اصلاحات ورشکستگی در میان رکود بزرگ: تجربه اسپانیایی Bankruptcy reforms in the midst of the Great Recession: The Spanish experience

1. Introduction Bankruptcy procedures are important determinants of the development of capital markets (La Porta et al. 1997, 1998), firm financing and investment (Rajan and Zingales, 1995, Davydenko and Franks, 2008, Acharya et al., 2011), innovation (Acharya and Subramanian, 2009) and entrepreneurship (Armour and Cumming, 2008). A well-functioning bankruptcy system reorganises viable businesses and liquidates nonviable ones, while it preserves lenders’ incentives to provide credit by protecting creditor rights and deterring borrowers’ moral hazard (Hart, 2000). However, as shown by Djankov et al. (2008), insolvency institutions usually perform poorly. Reforms to the bankruptcy code are therefore necessary, especially during economic downturns, as the number of insolvencies rise (Cirmizi et al., 2010). In this paper we study the effects of the reforms to the bankruptcy code in Spain during the Great Recession (2008-2013).1 The reforms were prompted by a severe economic crisis which, by dramatically increasing the number of bankruptcy filings (from 1,000 a year to 9,000) and congesting courts, made apparent the dysfunctional features of the insolvency law. Specifically, before the reforms the Spanish bankruptcy system was characterised by lengthy and costly procedures [Van Hemmen (2007, 2014), Consejo General del Poder Judicial (2007, 2014)] that resulted in the firm’s piecemeal liquidation in about 95% of the cases2 [Van Hemmen (2014), Celentani et al., (2010), Banco de España (2014)]. The reforms to the Spanish bankruptcy code consisted of four distinct laws (one passed in 2009, one in 2012 and two in 2014)3 that aimed to decrease the duration of bankruptcy procedures and to increase the percentage of successful reorganisations. The 2009 and 2012 reforms extended the scope for simplified procedures, which were cheaper and faster proceedings that were originally designed only for SMEs. Those reforms also created an early liquidation scheme in the spirit of US Chapter 7, so that the debtor or the insolvency administrator could propose a liquidation plan at the onset of the insolvency proceeding without the need of a reorganisation attempt first. Moreover, the 2012 reform sought to improve the performance of insolvency trustees, whose perceived quality was very low (Celentani et al., 2010). In particular, it reduced from three to one the number of insolvency administrators to eliminate coordination problems and to reduce the cost of the procedure, it increased their professionalisation by tightening the requirements for being appointed and it allowed professional partnerships to be appointed administrators to increase the competition in the market.