Spanish Sales of Business Units and UK Pre-Pack Sales Compared
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Since the entry into force of the current Spanish Insolvency Law (the Insolvency Law) in 2004, sales of business units of companies immersed in insolvency proceedings have proved to be an effective solution to insolvency, allowing debtors to preserve their businesses and the value of their assets.
In more than just a few cases, these types of transactions have been carried out satisfactorily within insolvency proceedings. The most widely known are Cacaolat, La Seda de Barcelona, Jugueterías Poly, Blanco, Seda Solubles and Puertas Norma, and the sale process currently under way of the business unit of Marme (which owns Ciudad Financiera, Banco Santander’s ‘Financial City’).
In the first years after the Insolvency Law entered into force, sales of business units could be complex because of the absence of specific rules, which meant that a certain amount of creativity had to be applied, as well as more flexibility on the part of judges, insolvency receivers and the other parties involved. Despite the difficulties encountered, a number of transactions were able to be completed, particularly in scenarios where the debtor’s assets faced a clear loss in value while the insolvency proceeding was being conducted.
After the Insolvency Law reforms, approved between 2011 and 2015, the sales of business units gained even more momentum. Through these reforms, Spanish lawmakers: (i) provided incentives to encourage the sales of business units within an insolvency context; (ii) ensured greater legal certainty for sales; and (iii) added flexibility to their legal rules to allow the transfer to be completed with the speed required by the gravity of the situation or the prospective transferee’s interests.
The two most important incentives in the current legal rules following those reforms are the transferee (i) not having to assume the debtor’s liabilities – with some exceptions – and (ii) having the chance to automatically take the place of (without the counterparty’s consent) the debtor owning the business unit as a party to the contracts that it wishes to keep at the business unit it is acquiring.
Additionally, one of the new measures allows the debtor to file with its petition for insolvency a liquidation plan accompanied with a third party’s binding offer to buy a business unit, giving the debtor the option in these cases for the insolvency proceeding to be conducted in abridged format (a quicker procedure compared to ordinary insolvency proceedings).
Following the introduction of this new measure, sales of business units in Spanish insolvency proceedings have often been compared to transfers of assets in pre-pack administrations in the United Kingdom. The intention of Spanish lawmakers for the sales of business units to be completed as quickly as reasonably possible has brought the Spanish and UK mechanisms, which already had elements in common, even closer.
In this chapter, we examine this comparison further by briefly outlining some of the main similarities shared by both asset transfer processes, together with a few of their differences, which will help better explain the characteristics of each mechanism.
The underlying purposes of UK pre-pack sales and of sales of business units in Spain are analogous. Both processes are tools designed to preserve the value of the assets of a distressed company and stave off, as far as possible, any harm to the business and its reputation.
This involves protecting the safety of the debtor’s main assets (often including its main trademarks and key contracts signed with third parties) before they are affected by the harm often caused by financial instability.
In both cases, the funds obtained by transferring the debtor’s assets and rights are used to pay creditors, and most of the price usually goes to the secured creditors and holders of executory contracts.
One of the main differences between UK pre-pack sales and sales of business units in Spain is the procedure for each process.
In UK pre-pack sales, the transfer of all or part of the debtor’s business is typically negotiated with a buyer before the appointment of an administrator and the sale takes place upon the appointment of that administrator or immediately afterwards. In other words, all the preparatory work for the transaction takes place before the formal administration process commences and the procedure is usually carried out without the permission of either the court or creditors.
However, sales of business units in Spain require court approval in all cases. For the specific legislation on these cases to apply, the transfer must be carried out within the debtor’s insolvency proceedings and with the competent court.
Sales of business units may take place at any point in the insolvency proceeding. Depending on when it takes place, the specific procedural steps that must be observed may vary, as well as the implications of the acquisition or the creditors’ power of decision regarding the transaction.
Commonly, these sales take place in the liquidation phase of the insolvency proceeding and according to a liquidation plan prepared by the insolvency receiver setting out the rules that are to govern the transfer (these usually require a competitive bidding process for the sale). The liquidation plan must be court-approved in a procedure allowing the creditors, workers and debtor itself to be heard, and in which an appeal may be lodged to a superior court that could potentially have staying effects.
However, there are other feasible alternatives. For example, the sale process may:
- be carried out in the initial phase of the insolvency proceeding, known as the ‘common phase’ (following court approval);
- be performed in the context of the creditors’ arrangement proposed in the insolvency proceeding (in which case it has to be supported by a majority of the unsecured creditors);
- take place through an advanced proposal for a creditors’ arrangement put forward by the debtor at the early stages of the insolvency proceedings, which allows the sale of the business unit and the debt restructuring to be tackled at the same time; or
- be completed using the faster procedure introduced by lawmakers (article 191-ter of the Insolvency Law), which, as explained above, allows the debtor to file, along with its petition for an insolvency order, a proposal to purchase the business unit and for the purchase to be completed within the procedure.
The last alternative listed above is the one most similar to a UK pre-pack sale from a procedural standpoint, in that a large part of the preparatory work for the transaction takes place before the insolvency proceeding is initiated. Unlike a UK pre-pack sale, however, it requires subsequent court approval.
The transfer of key contracts to the buyer of the assets
From the buyer’s standpoint, one of the most attractive incentives in the legal rules on transfers of business units in Spain is the chance to be substituted automatically for the debtor in any contracts and permits in force that are needed for the business unit to continue operating.
The ability of the buyer to be substituted for the debtor is expressly set out in the Insolvency Law (article 146-bis) and the consent of the other party to the contracts transferred to the buyer is not needed to bring it into effect.
Although the implementation of these legal rules is not free from issues in some scenarios (eg, intuitu personae contracts), the only exception expressly provided by lawmakers concerns public contracts, in relation to which the contracting authority has to authorise the substitution in some cases.
In the context of UK pre-pack sales, there is no legal provision comparable to article 146-bis of the Insolvency Law and therefore the ability to transfer contracts to the transferee of the assets depends on the specific terms drawn up in each contract. The administrators cannot override the contractual terms in this respect, so if the contracts contain restrictions on transfer or assignment (eg, requiring the consent of the counterparty), these restrictions will continue to apply in a pre-pack sale.
What usually happens, therefore, is that administrator, debtor and buyer have to work together to secure the consent of the counterparties to any strategic contracts that must necessarily be included in the sale to enable the acquired company to preserve its value. At times, these negotiations are no easy task, in view of the confidentiality usually required for pre-pack negotiations, the time limits typically associated with them and the high negotiating power normally held by the strategic counterparties whose consent is essential for the success of the transaction.
Transfer of undertakings
The UK justice system has confirmed that the provisions on the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) are applicable in cases of pre-pack arrangements where a company is placed into administration and the business is subsequently transferred. Therefore, workers’ rights are protected in pre-pack scenarios by the TUPE provisions.
Specifically, the provisions in Regulation 4 determine that all the transferor’s rights, and liabilities in connection with any contract of employment, shall be transferred to the transferee; and any act or omission before the transfer is completed in relation to the transferor in respect of that contract shall be deemed to have been an act or omission of or in relation to the transferee.
Furthermore, according to Regulation 7, dismissals will be automatically unfair if their sole or principal reason is the transfer of the business itself or a reason connected with the transfer that is not an economic, technical or organisational, entailing changes in the workforce.
In Spain, the legislation currently in force expressly determines that the acquirer of a business unit shall replace the debtor by operation of law in respect of the insolvent debtor’s employment and social security obligations related to the business unit. This is one of the few exceptions to the general rule consisting of the transferee of a business unit not acquiring the debts of the insolvent company.
However, to facilitate the transfer of business units, the Insolvency Law provides that the transferee is not required to pay the cost of any outstanding salaries and indemnities that have been assumed in the insolvency proceeding by the Wage Guarantee Fund.
The workforce factor in transfers of business units is relevant. The Insolvency Law actually allows a business unit to be awarded to a bidder that has offered a price up to 15 per cent lower than another bidder, if it provides greater assurance of continuity for the business and jobs. That does not, however, mean that adjustments to the workforce cannot be made when a business unit is transferred. These adjustments are possible and very frequent.
The role of secured creditors
In the context of a UK pre-pack sale, it is not usually feasible to release any fixed charge security interest over the assets to be transferred unless the secured creditors concerned give their express consent. Therefore, obtaining that consent often ends up being a key factor for concluding the transaction satisfactorily. For that reason, it is not unusual for secured creditors to be involved in pre-pack sale negotiations from the beginning.
In sales of business units in Spanish insolvency proceedings, secured creditors do not have a veto right (as in the United Kingdom), which would allow them to exert this pressure to disrupt the business itself. They do not have an absolute right to prevent the assets being transferred free from security interests.
The Insolvency Law only grants secured creditors the right to veto the transfer of a business unit if: (i) 75 per cent of the secured creditors affected by the transaction challenge it, and (ii) those secured creditors have what in technical terms is known as a ‘separate enforcement right’ (a right typically obtained when enforcement of the security was initiated before the commencement of the insolvency proceedings).
If that veto right is not applicable, the consent of secured creditors will not be necessary, and the transfer of the business unit can be carried out without the security interests continuing to exist (in other words, by releasing them) or by retaining all or some of them (with election by the transferee to be substituted for the debtor in its position with the secured creditor). In the first case, secured creditors are entitled to the proportional part of the price obtained relative to the value of the asset or right over which the security interest was created with respect to the whole business unit; and in the second, the court has to confirm that the transferee of the business unit has the necessary solvency to meet its obligations with the secured creditor.
The characteristics of the buyer
In both UK pre-pack sales and sales of business units, the buyer may, in principle, be any third party, including creditors, competitors and even parties connected to the debtor.
However, this is also the source of another fundamental difference between both processes: while in UK pre-pack sales it is very common for the transfer of the assets to be carried out by parties connected to the debtor, this is very rare in sales of business units in Spain because of the legal stumbling blocks faced by the connected parties. This is because, under the Insolvency Law, ‘persons specially connected’ to the insolvent debtor (including its directors and shareholders with a relevant stake in the company) are unable to benefit from the general rule exempting the transferee of the business unit from responsibility for the claims that the insolvent debtor has not paid before the transfer. As may be expected, this creates a barrier for directors and shareholders considering buying the business unit that is virtually impossible to eliminate.
As mentioned, the opposite is the case in the United Kingdom because most pre-pack sales of assets are made precisely to connected parties. To provide an example, 63.6 per cent of the pre-pack sales analysed in the report entitled ‘Pre-Pack Empirical Research: Characteristics and Outcome Analysis of Pre-Pack Administration’ proved to be connected sales.
Public disclosure and transparency
One of the criticisms traditionally made of pre-pack sales is that they lack transparency at times, in particular where the transfer takes place to connected parties. In these cases it is often asked whether the terms of sale have been sufficiently contrasted with the market or whether the business has been correctly valued for the transfer.
To find solutions to this perceived lack of transparency, a number of measures have been adopted, such as those set out in the Statement of Insolvency Practice 16 (which has the purpose of ensuring that creditors are informed as to the reasons why a practitioner decided on a pre-pack sale) or the initiatives arising from the six recommendations contained in the Graham Review, an independent review of the pre-pack model commissioned by the UK government in July 2013.
Transparency is not usually a problem in sale processes of business units in Spain because they are overseen by a court in a process allowing all the company’s stakeholders to take part (including unsecured creditors and workers). Besides, the sales usually take place through competitive processes, in which measures are often taken to publicise them to increase the number of potential bidders and, therefore, the highest sale price with which to pay the debtor’s liabilities.
Both pre-pack sales and sales of business units are procedures aimed at preserving the going-concern value of a distressed company.
In principle, a UK pre-pack sale is carried out more quickly than a sale of business units, mainly because the approval of the court and creditors is not required (resulting in the administrator’s liability being at stake). The way in which the process is designed, however, has prompted doubts concerning its transparency.
While not as quick, sales of business assets in Spain have major advantages for transferees, such as the chance to replace the debtor in the company’s key contracts without the counterparty’s approval, not having to take responsibility for most of the debtor’s liabilities and the chance to perform the transaction without the consent of secured creditors in certain scenarios.
 Reforms made by Law 38/2011 of 10 October 2011 reforming the Insolvency Law; by Royal Decree-Law 11/2014 of 5 September 2014 on urgent measures regarding insolvency proceedings; and by Law 9/2015 of 25 May 2015 on urgent measures regarding insolvency proceedings.
 At times, obtaining court approval may draw out the process longer than is desired. To soften the impact of that potential delay it is becoming increasingly common to use bridge financing systems, usually designed to ensure that the winning bidder takes responsibility for its costs and repays (at the offered price) the portion of financing provided by the other interested parties that were not selected.
 Regulation 8(7) provides that the transfer provisions of TUPE do not apply to any relevant transfer where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings that have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner. However, the Court of Appeal has ruled that this exception would not be applicable to administration proceedings under Schedule B1 of the Insolvency Act 1986 because they cannot be said to have been ‘instituted with a view to liquidation’ of the company’s assets
(Key2Law (Surrey) LLP v De’Antiquis).
 Before the 2015 reform, the Insolvency Law only referred to transfers of undertakings ‘for employment purposes’, which gave rise to drawn-out legal disputes over whether it should be considered that a transfer of undertakings also existed for social security debts. These doubts were dispelled following a reform that confirmed that this was the case; however, the decision has been severely criticised.
Looking ahead, the recently submitted draft for a recast regulation of the Insolvency Law (March 2019) promises to bring winds of change that could provide greater comfort to investors on this matter. Should this draft be approved in its current version, it could mean that the only competent judge to assess the existence of a transfer of undertakings would be the insolvency judge. It could also entail that this principle only applies to those employees effectively linked to the business unit being sold, something that could minimise the currently existing risk of the transferee being forced to acquire all labour debt, irrespective of whether those debts are owed to employment contracts in force or not, or whether the employees are linked to the business unit being transferred.
 According to the provisions in article 146-bis of the Insolvency Law, the transferee of the business unit does not acquire the insolvent debtor’s debts, unless: (i) it expressly decides to accept them; (ii) it is a person who is ‘specially connected’ to the debtor; or (iii) there is a legal provision determining otherwise (as happens with employment and social security obligations).
 The Wage Guarantee Fund (FOGASA) is an independent body that is attached to the Spanish Ministry of Work, Immigration and Social Security and has its own legal personality. It works as a scheme securing wage claims in the event of an employer’s insolvency. FOGASA therefore secures workers’ monthly wages, non-regular wage payments and back pay that are outstanding as a result of a declaration of the situation of insolvency or of the insolvency proceedings of their employer. It also covers severance payments arising from dismissal or termination of workers’ contracts under articles 50, 51 and 52 of the Workers’ Statute (ET) and article 64 of the Insolvency Law, together with any payments arising from termination of temporary or definite-term contracts where workers are legally entitled to receive those payments, all within the limits envisaged in article 33 ET.
 As an exception, this substitution is not allowed in relation to tax or social security claims.
 Prof. Peter Walton and Chris Umfreville, University of Wolverhampton.