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Amendment to the Insolvency Act
Law 38/2011 of
October 10 (“Law 38 /2011”), which partially amends Law
22/2003 of July 9 (the “Insolvency Act”), was published
on the Spanish Official Gazette on October 11, 2011. Law 38/2011 will
take effect on January 1, 2012. As an exception, amendments related with
out-of-court restructuring, some amendments related with claw-back
actions, treatment of fresh money and declaration of insolvency at the
request of creditors are already in force. Law 38/2011 includes certain
rules regarding the application of the amendments to insolvency
proceedings initiated prior to its coming into force.
Law 38/2011 does
not entail a general reform but a profound reform in several very
relevant sections of the Insolvency Act. Law 38/2011 constitutes the
second major amendment of the Insolvency Act after Royal Decree 3/2009
of March 27 on urgent measures for tax, financial and insolvency matters
(“RDL 3/2009”).
The main
objectives of this new Law are the following: (i) facilitate out-of-court
restructuring for companies undergoing financial difficulties; (ii)
anticipate the outcome of insolvency proceedings and thus facilitate and
speed up insolvency proceedings; (iii) favour the survival of the debtor’s
business; and (iv) reinforce the role and responsibility of insolvency
trustees.
The purpose of
this newsletter is to identify some of the most relevant amendments made
to the Insolvency Act by Law 38/2011. These novelties are set forth and
summarized below. It is not the purpose of this newsletter to provide a
detailed recount of all the amendments introduced by Law 38/2011.
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1. OUT-OF-COURT
RESTRUCTURING
1.1. Pre-insolvency filing
Article 5.3 of
the Insolvency Act is replaced by new article 5 bis. The main
amendments introduced by this new article to the pre-insolvency system
are the following:
1. the
debtor is entitled to notify the Court of the start of negotiations
with creditors even if its insolvency is imminent and not only already
existing, as previously established;
2. the debtor may file a pre-insolvency
notice when it is negotiating an out-of-court refinancing agreement
with its creditors and not necessarily an in-court early composition
creditors agreement;
3. the
new legislation clarifies that Courts are not entitled to examine at
this stage the merits of the pre-insolvency notice; and
4.
further clarifies that upon the three plus one months grace period to
file for insolvency, the debtor does not need to apply for insolvency
if the company is no longer insolvent.
These
amendments bring the Insolvency Act into line with current practice.
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1.2. Refinancing
agreements and treatment of fresh money
Law 38/2011
does not modify the definition of “refinancing agreement” created by
RDL 3/2009. The amendments, which are summarized below, mainly address
(a) certain problems evidenced in practice in the application of the
existing rules and (b) the treatment in a future insolvency scenario
of fresh money granted by creditors in the context of an out-of-court
pre-insolvency refinancing agreement.
1.
Refinancing agreements that involve a group of companies.
The agreement must be supported by creditors that hold at
least 3/5 of the claims against each individual debtor and against the
whole group or subgroup of companies. Intra-group credits are excluded
for such calculation. The Commercial Register may appoint a single
independent expert to issue the report required by the Insolvency Act.
2.
Appointment of independent expert. To facilitate appointment of the
independent expert, the Commercial Register must appoint the expert
“at his prudent discretion”.
3.
Reservations or limitations included in the report. If the report
contains any class of reservations or limitations, their importance
should be expressly assessed by each of the signatories of the
agreement.
4.
Treatment of fresh money granted to the debtor in the event of
insolvency. To encourage refinancing agreements, Law 38/2011 considers
post-insolvency debt 50% of the claims arising from fresh money
granted to the debtor in the context of a pre-insolvency refinancing
agreement. This classification will not apply to fresh money granted
by the debtor or by persons specially related to the debtor. The
remaining 50% of the claims shall be classified within the insolvency
claims as a claim with a general preference ranking junior to secured
claims and senior to unsecured claims.
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1.3 Cram-down
mechanism
Law 38/2011
has introduced a cram-down mechanism established to bind dissenting
unsecured financial creditors to a refinancing agreement of the type
described under section 1.2 above entered into by a reinforced
majority of financial creditors. However, we foresee that the cram-down
will have little relevance in practice because it cannot be applied to
secured creditors, which is usually the case with all financial
creditors. The main characteristics of this cram-down mechanism are
described below.
1.
Conditions. Cram-down can only be applied to refinancing agreements
according to the requirements already established by the Insolvency
Act. An additional requirement is that refinancing agreements must be
entered into by financial creditors representing at least 75% of the
debtor’s liabilities vis-à-vis financial entities. The agreement has
to be sanctioned by the Court at the request of the debtor. The Court
will sanction the agreement provided that it does not impose a
“disproportionate sacrifice” to creditors of the same class that have
not entered into the refinancing agreement or do not support it. Once
the debtor requests the application of the cram-down mechanism to a
refinancing agreement it may not file another application for one year.
2.
Effects and challenge of the decision. Once sanctioned, any extensions
(principal or interest payment deferrals) will bind dissenting
financial creditors, except for secured creditors. The Court’s
decision has to be published at the Spanish Official Gazette. Within
the fifteen days following the publication, creditors affected by the
decision may challenge it but only based on one of the following
reasons: (a) the refinancing agreement has not been entered by the
required number of creditors; or (b) it imposes a “disproportionate
sacrifice” to creditors. The effect of the refinancing agreement once
sanctioned and published will not be suspended by a challenge from
creditors.
3.
Possible stay of enforcement. The debtor may
simultaneously request that the Court make an order to stay
enforcements while the Court evaluates the application and for no more
than one month. If the Court sanctions the refinancing agreement the
Court may decide to order a stay of enforcements during the extension
period established in the agreement, which cannot exceed three years.
The Court shall decide whether or not to grant such stay after
considering the circumstances surrounding the case.
4.
Breach of the refinancing agreement. If the debtor breaches the terms
of the refinancing agreement, any creditor may apply to the Court for
the declaration of non-compliance. If the Court declares the non-compliance
the creditor may file a petition for insolvency or start enforcement
proceedings.
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2. IN-COURT RESTRUCTURING (IMMEDIATE
SALE OF THE BUSINESS AND EARLY COMPOSITION CREDITORS AGREEMENT)
2.1 Early Court
liquidation. Pre-pack
1. All references to
early court liquidation at the request of the debtor have been
eliminated. However, Law 38/2011 specifically allows the debtor to
submit a liquidation plan since the start of the proceedings with its
voluntary insolvency petition attaching a previously negotiated
binding purchase offer for the business. In this case, the Court is
obliged to apply the summary insolvency proceeding and open the
liquidation phase immediately.
Terms are
shortened in summary insolvency proceedings (i.e. insolvency trustees
shall submit the inventory within fifteen days following their
appointment and their report within one month). Terms are further
reduced if the debtor submits a liquidation plan with its insolvency
petition. Under the new regime, a quick sale of the whole or part of
the business can be accomplished. Considering that long insolvency
proceedings destroy value of the business, a quick sale of the
business as a going concern is essential to maximize the value of the
insolvency estate. Furthermore, the amendments introduced to the
Insolvency Act may be considered an alternative to implement some sort
of pre-pack agreement.
If the Court
approves the liquidation plan it can also decide to terminate all
bilateral agreements with outstanding reciprocal obligations, except
those connected with a purchase offer for the debtor’s business.
2. Law
38/2011 provides that the debtor may file for liquidation at any time
during the insolvency proceedings. Therefore, if an offer for the
purchase of the business is received after the petition for insolvency,
the debtor could decide to file for liquidation in order to allow the
transfer of the business. The liquidation phase may also be opened at
the request of the trustees if the debtor’s business or professional
activity has ceased. In this event, the Court will give the debtor
three days’ previous notice and will decide if it opens the
liquidation phase within the following five days.
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2.2. Early
composition creditors agreements
1. Under the existing
Insolvency Act early composition creditors agreements are not
effective until the Court has ruled on all challenges brought against
the trustee’s report (which usually takes a long time). This has
hindered the success of this form of in-court restructuring which is
seldom used. To fix this situation, Law 38/2011 introduces specific
rules for the approval of composition creditors agreement proposals (including
early composition creditors agreement proposals) filed by the debtor
with its voluntary insolvency petition that will significantly
anticipate their effectiveness and thus favour their approval.
The special
rules will only be applicable if the Court applies the summary
insolvency proceeding. Law 38/2011 specifically establishes that the
Court may apply the summary insolvency proceeding if the debtor files
a proposal for an early composition creditors agreement. The Court may
also apply the summary insolvency proceeding if the insolvency is not
complex (i.e. if there are less than 50 creditors, or if estimated
liabilities or the appraisal of assets do not exceed five million
euros). As previously discussed, terms are significantly shortened in
summary insolvency proceedings.
2. In
addition, Law 38/2011 establishes that if challenges brought against
the trustees’ report represent less than 20% of the insolvency estate
or of claims, the Court may declare the end of the common phase and
the opening of the composition agreement or liquidation phases. By
anticipating the conclusion of the common phase this provision should
also facilitate the approval of composition creditors agreements (including
early composition creditors agreements) not filed with the debtor’s
insolvency petition.
3. By
contrast to the previous regulation, Law 38/2011 sets forth that
composition creditors agreement proposals (including early composition
creditors agreements) may include debt-for-assets deals with the
creditor with security over such assets or a third party appointed by
said creditor, provided that the secured claim is completely settled
or that the remaining claim is reclassified within the insolvency
claims. This provision may only be applied to creditors that approve
the composition agreement.
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2.3 Sale of assets
during the common phase
1. An authorization from
the Court will not be required to carry out sales that trustees
consider essential in order to guarantee the viability of the debtor
or to meet cash needs for the continuation of the insolvency
proceedings. The trustees will have to give the Court immediate notice
of any action taken and justify the need for their actions. This
provision should facilitate the immediate sale of the debtor’s
business.
2. Law
38/2011 intends to facilitate the sale of assets that are not
necessary for the debtor’s activity if the trustees receive an offer
that substantially matches the value allocated to such assets in the
inventory. An offer will be considered a substantial match if the
difference between the offer and the value allocated to the assets in
the inventory is less than 10% (in the case of real estate assets) or
20% (in the case of movable assets) provided that there are no higher
offers. An offer that meets these conditions will be approved by the
Court if a higher offer is not filed within ten days.
3. At
the request of the trustees the Court may allow, at any stage of the
proceeding, sales of assets and debt-for-assets deals with a secured creditor or a third
party appointed by said creditor, provided that the secured claim is
completely settled or that the remaining claim is reclassified within
the insolvency claims.
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3. OTHER MATERIAL CHANGES
3.1. Declaration of insolvency at the
request of creditors
If the
insolvency petition is filed by a creditor who has been unable to
attach assets of the debtor, the Court must approve the insolvency on
the following business day, without giving previous notice to the
debtor. After the declaration of insolvency, the debtor and the other
interested parties may challenge the decision.
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3.2. Group
insolvencies
1. Law 38/2011 expressly
entitles directors of the debtor to file for insolvency of a group of
companies. Creditors are also entitled to file a petition for the
declaration of insolvency of several of its debtors if they belong to
the same group of companies.
2. If
the insolvency of two or more companies of a group has been separately
declared, any of the debtors or the insolvency trustees may request
that one Court processes all the insolvency proceedings. In the
absence of a petition by any of those parties, any of the creditors
may file the request.
3.
Insolvency proceedings that have either been declared simultaneously
or have been subsequently referred to the same Court will be processed
in a coordinated manner at the request of the debtor, the insolvency
trustees or any of the creditors. As an exception, if there is
confusion between the assets of the affected companies and it is not
reasonably feasible to separate the assets and liabilities of each
company, the insolvency trustees may draft a single list of creditors
and a single inventory.
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3.3. Appointment of
trustees
1. As a general rule,
only one insolvency trustee will be appointed (a lawyer or an auditor
or economist) instead of three, as previously established.
2. An
additional insolvency trustee (an unsecured creditor whose claim is
within the first tier of claims in view of its amount) will be
appointed when the insolvency is considered of special significance.
The judge hearing the case will determine if the insolvency has
special significance based on the existence of certain circumstances
(i.e. if there are more than one thousand creditors or if estimated
liabilities exceed one hundred million euros, among others). If labour
credits are within the first tier the Court may appoint a
representative of the employees as additional trustee. Finally, even
if the insolvency does not have a special significance the Court may
appoint an additional trustee (a Public Administration or Public
Entity) if a public interest justifies it.
3.
Legal persons may be appointed as insolvency trustee, provided that at
least one lawyer and an auditor or economist works with the legal
person.
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3.4. Other effects
of the declaration of insolvency
Law 38/2011
has introduced certain limitations that affect creditors in connection
with (i) enforcement of security interests; (ii) actions aimed at
recovering assets sold through instalment sales or with retention of
title; and (iii) creditors’ right to retain assets.
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3.5 Post-insolvency
claims and ranking of insolvency claims
In addition to
the privileges granted to claims arising from fresh money given to the
debtor under a pre-insolvency refinancing agreement (se section 1.2
above), Law 38/2011 has introduced the following material changes to
the rules concerning post-insolvency claims and the ranking of
insolvency claims.
1. If
trustees predict that the insolvency estate will be sufficient to pay
all post-insolvency claims, they may decide to alter the order set out
in the Insolvency Act for the payment of this kind of claims if
convenient for the benefit of the insolvency estate. However, this
decision may not affect claims by employees, tax authorities or social
security authorities.
2. In
the event of liquidation, any fresh money granted to the debtor to
finance a viability plan in accordance with a composition creditors
agreement will be classified as post-insolvency debt.
3.
Pledges as security of future claims will only grant a special
privilege to: (a) claims arising before the declaration of insolvency;
and (b) claims arising after the declaration of insolvency, provided
that they derive from a reinstated facility agreement or the pledge is
registered in a public registry before the declaration of insolvency.
4. The
percentage of claims by the creditor that files the petition for
insolvency that will be classified as claims with a general preference
has been increased from 25% to 50%.
5.
Certain specially related creditors may avoid subordination if they
prove that they have claims which are not loans or similar financing
facilities.
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3.6. Claw-back
actions
Under the
Insolvency Act, an action, agreement or transaction is presumed to be
detrimental to the insolvency estate when it constitutes a prepayment
of future obligations. As a general rule, this presumption is not
rebuttable. Law 38/2011 slightly changes this rule by providing that
the presumption will be rebuttable if the future obligation was
secured by a specific asset or right.
3.7. Purchase of
insolvency claims after the declaration of insolvency
A person that
acquires a claim after the declaration of insolvency (usually
distressed investors) is currently not entitled to vote on a
composition creditors agreement. This very controversial provision of
the Insolvency Act clearly disincentives the purchase of insolvency
claims. Law 38/2011 intends to remedy this situation by allowing the
acquirer to vote provided that it is an entity subject to financial
supervision.
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