Buying distressed assets in Spain

In Spain, there is no standard definition of what constitutes a distressed asset. However, for the purposes of a universal or general definition, we could say that an asset is considered non-performing or distressed when its owner is unable to pay its current debts and liabilities as they fall due.

Consequently, any business or asset - which is owned by a company that is forced to sell because it is threatened with insolvency or bankruptcy - and is therefore selling at a price that is below its actual market value, can be considered a distressed asset.

According to the Spanish Insolvency Law 1/2020, a company is insolvent if it is unable to meet its due payment obligations regularly.

On the other hand, a company is considered to be at risk of insolvency if it is likely to be unable to meet its obligations regularly and on time within the next three months.

The law lists further indications of the likelihood of insolvency:

• the existence of a previous judicial or administrative declaration of the debtor's inability to pay, provided it is final
• the existence of a title for which an enforcement or execution order has been issued without the attachment having resulted in free assets sufficient for payment
• the existence of garnishments due to current execution proceedings generally affecting the debtor's assets
• the general suspension of current payments of the debtor's debts
• the general suspension of payment of tax obligations that have become due in the last three months prior to the request for commencement of insolvency proceedings; the suspension of payment of social security contributions and other amounts levied jointly in the same period; or the suspension of payment of salaries and severance payments to employees and other remuneration from employment relationships corresponding to the last three monthly payments
• the debtor's hasty or ruinous realisation of assets

According to the Insolvency Act 1/2020, sales of distressed assets made by the debtor within two years prior to the opening of insolvency proceedings may be declared invalid by the judge through an action for recovery.
This would be the case if the purchase is considered economically damaging to the insolvency estate under the provisions of the law.

In addition, sales of distressed assets made by the debtor within two years prior to the date of the announcement of the existence of, or intention to enter into, negotiations with creditors with a view to achieving a reorganisation plan, as well as sales made from that date until the date of the declaration of insolvency, even if there was no fraudulent intent, are also voidable, provided that the following two conditions are met:

• a reorganisation plan has not been approved or, even if approved, it has not been approved by the judge
• insolvency proceedings are opened within one year of the end of the effects of this notice or of any extension granted

It must also be taken into account that if the ownership or availability of the acquired assets is subject to litigation, the purchaser remains subject to the outcome of the litigation.

In such cases, the insolvency administrators must notify the court dealing with the litigation of the sale. With this notification, a succession to the proceedings automatically occurs without the other party being able to object and even if the acquirer does not intervene.

If, on the other hand, the assets were part of a productive unit and were transferred in rem, the acquirer is responsible for these rights in rem.

This is a difficult question to answer: what is true is that buyers of distressed assets can reduce legal risks by commissioning a risk assessment or due diligence of the owner's financial situation.

Although the risk assessment will in most cases prevent recovery actions or the invalidity of the purchase agreement, the main problem in these situations is that the buyer has to rely on the seller's information.

The Spanish Insolvency Law 1/2020 provides for various solutions to ensure the economic continuity of the company, such as reorganisation plans, restructuring agreements or settlements with creditors.

These solutions can be applied in both pre-insolvency and insolvency proceedings. If they are adopted in pre-insolvency proceedings, they may also be approved by a judge. In such cases, the risks associated with distressed assets are limited, provided there is a court document specifying how these assets are to be disposed of.

To answer this question, we need to distinguish between pre-insolvency proceedings and insolvency proceedings.

If the purchase is made in pre-insolvency proceedings, we must take into account what has already been stated above, that the sales of distressed assets made by the debtor within two years prior to the opening of insolvency proceedings may be declared invalid by the judge.

The case is different if the purchase is made in insolvency proceedings. Then there are few liabilities affecting the purchaser, provided the purchase is made with the approval of the judge or in execution of a restructuring or liquidation agreement that has also been approved by a judge.

Here, too, we must distinguish between the pre-insolvency and the insolvency proceedings.

If the purchase takes place in a pre-insolvency situation, the public tender is not mandatory. Nevertheless, as mentioned above, sales of distressed assets made by the debtor within two years prior to the opening of insolvency proceedings can be declared invalid by the judge.

However, once insolvency proceedings have been opened, a public offer is mandatory unless one of the following exceptions applies:

• the sale of assets that are not necessary for the continuation of the business, provided that the price is at least 80% (movable assets) or 90% (real estate assets) of the value assigned to the assets. In this case, the insolvency administrators must forward the offers to the judge and justify that the assets are not necessary for the activity
• transactions necessary to ensure the viability of branches or business units within the company
• transactions that are necessary to cover the costs caused by the insolvency proceedings. transactions where the company takes measures to maintain the activity (e.g. sale of the shares of the insolvent company).
  

In summary, the purchase of a distressed asset in Spain is mostly always associated with risks for both the buyer and the seller.

However, these risks can be mitigated through various approaches, such as having the purchase approved by a judge, implementing a reorganisation plan or restructuring agreement, or even conducting a risk assessment.