I OVERVIEW OF RESTRUCTURING AND INSOLVENCY ACTIVITY
i Liquidity and state of financial markets
Monetary policies conducted by the European Central Bank have improved liquidity in the Spanish financial markets. This has resulted in financial entities progressively granting funds again. However, such liquidity has only reached Spanish-based international companies and listed or major companies. Small and medium companies (SMEs) are still finding it difficult to access funding.
The European financial crisis has directly affected the bailout of the savings banks, which has led to the creation of a bad bank (Sociedad de Gestión de Activos Procedentes de la Reestructuración) that, unlike in other jurisdictions, is privately controlled. The bad bank has enabled prices of assets (especially real estate assets) offered to the market to adjust at sufficiently attractive rates so as to encourage investment again. Foreign real-estate investment funds have played an important role in this process by investing in and recapitalising the Spanish economy. This policy has led to sustainable growth. The general consensus is that Spain is expected to grow 3 per cent this year. By contrast, other southern European countries continue to reject the amount of non-performing loans (NPL) and, thus, are not growing.
Furthermore, the single resolution mechanism (SRM) has lived up to expectations and has proven to help Banco Popular. This case is recognised as the first and only bail-in case in Europe. However, this should have been embraced by other countries in southern Europe (such as Italy with Banca Popolare di Vicenza and Veneto Banca).
ii Market trends in restructuring procedures and techniques employed during this period (formal or informal)
A ‘before and after' line has been drawn recently in relation to restructuring tools and procedures to avoid what had been occurring in Spain (and elsewhere in Europe) ever since the Spanish Insolvency Act (SIA) entered into force. Specifically, that most of the SMEs that entered into insolvency proceedings ended up in liquidation.
Consequently, the SIA modified its basic structure to enhance the continuity of viable businesses. This change of structure has been evidenced by several amendments to the SIA that, among other things, enforce the restructuring of companies (by introducing the Spanish equivalent to the English scheme of arrangements) (see Section II.iii, infra) and free the insolvency proceedings from obstacles that were initially foreseen to protect creditors in general and secured ones in particular (e.g., the reduction of secured creditors voting power by introducing the value of the security rule). Thus, a highly effective and efficient regime is being shaped, turning Spain into an attractive and competitive market to restructure debt.
In practice, companies are now seeking to prevent insolvency proceedings by resorting to out-of-court restructuring methods - such as, refinancing agreements, Spanish schemes or out-of-court payment agreements. Moreover, companies are no longer turning to foreign jurisdictions (e.g., the United Kingdom) for restructuring purposes.
II GENERAL INTRODUCTION TO THE RESTRUCTURING AND INSOLVENCY LEGAL FRAMEWORK
i Introduction to the insolvency legal framework
The SIA foresees a single insolvency proceedings (concurso) for companies that are not able (or expect not to be able) to regularly pay their debts as they fall due. In this regard, the directors of a company or the debtor must file for insolvency within two months following the date on which they became aware or should have become aware of the insolvency situation.
Every insolvency proceedings begins with the ‘common phase'. In this phase, the judge appoints a receiver that will be in charge of determining the debtor's estate and outstanding debts and overseeing the management of the debtor's business. The receiver will issue a report analysing the causes of the insolvency, the company's net worth and its accounting situation. The receiver's report will also include an inventory of the debtor's estate and a list of creditors.
Once this report has been filed with the court, the creditors or any interested party may challenge the inventory or the list of creditors. The common phase will not end until the court resolves these challenges, unless they represent less than 20 per cent of assets or claims. In such case, the court may decide to automatically proceed to next phase in order to reduce the length of the proceedings and preserve the value of the assets.
At this point, the proceedings may take two directions: (1) if the debtor's business is considered viable, the composition agreement phase will be initiated for the debtor to reach an agreement with its creditors with a view to restructuring the business; and (2) if the debtor's business is not viable, the liquidation phase will begin in order to wind up the company. Nevertheless, the debtor is entitled to request that liquidation begin at any point during the insolvency proceedings.
Summary insolvency proceedings may be applied in some cases, where: (1) the debtor has fewer than 50 creditors; (2) estimated liabilities do not exceed €50 million; or (3) if the debtor files an early composition agreement proposal (see Section II.ii Composition agreements, infra). The summary insolvency proceedings will also apply where the debtor has filed for insolvency requesting the opening of the liquidation phase with an agreed binding purchase offer for the business or where the debtor has ceased its activity and has no employees.
ii Formal methods to restructure companies in financial difficulties
Insolvent companies have the following mechanisms at their disposal to restructure their debts.
An insolvent debtor may restructure the company's debt by entering into composition agreements with its creditors. The SIA distinguishes between two types of composition agreements: (1) early composition agreement; and (2) ordinary composition agreement.
Composition agreements include debt release and deferrals. They may also establish reorganisation measures such as mergers, the sale of assets or business units as a going concern (with the same specialities as described in Section II.ii. The sale of the business during the insolvency proceedings: special reference to the prepackaged sales, infra), debt-for-equity swaps (with equity consent), conversion into subordinated loans or debt capitalisation. Other alternatives are also available. These measures cannot affect public creditors. Moreover, under no circumstance can composition agreements determine the global liquidation of a company. The proposal for a composition agreement shall include a viability plan and repayment schedule.
The court must verify if the composition agreement complies with all legal requirements. If this is the case, it will be voted by creditors (which are classed by the SIA into financial, trade, public and labour) and will be approved and imposed on the creditors of the class if a majority vote succeeds, at least among unsecured creditors. No cross-cramdown is possible. The composition agreement may also be imposed on privileged creditors (which include secured creditors) if qualified majorities are met. There is an specific voting rule established for syndicated creditors. It will be understood that the syndicate accepts the composition agreement if 75 per cent of the participants favour the proposal, unless a lower majority is provided in the syndicated agreement.
Under composition agreements, subordinated creditors do not have the right to vote and they are only paid after all privileged and ordinary creditors have been fully paid. If the composition agreement includes debt deferrals, those terms will be counted for subordinated creditors as from the expiry of the forbearance period of ordinary creditors.
Ordinary composition agreement proposals may be made by the debtor or creditors representing at least 20 per cent of the debtor's estate, once the common phase has ended and for up to 40 days before the creditor's meeting.
The voting of the proposal may be carried out in writing, or at a creditor's meeting arranged by the judge.
Only debtors are entitled to make early composition agreement proposals at an early stage of the insolvency proceedings and may do so at any time from filing for insolvency, subject to certain restrictions linked to the directors' failure to comply with their management duties. Moreover, the debtor can only make an early composition agreement proposal with the backing of creditors representing at least 20 per cent of the overall amount of the claims included in the list of creditors (or 10 per cent if the proposal is made together with the petition for insolvency). However, even if approved, the early composition agreement would only be effective after the common phase.
Creditors may adhere to the early composition agreement once it has been verified by the court until the term to challenge the receiver's inventory and list of creditors expires.
Sale of the business during the insolvency proceedings: special reference to pre-packaged sales
The debtor's business, or a business unit, can be sold as a going concern at any time during the insolvency proceedings. Moreover, the SIA provides an specific type of accelerated pre-packaged sale when a debtor files for insolvency and simultaneously requests liquidation with an agreed binding purchase offer for the business with a third party. In such a case, the judge is obliged to open the liquidation phase following the summary insolvency proceeding (please refer to Section II.i, supra) but with some special features to enable a quick sale.
An important aspect of the sale of business units or pre-packaged sales is that the transferee automatically subrogates to the position of the debtor in all the agreements, licences and administrative authorisations provided that they are related to the debtor's business or professional activity and, unless it expressly opposes to the subrogation.
The transferee is also exempted from assuming debts incurred by the debtor prior to the closing of the pre-packaged sale (even if they are classified as insolvency claims or post-insolvency claims) except for social security claims and, in certain circumstances, pending salaries.
When the pre-packaged sale is made up of secured assets and the transferee refuses to assume the security interest, the secured creditors will be repaid out of the price of the business unit in proportion to the value of the collateral and will have to cancel the security. If the price offered is lower that the value of the collateral, consent would be required by the secured creditors. Where there is more than one secured creditor, the SIA establishes that consent is given when the transfer is accepted by 75 per cent of the secured creditors of the same class with an individual right to enforce the claim.
iii Informal methods to restructure companies in financial difficulties
Ordinary out-of-court refinancing agreements
Under the SIA, there are two types of ordinary out-of-court refinancing agreements that may be immune to clawback if some requirements are met: (1) collective refinancing agreements; and (2) non-collective refinancing agreements.
The debtor can enter into these agreements if:
- a they entail at least a significant increase in the credit or an amendment or cancellation of the debtor's obligations, either by extending their maturity or establishing other obligations in lieu;
- b it has the backing of creditors (not only secured and ordinary creditors but also trade creditors) who have at least three-fifths of the claims against the debtor at the time the refinancing agreement is executed. If the refinancing agreement affects a group of companies, it must be backed by creditors holding at least three-fifths of the claims against each of the companies of the group and against the whole group of companies, excluding, in both cases, intra-group claims;
- c the debtor's auditor issues a certificate on the sufficiency of the liabilities required to execute the agreement; and
- d the refinancing agreement and related documents are executed in a deed before a notary public.
Immunity to clawback actions is also possible where the requirements described in II. 3. Collective refinancing agreements, supra are not met, but by means of a restructuring agreement: (1) the debtor's asset-liability proportion is increased; (2) the current assets resulting from the refinancing are greater than the current liabilities; (3) the applicable interest rate does not exceed a certain percentage; and (4) the agreement is executed in a deed before a notary public, and sets out the reasons for the agreements.
One of the main novelties introduced by the recent amendments to the SIA is the ‘Spanish Scheme'. This special type of refinancing agreement, in addition to becoming immune to clawback actions, allows the cramdown of dissenting creditors (including secured creditors), provided that they hold financial liabilities.
The Spanish Scheme must be backed by a qualified majority of creditors (the required majority will depend on the restructuring measure to be imposed on dissenting creditors). In addition, the agreement must be executed in a deed before a notary public.
The claims owned by related parties2 and commercial creditors are not taken into account for the purpose of calculating majorities, even if they decide to voluntarily adhere to or are ultimately affected by the cramdown. Moreover, secured claims will be treated as unsecured for the proportion of the claim that exceeds the value of the security.
The agreement must be approved by the judge in order to cram down dissenting creditors. Non-participating or dissenting creditors may challenge the resolution approving the cramdown but based on limited grounds (e.g., disproportionate sacrifice, failure to meet the required percentages). Once the judge has accepted the Spanish Scheme, enforcement proceedings (also of security) may only be initiated (or, if applicable, seeking the debtor's declaration of insolvency) if the court believes that the refinancing agreement has been breached.
Out-of-court payment agreements
Dissenting creditors (including secured ones) can also be crammed down through this out-of-court refinancing mechanism, but it only applies to individuals and small companies (i.e., companies with fewer than 50 creditors, estimated liabilities or estimated assets of €5 million or less).
iv The taking and enforcement of security
Under Spanish law, security over assets is created and perfected as a right in rem (i.e., enforceable against third parties) when a security agreement is executed and some formalities are met. This allows creditors to enforce their credit rights against those assets before other creditors.
In practice, real-estate mortgages are very commonly used to obtain security interest. The debtor creates a mortgage over one or several fixed assets that must be granted in a public deed and be registered. Possession does not need to be transferred. Mortgages can cover all ancillary assets (e.g., buildings and factories), construction improvements, indemnities, insurance proceeds and expropriation proceeds and must be executed in a deed before a notary public and registered with the land registry.
Chattel mortgages are another option. In this case, the debtor creates a mortgage over its title to certain types of moveable assets (e.g., business premises and industrial parts, machinery and industrial and intellectual property) which must be granted in a public deed and registered. Possession does not need to be transferred.
Another common type of security are pledges (with or without displacement of the possession of the pledged asset). By creating a pledge with displacement, the debtor delivers to the creditor a moveable asset (including security) or a credit right (e.g., accounts receivable) owned or held by the debtor. In this case, possession of the pledged assets must be transferred to either the pledgor or a third party (e.g., a security agent) and the pledge must be granted in a public deed to be enforceable against third parties. This type of pledge is not subject to registration.
The pledge without displacement (which may be created over, among other assets, harvesting machinery, proceeds of agricultural land, raw materials, merchandise held in a warehouse and credit rights) does not require transfer of possession but must be executed in a deed before a notary public and registered.
Another way of taking security over assets is through a retention of title agreement.
A debtor's declaration of insolvency entails that no enforcement of security in rem may be initiated or continued against a debtor's assets which are necessary for its business: (1) until a composition agreement is approved; or (2) one year after the declaration of insolvency if the liquidation phase has not already started.
However, enforcement of security in rem may be pursued before the above-mentioned terms if the judge of the insolvency proceedings declares that the assets are not necessary for the debtor's business. In this regard, the SIA illustrates examples of assets that are not considered necessary for the continuity of the debtor's business.
Moreover, actions such as the following may not be carried out against assets that are considered essential for the continuity of the debtor's business: among others, actions for the termination of sales of fixed assets with deferred payment in the event of default, even if the faculty is registered with the relevant land registry and actions aimed at recovering assets transferred under financial leasing formalised in a document involving enforcement or that have been registered with the above-mentioned registries.
The enforcement of security may be blocked even before the declaration of insolvency, if the debtor notifies the court that it has started to negotiate with its creditors to reach a collective refinancing agreement, a Spanish scheme, an early composition agreement or an out-of-court payment agreement within the two months in which the debtor is obliged to file for insolvency (please refer to II.1, supra).
This is known as a ‘pre-insolvency notice' and is the period in which the SIA grants certain benefits to the debtor and to a certain extent limits the creditors' rights, to enable the debtor to negotiate with its creditors (e.g., it is no longer obliged to file for insolvency until the pre-insolvency period elapses).
During that period, it will not be possible for secured creditors to initiate enforcement actions over assets that are necessary to continue the debtor's professional or business activity (exceptionally, enforcement of security in rem may be initiated but will be stayed) and already initiated enforcements will be stayed.
However, enforcement of security in rem by financial creditors over any type of assets (even if they are necessary to continue the debtor's professional or business activity) may not be initiated or will be suspended, if financial creditors representing at least 51 per cent of the liabilities of the company support starting a Spanish scheme.
v Clawback actions
Under the SIA, the debtor's acts within two years prior to the declaration of insolvency may be revoked if they are detrimental to the debtor's estate, even in the absence of fraud.
In such a case, the SIA also provides some rebuttable or non-rebuttable presumptions. For instance, acts of disposal carried out for no consideration or debt pre-payment due after the insolvency that are not secured with security in rem will be considered detrimental in any event (non-rebuttable presumption). Other acts, such as: (1) transfers made for consideration in favour of a related party; (2) the creation of security in rem to secure pre-existing unsecured obligations, or new obligations substituting unsecured obligations; or (3) the pre-payment of claims secured with a security in rem due after the insolvency will be presumed detrimental but may be rebutted with evidence to the contrary (rebuttable presumptions).
Some acts will never be subject to clawback, including, among others: (1) acts carried out in the ordinary course of business under standard conditions; (2) acts included within the scope of the special laws that regulate the payment and clearing and liquidation systems for securities and derivatives; and (3) guarantees or security created for claims under public law and in favour of the salary guarantee fund in the recovery agreements or conventions foreseen in their particular provisions.
Other than the above, the burden of proving the detriment caused to the debtor's estate lies with those exercising the clawback action.
If the act is revoked, it will be considered void. Consequently, both parties will have to return the consideration received for the act, together with the relevant proceeds and interest. Moreover, if the judge believes that the party entered into the agreement with the debtor in bad faith, he or she will award damages and losses caused to the debtor's estate.
Finally, the claims that arise in favour of the defendant as a result of the parties returning the consideration will be considered a claim against the debtor's estate and must be paid together with the consideration returned to the debtor, unless the act was carried out in bad faith, in which case the claim will be deemed subordinated.
vi Duties of directors in companies with financial difficulties
When a company is in financial distress, directors may be found liable in the following cases.
Capital impairment situation
If the company is subject to mandatory dissolution - i.e., when its net worth is less than 50 per cent of its share capital - directors must call the general shareholder's meeting within two months following the moment they became aware (or should have become aware) of the situation to either restore the net worth or wind up the company.
If a general meeting is not held or the corresponding resolutions are not passed, directors must file for the judicial dissolution of the company within two months following the general meeting or the date on which the meeting should have been held. If directors fail to comply with these obligations, they are jointly and severally liable for the obligations arising after the capital impairment situation.
Nevertheless, the directors' obligation to file for judicial dissolution is substituted for an application for insolvency if the company is insolvent.
The SIA establishes a specific liability for cases when the debtor's insolvency has been caused or made worse by the debtor's, directors' (including shadow and de facto directors) or general attorneys' bad faith or gross negligence (including those who were directors or general attorneys within two years prior to the declaration of the insolvency).
This regime provides a general rule (described above) and specific rebuttable and non-rebuttable presumptions. For example, the SIA establishes a rebuttable presumption of bad faith or gross negligence when directors fail to comply with their obligation to file for insolvency within two months following the date on which they became aware or should have become aware of the company's insolvency. A non-rebuttable presumption is where the debtor fails to comply with its obligations of keeping accounting records or if material inaccuracies are found in the company's financial statements.
Directors, including shadow and de facto directors, who are considered liable for the insolvency, may face the following consequences: (1) they could be disqualified from being directors for two to 15 years; (2) they could lose all claims against the debtor; and (3) they could lose their right to compensation for damages. They could also be fined if they are deemed liable for the insolvency and this results in the debts not being settled with the debtor's assets.
III RECENT LEGAL DEVELOPMENTS
No other significant changes to the insolvency proceeding have come into force recently. The Recast Regulation approved by the European Parliament has entered into force on 26 May 2016.
IV SIGNIFICANT TRANSACTIONS, KEY DEVELOPMENTS AND MOST ACTIVE INDUSTRIES
i Restructuring of Abengoa
The restructuring process of Abengoa's Group has been by far the largest restructuring in Spain (with an initial debt of €20 billion) with impact worldwide due to the size of the group (with more than 8,000 financial creditors and 600 group companies). The restructuring process began on November 2015 when the debtor filed a pre-insolvency notice to the court and was completed on March 2017. In this process, two major agreements were subject to homologation in less than one year (a standstill agreement to extend the negotiation period and the major restructuring agreement).
ii Banco Popular
Banco Popular was the first European financial entity subject to the SRM. Having declared its unviability before the relevant European and national organisms, the SRM was activated. As a result, the FORB and Spanish Central Bank agreed to the sale of the bank to Banco Santander for the amount of €1. Equity holders were subject to the debt reduction of all their investments.
Cross-border insolvencies are different to those that are subject to EU Regulation 2015 and are subject to the Spanish private international law system that has adopted the EU Regulation model when determining the rules of law recognition and enforcement (without the principle of community trust).
VI FUTURE DEVELOPMENTS
No future developments are foreseen in the short term.
1 Alberto Núñez-Lagos is a partner and Beatriz Albors Cano is an associate at Uría Menéndez.
2 Persons related to the debtor are those that the SIA considers not to be independent of the debtor. If the debtor is a natural person, related parties would refer to family members. If the debtor is a legal person, related parties would be, for example, companies of the same group and directors and shareholders that hold a certain percentage of the share capital. The claims held by persons that are related to the debtor are subordinated and are subject to certain restrictions (e.g., they will not have voting rights when reviewing a proposal of composition agreement and will only be paid once the privileged claims and the ordinary claims have been paid).