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Spain: Judges drive distressed investing

Ignacio Buil AldanaJosé Luis Lucena
During 2014, Spain's Insolvency Act suffered an accelerated shift. This was a response to the economy's need to adapt to unprecedented complex insolvency cases that the former wording of the law was unable to tackle. However, this sudden legal evolution has engendered a general feeling of uncertainty caused by the lack of case law and real life examples.

In an attempt to remedy this situation, in late 2014 the commercial justices of Madrid drafted a unified document approving common criteria with which to approach the new Spanish Insolvency Act. In essence, light has been shed upon a number of issues that have been holding back investors from distressed investing opportunities in Spain.

By way of illustration, after a clarificatory note, it has been confirmed by the justices of Madrid that financial securities (securities granted in accordance with Spanish Royal Decree-law 5/2005) can be affected by schemes of arrangement and, therefore, can be crammed-down. In practice, this means that creditors holding pledges over listed shares are not protected from eventual cram-downs called by unsecured creditors or even other secured creditors. This will certainly be a hotly debated issue in the coming months given the restructuring process within the Spanish courts.

Additionally, the justices of Madrid have limited internal cram-downs within syndicated loans in the context of statutory refinancing agreements. The letter of the law seemed to provide for an internal cram-down in scenarios where creditors holding 75% or more of a syndicate voted in favour of a statutory refinancing agreement. However, the agreed interpretation is that the remaining 25% of the syndicate would only be deemed to have voted in favour of majorities' calculations. Therefore, holdouts within a syndicate will not necessarily be bound by the terms of the refinancing, unless the standard rules and majorities for cram-downs lead to that conclusion. This view seems to differ from the one followed by judges in other Spanish courts, especially in Barcelona.

In some instances, it may be argued that the unified interpretation of the Spanish Insolvency Act has restrained its pro-debtor design after the recent reforms. Regardless of this criticism, and the many unanswered questions that remain in place, this initiative has clearly served to demonstrate that Spanish judges are willing to take a step further in driving a new era for distressed investing in Spain.

Ignacio Buil Aldana and José Luis Lucena

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