Do the amendments to the Spanish Insolvency Act imply additional risks in terms of D&O coverage? - DAC Beachcroft

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Do the amendments to the Spanish Insolvency Act imply additional risks in terms of D&O coverage?

Published 2 September 2014

Since its enactment in 2003, the Spanish Insolvency Act (the "Insolvency Act") has gone through a number of amendments aimed at adapting its dispositions to the ongoing situation of financial crisis in Spain, where the number of companies having filed for insolvency in the past five years has drastically increased.

For this purpose, in April 2014 the Spanish Legislator passed the Royal Decree Law 4/2014 ("RDL"), whose main objective was to help and protect companies at the pre-insolvency stage, in order to avoid financially viable companies filing for insolvency.

To this extent, the most remarkable features contained in the RDL are those concerning Refinancing Agreements which, when approved in accordance with the provisions provided in the Insolvency Act, will not be subject to claw-back action. In terms of D&O insurance however, the amendments to the Insolvency Act may lead to an increased broadening of the exposure to insurers, since a refusal "without good reason" to agree to the Refinancing Agreement i.e. the capitalisation of debts and/or the issue of convertible bonds or instruments, will classify the insolvency as being a "guilty insolvency" (i.e. attributable to directors' and officers' actions committed in bad faith or as a result of gross negligence) - and therefore trigger the personal liability of the directors and officers – when, as a result of the refusal, the approval of the Refinancing Agreement is frustrated.

What is to be considered a refusal "without good reason" is also stipulated in the RDL. Capitalisation will be considered a good reason if recommended by a report issued by an independent expert prior to its refusal by the debtor. However this is a rebuttable presumption, meaning that directors and officers potentially affected by the classification of the insolvency as a "guilty insolvency" will be allowed to challenge the appropriateness of the Refinancing Agreement at a later stage, but the risk of their personal liability remains. This is particularly relevant in terms of D&O insurance, bearing in mind the increasing number of D&O policies providing coverage for companies when acting as administrators of another company.

Two further amendments are worth mentioning, which may provide a defence to the directors and officers. Firstly, the possibility for directors and officers to avoid their personal liability when having recommended voting in favour of the capitalisation, even if the latter is finally rejected by the shareholders of the company. Secondly, the inclusion in the list of persons specifically affected by the classification of the insolvency as a "guilty insolvency", of those shareholders who have rejected the capitalisation of debts/issue of convertible instruments without good reason.

The consequences of the above modifications for the underwriting of D&O policies in Spain are clear, since they imply the widening of both the scope of directors' and officers' personal liability as well as the circumstances which trigger the classification of the insolvency as a "guilty insolvency", which will rarely allow insurers to reject coverage on the grounds of the bad faith of the insured, since the failure to reject "without good reason" can also be committed with gross negligence, which is not excluded under D&O policies. In order to mitigate this potential widening of risk, it would be advisable for insurers to include a new enquiry on the lack of approval of Refinancing Agreements in their proposal forms.


Beatriz Rodríguez

Beatriz Rodríguez


+34 91 781 6300

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