Appendix A: Legal terminology related to insolvency procedures, secured lending and foreclosures under Spanish, English and French Law
A.1 Some preliminary clarifications
Legal terms are difficult to translate and do not have exact equivalents in different legal systems. Basic concepts such as a “floating charge” (under English Law) have not a direct translation into Spanish Law or French Law. Furthermore, Spanish or French Law basic terms like hipotecaFootnote 44 or hypothèqueFootnote 45 cannot be unambiguously translated as “mortgage” in the British law. This appendix attempts to clarify the main concepts used in this paper.
In all cases, we define “insolvency” as a situation in which the debtor is unable to pay debts when they are due (cash-flow insolvency).Footnote 46 This situation is known in French law as cessationdepaiements or faillite and in Spanish Law as quiebra or bancarrota. In this appendix we focus on the analysis of insolvency once that insolvency situation has been formally recognized. Previously, the debtor could have tried to reach an out-of-court arrangement or private workout with its creditors by which the creditors could accept less than the full amount (or in some cases, the full amount, if it can be determined without the aid of any legal proceeding) they are owed. If those arrangements fail or they are not even attempted, in Spain there is a formal procedure to resolve an insolvency situation called concursodeacreedores. In this paper the Spanish procedure is compared with the main procedures for corporate insolvency in France (the redressement judiciareFootnote 47 —a reorganisation procedure- and the liquidationjudiciare—a liquidation oneFootnote 48) and in the UK (administration and, before 2003, administrative receivership).Footnote 49
The Spanish bankruptcy system (Ley Concursal), which entered into force in 2004,Footnote 50 applied to consumers and all types of firms, including both limited liability companies and personally owned businesses with no limit to personal liability. In September 2013 the Spanish Parliament approved some legal reforms in this regard that are summarised in Appendix A.6. By contrast, there are specific procedures for personal debtors both in France and the UK, which may be used by consumers, self-employed individuals and owners of small firms that used personal guarantees to fund their businesses. France has two procedures, the plan de redressement and the procedure de rétablissement personnel, while bankruptcy is the main insolvency procedure for individuals in the UK.Footnote 51 It is necessary to remark that, in the UK, the term “bankruptcy” only applies to individuals, while insolvency is the term that is used for companies. Once taken into account this legal notice, we must note that the term bankruptcy is used in this paper as a general term to denote formal insolvency procedures in general (as used in American Standard English).
A.2 The equivalents in Spanish and French law of the UK insolvency proceedings
In the UK the main corporate insolvency procedure is called administration. Administrative receivership is not available from September 15, 2003 (although, of course, we could still observe some few active cases) due to the adoption of the Enterprise Act 2002. This case is discussed separately in Appendix A.4.
In the case of administration, an administrator is appointed and tries to reach a better outcome for creditors than the one that could be achieved in a liquidation by the debtor. The administration is requested before a judge by the insolvent company or its creditors. If the judge deems that there is actually a situation of insolvency, she will issue an administration order. It is very important to note that the holder of a floating charge (a concept explained below) can appoint an administrator even without court order. This administrator, however, will take care of the interests of all creditors (and not only of the floating charge holder, unlike in the administrative receivership procedure, see Appendix A.4).
As it was mentioned, the procedures closer to administration in French and Spanish Law are, respectively, the redressement judiciare and the concursodeacreedores. In all these cases there is judicial supervision of the procedures and the judge may appoint an administrator for the insolvent company.Footnote 52
A.3 The equivalents in Spanish and French law of the security interests in the UK law
A.3.1 Fixed charge
A fixed charge is defined over a determined (specific) movable or immovable property. That is, the goods secured by a fixed charge must be clearly identifiable (in contrast to the floating charge).
There are several types of fixed charges in English Law: mortgage over land and buildings owned by the company, chattels mortgage and the charge against goodwill and other intellectual property rights.
The first type of fixed charge is the one that is closest to what in Spanish law we call hipoteca (which is a derecho real, a real right). It is regulated by articles 1874 et seq of the Spanish Civil Code. The figure is close to the hypothèque in French law (articles 2393 et seq of the French Civil Code). When there is a hipoteca or equivalent figures, the ownership of the property remains to the buyer, but there is a charge over that property right which disappears only when the loan has been repaid.
In the case of a chattels mortgage, the purchaser borrows funds for the purchase of movable property (the chattel). The lender secures the loan with a mortgage over the chattel. Legal ownership of the chattel is transferred to the purchaser at the time of purchase, and the mortgage is removed once the loan has been repaid.
Potentially similar legal figures exist in Spanish law as the prendaFootnote 53 (which is also a derechoreal) or the prendasindesplazamiento and hipotecamobiliaria governed by the Ley de Hipoteca mobiliaria y prenda sin desplazamientoFootnote 54 (thus out of the Spanish Civil Code). Also potentially similar concepts exist in French Law, such as the gage and the nantissement.Footnote 55
As a result, hipoteca and mortgage are not directly interchangeable terms. Mortgage in English law would identify a set of guarantees/securities on goods that could be, roughly, the derechos reales (real rights) in continental law (Spanish and French Law, in this paper). To avoid confusion, in this paper we identify what we call hipoteca in Spain as mortgage over land and buildings (for brevity of exposition, just mortgage), i.e., the first type of fixed charge discussed in this section.
A.3.2 Floating charge
Unlike the fixed charge (and its specificities), the floating charge has no strict equivalent in Spanish or French law. The Civil Code in both countries requires that the secured assets must be clearly identifiable. However, one would talk about some similarities in the case of the prenda sin desplazamiento of the Spanish law.Footnote 56
A floating charge is a security interest over a fund of changing assetsFootnote 57 of a firm that “floats” until it “crystallises” (converts) into a fixed charge, at which point the charge attaches to specific assets. The crystallisation can be triggered by a number of events, being one of them the borrower’s default. In other words, the “floating charge” is public and takes effect only when the company has failed to fulfil its obligations. The main difference of the floating charge relative to other security interests such as the fixed charge is that, because the security “floats”, the firm remains free to purchase and sell assets. That is, the company remains in possession of the property and can dispose of it in the normal course of business.
Unlike traditional collateral (derechos reales, as explained above) in Civil Law, the floating charge covers not only present property but also the future property of the debtor (including future cash flows), while giving the debtor the right to dispose of it. At the time of the crystallization, the “floating” charge is fixed and the beneficiary may then exercise its rights over it.Footnote 58 The floating charge is based on property that has not already been specifically mortgaged or pledged.
In summary, compared to the flexibility of the floating charge (that is not related to any good in particular until there is a crystallization as a result of the insolvency of the debtor), the derechos reales (hipotecas, prendas, etc) in Spain are specific in nature. The hipoteca, for example, is a security that gives its holder an immediate and direct right over immovable property (mainly land and buildings) that can be exercised and made effective against any other creditor. The prenda, meanwhile, is a security that gives the holder a right over movable property.
A.4 Administrative receivership
Although, as noted before, this procedure is no longer available, there are still some (few) active cases. In administrative receivership the holder of a floating charge on the business, commonly one bank providing the bulk of finance to the company, could appoint, with almost no other constraints, as soon as there was a default in the loan, a receiver who would take over the entire company, assumed all the powers of the company’s board of directors and would try to maximise recovery for the holder of the floating chargeFootnote 59.
Naturally, this procedure did not prevent other creditors from exercising their right to judicial oversight of the debtor’s insolvency. However, the floating charge holder had the ability to veto other procedures, particularly the administration, if he appointed an administrative receiver. As it was noted, after the disappearance of the administrative receivership procedure (after September 15, 2003), judicial supervision (through the process of administration) has become the standard way to proceed in UK Law.
A.5 Foreclosures, ejecuciones prendarias and related procedures
As it was introduced above, in Spain a creditor may secure a loan, among other options, through a contract of prenda (over movable property), a hipoteca (on immovable assets) and other legal figures with characteristics of one or the other (hipoteca mobiliaria, prenda sin desplazamiento). All these contracts are forms of real rights (derechos reales) as the good is well identified (in all these cases we would be talking about mortgages under UK Law, included under the category of fixed charges).
Both the prenda and the hipoteca must appear in a public document that facilitates execution (if needed). Moreover, in the case of the hipoteca, the Spanish Law also requires to be registered in the land registry. The creditor, in the event of loan default by the debtor, may proceed to execute its right over the property (the acción hipotecaria if there was a hipoteca contract and acción prendaria o pignoraticia if there was a prenda). In Spain, in both cases the creditor may recourse to a judicial enforcement (if performed by a judge) or an out of court enforcement (if performed by a notary).
The judicial enforcementFootnote 60, both in the case of prendas and hipotecas, is regulated by the Civil Procedural Law and establishes an auction with various guarantees to the parties. The extrajudicial executionFootnote 61, whether in either case, is done before a notary also by auction (with citation of the debtor and the owner of the prenda where applicable).
In the UK there is the so-called foreclosure, which could be defined as a debt enforcement procedure aimed at recovering money owed to secured creditors (Djankov et al. 2008). Derived from the above definition we must directly rule out a direct legal equivalence between foreclosure and ejecución oracción hipotecaria. That is, we must be very specific when using these terms. Therefore, we should “translate” ejecución de un bien mueble pignorado (acción pignoraticia) as a foreclose on a pledged movable asset under UK Law. Then, if the property is an immovable asset (e.g. a building, a plant, the entrepreneur’s home), we could use the term “mortgage over land and buildings” foreclosures in the case of an execution (acción hipotecaria in Spain). In the main text we simplify the terminology and, for brevity of exposition, we use the term mortgage foreclosure.
Alongside the Spanish case, in France we can find a droitréeldegage or nantissement on (tangible or intangible) movable property (the closest Spanish legal concept is therefore the prenda) and a hypothèque on immovable property (the closest Spanish figure, as it was discussed, would be the hipoteca). The French enforcement procedure in the case of immovable property (saisieimmobilière) differs with respect to that in Spain, in the fact that judicial intervention is always needed. The judicial intervention will take place either via a huissier (bailiff) or the enforcement judge directly (juged’exécution). Like in Spain, the execution of fixed charge/security over a movable property (mise à exécution d’un gage ou d’un nantissement) can be either judicial or extrajudicial.Footnote 62
The specific rules governing the executions of fixed charges over immovable property assets can be found in the Code des procédures civiles d’exécutionFootnote 63 and its regulations. The execution (procédure of saisie immobilière) takes place after the proper formal notifications to the debtor. In this procedure, as in Spain, there may be a forced sale of the (immovable/land, buildings, etc) mortgaged property (vente forcée) by auction (vente aux enchères) if it was not possible to do it in another way (vente amiable).
A.6 Recent developments in Spanish Law
Until very recently, in Spain the insolvency procedures available for self-employed individuals and entrepreneurs (i.e., managers/owners of small firms) were governed by the same rules than in the case of large businesses such as a limited liability companies. In September 2013 the Spanish Parliament approved a law that will create some sort of special bankruptcy regime for them.Footnote 64 The law contemplates introducing some limitation of the liability of the entrepreneur / self-employed individual through the new figure of entrepreneur with limited liability (emprendedor de responsabilidad limitada). This figure will allow that part of the assets of the entrepreneur will be exempted in case of insolvency, namely EUR 300,000 invested in its primary residence. The law also introduces a partial “fresh start”: the entrepreneur will be discharged of her pre-bankruptcy debts as longs as she pays in full the preferential, secured and privileged credit and at least a 25 % of the ordinary credit.Footnote 65 Finally, the law establishes a new insolvency procedure, the acuerdo extrajudicial de pagos, an extrajudicial debt workout coordinated by a public mediator. If no agreement is reached between the debtor and her creditors, a judicial bankruptcy procedure (concurso consecutivo) will follow, but the negotiation attempt will increase the fresh start: no ordinary credit will have to be reimbursed.
We must keep in mind that in Spain, as a general rule, it is not possible to apply a principle of limited liability to the debtor (that is, legally release the debtor from its debts, fully or partially, when it cannot pay). This is the so-called “principle of universal liability” (article 1911 of the Civil Code)Footnote 66 that states that the debtor responds with all present and future assets to the fulfilment of its obligations.
The process of ejecución hipotecaria has also undergone some reforms very recently (2013) which we should summarise here but do not affect the results of this paper either. In parallel to the debate on the judgment “Aziz vs CatalunyaCaixa”,Footnote 67 the Law 1/2013 opens avenues to override clauses that impose “excessive” interest rates to the debtor, through a reform of the Ley Hipotecaria.Footnote 68 The reform also increases from one to three the minimum number of payments that must be missed before the foreclosure process can be started and it allows suspending for two years the evictions of debtors when they are considered to be especially vulnerable. It also reformed the auction process by amending the Civil Procedure Act. Specifically, it has lowered the security required to tenderers.
Appendix B: Robustness analysis of the Ex-Post perspective: weighted sample of distressed firms
Since Orbis is a commercial database, our sample may not be representative of the whole population of Spanish, French and British firms. This may be especially problematic for distressed firms because of the rarity of bankruptcy filings and for micro firms because of their low coverage in databases on firm annual accounts. In order to increase the representativeness and external validity of our results we construct sampling weights using data from the OECD’s Structural and Demographic Business Statistics (SDBS) and the Spanish Statistical Institute (INE). SDBS provides the distribution of enterprises in each economy by detailed industrial sector (up to 4-digit level) and by size class,Footnote 69 while INE has the distribution of Spanish bankrupt firms by size and industry.Footnote 70 Hence, by weighting our observations we can correct sampling biases. A caveat of this approach is that, since the SDBS does not have information on some industries,Footnote 71 we must throw away some firms, ending up with around 136,000 observations of distressed firms.
Table 17 shows the number and percentage over the total number of distressed companies of micro firms, by country, for both samples. Those percentages are somewhat higher in the weighted sample in the case of Spain and France, while they are dramatically higher in the UK, indicating that micro firms are underrepresented in the unweighted sample, especially in the UK.
Table 18 shows the number and percentage over the total number of distressed companies of bankrupt firms, by country and by size, of both samples. In the case of the unweighted sample, although the percentage of bankrupt firms is the lowest for Spain, the differences relative to France and the UK are much smaller than the differences in bankruptcy rates reported in the introduction (see Table 1). However, this is not longer the case in the weighted sample, where the percentages of bankrupt firms in France and the UK are more than 60 times larger than that of Spain, in line with the differences in bankruptcy rates, and the percentage of Spanish micro firms under bankruptcy is much lower than that of their non-micro counterparts, also in line with the aggregate evidence. Hence the oversampling of Spanish bankrupt firms in the unweighted sample enhances the internal validity of our estimations because, given the rarity of bankruptcy filings, a simple random sample will not yield enough bankruptcies to implement statistical analyses, while the correction of this sampling bias with the weighted sample ensures the external validity of our results.
Let us now, as in Sect. 5.2, study the relationship between capital structure and probability of bankruptcy. Table 19 shows, again as a benchmark, the results of OLS estimation for the probability of bankruptcy of a micro firm using sampling weights. Comparing it with Table 9 (no weights) we can see that results are remarkably similar for Spanish firms: there is a negative and significant correlation between Tangibility and the probability of bankruptcy, which is robust to all specifications. The correlation is positive and significant in the case of the UK, as it was in the unweighted sample. By contrast, the conclusions do change for French firms: now such a relationship is not statistically different from zero in any specification.
In the case of the consistent IV estimates, Table 20 corroborates the findings of Table 10 (unweighted sample). Tangibility has a negative impact on the probability of bankruptcy of a Spanish micro firm. The effect is statistically and economically significant: a 1 % increase in Tangibility decreases that probability by around 0.002 %. As the unconditional probability of those firms is 0.1 %, the estimated semielasticity is 2 %. By contrast, the effect is positive in the UK and non-robust in France, since it is insignificant in specifications (4) and (5).
The results for larger firms, which are displayed in Tables 21 and 22, confirm the findings for the unweighted sample in the case of Spain: Tangibility has no impact on the probability of bankruptcy, since it is not statistically different from zero in any IV estimation. By contrast, the effect is positive in the UK—as it was in the unweighted sample—and non-robust in France, since it is insignificant in the IV estimation of specifications (4) and (5), unlike the unweighted case. An interpretation of the contradictory results for France is that the associations between the two variables found in the unweighted sample were driven by some observations that were overrepresented in such a sample.