The Second-Chance Procedure

The principle of universal liability is regulated by Spanish law in article 1911 of the Civil Code. Under this principle, a debtor responds with all his assets for the debts in which he has incurred, even after going through an insolvency process. This principle, however, has been softened with the introduction of the second-chance procedure by Law 25/2015 of July 28, of second chance mechanism, reduction of the financial burden and other measures of social order. The second-chance procedure, also known as fresh start, is a procedure that offers insolvent persons a way to try to reach an out-of-court settlement of payments with their creditors. This procedure can even provide debtors the possibility of the partial waiver of his debts as a last resort, if the debtor’s good faith can be proved and verified.

The second-chance procedure can be initiated by any natural person, whether merchant or not, or by any legal entity, who is currently insolvent and whose liability does not exceed five million euros. Persons who have been convicted of committing socioeconomic crimes, documentary misrepresentation crimes, or crimes against property or public finances in the last ten years are excluded from the possibility of initiating this procedure. Those who have reached an extrajudicial settlement agreement with their creditors in the last five years or who have already initiated a bankruptcy procedure are also excluded from this possibility.

The first stage in a second-chance procedure is the mediation phase between the debtor and his creditors. The objective of this phase is to try to reach an extrajudicial agreement between debtor and creditors regarding the debtor's insolvency situation. To initiate it, the debtor must submit his request by means of a standard form. This form must be presented before the Mercantile Registrar or the Official Chambers of Commerce, Industry, Services and Navigation if the debtor is a merchant or a legal entity or before a notary of the domicile of the debtor if the debtor is not a merchant. These, in turn, will proceed to verify if the requirements are met, which will either result in an obligation to amend any errors or omissions within five days or the admission of the request. In the above-mentioned form, the debtor must identify, in detail, the assets that he owns, his debts and the creditors. The debtor is obliged to present certain documents, including his criminal record, his annual accounts of the last three periods (if he is obliged to keep them), the last three payrolls received, among others. Once the request has been accepted, the authority to whom the request has been submitted to shall proceed to appoint the insolvency mediator, who shall be responsible for managing the procedure. 

Once the appointed insolvency mediator has accepted his designation, certain effects begin to take place. The first effect is that no creditor may request the necessary bankruptcy procedure of the debtor or initiate any new judicial proceedings. In addition, any legal proceedings that had been previously initiated are deactivated or suspended for 3 months (except if they are public creditors or credits with collateral securities). The interest accrual of the credits involved is also suspended. In spite of having started this extrajudicial process, the debtor can continue with his business or professional activity, excluding any acts of administration or disposal that exceed his activity. The authority in charge of the extrajudicial procedure must notify the lower court who would be competent to hear the insolvency proceedings, should it occur, that the second-chance procedure has been initiated. The literate of the Administration of Justice of this court must publish in the Public Insolvency Registry the fact that the debtor is involved in a process of this nature.

The insolvency mediator must verify the facts and documents provided by the debtor within a period of ten calendar days from the acceptance of his designation. Within this period, he must also summon the meeting to be attended by the debtor and the creditors, which must be held within two months of his acceptance.

Twenty calendar days before the meeting, the mediator shall submit to the creditors a proposal to reach an agreement, which shall have the consent of the debtor. The proposal can include any of the following: settlements for a maximum period of ten years, acquittals that do not exceed twenty-five percent of the debt, transfer of assets in payment, conversion of part of the debt into shares of the debtor company or the conversion of the debt into participatory loans for no more than ten years (normally foreseen for corporations). The proposal should also include a payment plan and a feasibility plan that explains how the economic resources will be generated by the debtor to comply with the payment plan.

The meeting between debtor and creditors should be held on the day and time designated for this purpose. At this meeting, the proposal will be discussed, and may be modified in regards to the payment or feasibility plan. Once discussed, it will be put to a vote, which can result in a favorable or unfavorable result. All of this will be documented in the minutes that will be managed by the mediator. In case the agreement has been approved, it must be documented in a public deed if the procedure is carried out before a notary or a copy of the agreement will be presented to the Mercantile Registry to finish the process, and it will be binding on both creditors and debtor immediately. Said agreement shall be published in the Public Insolvency Registry.

In case this extrajudicial agreement is not reached, we enter the second stage of this procedure, which will be the consecutive declaration of insolvency. The mediator must immediately request the competent judge to dictate the insolvency of the debtor, and the judge must immediately agree. Once the insolvency process is concluded, the debtor can opt for the benefit of exemption of unsatisfied debts if, after the liquidation, there are still debts to be paid. This benefit is granted to debtors who have undergone this procedure because it presumes good faith on the part of the debtor when trying to reach an agreement with his creditors, in view of his insolvency situation. Although it is an exceptional mechanism, and not the purpose of the second-chance procedure, a debtor who is considered in good faith may benefit from this measure.

Daniela Rivera Jourdain
Lawyer with EGEA LAWYERS