The Renewal Of The Insolvency Moratorium Could Worsen The Situation Of Businesses On The Verge Of Bankruptcy

working at office

March 14 is the deadline for the so-called insolvency moratorium, a measure that eliminated the requirement to file for insolvency proceedings for all companies in a situation of bankruptcy. This measure, adopted at the beginning of the health crisis, has already been extended twice, in April and December 2020. And now it will be extended for a third time until December 31 of this year, according to El País. The newspaper reports that despite the moratorium, insolvency cases increased by 5.8% in the last quarter of 2020.

In fact, a good number of experts believe that with this new extension of the insolvency moratorium, the situation of all those companies in a position to file for insolvency will only get worse, as this is not sustainable indefinitely. As Carlos Grande, partner at Abencys, points out:

“Under this false sense of security, the new moratorium causes the postponement of decisions that, although difficult, must be taken in advance in order to have the desired effect.”

This effect would be the restructuring (financial, operational) of a business, with the aim of salvaging it and continuing activity.

Along the same lines, Grande assures that the end of the moratorium on March 14 would not necessarily have caused negative consequences for entrepreneurs, as it would have pushed many to take decisions that cannot be postponed any longer. In fact, he says:

“The insolvency moratorium generates a misleading message that bankrupcy means liquidation and the end of the business, when this does not have to be the case.”

In the extension of the moratorium decided in December 2020, the government already did not consider the criteria of the Bank of Spain. In the document “Analysis of insolvency proceedings in Spain in the context of the covid-19 crisis”, published a few days earlier, the BoS warned the measure could have a negative impact on the recovery of business activity if it was maintained over time. It flagged this would allow a higher survival rate of non-viable companies.

The Bank of Spain pointed out that the so-called “zombie companies” reduce the profits of other companies and reduce investment and employment growth. They also discourage the entry of new companies and cause a poor allocation of productive resources and productivity losses.

Other experts also warn that the moratorium extension could provoke an unprecedented increase in the number of legal proceedings by 2022, which would collapse the courts. The General Council of Economists, for example, predicts that in 2021 Spain will lead the EU in the rate of company insolvencies, with an increase of 41% compared to 2019. It will only be surpassed by the United Kingdom, with 43%.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.