New developments regarding Spanish pre-insolvency restructuring tools
The Law for the amendment of the Spanish Insolvency Law that transposes Directive 2019/1023 (Directive on restructuring and insolvency) (the Law) has been sent to the Spanish Congress for its final approval after which it will be published in the Spanish Official Gazette, and twenty days thereafter the Law will enter into force, excluding some articles.
The Law sets out structural reforms in pre-insolvency and insolvency regulations to achieve the following goals:
- with respect to viable companies facing financial difficulties, to facilitate debt restructurings that guarantee the rights of creditors and the continuity of the company through restructuring plans (RPs), which replace refinancing agreements and out-of-court payment agreements;
- with respect to non-viable companies, to extract the highest value of the assets to satisfy creditors following a defined ranking of claims; and
- with respect to natural persons facing insolvency, to offer good faith debtors a partial discharge of their liabilities and a second chance.
This note summarises some of the main new developments approved, exclusively in pre-insolvency regulation.
1. On the notice to the court regarding the initiation of negotiations (former article 5 bis of the Spanish Insolvency Law)
- Earlier notice:
- insolvency probability: In addition to the status of actual and imminent insolvency (now defined as the situation where the debtor foresees its inability to regularly and timely meet its payment obligations within the next three months), the notice may be made in the case of probability of insolvency, a situation that arises “when it is objectively foreseeable that if a restructuring plan is not reached, the debtor will not be able to regularly meet its payment obligations that are due to be paid within the next two years”. It is required (for notification to the court and for homologation) that no insolvency application by a creditor has been admitted for processing by the insolvency court.
- Intention to initiate negotiations: In addition to the debtor being able to notify the existence of negotiations with its creditors to reach a RP it may now communicate its intention to start them immediately.
- Blocking of voluntary insolvency proceedings: When a RP is being negotiated, the insolvency application filed by the debtor may be suspended by the court upon request of the restructuring expert or of creditors representing more than 50 per cent of the debt affected by the RP. The suspension shall be lifted if the creditors have not filed the application for homologation of the RP within one month.
- Claw-back actions - term extension: The two-year claw-back period ends on the date of the insolvency declaration petition (instead of the date of the insolvency declaration itself) and applies as long as the RP has not been approved or homologated and the insolvency declaration takes place within the year after the end of the effects of the notice.
- Effects of the notice – up to six months:
- Debtor: Suspension of the legal duty to liquidate as a result of negative net equity.
- Debts: Ineffectiveness of any contractual clause that establishes the amendment of terms or conditions, including acceleration, as a result of the notice or the homologation.
- Financial collateral (Royal Decree-Law 5/2005): The notice does not prevent the enforcement of financial collateral and will not affect the early maturity clauses of obligations secured by financial collateral, in respect of the amount covered by the collateral. Financial collateral will not be affected by the RP, nor will the early maturity clauses of obligations secured with financial collateral, in respect of the amount covered by the collateral.
- Contracts: Clauses providing for the suspension, amendment, rescission or termination of executory contracts (contratos con obligaciones recíprocas pendientes de cumplimiento) as a consequence of the notice or the homologation shall be deemed not included.In the case of contracts which are necessary for the debtor’s business activity, the powers to suspend performance of the obligations, to modify, to terminate or to accelerate the contracts for breaches that took place before the pre-insolvency notice, cannot be exercised.
- Shielded agreements and contracts: Rights of acceleration, termination or cancellation contained in netting arrangements subject to Royal Decree-Law 5/2005 and (subject to certain requirements) in supply contracts which are necessary for the continuity of the business activity will not be affected.
- Enforcement actions and proceedings:
- Suspension of the enforcement of guarantees or security interest granted by another group company, when requested by the debtor with evidence that enforcement could lead to the insolvency of both guarantor/security provider and debtor.
- At the request of the debtor the court may expand the scope of the prohibition on initiating enforcement proceedings or grant the suspension of those already initiated over any assets of the debtor and/or against one or several creditors or classes of creditors.
- Suspension of the enforcement of public claims over assets or rights necessary for the continuity of the business activity.
- Shielded enforcement proceedings:
- Enforcement of financial collateral regulated in Royal Decree-Law 5/2005.
- Enforcement proceedings relating to claims that legally cannot be affected by the RP (i.e., those derived from non-contractual liability and employment claims, among others).
- Extension of the effects of the notice given to the court:
- The debtor and creditors representing more than 50 per cent of the liabilities excluding the subordinated liabilities may request three-month extension of the effects of the notice.
- Upon request of the debtor, the restructuring expert, creditors representing, at least, 40 per cent of the liabilities affected by the RP excluding the subordinated liabilities or of any creditor that proves that the extension does not benefit the PR negotiations, the court will repeal the extension.
- Any creditor may request the exclusion of its credit from the effects of the extension when it could lead to its own insolvency or a significant loss in the value of its collateral.
2. Restructuring Plans:
- Expanded scope: They may consist of changes to the composition, conditions or structure of the debtor’s assets and liabilities or its equity, including transfers of assets, business units or of the entire company, as well as any necessary operational change, or a combination of these elements.
- Expansion of debt types: In addition to financial debt, public nature claims (to a limited extent and in certain circumstances) and commercial debt may also be subject to the RP.
- Impact on contracts:
- The RP may terminate executory contracts (contratos con obligaciones recíprocas pendientes).
- Contracts which are necessary for the continuity of the business activity may not be suspended, amended, terminated or subjected to acceleration merely on the basis that the RP entails a change of control of the debtor.
- Netting contracts: may be terminated or subjected to early close-out when necessary for the successful completion of the restructuring and to prevent insolvency. The balance resulting from the settlement may also be affected by the RP.
- Structural changes (mergers and capital decreases): affected creditors will not have the right to oppose.
- Labour relationship expiration/amendment: Labour law will apply, including workers’ information and consultation rights.
- They must include the different creditor classes: Creditors will be grouped into classes based on the existence of a common interest.
- There is a common interest among claims with the same ranking within insolvency proceedings. Different classes may be formed within the same ranking if advisable, for instance on the grounds of the financial or commercial nature of the claim, conflicts of interest or the impact of the RP.
- Secured creditors will be grouped in a single class, unless there are differences between the charged assets and rights that justify secured claims being grouped into two or more classes.
- Public nature claims will be grouped in a separate class alongside other classes of the same rank.
- A separate class is established for creditors which qualify as SMEs when the RP involves relinquishing more than 50 per cent of their claim. The debtor and creditors representing, more than 50 per cent of the affected liabilities may request judicial confirmation on the correct formation of the classes prior to the submission of the RP for approval (homologación) by the court. If the court approval to class formation is obtained the RP may not be challenged on this ground.
- All creditors whose claims may be affected by the RP are entitled to vote.
- Class majorities:
- General: more than 2/3 of the liabilities of each class; and
- Secured creditors: minimum of 3/4 of the liabilities of this class.
- Syndicated creditors: The contractual regime shall apply if it contains lower majorities than those stated above.
- Equity holders: If the RP contains measures affecting the equity holders such as a debt capitalisation or a sale of essential assets, their consent will be required, following procedure in accordance with the debtor’s legal structure. Equity holders will not have pre-emptive right over new shares in the event of PR homologation being shout under current or imminent insolvency.
- Claims calculation:
- Each claim (including those subject to conditions subsequent (condición resolutoria)) is accounted for as the principal plus surcharges and interest due up to the date of notarisation of the RP.
- In the case of credit agreements, only the drawn down amount at the time of notarisation of the RP is accounted for.
- Contingent claims, litigious claims or those subject to conditions precedent are accounted for at their maximum amount, unless they have been included in the RP for a lower amount. If such claims materialise they will only be affected by the amount included in the RP.
3. Judicial homologation / court Sanctioning:
- Necessary to:
- extend the effects of RPs to creditors or creditor classes who had not voted in favour of the RP or to the equity holders;
- terminate contracts for the benefit of the restructuring;
- protect and upgrade the ranking of the interim financing and the new financing contemplated in the RP; and
- protect the acts, transactions or business carried out in the context of the RP against claw-back actions.
- Majorities and cross-class cram down:
- General: Requires that the RP has been approved by all creditor classes and, if it affects the rights of equity holders and the debtor in insolvency probability, by the equity holders which are legally liable for the corporate debts (if any) or otherwise by the general shareholders meeting.
- Cross-class cramdown: As an exception to the above, the RP may be homologated and bind dissenting creditors (individual creditors, entire classes and the equity holders of the debtor company) if:
- it has been approved by a simple majority of classes, provided that within such majority there is at least one class of claims that within insolvency proceedings would have ranked as special/general privileged claims; or
- it has been approved by at least one class that within insolvency proceedings would have obtained, presumably, some payment following a going concern valuation (in-the-money class). This requires a report from the restructuring expert on the value of the debtor as a going concern.
- Effects of the court order approving the RP:
- Immediate extension of the effects of the RP to all affected creditors, debtor and equity holders, even if the court order is not final.
- Lifting of the stay order over the enforcement proceedings of the claims not included in the RP and dismissal of the remaining enforcement proceedings.
- Secured creditors who have voted against the RP and belong to a class where the favorable vote has been lower than the dissenting vote:
- will have the right to request the realisation of the charged assets or rights within one month from the publication of the court order approving the RP in the public insolvency registry. The exercise of this right will trigger the accelerated maturity of the original secured claim.
- The RP may provide for the substitution of this right for the ability to collect in cash, the part of the claim covered by the collateral value within a term not exceeding 120 days. If the claim is not paid the charged assets or rights can be realized.
- If the enforcement proceeds are less than the secured debt but greater than the collateral value allocated in the RP, the creditor shall receive all proceeds obtained from the enforcement. The difference between this amount and the collateral value will be deducted from the amount (if any) that such creditor would have received or must receive according to the RP in respect of the unsecured claim.
- The effects of the RP may be extended to guarantees or security interests granted by any other company of the same group which is not subject to the RP when the enforcement of the guarantee/security may cause the insolvency both of the guarantor/security provider and of the debtor itself.
- Grounds for challenging the RP are expanded: the grounds for challenging the RP are substantially expanded, including, among others:
- “that the reduction in value of the debt is manifestly greater than what is necessary to ensure the viability of the company”. An important limitation is that this may not be alleged if the reduction imposed by the RP is less than the discount at which the debt was acquired; and
- “best interest of creditors test”: when the debts are adversely affected by the RP in comparison with their treatment in case of liquidation within insolvency proceedings, whether individually or as a business unit. In order to calculate the insolvency liquidation value the effective payment shall be deemed to take place two years after the execution of the RP.
- “absolute priority rule”: in the case of homologation with dissent no class ranking below the dissenters shall receive anything unless each member of the dissenting class has been paid the full face value of its outstanding claim.
- Prior opposition: as an alternative to the ordinary challenge (which can take place within 15 days following the publication of the homologation order) upon filing the homologation request the applicant has the ability to require the affected parties to oppose in advance the court’s approval of the RP.
- Interim financing and fresh money protections: If the approved RP affects at least 51 per cent of the total liabilities:
- reasonable interim financing granted during the negotiations and immediately necessary for the continuation of the debtor’s business or to preserve or enhance the value of the debtor;
- new financing necessary for the fulfillment of the RP approved by the court; and
- acts and transactions identified on the RP that are necessary for the success of the negotiations and those carried out to execute the RP
will be protected against claw-back actions, unless it is evidenced that they were granted with fraudulent intent. Half of such financing will rank as debts against the insolvency state, and the other half will rank as privileged debt.
New or interim financing granted by specially related parties will only enjoy protection and upgraded ranking if the total debts affected by the RP, excluding the financing granted by specially related parties represent more than 60 per cent of the total liabilities.
- Restructuring expert:
- The debtor, creditors representing more than 50 per cent of the liabilities affected by the RP and (in some circumstances) the Court may appoint a restructuring expert whose role will be to prepare and to present the reports requested by the Court/required by the Insolvency Act and to assist the debtor and creditors in the negotiations and the preparation of the RP.
- If an expert has not been appointed creditors representing 35 per cent of the affected liabilities can request of the Court the appointment of a given expert, with the debtor having 2 days to oppose.
- The appointment of the expert is mandatory where the homologation bind dissenting creditors and/or equity holders.
4. Special procedures for small debtors and microenterprises.
Special rules will apply to debtors (i) with an average of no more than 49 employees and (ii) with an annual turnover (volumen de negocios) or annual balance (balance general) of €10m or less.
Additionally, neither the foregoing nor the general insolvency regulations will apply to debtors (i) with an average of fewer than 10 employees on their staff and (ii) with a turnover below €700,000 or liabilities of less than € 350,000 in the financial year prior to the pre-insolvency notice, being replaced by a new proceeding aiming to reduce costs and to simplify formalities. This new proceeding combines those aspects of the insolvency and RP procedures which best suit microenterprises.