Selling the business before its value is destroyed: transfers of business units in situations of insolvency
A company's insolvency does not necessarily mean that its business has no value. An activity may be economically viable and yet be trapped in a financial structure that can no longer sustain it. Spanish insolvency law has evolved precisely in order to allow the business, in such cases, to be separated from the insolvent company and transferred as a business unit to a third party, preserving assets, contracts, activity and, where possible, jobs. The key lies in acting far enough in advance: the longer the financial deterioration continues, the more the value that could have been transferred is destroyed.
1.Insolvency as a problem of structure, not necessarily of business
Article 2 of the consolidated text of the Spanish Insolvency Act —the “texto refundido de la Ley Concursal”, TRLC—, approved by Royal Legislative Decree 1/2020 of 5 May, defines insolvency as the inability to meet due obligations on a regular basis, distinguishing between actual insolvency and imminent insolvency. Insolvency is therefore a category that refers to the debtor, not to the business in the abstract. A company may be insolvent because its debt structure, its finance costs or its contingent liabilities make it incapable of meeting its obligations, even though the activity it carries on is profitable or has economic potential. This distinction is essential to understanding the logic of transfers of business units: the point is to rescue the viable business from a corporate shell that can no longer sustain it.
The preamble to the consolidated text itself stresses that insolvency law asserts its place as a fundamental tool for preserving the business fabric and employment, and that this preservation purpose is expressed both through rules intended to endure and through urgent measures adopted in times of crisis. The rules on transfers of business units form part of that logic: allowing the activity to continue even though its current owner cannot carry it on, and allowing creditors to obtain better satisfaction of their claims through an orderly realisation of the business.
2.Transfers of business units in insolvency proceedings: method of realisation and preference for continuity
The consolidated text devotes several provisions to the transfer of businesses or business units in insolvency proceedings. Article 215 provides that, until the “convenio” —the composition with creditors— is approved or the liquidation stage is opened, the disposal of a business as a whole or of one or more business units is to be effected by electronic auction, unless the judge authorises another method of realisation. Article 216 allows the judge, at any stage of the insolvency proceedings, or where the auction attracts no bids, to authorise the direct sale of the business as a whole or of one or more business units, or its disposal through a specialised person or entity. This flexibility as to methods of realisation reflects the need to adapt the sale technique to the characteristics of the business and of the market.
Article 219 introduces a preference rule that reflects the priority of continuity over price alone: in the case of an auction, the judge may make the award to the bidder whose offer does not differ by more than fifteen per cent from the highest offer where the judge considers that it better secures the continuity of the business as a whole or, as the case may be, of the business unit and of the jobs, as well as the best and swiftest satisfaction of the creditors' claims. That rule also applies to offers by workers interested in succeeding to the business by incorporating a cooperative or a “sociedad laboral”, an employee-owned company. The provision recognises that the value of a business unit is measured not only in terms of immediate price, but also in terms of continuity of activity and of employment.
3.Transfer of an undertaking and employment and social security effects
The transfer of a business unit in insolvency proceedings has specific effects in the employment and social security fields. Article 221 of the consolidated text provides that, where a business unit is disposed of, there is deemed to be a transfer of an undertaking for employment and social security purposes. The insolvency judge has exclusive jurisdiction to declare that a transfer of an undertaking exists and to determine the assets, liabilities and employment relationships of which it is made up. The judge may call for a report from the “Inspección de Trabajo y Seguridad Social”, the labour and social security inspectorate, on the employment relationships attached to the disposal and on any social security debts relating to those employees, a report which must be issued within a non-extendable period of ten days.
This insolvency provision dovetails with the general regime on the transfer of an undertaking in article 44 of the “Estatuto de los Trabajadores” —Spain's Workers' Statute, the ET—, approved by Royal Legislative Decree 2/2015 of 23 October. That provision establishes that a change in the ownership of a business, of a workplace or of an autonomous business unit does not of itself terminate the employment relationship, the new employer being subrogated to the employment and social security rights and obligations of the previous one, including pension commitments and supplementary social protection obligations. For the purposes of article 44, there is a transfer of an undertaking where the transfer affects an economic entity which retains its identity, understood as an organised grouping of resources with the objective of pursuing an economic activity, whether central or ancillary.
In insolvency proceedings, the judicial declaration of a transfer of an undertaking and the determination of assets, liabilities and employment relationships make it possible to adapt this general regime to the particular features of a transfer in insolvency, balancing the protection of employees against the viability of the transaction. Article 224 of the consolidated text qualifies the effects on outstanding claims: the transfer of a business unit does not carry with it any obligation to pay claims left unpaid by the insolvent debtor before the transfer, whether they are insolvency claims or claims against the estate, unless the purchaser expressly assumes them, a statutory provision so provides, or there is a transfer of an undertaking in respect of the employment and social security claims relating to the employees of that business unit into whose contracts the purchaser is subrogated. The judge may order that the purchaser is not to be subrogated to that part of the wages or severance payments outstanding before the disposal which is met by the “Fondo de Garantía Salarial”, Spain's wage guarantee fund, in accordance with the ET.
4.Contracts, licences and subrogation of the purchaser
Preserving the value of the business is not confined to assets and employees; it also covers contracts and licences. Article 222 of the consolidated text provides that, where one or more business units are transferred, the purchaser is subrogated to the contracts attached to the continuity of the professional or business activity carried on in the business unit or units being transferred, without the other party's consent being required. By way of exception, the assignment of public-law contracts takes place in accordance with the public-sector contracts legislation. Where the purchaser continues the activity on the same premises, it is also subrogated to the administrative licences or authorisations attached to the continuity of the business or professional activity which form part of the business unit.
Article 223 adds that the transfer of a business unit does not entail the transferee's subrogation in respect of those licences, authorisations or non-employment contracts in relation to which the purchaser, when making its offer, expressly stated its intention not to be subrogated. This possibility of exclusion makes it possible to adjust the perimeter of the transfer to the economic logic of the transaction, preventing the purchaser from being obliged to take on contracts or licences which it does not regard as necessary or which may weigh down the viability of the business.
The combination of automatic subrogation to contracts and licences attached to continuity with the possibility of exclusion for others is one of the features that make transfers of business units an effective instrument for preserving the value of the business: the purchaser receives a functioning set of assets, employment relationships, contracts and authorisations which allow it to carry on the activity without having to rebuild it from scratch.
5.Transfer in satisfaction of the debt, charged assets and application of the proceeds
In many transactions transferring business units in insolvency proceedings, the business is encumbered by claims with special priority, such as mortgages or pledges over essential assets. The consolidated text lays down specific mechanisms for realising these charged assets. Article 211 allows the judge, at any stage of the insolvency proceedings, to authorise the transfer of the assets and rights charged as security for claims with special priority to the secured creditor, or to the person that creditor designates, whether in satisfaction of the debt —the “dación en pago”— or for the purposes of payment, the “dación para pago”. The “dación en pago” satisfies the claim with special priority in full; the “dación para pago” requires the subsequent realisation of the asset to be effected at a value not lower than market value, according to an up-to-date official valuation, and any surplus to go to the insolvency estate, while the unsatisfied part of the claim is recognised in the insolvency proceedings with whatever ranking is appropriate.
Article 212 contemplates the disposal of charged assets and rights with the charge subsisting and with the purchaser being subrogated to the debtor's obligation, the consequence being that the claim is excluded from the body of insolvency liabilities. By way of exception, there is no subrogation in the case of tax and social security claims. Article 213 provides that, whatever the method of realising the charged assets, the secured creditor is entitled to receive the amount resulting from the realisation up to a sum not exceeding the original debt, and that any surplus goes to the insolvency estate, while the unsatisfied part of the claim is recognised in the insolvency proceedings with whatever ranking is appropriate.
These mechanisms make it possible to structure transfers of business units in such a way that the rights of creditors with special priority are respected, the value of the business is preserved and the return to the insolvency estate is maximised. Coordinating the realisation of charged assets with the transfer of the business unit is a key technical aspect of preparing the transaction.
6.Preparing the transfer in advance: binding offers and experts
The importance of acting in advance is reflected in the rules on offers to acquire business units and on the appointment of experts to seek offers. Article 224 bis allows the debtor to file, together with the petition for a declaration of insolvency, a written binding proposal from a creditor or a third party for the acquisition of one or more business units. In the proposal, the purchaser must undertake to continue or restart the activity with the business unit or units for a minimum of three years, with liability in damages in the event of breach. The judge grants a period for observations and alternative proposals, calls for a report from the insolvency administrator and approves the offer most advantageous to the interest of the insolvency proceedings, with priority for offers from employees through cooperatives or employee-owned companies where these are equal or higher and serve the interest of the insolvency proceedings.
Article 224 ter allows the debtor, in cases of likelihood of insolvency, imminent insolvency or actual insolvency, to apply for the appointment of an expert to seek offers from third parties for the acquisition, for cash, of one or more business units belonging to the debtor, even if they have ceased trading. Article 224 quater governs the appointment of the expert, who may be a natural or legal person meeting the conditions to act as a restructuring expert or as an insolvency practitioner, with remuneration set by the judge and the decision kept confidential. Article 224 quinquies recalls that the appointment of the expert does not relieve the debtor of the duty to petition for insolvency within the two months following the date on which it became aware, or ought to have become aware, of actual insolvency, in accordance with article 5. Article 224 sexies provides that, in the event of subsequent insolvency proceedings, the judge who appointed the expert has jurisdiction to declare them, and may ratify the appointment and turn the expert into the insolvency practitioner, and that any remuneration not received is to be treated as a claim against the estate.
Article 224 septies requires that the person making the offer is not acting on the debtor's own behalf and that it undertakes to continue or restart the activity with the business unit or units for a minimum of two years, with liability in damages in the event of breach. These rules show that the legislature has sought to facilitate the preparation of transfers of business units before and at the outset of insolvency proceedings, preventing financial deterioration from destroying the value of the business and allowing offers to be structured around continuity commitments.
7.Conclusion: selling the business in time to save value and jobs
Transferring business units in situations of insolvency is one of the most powerful instruments insolvency law offers for preserving value and employment. A company's insolvency does not mean that its business has no value; it means that the present financial and asset structure cannot sustain it. The TRLC and the ET provide a legal framework which makes it possible to separate the viable business from the insolvent company, transfer it to a third party with subrogation to contracts, licences and employment relationships, respect the rights of secured creditors and limit the assumption of pre-existing liabilities.
The condition for this instrument to deploy its full potential is acting in time. Preparing the transfer at the stages of likelihood of insolvency or imminent insolvency, using binding offers and the appointment of experts, designing the transaction with the transfer of an undertaking and subrogation to contracts and licences in mind, and coordinating the realisation of charged assets are steps that make it possible to sell the business before financial deterioration destroys what can still be transferred. Ultimately, transferring business units is not merely a liquidation technique; it is a value-preservation strategy that calls for anticipation, planning and intelligent use of the insolvency-law framework.
