Spain: Avoid liquidation through PPLs

Author: | Published: 30 Oct 2015
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Cuatrecasas Gonçalves Pereira

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As from January 1 2015, the additional provision of Royal Decree-Law 10/2008 ceased to be in force. This additional provision related to the exceptional accounting regime for losses sustained due to the deterioration of real estate assets with regards to the mandatory reduction of share capital in public limited companies (SA) and mandatory liquidation in SAs and in private limited companies (SL). As from December 13 2008, SAs and SLs benefited from an exceptional regime, under which they were not required to apply certain losses sustained due to the impairment of real estate investments for the purpose of mandatory share capital reduction and liquidation.

During this period this provision prevented a situation where a large number of companies had to apply for liquidation because of the deterioration in value of their real estate assets. Once the abovementioned provision ceased to be in effect, all those companies had to take immediate measures to avoid liquidation or share capital reduction. This meant that companies with a high level of indebtedness had to find alternative solutions with their creditors to prevent potential liquidation.

The first measure open to companies was to increase their share capital by means of cash contribution. However, this solution was not attractive or practical for many of the companies in this situation because their existing shareholders might not wish to make additional contributions and there was a lack of new investors willing to become shareholders of these companies. Another possible measure consisted of reducing the share capital of the company as much as possible. However, this measure was not feasible for many companies because the companies' existing share capital was not high enough due to the extent of the deterioration in their real estate assets.

The main option we consider to be open to companies to solve the abovementioned problem would be to convert the debt, either partially or totally, into participative loans (PPL). The conversion into PPLs would permit the companies, in order to avoid liquidation, to account for the amounts converted as equity, as provided in article 20.1(d) of Royal Decree 7/1996. Accordingly, these companies would not have to face a liquidation risk and would be able to continue their activities normally.

Notwithstanding the above, it is necessary to point out that such a conversion into PPLs of part of a company's debt may result in some issues for the creditors since they would have to digest a higher financial cost derived from those PPLs. In addition, in some cases where debt is secured by a mortgage or another in rem security, such a conversion may reduce the effectiveness of those securities. Therefore, the use of this type of solution would have to be analysed on a case-by-case basis to ensure that its implementation was viable for all the parties involved in the process.

Cristóbal Cotta