Productive unit and insolvency proceedings: the most effective way to save companies

European Directive 2019/1023 on restructuring and insolvency, transposed into Spanish law with the reform of the Insolvency Act in 2022, has as one of its objectives to promote the sale of productive units in order to encourage the continuity of companies and avoid liquidation in insolvency proceedings, as has been the case in most proceedings in recent years.

With this in mind, within the framework of insolvency proceedings and following the transposition of European Directive 2019/1023, there are three ways to process the sale of the Production Unit of a company that is currently or imminently insolvent.

1. The Prepack (Arts. 224 ter et seq. TRLC)

What is the Prepack?

In this case, it is a phase prior to the insolvency application that consists of requesting the appointment of a figure called a “Prepacker.”

This is an expert appointed by a Commercial Court Judge at the request of the future insolvent party, who directs an information process for the sale of the company's Production Unit.

Functions of the Prepacker

This figure is responsible for:

• Gathering information.
• Seeking interested parties.
• Preparing the due diligence.
• Opening a public information procedure to obtain the best offer.

All of this must be done within a period established by the commercial court judge.

Special features of the Prepack

One of the most important features is that, once the deadline for finding the best offers has passed, the company must submit a bankruptcy petition. Everything outside the scope of the Production Unit will be liquidated as part of the procedure.

In short, the purpose of the Prepack is to carry out a public sale process prior to the insolvency petition, so that when the petition is filed, the best offer has already been obtained and the deterioration of the Production Unit is avoided.

Commitment to maintain the activity

The offers submitted must include the obligation to maintain the activity of the Production Unit for a period of two years.

2. The Stapled Offer (Arts. 224 bis et seq. TRLC)

This method consists of submitting the insolvency petition together with a written and binding proposal, either from a creditor or a third party, for the acquisition of one or more Production Units.

Stages of the procedure

Once the application has been submitted:

The Insolvency Declaration Order grants the other creditors a period of time to submit counteroffers and/or allegations.

The Insolvency Administrator is appointed to evaluate all proposals.

The bankruptcy judge approves the most advantageous offer, paying special attention to:

• the continuity of the company,
• the maintenance of jobs,
• and the interests of the bankruptcy proceedings.

Unlike Prepack, in this case, the maintenance of the activity must be guaranteed for a period of 3 years.

3. Ordinary insolvency petition and sale of the Production Unit without Prepack or Stapled Offer

This option consists of the sale of the Production Unit during the common phase of the insolvency proceedings. The Insolvency Administrator negotiates the entire scope of the sale during the proceedings.

In practice, it is recommended that the sale take place during the common phase.

A practical case:

Companies with administrative concessions see how, when the liquidation phase begins, public procurement legislation automatically terminates administrative contracts.
This can result in a production unit with high value in the common phase having a much lower value in the liquidation phase, as it loses concessions that are essential to its activity.

Responsibilities and succession

Regardless of the method chosen for the sale of the Production Unit, it should be noted that, for labor and Social Security purposes, there is always business succession.

This means that the purchaser automatically assumes the obligations linked to the workers, both in terms of the payment of outstanding wages and Social Security obligations arising from the continuing activity.

As for the rest of the obligations, whether they are assumed will depend on the definition of the scope of the Production Unit. In other words, the acquirer can decide which obligations to assume and which not to assume, provided that there is no legal requirement to do so. This allows the transfer to be adapted to the economic reality of the company and the continuity project, preserving only those elements that are essential for the operation of the business.

Conclusion

The transposition of European Directive 2019/1023 aims to promote the continuity of companies that are currently or imminently insolvent, especially when their activity is viable.

Production Units are consolidated as a fundamental tool for preserving value, jobs, and business activity.