Royal Decree-Law 11/2014 of 5 September regarding urgent measures on insolvency (the “RDL”) was published in Spain’s Official Gazette on 6 September 2014 and came into force on the following day. However, some of its provisions will not apply to insolvency proceedings already underway, depending on the phase of the proceedings when of the RDL came into force.
The purpose of the amendment of Law 22/2003 of 9 July on insolvency (the “Insolvency Law”) by the RDL is to encourage the survival of the business of insolvent companies by: (i) making the in-court creditors agreement (convenio de acreedores) more flexible and removing the obstacles and rigidities that viable companies cannot overcome to avoid going into liquidation; (ii) if liquidation is inevitable, enabling the sale of the business (transmisión de la unidad productiva), or a part of it (“business unit”), as a going concern.
The RDL focuses on extending the alternative proposals to restructure the liabilities established in Royal Decree-Law 4/2014 of 7 March (RDL 4/2014) for out-of-court refinancing agreements to encompass in-court creditors agreements. It also clarifies the circumstances under which the sale of business units as a going concern are to be carried out during the liquidation phase, particularly by adopting a mandatory subrogation system –at the discretion of the acquirer of the business unit– in contracts, licences and authorisations of the debtor, both of a commercial and administrative nature.
2. IN-COURT CREDITORS AGREEMENTS
RDL introduces novelties to in-court creditors agreements as a result of the incorporation into these agreements of the measures for out-of-court refinancing agreements introduced by RDL 4/2014, especially those related to the valuation of secured claims, creditors meeting quorums, the majorities required for in-court creditors agreement approval, and the scope, type and consequences of the different measures of in-court creditors agreements.
2.1 Valuation of secured claims
The RDL introduces in the insolvency regulations –specifically, in relation to in-court creditors agreements– the concept of “secured claim value” which was already included in RDL 4/2014 but within the scope of pre-insolvency as it refers to the validation by the court of out-of-court refinancing agreements.
Following the analysis in the previous newsletter on insolvency, each creditor’s secured claim value, which cannot fall below zero or exceed the amount of the secured claim, will be calculated according to the following formula:
9/10 of the fair value of collateral
claims with prior ranking security over collateral (e.g., other security interests with prior ranking)
Secured claim value
See our previous newsletter on insolvency for further information on how to calculate the fair value of collateral, the valuation in the event of plurality of security securing the same claim and the cases when security is jointly held by various creditors, since the regulation in the RDL is virtually the same in this respect as that in RDL 4/2014.
2.2 Creditors meeting quorum
One of the most significant novelties of the RDL is the increase of the quorum for creditors meetings to vote in-court creditors agreements proposals because of the following:
- As a result of the new definition of secured claim value, some creditors have acquired the right to vote (i.e., preferential creditors for the unsecured part in the event of insufficient collateral due to the secured claim exceeding the secured claim value).
- The RDL now grants voting rights to creditors who have acquired their claims after the declaration of insolvency, regardless of how such claims are acquired, except for creditors considered specially-related persons to the debtor.
This second measure will stimulate the distressed debt trading which will provide fresh money to original creditors without them having to wait for the liquidation phase to end, and will allow investors to acquire the claims at a lower price. In this situation, distressed investors with loan-to-own strategies will have it easier to agree and implement with the debt, restructuring non-distressed debt with the aim of continuation of the business.
Nevertheless, the quorum increase is not as significant as it seems at first sight because the circumstances under which a creditor can be subordinated as a result of being a specially-related person to the debtor have also changed, as explained below.
2.2.1 Extension of the concept of “persons specially-related to the debtor”
The RDL, amending article 93 of the Insolvency Law, modifies the concept of “persons specially related to the debtor”, by increasing the list of persons who will be considered subordinated creditors within the insolvency proceedings and who, therefore, will not be able to vote at the creditors’ meeting.
As a result of this amendment, the following legal entities will also be considered persons specially related to the debtor” (natural person): (i) those controlled (in accordance with article 42.1 of the Spanish Commercial Code) by the debtor or by any person specially related to the debtor; (ii) those belonging to the same group of companies as the legal entities described in the preceding point; or (iii) companies which directors (de iure or de facto) are persons specially related to the debtor.
In the event of insolvency proceedings of legal entities, the persons specially related to the shareholders –who are natural persons– will now also be considered persons specially related to the debtor.
2.3 Majorities for the approval of in-court creditors agreements
The RDL regulates, as RDL 4/2014 did with regard to out-of-court refinancing agreements, the majorities required to approve in-court creditors agreements. This majority will depend on the kind of measures included in the in-court creditors agreement proposal to be voted on:
- A simple majority is required for (i) the full payment of ordinary claims with an extension (espera) not exceeding three years, or (ii) the prompt payment of ordinary claims but with debt reductions (quitas) not exceeding 20%.
- The favourable vote of creditors representing at least 50% of ordinary claims is required for: (i) debt reductions (quitas) not exceeding 50%; (ii) extensions (esperas), of principal, interest or any other amount due, for a period not exceeding 5 years; or (iii) the conversion of claims into profit participating loans (préstamos participativos), excluding “public” and “labour” creditors, for a period not exceeding 5 years.
- The favourable vote of creditors representing at least 65% of ordinary claims is required for: (i) debt reductions (quitas) exceeding 50%; (ii) extensions (esperas), either of principal, interest or any other amount due, for a period between 5 and 10 years; (iii) the conversion of claims into subordinated profit participating loans (préstamos participativos), excluding “public” and “labour” creditors, for a period between 5 and 10 years; or (iv) any other measure established under article 100 of the Insolvency Law (such as debt-for-assets deals in relation to some assets and under certain circumstances).
According to RDL 4/2014, if part of the financial liabilities includes syndicated loans, all creditors holding an interest in the syndicated loan will be deemed to have adhered to the in-court creditors agreements proposal if at least 75% of the liabilities represented by the loan, or a lower majority if so established in the syndicated loan agreement, vote in favour.
2.3.1 Cram down to creditors with privileged (general and/or special) claims
According to the RDL, the effects of the duly approved in-court creditors agreement may be extended to privileged creditors (regardless of the kind of privilege) and even in relation to the amount of the claim not exceeding the secured claim value.
Notwithstanding this, in order to implement the cram down mechanism, a dual majority is required: (i) the in-court creditors agreement must be approved by the superior majority indicated below; and (ii) the in-court creditors agreement must also be approved by creditors of the relevant privileged class, according to the definition provided under article 94.2 of the Insolvency Law.
The superior majorities required to extend the effects of the in-court creditors agreement to those privileged creditors who have not voted in favour of the proposal are the following:
- The favourable vote of creditors representing at least 60% of any privileged class will be required if the measures in the proposal include any of those indicated in point 2.3(b) above.
- The favourable vote of creditors representing at least 75% of any privileged class will be required if the measures in the proposal include any of those indicated in point 2.3(c) above.
2.4 Sale of business units
In line with the legislator’s intention to encourage the sale of business units during the liquidation phase, the RDL expands on the measures contained in the in-court creditors agreement proposal in this respect, but refers to the general regulation on the sale of business units established under article 146 bis of the Insolvency Law. This aspect is especially significant in relation to clearing outstanding obligations in favour of the transferee of business units, with the exceptions indicated in point 3.2 below.
Furthermore, the proposal of in-court creditors agreement may include debt-for-asset deals, provided that: (i) the assets or rights assigned are not considered necessary to carry out the debtor’s business; (ii) their fair market value is not higher than the extinguished claim or, if so, any excess is then used for the insolvency estate; and (iii) debt-for-asset deals cannot be imposed to public creditors.
2.5 Transitional regime for in-court creditors agreements approved before the RDL and breached afterwards
The RDL provides a transitional regime for in-court creditors agreements approved in accordance with the previous regulation and which have been breached within a two-year period following the entry into force of the RDL. In this case, either the debtor or the creditors representing at least 30% of all the outstanding liabilities when the in-court creditors agreement is breached will be entitled to request an amendment of the in-court creditors agreement, thus applying the measures introduced by the RDL.
The majorities required to approve the new in-court creditors agreement proposal will vary depending on the kind of creditors affected and the kind of measures in the proposal.
- If the measures in the proposal are any of those indicated in point 2.3(b), the favourable vote of: (i) creditors representing at least 60% of ordinary claims; and (ii) creditors representing at least 65% of any privileged class (according to the classification provided under article 94.2 of the Insolvency Law), will be required.
- If the measures in the proposal are any of those indicated in point 2.3(c),the favourable vote of: (i) creditors representing at least 75% of ordinary claims; and (ii) creditors representing at least 80% of any privileged class (according to the classification provided under article 94.2 of the Insolvency Law), will be required.
The effects of the new approved proposal will affect creditors (ordinary and privileged) who did not vote in favour of the proposal and subordinated creditors.
However, public creditors will not be affected by this new in-court creditors agreement. In fact, they are excluded from such quorum and majority requirements.
3. Sale of business units during the liquidation phase
3.1 Assignment of the debtor’s contractual position without the other party’s consent
Another novelty is the automatic subrogation of the transferee in the position held by the debtor in any agreements, licences or administrative authorisations without the other party’s consent being required, provided that: (i) the agreements, licences and administrative authorisations relate to the debtor’s business or professional activity; and (ii) the transferee does not expressly oppose such subrogation.
3.2 Exemption of liability from previous debts
The RDL exempts transferees from assuming the debts (regardless of their classification as insolvency claims or post-insolvency claims) of the debtor prior to the sale of business units, unless the transferee expressly assumes such subrogation or any regulation provides otherwise.
Therefore, despite being released from certain liabilities, the transferee must assume all social security claims related to the business and any other legally imposed claims on the transferee.
3.3 Update of the fall-back rules to the liquidation plan
In line with the objective of overcoming the insolvency situation by transferring the concern as a whole, or at least any of its business units in the event that the liquidation phase is already open, the RDL amends article 149 of the Insolvency Law which contains the fall-back rules applicable to the liquidation plan.
In this way, firstly, the judge can opt, even before the auction, to sale any business unit through a specialised person or entity if it deems that this is in the best interest of the insolvency estate. In this case, the fees incurred by the specialised person or entity are taken from the receiver’s remuneration.
The judge also has broad discretion to approve, among those offers for the acquisition of the business unit within a threshold of up to a 10% of the price, the offer which best guarantees the continuity of the concern or, where relevant, employment and/or debt settlement.
The RDL also modifies the regulation applicable to the consequences of the transfer of assets and rights linked to specially privileged claims when these belong to the sold business unit, determining whether or not such security remains. In addition, the sale of this kind of assets is allowed for a price lower than the secured claim value, if approved by the specially privileged creditors who are entitled to a separate enforcement or represent at least 75% of those liabilities.
4. Other changes
4.1 Insolvency proceedings of concessionary companies or contractors of public authorities
The RDL deals with the current problem of the insolvency of companies operating public concessions (namely, toll motorways). In this regard, with a view to continuing the activity subject-matter of the contract, and ultimately, to ensure the provision of public services, the RDL provides, under “Additional Provision Two ter”, a regime applicable to concessionary companies and contractors of public authorities.
This regulation basically refers the public contracts involved in each particular case to the relevant administrative legislation and also the joinder of already on-going insolvency proceedings when the relevant in-court creditors agreement proposal affects all of them.
In this regard, the public authorities (through bodies, entities and corporate entities linked or dependent on them) can submit in-court creditors agreement proposals and make the approval of the in-court creditors agreement proposal submitted in each insolvency proceeding subject to the approval of the in-court creditors agreement proposals submitted in the other joined insolvency proceedings.
4.2 Classification of creditors and the guilty or non-guilty classification phase
The RDL clarifies the concept of “class” within article 167 of the Insolvency Law regarding the opening of the classification phase as a consequence of the judicial approval of a in-court creditors agreement, by referring to the definition of this concept in article 92.2 of the Insolvency Law, which distinguishes between “labour”, “public”, “financial” and “other” creditors.
4.3 Other novelties regarding the liquidation phase
The RDL allows the inclusion of debt-for-assets deals provided that: (i) no public creditors are affected; and (ii) the enforcement regime for assets related to special privileged claims under article 155.4 of the Insolvency Law is complied with.
Conversely, in order to speed-up the liquidation phase, the judge can retain up to 10% of the insolvency estate as security to satisfy future appeal decisions based on discrepancies with creditors regarding liquidation.