal for a Directive on Preventative Restructuring Frameworks, Second Chances and Measures to Increase the Efficiency of Restructuring, Insolvency, and Discharge Procedures (the “draft EU Directive on Insolvency”).
- Spain underwent a severe financial crisis and NPLs continue to be elevated. The resolution of legacy assets is important for financial stability.
- Spanish business demographics:
  - About 3.1 million businesses operating in Spain.
  - Over 50 percent have only a single employee.
  - About 50 percent operate as entrepreneurs/professionals (rather than a legal entity).
  - About 300.000 businesses (of which 61 percent are entrepreneurs/professionals) exit the market annually.

### Creditor/Debtor rights — description, use, analysis
- Description of the system
  - Spain has an advanced and largely transparent system in support of debtor/creditor rights.
  - Public registers are transparent, reliable and effective.
  - Data in this area is largely of very good quality albeit with some gaps.
- Registration of real estate mortgages
  - To be validly perfected, mortgages need to be notarized and registered with the land register.
  - Mortgages are generally full recourse mortgages.
  - Exceptions to full recourse mortgages exist under Article 140 of the Mortgage Act (Ley Hipotecaria).
  - Individuals in vulnerability may use processes in the 2012 Code of Good Practices, including “dación en pago”.
- Foreclosure processes on real estate collateral
  - Two processes: in-court through civil courts; out-of-court if agreed in advance before a notary public (latter rarely used).
  - In-court process separated into enforcement and auction; reserve price of 70 percent of the assessed value for the auction.
  - Possibility for creditor to acquire the property if the auction fails.
  - “Dación en pago” has been used by many banks.
  - For consumer residential mortgages, European Court of Justice decisions and the forthcoming Mortgage Directive will further strengthen due process and consumer protection, possibly at the expense of speed and efficiency.
- Registry for security rights over movables
  - Well managed and computerized.
  - Most movable assets may be used as collateral (receivables, vehicles, machines, plant, vessels, aircrafts).
  - System is document-based and managed by registradores (who charge a fee).
  - Registry works online and is publicly accessible for a fee.
  - Regulation of security interests over movables is spread over several laws of different times and levels of evolution.
- Use
  - Foreclosure on real estate has been used extensively in Spain.
  - Duration of foreclosure:
    - In 2007, about 7–9 months.
    - Stakeholder information indicates it lasts around 24 months recently.
  - Registry for security rights over movables is not used widely or to its fullest potential:
    - Most businesses in Spain are SMEs with a high percentage of micro-businesses.
    - Due to lack of additional (not yet collateralized) real estate, most SMEs and startups could increase access to finance by providing movable assets as collateral.
    - Stakeholders note cost as a reason the register is not used more frequently.
    - It is difficult to create security interests over inventory, raw materials, and groups of assets.
    - Micro and small SMEs do not often use receivables as collateral; receivables-as-collateral is widespread in financing larger entities and certain project types.
- Analysis
  - Stakeholders cannot point to a specific reason why foreclosure length increased to 24 months during the financial crisis.
    - One possible reason is increased workload for civil courts due to large numbers of foreclosures, increasing duration.
    - With economic recovery, the number of foreclosures has decreased, which should reduce civil courts’ workload and shorten foreclosure periods.

### Security rights over movable assets — findings, numeric series, recommendation
- Findings
  - The legal framework for security rights over movable assets is described as "sufficiently good" and the institutional framework as "adequate."
  - Operational frictions:
    - Searches on the registry for security rights over movables take time and are somewhat costly.
    - Regulations are dispersed and there is legal uncertainty over some types of security (explicitly noted for receivables—prenda de créditos).
    - Consistency has not always been achieved despite some updates.
  - Potential impact of reform:
    - "The use of secured transactions may increase—and access to credit growth as a consequence thereof—in case a cheaper, unified registry, with one law and one type of security right over all sorts of movable assets (individually considered and universalities) is introduced."
- Numeric series (preserved exactly as presented)
  - 25,943
  - 58,686
  - 93,319
  - 93,636
  - 77,854
  - 91,622
  - 82,688
  - 80,785
  - 68,165
  - 48,410
- Recommendation (security rights register)
  - Consider enhancing the register for security rights over movable assets and reducing related costs to improve SME creditor access to credit.
  - Possible measures:
    - Lower formal requirements of titles (for some kinds of assets) to make access easier and cheaper.
  - Stakeholder view: stakeholders "overwhelmingly did not see such an enhancement as critical."

### Corporate workouts / Out-of-court — description, use, analysis, recommendations
- Description of the system
  - Spain adopted a new insolvency law in 2003 (effective 2004) which has continuously evolved, with reforms in 2009, 2011, 2012, 2013, 2014, and 2015.
  - Out-of-court debt restructuring options:
    - Purely contractual arrangements (bind only participating creditors; no protection if ex-post failure).
    - Three regulated hybrid collective proceedings introduced via reforms:
      - Ordinary Refinancing Agreements (Acuerdo de Refinanciación)
        - Any creditor (except public creditors) may participate.
        - To obtain protection from ex-post avoidance actions, conditions include:
          - (i) agreement must substantially increase funds available or reschedule/write down debts linked to a business viability plan;
          - (ii) 3/5 of total claims must support the agreement (with syndicated loan caveat: creditors representing 75 percent of the loan deemed to support if they voted; loans from same group excluded);
          - (iii) an auditor certifies required majority;
          - (iv) agreement and documents notarized.
      - Homologated Refinancing Agreements (Acuerdo de Refinanciación Homologado)
        - Between debtor and financial creditors (excludes trade/commercial, public creditors, and employees unless voluntary).
        - Limited court involvement (voluntary court notification to commence; mandatory court confirmation to conclude).
        - May bind dissenting and non-participating financial creditors.
        - Required majority: 51 percent of claims (debt to related parties not taken into account) to obtain protection from ex-post avoidance.
        - Can bind non-participating/dissenting financial creditors if thresholds met (60 percent to 80 percent depending on agreement content).
      - Out-of-court Agreements on Payments (OCAP)
        - Designed for SMEs with debts up to EUR 5 Million; includes legal entities and individual entrepreneurs.
        - Involves mediator (mediador concursal), channeled through commercial register or chamber of commerce, with limited court involvement.
        - Majorities required depend on level of debt restructuring and are slightly higher than in formal insolvency proceedings.
  - Opening a negotiation period of three months suspends duty to file for insolvency; if negotiations fail, debtor/directors have one month to file if still insolvent.
- Use
  - Banks use purely contractual arrangements and ordinary refinancing agreements to restructure NPLs; no comprehensive data on volumes under these agreements.
  - Pre-insolvency processes increased notably; pre-insolvency use compared to in-court processes reached "about 92.7 percent in 2016."
  - Homologated refinancing agreements: "more than 90 in 2015 and 2016."
  - OCAP usage: "about 978 in 2016" (provisional data); mostly with limited debts and many commenced at a late stage; about 1/3 used by entrepreneurs (very few legal entities) and often by natural persons seeking a discharge.
- Pre-insolvency processes — preserved annual data (from Figure 3)
  - 2010 — 1,266 — 25.4
  - 2011 — 3,124 — 52.9
  - 2012 — 5,644 — 69.7
  - 2013 — 5,437 — 59.5
  - 2014 — 4,621 — 70.4
  - 2015 — 4,256 — 83.5
  - 2016 — 4,754 — 89.1
- Analysis — issues identified
  - Public creditors
    - Public claims are not affected by out-of-court agreements or the stay during the negotiation period; public creditors have a parallel process permitting extensions of maturities but no haircuts.
    - Public creditors' exclusion may reduce effectiveness of out-of-court restructuring, particularly when public debt is large.
  - SMEs
    - SMEs often arrive late, with impaired finances.
    - OCAP has a debt cap of EUR 5 Million, creating a gap for larger SMEs.
    - Majorities required in OCAP are higher than in-court processes, discouraging use.
    - Public creditors remaining outside the process is particularly problematic for SMEs.
  - Class voting in homologated refinancing agreements
    - Current class system has only two classes: secured and unsecured, which may fail to treat economically similar claims equally.
    - Lack of clarity on treatment of shareholders; "out-of-the-money" shareholders cannot be bound by debt-for-equity unless they consent.
    - System uses a complex remedy (personal liability for unreasonable withholding) instead of a clear absolute priority rule.
    - The "best interest test" is not ensured in practice.
  - Judicial review
    - Judicial review focuses on process rather than substance; judges check majorities and formal requirements and are to verify that agreements foresee a significant increase in funds or allow continuation in short to medium term.
    - Stakeholders report unawareness of agreements being denied approval; no ex ante control of content seems evident.
    - Appeal mechanism limited to "disproportionate sacrifice"; lack of a legally recognized "best interest test" creates uncertainty about this concept.
    - Appeals are about 20 percent; anecdotal evidence of lengthy appeals (up to 19 months in one case).
- Recommendations (out-of-court)
  - Public creditors
    - Public creditors should participate in and be affected by restructuring and be subject to the stay during the negotiation period.
    - Achieve this either by changing the law or issuing detailed guidelines for public creditor participation.
    - Make parallel rules for public creditors more flexible to enable similar involvement and effects as commercial/financial creditors.
  - SMEs (OCAP enhancements)
    - (i) Involve and affect public creditors as above.
    - (ii) Lower the majorities to equate them with those in formal insolvency proceedings (OCAP currently has considerably higher majorities).
    - (iii) Better promote the mechanism to enhance SME awareness.
    - Bankers’ association should refine OCAP templates and develop unified assessments to ascertain viability.
  - Enhancements to refinancing agreements
    - Enhance class voting to ensure inter-creditor equity.
    - Fully adopt the absolute priority rule to ensure creditor hierarchy.
    - Introduce the "best interest test."
    - Review the scope of judicial review for financing agreements to ensure adequate judicial supervision.

### Legal framework for insolvency — key features, use, analysis, recommendations
- Key features
  - The Spanish insolvency law is unitary with a single point of entry, followed by either reorganization or liquidation.
  - Distinguishes between abbreviated and ordinary proceedings depending on debtor size or debt amount.
  - Provides a fresh start for individual entrepreneurs subject to conditions; combines liquidation with a good faith payment process for up to five years.
  - Techniques to restructure a viable business:
    - Insolvency plan (ordinary or anticipated) or sale as a going concern in liquidation.
    - Majorities required to approve plans vary depending on content (ranging "from the simple majority of 50 percent to 65 percent of ordinary creditors") and include special thresholds for privileged creditors.
    - Anticipated insolvency plan: any debtor may file in court supported by 10 percent of claims (20 percent if filed after petition); negotiations expected beforehand.
    - Ordinary insolvency plan: debtor proposes a reorganization plan subject to class voting; no supervision of implementation unless agreed; failure leads to liquidation.
    - Going concern sale: business may be sold even in the common stage; contracts and, in principle, licenses and permits automatically assigned; liabilities can be shed except labor and social security claims which can be shed only subject to a judge’s decision.
- Use — empirical indicators
  - Recent reforms have considerably improved the insolvency regime, but:
    - Data suggests the current regime continues to be lengthy and anecdotal evidence suggests that it provides only a moderate recovery rate for creditors.
    - The total number of cases are less than during the crisis.
    - Liquidations account for about 90 percent of all insolvency proceedings.
    - The large majority of proceedings (88.5 percent in 2015) are abbreviated proceedings.
    - The average duration of processes in which an agreement is reached:
      - abbreviated proceeding: 15 months.
      - ordinary proceeding: 21 months.
    - Creditor recovery rate for unsecured creditors in reorganization plan:
      - 50.56 percent in 2014.
      - 51.68 percent in 2015.
    - There is no data available for liquidations.
  - Footnotes and contextual rules (as presented)
    - To bind all privileged creditors within a class, thresholds: (a) creditors holding 60 percent of the total value of the claims if the plan includes write downs of less than 50 percent and rescheduling of up to 5 years or (b) creditors holding 75 percent of the total value of the claims if the plan includes higher write-downs and longer rescheduling (with a cap of 10 years).
    - Public contracts can be transferred but only if there is compliance with the special law on public contracts.
    - Until 2015, ordinary insolvency plans could only include a write down of 50 percent; maturities could only be stretched out to 5 years until 2015 and 10 years now. The recovery numbers refer to nominal write down and do not take into account the NPV value.
- Analysis — specific shortcomings
  - Class voting and cram down/absolute priority rule
    - In Spain’s formal insolvency proceedings, classes are set by nature of the debt (financial, labor, public, other creditors), not by economic value; there is no cross class cram down mechanism.
    - Occasional breaches of the absolute priority rule allow shareholders to block restructuring plans even though they are “out of the money.”
    - Example: subordinated creditors are subject to the same write downs and rescheduling as unsecured creditors, although they will not receive payments until unsecured creditors have been paid the restructured amount — departing from absolute priority.
  - Executory contracts
    - Damage awarded to the counterparty in disclaimed executory contracts is treated as an administrative claim rather than as an ordinary claim, diminishing disclaimer utility.
  - Labor claims
    - The acquirer of a business in liquidation needs to assume all labor and social security claims (deducting those paid by FOGASA if so decided by the judge), diminishing chance of acquisitions or reducing price.
  - Creditor control
    - Creditors have no control over certain aspects such as appointment of insolvency administrators.
    - Consideration could be given to enabling establishment of creditor committees; recommend minimum rules for conduct and voting process of creditor committees in the insolvency law.
- Recommendations (legal framework)
  - Finalize reforms of the insolvency regime; the Law Commission has instructions to prepare a texto refundido (unified version of the law) and work is ongoing.
  - Spain will need to bring the insolvency regime into line with the draft EU Directive on Insolvency once adopted.
  - Specific recommended changes:
    - Update and enhance class voting mechanism, including a mechanism to adopt plans when not all classes vote in favor (cram down).
    - Fully implement the absolute priority rule so shareholders can no longer block agreements and inter-creditor equity is observed in accordance with statutory creditor hierarchy.
    - Adopt a mechanism to protect dissenting creditors (“best interest test”).
    - Treat claims derived from extinction of executory contracts as ordinary claims.
    - Limit liability for the acquirer of labor and social security claims in cases of a sale of the business as a going concern.

### Implementation: Institutional framework — description, analysis, recommendations
- Description and use — key institutions
  - Commercial judges:
    - About 75 specialized commercial judges in 55 commercial courts around Spain.
  - Insolvency administrators (administradores concursales):
    - About 9000 administrators listed in the list of insolvency administrators from which the court appoints an administrator.
    - They can be lawyers, economists or accountants.
    - Only a law rudimentarily regulates accreditation, supervision and monitoring of the administrators; government regulation to specify this has not yet been adopted.
- Analysis (institutional)
  - Commercial courts and judges:
    - Most commercial judges have very high technical expertise and competence, but there are too few judges and inadequate support in terms of clerks and infrastructure.
    - Anecdotal evidence suggests commercial judges sometimes deal with three times the caseload as planned.
    - Commercial courts are not fully computerized and lack fully implemented e-justice.
  - Insolvency administrators:
    - Lack of proper regulation of accreditation, supervision and monitoring results in an incomplete professional framework.
    - International standard recommends objective, clearly established, and publicly available criteria for insolvency representatives.
    - Authorities propose changing appointment system from court-appointed to randomly appointed from the list except for large cases (where the judge would continue to appoint).
    - Fee structure for administrators was recently capped to EUR 1.5 Million or 4 percent of the value of the estate.
- Recommendations (institutional)
  - Commercial courts:
    - Resource commercial courts adequately in terms of number of judges and support.
    - Appoint more commercial judges.
    - Fully integrate commercial courts into the system of electronic justice (e-justice).
  - Insolvency administrators profession:
    - Fully develop the profession and issue regulation for accreditation and supervision.
    - Review system of appointment and the fee structure for administrators to ensure an efficient profession that facilitates high recovery value for creditors.
    - Adopt expeditiously the regulation setting out supervision, accreditation and the appointment of insolvency administrators.

*This note was prepared by Wolfgang Bergthaler (IMF) as part of the Spain FSAP 2017 team.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY
- This technical note analyzes selected issues related to four areas of the legal system for insolvency and creditor rights with particular relevance for financial stability and the resolution of legacy assets: creditor/debtor rights, corporate workouts/out-of-court regimes, the legal framework for insolvency, and institutional frameworks.
- The regime for creditor/debtor rights is largely in line with international best practices.
- Registration of real estate mortgages:
  - Efficient, reliable and cost effective.
  - Real estate collateral plays a critical role in Spain because a very large percentage of loans are collateralized with real estate.
  - Mortgages are generally full recourse mortgages in Spain.
- Due to nonperforming loans (NPLs), real estate foreclosure has been extensively used in Spain.
  - Stakeholders reported that the duration of foreclosure has increased to around 24 months recently.
- There is a register for security rights over movable assets which is computerized and efficient; due to the focus on financial collateral it is limited to such purpose.
  - Enforcement on movable assets is reportedly somewhat lengthy.
- Pre-insolvency out-of-court mechanisms, in particular the homologated refinancing agreements, have been well accepted and used by the market and have increased the use of out-of-court pre-insolvency mechanisms facilitating restructurings (including some high-profile cases).
  - To enhance out-of-court workouts, public creditors in pre-insolvency out-of-court procedures should also be stayed and affected by those processes.
- SME-specific out-of-court debt restructuring process (OCAP):
  - OCAP agreements on payment for SMEs have not been used frequently and therefore have not sufficiently facilitated restructuring of distressed but viable SMEs.
  - They should be strengthened by facilitating coordination and promoting unified approaches among banks (for instance with respect to viability) and by including the possibility to stay and restructure public claims.
  - SMEs form a significant share of businesses in Spain and thus mechanisms benefiting such segment should be fast, government supported, and cost effective.
- The revised Spanish insolvency law, with eight reforms since 2009, has substantially improved the regime to restructure viable firms and resolve and liquidate nonviable firms:
  - Reforms introduced hybrid pre-insolvency restructuring procedures, streamlined in-court processes, and addressed substantive shortcomings.
  - Stakeholders continue to note lengthy processes and limited recovery for creditors due to some remaining obstacles.
  - A modern creditor class voting system (in accordance to economic value/hierarchy of claims) with a cram down mechanism should be introduced in all in-court and out-of-court procedures to ensure creditor equity and the restructuring of only viable firms (those whose restructuring value exceeds their liquidation value).
  - The (albeit limited) mandate from Congress to finalize the insolvency reform (ongoing), and the need to transpose the EU Insolvency Directive, once adopted, are opportunities to refine Spain’s legal insolvency framework.
- Institutional framework:
  - Has been strengthened but requires further reinforcement and more resources.
  - Commercial courts need more resources in terms of support staff and judges; electronic justice systems should be fully implemented.
  - The profession of insolvency practitioners needs to be fully developed including their framework for supervision, appointment and remuneration.

### Main Recommendations
- Enable the stay and involvement of public creditors’ claims in all pre-insolvency out-of-court procedures (including the OCAP process).
  - Time line: Short term/Medium term
  - Institution: Ministry of Finance, Economy and Justice, Congress
- Fully adopt a class voting system including a cram-down for all in-court and out-of-court processes.
  - Time line: Short term/Medium term
  - Institution: Ministry of Economy and Justice, Congress
- Enhance the SME out-of-court agreement on payment (OCAP) by promoting it, giving guidance on viability and facilitating coordination among banks.
  - Time line: Short term
  - Institution: Ministry of Economy and Justice
- Strengthen and resource better (including by use of electronic justice) the commercial courts in terms of support staff and more judges.
  - Time line: Short term
  - Institution: Ministry of Justice

### INTRODUCTION
- The note assesses the Spanish system of insolvency and creditor rights against international best practices such as the World Bank Principles for Effective Insolvency and Creditor/Debtor Regimes and the UNCITRAL Legislative Guide on Insolvency Law.
- An emerging European body of law is relevant, including the 2014 Recommendation on a New Approach to Business Failure and the Proposal for a Directive on Preventative Restructuring Frameworks, Second Chances and Measures to Increase the Efficiency of Restructuring, Insolvency, and Discharge Procedures (the “draft EU Directive on Insolvency”).
- Spain underwent a severe financial crisis and NPLs continue to be elevated. The resolution of legacy assets is important for financial stability.
- Spanish business demographics:
  - About 3.1 million businesses operating in Spain.
  - Over 50 percent have only a single employee.
  - About 50 percent operate as entrepreneurs/professionals (rather than a legal entity).
  - About 300.000 businesses (of which 61 percent are entrepreneurs/professionals) exit the market annually.

### CREDITOR/DEBTOR RIGHTS

#### A. Description of the System
- Spain has an advanced and largely transparent system in support of debtor/creditor rights.
  - Public registers are transparent, reliable and effective.
  - Data in this area is largely of very good quality albeit with some gaps.
- Registration of real estate mortgages:
  - To be validly perfected, mortgages need to be notarized and registered with the land register.
  - Mortgages are generally full recourse mortgages.
  - Exceptions to full recourse mortgages exist under Article 140 of the Mortgage Act (Ley Hipotecaria).
  - Individuals in vulnerability may use processes in the 2012 Code of Good Practices, including “dación en pago”.
- Foreclosure processes on real estate collateral:
  - Two processes: in-court through civil courts; out-of-court if agreed in advance before a notary public (latter rarely used).
  - In-court process separated into enforcement and auction; reserve price of 70 percent of the assessed value for the auction.
  - Possibility for creditor to acquire the property if the auction fails.
  - “Dación en pago” has been used by many banks.
  - For consumer residential mortgages, European Court of Justice decisions and the forthcoming Mortgage Directive will further strengthen due process and consumer protection, possibly at the expense of speed and efficiency.
- Registry for security rights over movables:
  - Well managed and computerized.
  - Most movable assets may be used as collateral (receivables, vehicles, machines, plant, vessels, aircrafts).
  - System is document-based and managed by registradores (who charge a fee).
  - Registry works online and is publicly accessible for a fee.
  - Regulation of security interests over movables is spread over several laws of different times and levels of evolution.

#### B. Use
- Foreclosure on real estate has been used extensively in Spain (see Figure 1 in source).
- Duration of foreclosure:
  - In 2007, about 7–9 months.
  - Stakeholder information indicates it lasts around 24 months recently.
- Registry for security rights over movables is not used widely or to its fullest potential:
  - Most businesses in Spain are SMEs with a high percentage of micro-businesses.
  - Due to lack of additional (not yet collateralized) real estate, most SMEs and startups could increase access to finance by providing movable assets as collateral.
  - Stakeholders note cost as a reason the register is not used more frequently.
  - It is difficult to create security interests over inventory, raw materials, and groups of assets.
  - Micro and small SMEs do not often use receivables as collateral; receivables-as-collateral is widespread in financing larger entities and certain project types.

#### C. Analysis
- Stakeholders cannot point to a specific reason why foreclosure length increased to 24 months during the financial crisis.
  - One possible reason is increased workload for civil courts due to large numbers of foreclosures, increasing duration.
  - With economic recovery, the number of foreclosures has decreased, which should reduce civil courts’ workload and shorten foreclosure periods.

*This note was prepared by Wolfgang Bergthaler (IMF) as part of the Spain FSAP 2017 team.*

### 12. Although the system of security rights over movable assets has a sufficiently good

### cr17340 - 12. Although the system of security rights over movable assets has a sufficiently good

### Security rights over movable assets — findings
- The legal framework for security rights over movable assets is described as "sufficiently good" and the institutional framework as "adequate."
- Operational frictions:
  - Searches on the registry for security rights over movables take time and are somewhat costly.
  - Regulations are dispersed and there is legal uncertainty over some types of security (explicitly noted for receivables—prenda de créditos).
  - Consistency has not always been achieved despite some updates.
- Potential impact of reform:
  - "The use of secured transactions may increase—and access to credit growth as a consequence thereof—in case a cheaper, unified registry, with one law and one type of security right over all sorts of movable assets (individually considered and universalities) is introduced."
- Numeric series (preserved exactly as presented):
  - 25,943
  - 58,686
  - 93,319
  - 93,636
  - 77,854
  - 91,622
  - 82,688
  - 80,785
  - 68,165
  - 48,410

### Recommendation (security rights register)
- Consider enhancing the register for security rights over movable assets and reducing related costs to improve SME creditor access to credit.
- Possible measures:
  - Lower formal requirements of titles (for some kinds of assets) to make access easier and cheaper.
- Stakeholder view: stakeholders "overwhelmingly did not see such an enhancement as critical."

### Corporate workouts / Out-of-court — Description of the system
- Spain adopted a new insolvency law in 2003 (effective 2004) which has continuously evolved, with reforms in 2009, 2011, 2012, 2013, 2014, and 2015.
- Out-of-court debt restructuring options:
  - Purely contractual arrangements (bind only participating creditors; no protection if ex-post failure).
  - Three regulated hybrid collective proceedings introduced via reforms:
    - Ordinary Refinancing Agreements (Acuerdo de Refinanciación)
      - Any creditor (except public creditors) may participate.
      - To obtain protection from ex-post avoidance actions, conditions include:
        - (i) agreement must substantially increase funds available or reschedule/write down debts linked to a business viability plan;
        - (ii) 3/5 of total claims must support the agreement (with syndicated loan caveat: creditors representing 75 percent of the loan deemed to support if they voted; loans from same group excluded);
        - (iii) an auditor certifies required majority;
        - (iv) agreement and documents notarized.
    - Homologated Refinancing Agreements (Acuerdo de Refinanciación Homologado)
      - Between debtor and financial creditors (excludes trade/commercial, public creditors, and employees unless voluntary).
      - Limited court involvement (voluntary court notification to commence; mandatory court confirmation to conclude).
      - May bind dissenting and non-participating financial creditors.
      - Required majority: 51 percent of claims (debt to related parties not taken into account) to obtain protection from ex-post avoidance.
      - Can bind non-participating/dissenting financial creditors if thresholds met (60 percent to 80 percent depending on agreement content).
    - Out-of-court Agreements on Payments (OCAP)
      - Designed for SMEs with debts up to EUR 5 Million; includes legal entities and individual entrepreneurs.
      - Involves mediator (mediador concursal), channeled through commercial register or chamber of commerce, with limited court involvement.
      - Majorities required depend on level of debt restructuring and are slightly higher than in formal insolvency proceedings.
- Opening a negotiation period of three months suspends duty to file for insolvency; if negotiations fail, debtor/directors have one month to file if still insolvent.

### Corporate workouts / Out-of-court — Use
- Banks use purely contractual arrangements and ordinary refinancing agreements to restructure NPLs; no comprehensive data on volumes under these agreements.
- Pre-insolvency processes increased notably; pre-insolvency use compared to in-court processes reached "about 92.7 percent in 2016."
- Homologated refinancing agreements: "more than 90 in 2015 and 2016."
- OCAP usage: "about 978 in 2016" (provisional data); mostly with limited debts and many commenced at a late stage; about 1/3 used by entrepreneurs (very few legal entities) and often by natural persons seeking a discharge.

### Pre-insolvency processes — preserved annual data (from Figure 3)
- Year — Communications of the negotiation of pre-insolvency processes (number) — Pre-insolvency processes compared to in-court insolvency procedures (percent of total)
  - 2010 — 1,266 — 25.4
  - 2011 — 3,124 — 52.9
  - 2012 — 5,644 — 69.7
  - 2013 — 5,437 — 59.5
  - 2014 — 4,621 — 70.4
  - 2015 — 4,256 — 83.5
  - 2016 — 4,754 — 89.1

### Corporate workouts / Out-of-court — Analysis (issues identified)
- Public creditors
  - Public claims are not affected by out-of-court agreements or the stay during the negotiation period; public creditors have a parallel process permitting extensions of maturities but no haircuts.
  - Public creditors' exclusion may reduce effectiveness of out-of-court restructuring, particularly when public debt is large.
- SMEs
  - SMEs often arrive late, with impaired finances.
  - OCAP has a debt cap of EUR 5 Million, creating a gap for larger SMEs.
  - Majorities required in OCAP are higher than in-court processes, discouraging use.
  - Public creditors remaining outside the process is particularly problematic for SMEs.
- Class voting in homologated refinancing agreements
  - Current class system has only two classes: secured and unsecured, which may fail to treat economically similar claims equally.
  - Lack of clarity on treatment of shareholders; "out-of-the-money" shareholders cannot be bound by debt-for-equity unless they consent.
  - System uses a complex remedy (personal liability for unreasonable withholding) instead of a clear absolute priority rule.
  - The "best interest test" is not ensured in practice.
- Judicial review
  - Judicial review focuses on process rather than substance; judges check majorities and formal requirements and are to verify that agreements foresee a significant increase in funds or allow continuation in short to medium term.
  - Stakeholders report unawareness of agreements being denied approval; no ex ante control of content seems evident.
  - Appeal mechanism limited to "disproportionate sacrifice"; lack of a legally recognized "best interest test" creates uncertainty about this concept.
  - Appeals are about 20 percent; anecdotal evidence of lengthy appeals (up to 19 months in one case).

### Corporate workouts / Out-of-court — Recommendations
- Public creditors
  - Public creditors should participate in and be affected by restructuring and be subject to the stay during the negotiation period.
  - Achieve this either by changing the law or issuing detailed guidelines for public creditor participation.
  - Make parallel rules for public creditors more flexible to enable similar involvement and effects as commercial/financial creditors.
- SMEs (OCAP enhancements)
  - (i) Involve and affect public creditors as above.
  - (ii) Lower the majorities to equate them with those in formal insolvency proceedings (OCAP currently has considerably higher majorities).
  - (iii) Better promote the mechanism to enhance SME awareness.
  - Bankers’ association should refine OCAP templates and develop unified assessments to ascertain viability.
- Enhancements to refinancing agreements
  - Enhance class voting to ensure inter-creditor equity.
  - Fully adopt the absolute priority rule to ensure creditor hierarchy.
  - Introduce the "best interest test."
  - Review the scope of judicial review for financing agreements to ensure adequate judicial supervision.

### Legal framework for insolvency — key features
- The Spanish insolvency law is unitary with a single point of entry, followed by either reorganization or liquidation.
- Distinguishes between abbreviated and ordinary proceedings depending on debtor size or debt amount.
- Provides a fresh start for individual entrepreneurs subject to conditions; combines liquidation with a good faith payment process for up to five years.
- Techniques to restructure a viable business:
  - Insolvency plan (ordinary or anticipated) or sale as a going concern in liquidation.
  - Majorities required to approve plans vary depending on content (ranging "from the simple majority of 50 percent to 65 percent of ordinary creditors") and include special thresholds for privileged creditors.
  - Anticipated insolvency plan: any debtor may file in court supported by 10 percent of claims (20 percent if filed after petition); negotiations expected beforehand.
  - Ordinary insolvency plan: debtor proposes a reorganization plan subject to class voting; no supervision of implementation unless agreed; failure leads to liquidation.
  - Going concern sale: business may be sold even in the common stage; contracts and, in principle, licenses and permits automatically assigned; liabilities can be shed except labor and social security claims which can be shed only subject to a judge’s decision.

*Source: IMF staff summary from the provided chapter content.*

### 23. If a going concern sale fails, the liquidation stage completes with a piece-meal

### 23. If a going concern sale fails, the liquidation stage completes with a piece-meal liquidation of the business.

### B. Use
- Recent reforms have considerably improved the insolvency regime, but:
  - Data suggests the current regime continues to be lengthy and anecdotal evidence suggests that it provides only a moderate recovery rate for creditors.
  - The total number of cases are less than during the crisis (see Figure 5).
  - Liquidations account for about 90 percent of all insolvency proceedings (Figure 6).
  - The large majority of proceedings (88.5 percent in 2015) are abbreviated proceedings.
  - The average duration of processes in which an agreement is reached:
    - abbreviated proceeding: 15 months (Figures 7 and 8).
    - ordinary proceeding: 21 months (Figures 7 and 8).
  - Creditor recovery rate for unsecured creditors in reorganization plan:
    - 50.56 percent in 2014.
    - 51.68 percent in 2015.
  - There is no data available for liquidations.

- Footnotes and contextual rules (as presented in source):
  - To bind all privileged creditors within a class, thresholds: (a) creditors holding 60 percent of the total value of the claims if the plan includes write downs of less than 50 percent and rescheduling of up to 5 years or (b) creditors holding 75 percent of the total value of the claims if the plan includes higher write-downs and longer rescheduling (with a cap of 10 years).
  - Public contracts can be transferred but only if there is compliance with the special law on public contracts.
  - Until 2015, ordinary insolvency plans could only include a write down of 50 percent; maturities could only be stretched out to 5 years until 2015 and 10 years now. The recovery numbers refer to nominal write down and do not take into account the NPV value.

### C. Analysis
- Overall alignment:
  - The insolvency law is largely in line with international best practices, but should be brought fully in line with the standard.

- Specific shortcomings identified:
  - Class voting and cram down/absolute priority rule:
    - Standard: classes of creditors may be provided with voting rights weighted according to amount of a creditor’s claim; opposing creditors should be offered a dividend equal to or greater than they would receive in liquidation (“best interest test”).
    - In Spain’s formal insolvency proceedings, classes are set by nature of the debt (financial, labor, public, other creditors), not by economic value; there is no cross class cram down mechanism.
    - Occasional breaches of the absolute priority rule allow shareholders to block restructuring plans even though they are “out of the money.”
    - Insolvency Law example: subordinated creditors are subject to the same write downs and rescheduling as unsecured creditors, although they will not receive payments until unsecured creditors have been paid the restructured amount — this departs from absolute priority (which would imply subordinated debt should receive nothing if unsecured creditors suffer a write down). This creates a disincentive to approve plans.
  - Executory contracts:
    - Inconsistent with the standard, damage awarded to the counterparty in disclaimed executory contracts is treated as an administrative claim rather than as an ordinary claim.
    - This treatment deprives disclaimer of contracts of utility as a restructuring tool because awarding full damages places the debtor in the same position as if the contract had been executed.
  - Labor claims:
    - The acquirer of a business in liquidation needs to assume all labor and social security claims (deducting those paid by FOGASA if so decided by the judge).
    - This diminishes chance of acquisitions by third parties or reduces acquisition price, creating a de facto super-priority on all past labor debts.
  - Creditor control:
    - Creditors have no control over certain aspects such as appointment of insolvency administrators.
    - Consideration could be given to enabling establishment of creditor committees to better facilitate creditor influence.
    - At minimum, recommendable to have minimum rules for conduct and voting process of creditor committees in the insolvency law.

### D. Recommendation (policy changes advised)
- Finalize reforms of the insolvency regime; the Law Commission has instructions to prepare a texto refundido (unified version of the law) and work is ongoing.
- Spain will need to bring the insolvency regime into line with the draft EU Directive on Insolvency once adopted.

- Specific recommended changes:
  - Class voting and absolute priority rule:
    - Update and enhance class voting mechanism, including a mechanism to adopt plans when not all classes vote in favor (cram down).
    - Fully implement the absolute priority rule so shareholders can no longer block agreements and inter-creditor equity is observed in accordance with statutory creditor hierarchy.
    - Adopt a mechanism to protect dissenting creditors (“best interest test”).
  - Executory contracts:
    - Treat claims derived from extinction of executory contracts as ordinary claims, in line with the standard.
  - Labor claims:
    - Limit liability for the acquirer of labor and social security claims in cases of a sale of the business as a going concern.

### IMPLEMENTATION: INSTITUTIONAL FRAMEWORK
#### A. Description of the System and Use
- Key institutions:
  - Commercial judges:
    - About 75 specialized commercial judges in 55 commercial courts around Spain.
  - Insolvency administrators (administradores concursales):
    - About 9000 administrators listed in the list of insolvency administrators from which the court appoints an administrator.
    - They can be lawyers, economists or accountants.
    - Only a law rudimentarily regulates accreditation, supervision and monitoring of the administrators; government regulation to specify this has not yet been adopted.

#### B. Analysis (institutional)
- Commercial courts and judges:
  - Most commercial judges have very high technical expertise and competence, but there are too few judges and inadequate support in terms of clerks and infrastructure.
  - Anecdotal evidence suggests commercial judges sometimes deal with three times the caseload as planned.
  - Commercial courts are not fully computerized and lack fully implemented e-justice.

- Insolvency administrators:
  - Lack of proper regulation of accreditation, supervision and monitoring results in an incomplete professional framework.
  - International standard recommends objective, clearly established, and publicly available criteria for insolvency representatives.
  - Authorities propose changing appointment system from court-appointed to randomly appointed from the list except for large cases (where the judge would continue to appoint).
  - Fee structure for administrators was recently capped to EUR 1.5 Million or 4 percent of the value of the estate.

#### C. Recommendation (institutional)
- Commercial courts:
  - Resource commercial courts adequately in terms of number of judges and support.
  - Appoint more commercial judges.
  - Fully integrate commercial courts into the system of electronic justice (e-justice).

- Insolvency administrators profession:
  - Fully develop the profession and issue regulation for accreditation and supervision.
  - Review system of appointment and the fee structure for administrators to ensure an efficient profession that facilitates high recovery value for creditors.
  - Adopt expeditiously the regulation setting out supervision, accreditation and the appointment of insolvency administrators.

*Source: cr17340 - 23. If a going concern sale fails, the liquidation stage completes with a piece-meal*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17340.pdf_