Harmonisation of avoidance rights from a Spanish perspective

Avoidance action is an umbrella term for adversary proceedings that seek to unwind or avoid transactions that occurred before an insolvency filing. These actions are also referred to as “claw-back claims” because, by undoing a transaction, an asset or value is being clawed back into the insolvency estate.

With the publication of Law 16/2022 on 6 September 2022, Spain concluded its thorough review of insolvency law with the transposition of European Directive (EU) 2019/1023, which highlighted the regulation of avoidance rights through measures such as preventive restructuring frameworks, the discharge of debt and disqualifications, and improved procedures for restructuring, insolvency and discharging debt.

This article answers the following key questions concerning Spain’s Law 16/2022.

Does the avoidance right require a fraudulent intention by the parties involved?

No. Fraudulent intent is not a requirement for the avoidance-right action. The only requirement is proof that the transaction was made during the suspect period stated in the law previous to the insolvency situation, and that the insolvency estate suffered patrimonial damage.

What is the time frame for being affected by avoidance rights?

The Spanish law specifies the following time frames:

• Up to two years before insolvency is filed before the Commercial Court.
• Any time between the insolvency is filed and judicially declared.
• Up to two years before negotiating with or intending to negotiate with creditors is communicated regarding a restructuring plan.
• From the moment when communication of negotiations is made until the judicial declaration of insolvency, provided that a restructuring plan has not been approved or, if approved, has not been endorsed, and that the insolvency proceeding is declared within the year after the validity of such communication or extension has expired.

Who can file an avoidance right action?

The insolvency practitioner, appointed by the Commercial Court, can file an avoidance right action at any time and until the insolvency proceedings are concluded.

Can creditors file an avoidance right action?

Yes, but the creditors must request the insolvency practitioner to do this. If the insolvency practitioner does not file the action within a period of two months, the creditors may file the avoidance right action directly. If the avoidance right is declared by the Commercial Court, the creditors may recall the cost incurred from the insolvency estate.

Who is an avoidance right action filed to?

The avoidance right action must be served to the debtor and the third party who participated in the transaction.

Does the law provide for legal presumptions of prejudice?

Yes. Patrimonial damage is presumed in the following transactions:

• The disposition for valuable consideration made in favour of any of the persons especially related to the debtor.
• The constitution of real guarantees in favour of pre-existing obligations or new ones contracted to substitute for those.
• The making of payments or other transactions of extinction of obligations whose maturity is subsequent to the declaration of insolvency in the case of a real guarantee.

Are there non-avoidance right transactions?

Yes. The following transactions cannot be the subject of an avoidance right action:

• Ordinary acts of the debtor's professional or business activity carried out under normal conditions.
• Acts of constitution of guarantees of any kind in favour of public credits, as well as acts of recognition and payment of credits to achieve the regularisation or attenuation of the responsibility of the debtor foreseen in the criminal legislation.
• Constitution of guarantees in favour of the Wage Guarantee Fund.
• Acts included in the scope of special laws regulating the systems of payments and compensation and liquidation of securities and derivative instruments.
• Operations by means of which the measures of resolution of credit institutions and investment services companies are conducted.

 What are the legal effects of an avoidance right action?

The judgment upholding the avoidance right action must declare the ineffectiveness of the challenged act.

If the judgment appreciates bad faith in the person who contracted with the debtor, he will also be sentenced to compensate the totality of the damages caused to the insolvency estate, and the eventual credit will be considered as a subordinated credit.

 Avoidance rights in the proposed Directive

The proposed Directive states three types of acts that may be declared void:

• Preferences rights granted to creditors within a three-month period before filing for the opening of insolvency proceedings if the debtor was unable to pay its mature debts, or if the rights were granted after the application was filed.
• Acts without consideration (except for gifts and donations of symbolic value) entered into the year before the filing for the opening of insolvency proceedings or entered into after the application was filed.
• Prejudicial acts committed intentionally to the detriment of creditors within four years prior to the filing of insolvency proceedings or committed after this filing, provided that the debtor knew or should have known of the debtor's intention to prejudice the community of creditors. Knowledge of this intention would be presumed where the party was closely linked to the debtor.

The present regulation is expected to be amended when the incorporation of the rules suggested by the Commission on the proposal for the directive to harmonise insolvency laws, published on 7 December 2022, take places.

For more information on avoidance rights regulations in Spain, contact your CMS client partner or these local CMS experts.