This content is from: Local Insights

Spanish reforms to facilitate distressed deals

Ignacio Buil Aldana
Act 14/2013, of September 27 2013, favouring entrepreneurs and their internationalisation (the Act), has introduced a wide range of reforms on several insolvency, corporate, tax and labour matters. Regarding insolvencies, the Act (among other changes) significantly reduces the quorum of financial creditors required for court-sanctioned refinancing agreements. It also includes a new out-of-court device in order for debtors and creditors to reach payment agreements binding dissident creditors.

With respect to the court-sanctioned refinancing (the so called Spanish scheme), the Act lowers the 75% (of financial debt) support threshold required under additional provision 4 of the Insolvency Act to court-sanction a refinancing agreement to a mere 55%. Further, the Act clarifies that that quorum be superimposed on the quorum required for refinancing agreements under article 71.6 of the Insolvency Act (60% of total debt, including financial debt), in line with both doctrine and case law. This reform is aimed at facilitating Spanish schemes by simplifying and lowering the threshold to reach the relevant majorities. This, of course, may have an effect on existing and future Spanish restructurings even if other key issues such as the ability to cram-down secured creditors is still uncertain, despite relevant developments in this regard (such as the Celsa case).

Additionally, the Act introduces for the first time in Spanish law the out-of-court payment scheme, which will allow individual entrepreneurs whose liabilities do not exceed €5 million ($6.8 million), and specific legal entities to propose to creditors (with the intervention of the insolvency mediator, a new body created by the Act) debt payment plans, which may include up to a three year term-out and write-offs up to 25%. Regarding creditors that may be affected by the agreement, the Act specifically excludes holders of public law credits and secured creditors with in rem security that choose not to be a party to the agreement. As for legal entities, even if this device has originally been introduced to apply generally to SMEs with assets and liabilities below €5 million, corporate entities with less than 50 creditors could also benefit from this procedure, as is the case in leveraged buyout, sale-and-lease back or even project finance transactions.

A quorum for the approval of the payment plan will require the affirmative vote of at least 60% of the liabilities affected by the agreement (if the plan calls for assignment of assets in payment, the percentage will be 75%, and the affirmative vote of the creditors with in rem guarantees on the assets involved will be necessary). If these majorities are not obtained, the insolvency mediator will immediately apply for a declaration of insolvency, which will result in liquidation.

The Spanish legislation has several times before this attempt sought to improve the out-of-court restructuring system by introducing reforms to facilitate distressed deals in Spain, even if key issues such as the treatment of secured creditors (which can also not be crammed-down in a payment scheme scenario) or the ability to create classes among creditors in a Spanish scheme remain untackled. In any case, borrowers, lenders and funds will need to reassess their legal position in existing and future deals in light of this reform.

Ignacio Buil Aldana

© 2021 Euromoney Institutional Investor PLC. For help please see our FAQs.

Instant access to all of our content. Membership Options | 30 Day Trial