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Spain: Restructuring challenges

Reforms made to the Insolvency Act over recent years have brought about significant changes to debt restructuring procedures in Spain

Carmen Arribillaga

Reforms made to the Insolvency Act over recent years have brought about significant changes to debt restructuring procedures in Spain. These new measures and regulations address the crisis affecting Spanish companies and introduce new financial tools that are already available in other western jurisdictions.

The new regulation introduces a pre-insolvency procedure for debt restructuring deals as well as new tools in schemes of arrangement to protect different types of agreements, depending on the consensus obtained and the nature of the contracts. After being tested for the last two years, the new legal framework has given both creditors and companies the flexibility needed to reach an agreement. The overriding aim is now to ensure the company's continuity and recovery, as opposed to the previous so-called extend and pretend regime.

However, the reforms have not been followed through with the necessary updates and improvements to the work of the courts, administrative bodies and authorities involved in all the actions required under the new Insolvency regulation in order to be more effective. For instance, actions carried out by the courts often delay the process, causing major damage to the company's already difficult situation. Other criticisms focus on the impossibility of cramming down the equity, the new money regulation, the valuation of the collateral to determine the secured claim amount, and the absence of super-privilege financing tools.

The author recently had a case in which, after a refinancing agreement reached by 100% of the financial creditors of the debtor was approved by the courts within a couple of months (under the fourth Additional Disposition of the Spanish Insolvency Act), the subsequent formal requirements needed to finalise the process took another four months. This was due to the formalities that had to be complied with (for example, publishing an extract of the agreement in the State Official Gazette, among others) and the time it took the court's secretary to issue an authenticated copy of the court's order due to the excessive workload.

As the refinancing agreement was subject to a condition precedent consisting of the final approval of the agreement, the damages the company suffered included:

  • having to request different waivers, resulting in high costs for the company;
  • the delay in several payments in kind agreed by the parties to be formalised in connection with several of the company's assets (together with the high maintenance costs of these assets); and
  • the difficulties in formalising the payments in kind as well as other sales of assets due to the variation of their values.

In the author's view, these damages were suffered quite unfairly and, of course, will never be compensated. Unfortunately, this is not the only case in which the actions and formalities involved before the agreement can become effective and obtain the protection provided by the new regulation have involved more time than the period the parties have taken to reach the agreement. As a result, these factors still require fine-tuning in Spain's insolvency law in order for the new refinancing tools to produce effective results.

There is no doubt that the new provisions of the Insolvency Act respond to the specific needs of Spanish companies and the finance markets. However, there is an urgent need to improve Spain's institutions and procedures to keep pace with the amendment made to the law. This is the only way to achieve a competent and effective legal framework for the future of Spanish economic development.

Carmen Arribillaga

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