Spain: Urgent changes to the insolvency framework

Author: | Published: 1 Oct 2009
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

The development of the global economic crisis following the Lehman Brothers' collapse, and its impact on the Spanish economy have forced a quick legislative reaction from the Spanish government. In particular, certain insolvency provisions have been improved and adapted to suit the current economic environment. The new changes to the Spanish Insolvency Act have been carried out by virtue of Royal Decree-Law 3/2009 of March 27 on urgent measures on taxation, financial and insolvency matters (RDL 3/2009).

Apart from these changes, the Spanish Ministry of Justice also announced its intention to carry out a fundamental reform of the Insolvency Law in the near future and a commission has been established for that purpose.

In 2004 the Spanish insolvency legal framework was changed considerably by the introduction of Law 22/2003 on insolvency (Insolvency Law), which came into force on September 1 of that year. The rules of the Spanish insolvency system dating back to the 19th century were invariably outdated and provided inadequate answers to the challenges of the global economy in the 21st century.

Five years after the Insolvency Law entered into force, both its strengths and weaknesses have become apparent. Insolvency practitioners generally consider that despite certain favourable solutions provided by the Insolvency Law to problems existing under the old insolvency framework, fine-tuning must be carried out in order to cope with the current challenges resulting from the economic crisis.

As an example, more than 90% of insolvency procedures end with the liquidation of the company. This high figure confirms the failure to achieve the fundamental aim of the Insolvency Law: the preservation of the viability of the insolvent company and the liquidation of companies that are unviable in the market.

The main amendments introduced by RDL 3/2009 are: (i) the possibility of reaching out-of-court refinancing agreements (including the benefit of new security) with no claw-back risk (except in case of fraud) with the support of 60% of the creditors and a viability plan approved by an independent expert (Refinancing Agreements); (ii) protection of the debtor in pre-insolvency negotiation of an early creditors agreement; (iii) clarification on the status of certain claims; (iv) early liquidation of the debtor's estate; and (v) measures to reduce costs and simplify and speed up insolvency proceedings.

Refinancing agreements

The Spanish lawmaker embraces the reasonable interest and preference shown by creditors regarding out-of-court restructurings due to the significant advantages they afford: reduction of costs and the extension of time to help the company overcome its insolvency situation.

Out-of-court restructurings not only enable the survival of the insolvent company but in most cases also avoid the early certificate of death of the company through the insolvency declaration. For that purpose, in order to convince creditors to partially waive their rights in an out-of-court restructuring, it is essential that creditors be protected if the restructuring fails and the debtor ultimately becomes insolvent.

The Spanish lawmaker recognises that it could no longer turn its back on the bulletproof out-of-court restructurings common in neighbouring countries. On that basis, the lawmaker introduced a new framework through RDL 3/2009 in order to give protection to out-of-court restructurings (especially new security granted in connection therewith) against the risk of claw back in a future insolvency.

In general, the basis for the claw-back action under the Insolvency Law is solely based on the observation that the act subject to claw back is detrimental to the estate of the debtor and, therefore, it may be rescinded even in the absence of fraud. New security granted to cover obligations that priorly were unsecured, is presumed detrimental and subject to claw-back. This two-year claw-back period is the major obstacle for most refinancing transactions and generated disturbances in the market for companies requiring debt restructurings in the economic crisis. The new framework governing Refinancing Agreements that fulfil the requirements provided by RDL 3/2009 protects such agreements (including new security) against that claw-back risk.

Notwithstanding the above, Refinancing Agreements remain susceptible to general rescission actions under the Insolvency Law since they may be challenged under articles 1,111 and 1,291 of the Spanish Civil Code. However, these are much more difficult to exercise, since there must be evidence of fraud. The new framework also prohibits creditors from exercising the claw-back action of Refinancing Agreements entered into under such provision, limiting that right to receivers.

Several provisions of the new framework are subject to interpretation. First, the new framework establishes a functional concept of what should be understood as Refinancing Agreements as well as a general framework for the same. This new framework is applicable to restructurings agreed by debtors out of court involving a significant increase of credit or modification of obligations, either through the extension of its maturity or the replacement of obligations. Consequently, strictly speaking, not all agreements are Refinancing Agreements. Second, in order that an agreement qualifies as a Refinancing Agreement it is not necessary that creditors grant new credits in the form of new money or the modification of any other condition (interest rate, the amortisation calendar or other similar conditions).

A Refinancing Agreement must meet the following requirements: (a) to fall under the scope of a viability plan (endorsed by an independent expert) to allow the continuation of the business of the debtor in the short and medium term; (b) be approved by creditors representing at least 60% of the liabilities of the debtor; and (c) be elevated to a public deed. If these requirements are met, the transactions, payments and security executed thereunder will not be subject to claw back.

Creditors' agreements

RDL 3/2009 has introduced several modifications to in-court composition agreements between the debtor and its creditors within the insolvency process, both as an early creditors' agreement (convenio anticipado) or an ordinary composition agreement (convenio ordinario).

As regards early creditors' agreements, if the debtor starts negotiations towards such agreement within the two months after the insolvency situation is known or should have been known, RDL 3/2009 establishes that the debtor will have an additional three months to negotiate the creditors' adherence to that proposal without (i) the obligation to file for insolvency within such period and (ii) the risk that a creditor files for insolvency. Subsequently, the debtor must apply for insolvency during the month following the end of the three-month period.

This measure is designed primarily to avoid certain practices normally carried out under the existing provisions for those cases in which, while a company was negotiating its debt restructuring with its main creditors (mainly financial entities), creditors sought the insolvency declaration of the debtor in order to put pressure on the debtor or financial entities to obtain repayment of credits.

The following requirements must be met in order the extension is granted: (i) the debtor must currently be in an insolvency situation; (ii) the request for an insolvency proceeding must be filed within two months of the time the debtor becomes aware or should have become aware of the insolvency situation; (iii) negotiations have already been initiated in order to obtain adherence to an early creditors' agreement before the end of the two-month period in which to file the insolvency; (iv) the communication of the abovementioned negotiations must be forwarded to the court competent to hear the insolvency proceeding; and, (v) there have been no previous applications for an insolvency declaration made by any creditor.

The purpose of this amendment is to facilitate an early creditors' agreement and is not designed to give rise to a Refinancing Agreement, which would enable the debtor to overcome its insolvency situation. As such, once the three-month period granted to the debtor has expired, the insolvency proceeding will continue its course. However, there has been an increase in the time granted to negotiate an early creditors' agreement before the insolvency proceeding has been filed (without the receiver having intervened in the management of the insolvent debtor).

Other innovations introduced by RDL 3/2009 such as the early creditors' agreement offer the possibility that the minimum number of adhesions required for such agreements to come into effect include any type of creditors (whether or not subordinated). Likewise, the minimum credits support for the proposal's filing has been reduced by RDL 3/2009 from 20% to 10% of the total liabilities if the proposal is submitted to the court together with the insolvency application.

RDL 3/2009 also reduces the list of situations that would prevent an early creditors' agreement to the following: (i) the debtor has been convicted in a final judgment for criminal offence regarding the company's assets, social economic order, forgery crimes against workers' rights; or (ii) the debtor has breached its obligation to deposit annual accounts with the commercial registry for any of the last three year periods.

Two additional changes have been introduced concerning the ordinary creditors' agreement. First, a written voting procedure for the creditors' agreement without the need for a creditors' meeting is possible if more than three hundred creditors are involved. Furthermore, if the judge believes there will be opposition due to legal infringement of the written vote process, he or she will be competent to call a meeting according to the same rules applicable before agreeing on a new written vote process for a period no longer than 30 days since the last ruling.

Second, the requirement to obtain the administrative authorisation to overcome the legal limits to exceed the maximum debt reduction threshold (50%) and the maximum debt deferral period (5 years) with respect to entities particularly relevant for the Spanish economy is abolished and the judge will have exclusive authority to permit those limits to be exceeded.

Recognising and classifying credits

RDL 3/2009 adopts certain long-awaited amendments to the credits framework by providing solutions to specific problems raised in its application. In doing so, RDL 3/2009 has settled certain discussions among insolvency courts on the ranking and subordination of credits that, despite having been clarified by the majority of sentences from the Appeal Courts, had still not been accepted by some receiver administrators. In brief, RDL 3/2009 makes the following modifications: (i) clarification of two ranks of claims; (ii) classification of credits granted by parties related to the debtor; and (iii) a new subordination assumption.

RDL 3/2009 clarifies two ranks of claims: (i) credits protected by public law (taxes, social security and so on); and (ii) credits of individuals or companies especially related to the debtor (for example inter-company claims). In relation to the first rank, RDL 3/2009 establishes that claims arising from inspection or verification proceedings will be recognised as contingent until they are determined and, consequently, any late communication to the receiver administration will not result in a subordination of such credits.

On the other hand, credits guaranteed by parties related to the debtor will be classified as subordinated whenever the grantor has paid the creditor concerned and, therefore, subrogates in its position. Consequently, such creditors will have the same rights as ordinary creditors if the party related to the debtor is not subrogated in the credit.

The relevant moment for considering those shareholders as related to the debtor (owner of at least 5% of the share capital if the debtor is a listed company or 10% otherwise) will be the date on which the credit is granted and not the moment at which the relationship to the debtor is made known or when it had been established (before, the subordination took place or even ex post, when the creditor became a partner of the company).

The last amendment to the classification framework involves all claims arising from contracts with reciprocal obligations. As a general rule and, pursuant to the Insolvency Law, the sole declaration of insolvency will neither affect the validity of contracts with reciprocal obligations still pending to be fulfilled between third parties and the insolvent debtor nor will the effects of such contracts be altered. Otherwise, the continuation of the debtors' business throughout the insolvency would not be viable.

Experience has shown that third party debtors of the insolvent company are keen to create obstacles to the fulfilment of their obligations. In such cases, RDL 3/2009 is designed as a coercive measure since their claims will be subordinated if the creditor repeatedly breached such contracts during the insolvency process.

Liquidating the estate

Under the Insolvency Law, an insolvency proceeding may be terminated (i) once a creditors agreement has been agreed and approved or (ii) upon the liquidation of the debtor's estate and subsequent sale of assets owned by the debtor (or by any liable third party) to satisfy the creditors.

The RDL 3/2009 allows for a shortening of the liquidation process by virtue of which the debtor may request early liquidation of the debtor's estate during the ordinary phase of the insolvency proceeding. This proposal may even be sought (and used to pay creditors with the amounts obtained from the liquidation transactions) without waiting for the decision on the challenge of the receivers' report.

The principal characteristics of the new procedure are the following: (i) it must be requested by the debtor within 15 days of the issuance of the receivers' report; (ii) it must be evaluated by the receiver administration; (iii) the judge will approve or reject the proposal; and (iv) payment to the creditors will be the same as under the general framework established by the Insolvency Law, but the judge may authorise payment to creditors without waiting for the decision on the claims filed against the receiver's report.

The advantages of this alternative are that the liquidation and sale of assets will begin after the issuance of the receiver's report, saving time and creating the possibility to obtain a better price for the assets (the length of insolvency proceedings is inversely related to the value of the assets). The time saved with respect to the normal liquidation process is therefore the period of resolution of the creditor's list or the inventory list.

Simplifying proceedings

RDL 3/2009 has introduced further changes designed to speed up, simplify and save costs associated with the insolvency proceeding.

First, a new system is established for publicising the initiation of the insolvency process. Edicts related to the insolvency declaration are published in the Official Spanish Gazette without cost and a new Insolvency Public Registry is established to publish other resolutions issued by means of edicts, which can be accessed without cost via the internet.

Second, RDL 3/2009 has modified the retribution system for the receiver administration including, in particular, the following measures: (i) limiting the receivers' fees; and (ii) establishing a mechanism to ensure receivers are paid a minimum fee by means of the creation a common fund for cases involving companies with insufficient assets to cover fees of the receiver. Finally, the scope of cases to which the abbreviated insolvency process (process deadlines are halved and only one receiver is appointed) is applicable has been extended.

The functions expected from insolvency proceedings have not been fully achieved throughout the past five years. RDL 3/2009 takes a step in the right direction by protecting out-of-court restructurings, providing more time for negotiations prior to insolvency without incurring liability, reducing the time for liquidation in order to limit the losses to the value of assets, and reducing costs.

RDL 3/2009 represents a small step in the larger reform of the Insolvency Law that was recently announced by the Spanish Ministry Justice. Hopefully, all these new changes will help debtors and creditors to better overcome the negative consequences of the economic crisis.

About the author

Alberto Núñez-Lagos is a partner in the Madrid office of Uría Menéndez. He joined the firm in 1987 and became a partner in 1998.

Alberto’s practice covers a wide range of corporate and banking work, although he has tended to specialise in restructuring, thereby becoming engaged in insolvency proceedings involving leading Spanish and international corporations.
Contact information

Alberto Núñez-Lagos
Uría Menéndez

c/Príncipe de Vergara, 187
Plaza de Rodrigo Uría
28002 Madrid

Tel: +34 915 860 421
Fax: +34 915 860 785

About the author

Ángel Alonso is a lawyer in the Madrid office of Uría Menéndez. He joined the firm in 1997 and became a partner in 2009.

Ángel has extensive experience in mergers and acquisitions, finance, private equity investments and general commercial matters. He specialises in restructuring, distressed investments and insolvency, having at various times advised all the parties involved when companies are in financial difficulty (debtors, company directors, creditors, receivers and so on).
Contact information

Ángel Alonso
Uría Menéndez

c/Príncipe de Vergara, 187
Plaza de Rodrigo Uría
28002 Madrid

Tel: +34 915 860 432
Fax: +34 915 860 484