The Restructuring Review: Spain

Overview of restructuring and insolvency activity

i Liquidity and state of the financial markets

Most of the measures implemented by the Spanish government to provide financial support to Spanish companies and individuals have been maintained during 2021 and will be available at least until June 2022. For example, the availability of loans backed by Instituto de Crédito Oficial (ICO) and Compañía Española de Seguros de Crédito a la Exportación (CESCE) provided to Spanish companies and self-employed individuals whose activity was affected by the covid-19 pandemic has been extended until 1 June 2022. Also, by means of several decisions of the Council of Ministers and following the authorisation issued by the European Commission, the Spanish government extended the term for Spanish companies to request public financing from the €10 billion recapitalisation fund managed by Sociedad Estatal de Participaciones Industriales (SEPI) (available to Spanish companies that are considered strategic) and the €1 billion recapitalisation fund managed by Compañía Española de Financiación del Desarrollo (COFIDES) (available to Spanish small and medium-sized enterprises (SMEs)) until 30 June 2022.

In addition, the moratorium enacted by the Spanish government to protect and financially assist debtors during the covid-19 crisis, which was aimed at avoiding insolvency proceedings (the insolvency moratorium), was extended until 30 June 2022 by Royal Decree-Law 27/2021, of 23 November 2021. Similarly, by means of the decision of the Council of Ministers dated 30 November 2021, the term to request the refinancing of ICO- and CESCE-backed loans under the Code of Good Practice, which was approved by means of Royal Decree-Law 5/2021, has been extended until 1 June 2022 to request tenor extensions and conversion of loans into profit participating loans and until 1 June 2023 to request debt write-offs.

Finally, in its meeting of 29 March 2022, the Spanish Council of Ministers approved Royal Decree-Law 6/2022 to implement urgent measures in the framework of the National Plan to respond to the economic and social impact of the war in Ukraine. A wide variety of measures and extensive regulations were implemented to provide financial support and to mitigate liquidity pressures resulting from the increase in the price of energy and other raw materials.

ii Impact of specific regional or global events

The need to extend most of the financial measures relating to covid-19 described above until, at least, June 2022 reflects that the Spanish economy had not yet recovered to pre-pandemic levels in Q4 2021 and Q1 2022. Indeed, most Spanish companies are dependent on public financial assistance (mostly ICO- and CESCE-backed loans), which initial tenor would need to be compulsorily extended up to eight or 10 years without the need to demonstrate that borrowers' annual turnover has fallen by more than 30 per cent in 2020 compared with 2019, following the most recent amendment of the Code of Good Practice approved by means of Royal Decree-Law 6/2022.

With the elimination of such a requirement, the potential beneficiaries of the measures of the Code of Good Practice would increase substantially, and therefore the amount of principal instalments that Spanish companies will need to start paying will be reduced accordingly. But we cannot forget that the compulsory extension of the grace periods initially granted up to 24 months has not been included under the measures approved by Royal Decree-Law 6/2022 (other than for companies doing business under the agricultural, livestock, fishing and road transportation sectors).

Although Spanish companies will need to start repaying the principal amount of the ICO- and CESCE-backed loans, the high levels of inflation seen at the end of Q1 2022 in Spain, which started during Q3 and Q4 2021 but were very much increased by the effects of the war in Ukraine starting in February 2022, are having a significant impact on commercial margins and liquidity available for many Spanish companies. Indeed, the most recent financial projections published by the Bank of Spain2 reflect that the Spanish gross domestic product (GDP) will increase during 2022 by an average of 4.5 per cent (which is 0.9 per cent less than what was foreseen by the Bank of Spain in December 2021 and is miles away from the 7 per cent increase foreseen by the Spanish government for 2022) and that the average rate of inflation will reach 7.5 per cent during 2022.

The Bank of Spain has even reduced its GDP expectations for 2023 to 2.9 per cent and has warned in its latest Financial Stability Report (dated April 2022) that the number of Spanish companies under financial pressure would certainly increase if an increase of the production costs associated with high energy prices and a general increase of the interest rates is added to the current financial scenario.3

Simultaneously, the concentration of the Spanish banking system together with the low flexibility of Spanish banks in the restructuring process and the low levels of public financing granted so far by the rescue funds managed by SEPI and COFIDES should provide an opportunity for alternative lenders to increase their presence in the Spanish market to take a significant role in the financial restructuring that will come once the economy is stabilised and financial projections are more accurate.

iii Market trends in restructurings

After several years in which the number of insolvency proceedings stabilised, covid-19 brought huge uncertainty about its impact for Spanish companies, in particular for SMEs, entrepreneurs and professionals.

It was expected that covid-19 would dramatically increase the number of insolvency fillings during 2020–2021. However, the measures enacted by the Spanish government to protect and financially assist debtors during the crisis were aimed, among other purposes, at avoiding insolvency proceedings by means of the suspension of the debtor's duty to file insolvency and of the creditors' rights for petition (recently extended to 30 June 2022).

As stated above, the withdrawal of public aid by the Spanish government and the European Central Bank, together with the high inflation levels and the foreseen increase of official interest rates, will likely increase the need of Spanish companies to be refinanced.

During the first half of 2022, we expect refinancing processes to be conducted mainly at the initiative of debtors, as the option for creditors to file for insolvency and the insolvent debtor's obligation to file for insolvency have been postponed until 30 June 2022. During such time, we will see restructuring transactions subject to current pre-insolvency legislation (the Spanish Insolvency Act (SIA), as amended by Royal Decree-Law 1/2020, of 5 May 2020, approving the Compiled Insolvency Statute (TRLC)), with possible access to company recapitalisation funds managed by SEPI and COFIDES. During this stage, we will also see the first renegotiations of the financing guaranteed by ICO or secured by CESCE following terms and conditions of the Code of Good Practice.

The end of the insolvency moratorium is expected to coincide with the approval of the draft bill transposing in Spain Directive (EU) 1023/2019 on Preventive Restructuring (the Draft Bill and the Restructuring Directive, respectively). From its entry into force (expected in the second half of 2022), new opportunities will arise for debt restructuring to provide a more central role to creditors, who will be able to benefit from more flexible pre-insolvency instruments with a broader scope, including the possibility of cramming down not only all types of creditors (financial, commercial and even holders of public law credits, subject to certain requirements) but also debtors. In addition, the aim of the Draft Bill is to promote the purchase of business units by providing greater legal certainty with regard to its scope and effects, as further explained below (see Sections II and III).

General introduction to the new restructuring legal framework

The implementation of the Draft Bill will involve a comprehensive reform of the Spanish pre-insolvency framework, shifting the focus to the preservation of the business as a going concern, by (1) enhancing anticipatory restructurings (likelihood of insolvency), (2) broadening the scope of restructuring schemes from both a subjective and an objective perspective and (3) strengthening the position of 'in the money' creditors, in particular in relation to shareholders, who will be deprived of the possibility of blocking restructuring agreement negotiations, although being out of money.

The pre-insolvency mechanism to restructure companies in financial difficulties will continue to be agreed under a refinancing agreement (a restructuring plan under the Draft Bill and following the Restructuring Directive), which shall always be court sanctioned (i.e., homologated) to be able to achieve any restructuring effects (creditors' or debtors' cramdown, clawback protection, protection of new money and interim financing, or termination of agreements in the interest of the restructuring).

The Draft Bill is currently being discussed in the Spanish Parliament. Its final drafting might be (slightly) amended, but the key features of the Draft Bill (as approved in December 2021 by the Spanish Council of Ministers and published on 14 January 2022) can be summarised as follows.

i A new concept of a 'restructuring plan'

The Draft Bill implements a brand-new concept of a 'restructuring plan', with which it is possible to amend not only debtors' liabilities but also debtors' asset composition, including a transfer of assets, a transfer of business units or even a transfer of the whole company (liquidation plans).

Under the new concept of a restructuring plan incorporated by the Draft Bill, it is also possible to amend the capital structure or equity conditions of the debtor and to amend or terminate agreements with outstanding reciprocal obligations in the interest of the restructuring (including senior management agreements and excluding contractual netting agreement or financial collateral regulated by Royal Decree-Law 5/2005), provided that the restructuring plan is subject to court sanction (homologated). Any potential indemnity or compensation arising from such a termination or amendment might also be affected by the restructuring plan.

With regard to liabilities, both financial and commercial claims may be affected, including contingent and conditional claims (with a special regime for their calculation).

Measures that can be agreed in relation to debtors' liabilities are also very much extended, other than in relation to public law claims, which may be affected only subject to conditions and limitations. The Draft Bill clearly states that the measures identified therein to be imposed to creditors shall not be understood to be numerus clausus, and it includes the following as an example: change of maturity date, write-off of principal amount or due interest, conversion of debt into profit participating loans or into subordinated loans, shares or any other instrument with a different nature or ranking from that of the original claim, amendment or release of existing security interest, change of borrower and change of law applicable to affected claims.

The moment at which creditors or debtors may seek protection under a pre-insolvency situation (former 5 bis notice) and request the homologation of a restructuring plan is also very much advanced under the Draft Bill, as both can be requested on the basis of a situation in which it is objectively foreseeable that, if a restructuring plan is not established, the debtor will not be able to regularly meet its obligations due in the following two years (likelihood of insolvency).4

Formalities foreseen under the TRLC remain in the Draft Bill. As such, the restructuring plan must be formalised in a Spanish notarial public document and shall be entered into together with a viability plan and an auditor's certificate attesting that necessary majorities have been reached. When a report from the restructuring expert is needed (e.g., in cases of cross-class cramdowns where the Draft Bill requests a going-concern valuation to show that one of the approving classes is in the money), such a report shall also be included in the documentation to be submitted to the court for homologation purposes.

ii Pre-insolvency notice

The Draft Bill includes a more extensive regulation of the effects of the former 5 bis notice by means of which a debtor is able to seek protection with the view to establishing a restructuring plan with creditors. It does not require that a minimum number of creditors be involved in the negotiations, and it regulates a number of effects that such a pre-insolvency notice would have on the legal position of the debtor and on the feasibility to start or to continue enforcement actions against the debtors' assets, which are generally frozen if such assets are considered necessary for the continuation of the debtor's activity, except with regard to enforcement of financial collateral or contractual netting agreements subject to Royal Decree-Law 5/2005.

The initial term of the pre-insolvency notice remains three months, but the Draft Bill implements the feasibility of extending such an initial term for three additional months, if requested to the court by the debtor or by creditors representing more than 50 per cent of the liabilities affected by the restructuring plan.5 In any event, such an extension can be revoked if requested by (1) creditors representing at least 40 per cent of those affected by the restructuring plan, (2) the debtor, (3) the restructuring expert or (4) any creditor that proves to the court that the purpose of the extension is no longer to promote the negotiation of a restructuring plan.

Most important, one of the new effects of the pre-insolvency notice contained in the Draft Bill is to suspend not only a mandatory insolvency petition by creditors (which the TRLC already included) but also a potential voluntary insolvency petition by the debtor. The petition can be made by the restructuring expert (if appointed) or by creditors representing more than 50 per cent of the claims that could be affected by the restructuring, which will need to prove to the court that a restructuring plan is likely to be approved. This notwithstanding, the court will lift the stay if creditors do not submit a request for the homologation of a restructuring plan one month after the petition for voluntary insolvency has been filed by the debtor.

iii Classification of creditors and rules for voting for a restructuring plan

One of the main changes under the Draft Bill is that creditors must vote for a restructuring plan organised into different classes based on their common interests. The general rule is that each creditor's class will be formed by claims with the same insolvency ranking, but exceptions are available on the basis of multiple criteria (e.g., manner of affecting the claim, claims secured by different collateral, different nature of the claim and existence of conflicts of interest, etc.). This notwithstanding, it is worth noting that no mention is given in the Draft Bill to the effects that contractual subordination would have on the criteria to be used for class formation or for the purposes of valuating each claim.

Once the relevant creditors' classes are formed, the rules for voting for a restructuring plan under each class and to extend the effects of the plan to dissenting creditors are as follows:

  1. unsecured claims: a class of claims is considered approved if two-thirds of the claims corresponding to that class have voted in favour; and
  2. secured claims: a class of secured claims is deemed to be approved if three-quarters of the claims of that class have voted in favour.

The value of each claim will be equal to the utilised principal amount plus accrued and unpaid interest and fees as of the date of the formalisation of the restructuring plan value into a notarial public deed. This rule also applies to claims subject to condition subsequent. Contingent claims and those that are litigious or subject to conditions precedent will be valued at their maximum amount, unless otherwise agreed under the restructuring plan (in which case they will vote only for the affected amount). In turn, secured claims will be considered as secured debt only for 90 per cent of the amount covered by the fair value of the collateral (the nine-tenths rule), such a fair value to be calculated under the same terms as are currently foreseen under the TRLC.

Under the Draft Bill, it is possible to extend the effects of the restructuring plan to a class that has not approved the plan (cross-class cramdown) if the following conditions are met and provided that the restructuring plan is homologated by the court:

  1. approval by a simple majority of the creditors' classes, provided that at least one of them is a class of claims that in an insolvency proceeding would have been classified as a claim with special or general privilege; or
  2. approval by at least one of the creditor's classes that is considered to be in the money on the basis of a report to be issued by the restructuring expert showing the debtor's valuation as a going concern.

In addition, for the first time in Spain, under the Draft Bill, creditors have the ability to translate the economic value of their claims into real political rights, as a single class of creditors will be able to cram down other creditors (including senior creditors), provided that such a class is considered to be in the money under a going-concern valuation issued by the restructuring expert.

Subject to the fulfilment of certain conditions, the effects of the restructuring plan may be extended to the debtor itself as well as to dissenting shareholders (but not in cases of likelihood of insolvency).

iv Homologation, new money and interim financing

According to the Draft Bill, the homologation of a restructuring plan is necessary to achieve any of the following effects: creditors' cramdown (and, under certain circumstances, shareholder or debtor cramdown), protection of new money and interim financing from clawback actions, and termination of agreements in the interest of restructuring.

In order to be homologated by the court, the restructuring plan must offer a reasonable prospect of avoiding insolvency proceedings, must ensure the viability of the debtor in the short and medium term, and cannot impose a disproportionate sacrifice on creditors to achieve such purposes. Claims belonging to the same creditor's class may be treated differently, although not in a less favourable manner. As a general rule, the restructuring plan must comply with the best interest of creditors test (understood as the liquidation quota to which each creditor has an individual right) and with the absolute priority rule (could not be respected if required for the viability of the debtor and the sacrifice imposed to the affected claims is justified). All the above criteria will be reviewed only ex post by the court, if the restructuring plan is challenged.

The court that will be competent under the Draft Bill to homologate a restructuring plan will be the court corresponding to the place where the debtor has its centre of main interests (COMI), and both the debtor and any affected creditor will be able to request it. As under the TRLC, no more than one homologation per year is feasible.

The homologation of a restructuring plan by the court will stay any enforcement proceedings over the debtor's assets or any voluntary declaration of insolvency by the debtor (even if the homologation rule is not final) and will protect from clawback actions interim financing provided during the period of negotiations of the restructuring plan, as well as new money financing, if certain conditions are met. Interim financing or new money financing provided by insiders or specially related parties may also be protected under the Draft Bill under certain circumstances (opposite to the current regulation under the TRLC, where only third-party new money or interim financing can be protected).

v Challenge and opposition mechanism

The Draft Bill provides a comprehensive list of grounds for challenges, which can be used depending on the restructuring plan being considered a consensual plan (when it has been approved by all classes of creditors) or a non-consensual plan (when a cross-class cramdown has been achieved). It also includes specific grounds for challenge that can be used only by dissenting shareholders.

Other relevant grounds for challenge recognised by the Draft Bill are the following:

  1. non-compliance with the necessary requirements for the plan to be approved, including that the plan does not offer a reasonable prospect of avoiding insolvency and ensuring the viability of the debtor;
  2. if a creditor's class receives rights or shares for a value higher than the value of its claims;
  3. the class to which the challenging creditor belongs is treated less favourably than any other class belonging to the same insolvency ranking; and
  4. the value of the claims has been reduced in a manner that is manifestly higher than is necessary to ensure the viability of the company.6

Opposition to the restructuring plan may be brought by dissenting creditors or shareholders under two different alternative judicial actions:

  1. after the homologation ruling issued by the court, by challenging the ruling before a higher court (Audiencia Provincial); or
  2. prior to the court issuing the homologation ruling, by requesting a preliminary hearing in front of the same judicial body that will deal with the homologation (in which case an additional challenge in front of a higher court will not be available).

The effects of a successful challenge will extend only to the challenger, except if the restructuring plan is challenged on the grounds of not being compliant with the necessary majorities to approve it or due to wrong creditor class formation (in which case the restructuring plan will be considered ineffective). To avoid the latter ground for challenge, the Draft Bill makes available to parties a mechanism under which the class formation methodology may be checked with the court prior to the restructuring plan being subject to homologation.

vi The restructuring expert

One of the new features under the Draft Bill is the creation of the role of the restructuring expert, understood to be a new actor in restructuring deals, the appointment of which is mandatory in the following circumstances: (1) when requested by the debtor, (2) when the stay of individual enforcement actions has been requested and the judge deems it necessary, (3) in the event of the cramdown of shareholders or creditors cross-class cramdown, and (4) when requested by the majority of creditors representing more than 50 per cent of the liabilities affected by the restructuring plan.

The appointment of the restructuring expert will be made by the court and will be vested by a duty to act in the interest of creditors, shareholders and obligors. The same incompatibilities applicable to auditors will apply to the restructuring expert.

General introduction to the insolvency legal framework

i Introduction to the insolvency regime

In 2020, the SIA was subject to a recast by virtue of the TRLC. The purpose of the recast was to promote a more coherent systematisation of the law (necessasry after the different reforms carried out during the 17 years that had passed since the SIA was approved). It has also included some (but not all) of the case law from the Supreme Court.

The SIA foresees a concurso (the full Spanish insolvency proceeding) for companies that are not able (or expect not to be able) to regularly pay their debts as they fall due. The directors of a company or the debtor must file for insolvency within two months of the date on which they became aware or should have become aware of the insolvency situation.

The SIA determines the equitable subordination of those claims held by persons with a special relationship to the debtor (insiders or connected parties). Connected parties are:

  1. shareholders with a direct or indirect equity stake of at least 10 per cent (or 5 per cent in listed companies);
  2. directors (also de facto or shadow directors) and those who had that role within two years prior to the insolvency declaration;
  3. other group companies controlled by the same corporation or individual as the debtor company;
  4. shareholders who, despite not having the relevant stake in debtors' equity, have it in another group company; and
  5. assignees of any connected party within two years prior to the declaration.

Except in the case of directors and group companies, subordinated claims are only those accrued after the relevant fact or circumstance occurs. Equitable subordination affects any sort of claims, except in relation to shareholders (points (a) and (d) above), where only financial claims are subordinated. The main effects of the subordination of the claims are (1) the cancellation of any security interests granted by the debtor, (2) deprivation of voting rights (although the claim will be bound by the restructuring agreement or plan of reorganisation) and (3) subordination in terms of priorities in distribution (i.e., rank at the bottom of the payment waterfall).

Unlike the US Bankruptcy Code, debtors (or creditors) do not have to make a decision between reorganisation (Chapter 11) or liquidation (Chapter 7) upon seeking judicial protection. Every insolvency proceeding begins with the common phase, which, however, may be coupled with other actions if the debtor requests the opening of the liquidation stage of the insolvency proceeding, or if the debtor's filing attaches, for instance, a prearranged proposal of composition agreement or a binding offer to acquire the business as a going concern. The common phase starts with the judge appointing an insolvency administrator (an independent third party – creditors have no say), who will be in charge of determining the debtor's estate and list of creditors (by producing the draft insolvency report). The insolvency administrator also oversees management of the debtor's business (default rule in voluntary cases) or steps into the shoes of the directors if so determined by the court (default rule in involuntary cases).

Creditors, the debtor, or any interested party may challenge the estate or the list of creditors drafted by the insolvency administrator. The SIA foresees that the common phase will not end until the court resolves these challenges, unless they represent less than 20 per cent of assets or claims. However, pursuant to the Draft Bill, and in order to reduce the length of the proceedings and preserve the value of the assets, the common phase will end 15 days after the draft insolvency report is filed by the insolvency administrator. Unless a proposal for a composition agreement has been presented, the proceeding will move on to the liquidation phase as a default rule.

The SIA traditionally foresaw a summary insolvency proceeding applicable to those insolvency proceedings that could be regarded as lacking complexity under certain requisites. One of the main innovations of the Draft Bill is the introduction of a fast-track insolvency proceeding for small businesses (i.e., those that employed an average of less than 10 workers during the year preceding the insolvency declaration and those with turnover or liabilities lower than €2 million according to their latest annual accounts). Special proceedings for small businesses are largely processed via the internet and rely on legal forms to be completed directly by the debtor, whereas the intervention of an insolvency administrator and lawyers assisting the interested parties is generally non-mandatory.

ii Pre-insolvency notice (automatic stay) of Articles 583 to 595 SIA

Under Spanish insolvency law, directors must file for concurso within two months from directors' actual or due awareness of the debtor's inability to regularly pay its obligations as they are due (see above special rules due to covid-19). Failure to comply with this duty might have negative consequences for directors if they are found to have wilfully or grossly negligently created or deepened insolvency (a late petition is a rebuttable presumption thereof). Directors' liability is analysed within the frame of the insolvency classification section, which kicks in upon the finalisation of the common stage of the insolvency proceeding. In particular, in the event of liquidation, directors may be liable for the impaired claims accrued from the onset of insolvency.

Debtors may earn an additional period of up to six months (three months extendable for an additional three months) to continue negotiating a refinancing agreement out of court, an out-of-court payment scheme or a prearranged composition agreement. The First Title of the Second Book of the SIA establishes the proceeding to earn this safe harbour for directors. The debtor must serve notice with the court that would entertain concurso within two months from the onset of insolvency. The debtor's notice pursuant to the Draft Bill is a comprehensive document whereby several formal requisites concerning relevant information on the debtor's status need to be fulfilled. The court analyses whether the formal requisites established by law are fulfilled and orders its publication in the Insolvency Register (unless the notice is confidential). Debtors can challenge only specific aspects of the court's resolution accepting the debtor's notice (concerning fulfilment of certain formalities and issues relating to enforcement of guarantees and executory contract performance). The debtor has three months to continue negotiating, as a concurso petition must otherwise follow during the fourth month. Thus, considering that the debtor has two months to file for concurso or serve a pre-insolvency notice, borrowers have six months from the onset of insolvency to negotiate out of court instead of filing for concurso. This period, as is indicated above, can be extended for an additional three months when certain requisites are met. In practice, as long as suppliers and workers are supportive or controlled, debtors may extend this period through standstill agreements (even seeking homologation thereof to bind dissidents as in the first Abengoa case; however, this remains highly controversial).

During this four-month period, the court shall not admit petitions for involuntary concurso (the debtor has preference to file voluntarily until the end of the fourth month). The same rule shall apply if this period is extended.

A pre-insolvency notice also establishes an automatic stay, though this is limited to enforcement actions (e.g., security interests, monetary judgments – not payment, set-off, etc.) over assets necessary to continue the ordinary course of business. Public claims (taxes and social security, etc.) are not affected by this automatic stay. Security interests governed by the financial collateral special regime or perfected on assets not located in Spain also escape this automatic stay (if the collateral is located outside the EU, the ability to escape the automatic stay shall rely on local insolvency law).

The Draft Bill also foresees the stay of the right to modify, terminate or accelerate an executory contract that is deemed necessary to the continuity of the business activity of the debtor during the period of effects of the pre-insolvency notice. Debtors' counterparties may challenge this effect of the pre-insolvency notice on the grounds that their contract with the debtor is unnecessary to the company's ongoing business.

The debtor is allowed to file one pre-insolvency notice per year. This is consistent with the SIA's goal of promoting restructuring alternatives to concurso, as long as the restructuring alternatives are actually suitable to remove financial distress.

Lastly, one of the main changes to the pre-insolvency regime introduced by the Draft Bill consists of the right of creditors representing the majority of claims that may be affected by a restructuring plan (or, when appointed, the restructuring expert) to request the insolvency court to suspend the debtor's filing for insolvency for a period of one month insofar as they prove that a restructuring plan that is likely to be approved has been presented.

iii Clawback actions (avoidance)

According to Article 226 of the SIA, a debtor's acts and contracts detrimental to the estate that were performed within the two years prior to the request for the declaration of insolvency, and those between such a request and the date when insolvency was declared, may be avoided, even in the absence of fraud or intent (this period also extends to the period following a pre-insolvency notice that is not followed by a successful court-sanctioned restructuring plan). The SIA establishes certain rebuttable and non-rebuttable presumptions of detriment to the estate.

The SIA also establishes certain safe harbours, mainly:

  1. acts and contracts pertaining to the ordinary course of business and at arm's length terms;
  2. acts within the scope of special regulation over payment and clearing and liquidation systems for securities and hedging instruments;
  3. security interests granted in favour of the salary guarantee fund or in connection with credit claims subject to public law;
  4. operations through which resolution measures of credit institutions and investment services companies are implemented;
  5. refinancing agreements gathering specific requirements; and
  6. acts or transactions subject to foreign law that are unavoidable under the circumstances.

Should the clawback action be successful, the act or contract will be rescinded. Concerning bilateral contracts, parties shall then return the consideration, having the non-insolvent party right to a pre-deductible claim (or subordinated if found to have acted in bad faith). As to avoided acts and contracts other than bilateral contracts, the creditor gets a claim (e.g., regarding debt-to-asset swaps, the asset must be turned over and the creditor gets a reinstated pre-petition claim).

To avoid clawback risk, out-of-court refinancings and, in particular, the security interests taken can be ring-fenced from clawback through homologation and notarisation with certain additional requirements, as explained in the next subsection.

In addition to the insolvency law clawback action, generally applicable fraudulent conveyance actions, which require intent and have a four-year reach-back period, also work in concurso. Pursuant to the Spanish Supreme Court case law, intent is found to occur when a diligent creditor could not ignore that the act or contract at issue was detrimental for the estate or the rest of the creditors. This general fraudulent conveyance action is the only one applicable to unwind security interests subject to the financial collateral regime.

iv Formal methods to restructure companies in financial difficulties (within insolvency proceedings)

Insolvent companies have the following mechanisms available under the SIA to restructure their debts.

Composition agreements

An insolvent debtor may restructure the company's debt by entering into composition agreements with its creditors.

A proposal for a composition agreement can be filed at any time between the declaration of insolvency and 15 days after the filing of the preliminary insolvency report by the insolvency administrator. Otherwise, the insolvency court shall open the liquidation stage of the insolvency proceeding. The proposal can be filed both by the debtor and by creditors whose claims, individually or jointly, exceed 20 per cent of the total liabilities of the company.

Composition agreements include term extensions (up to 10 years) or haircuts (or both). They may also establish corporate restructurings such as mergers, the sale of assets or business units as a going concern (with the same rules described in Section II.ii), debt-to-asset swaps, and conversion into subordinated loans (PPL) or into any other debt instrument. Other alternatives are also available. These measures, other than haircuts and term extension, 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 repayment schedule and a business plan (if the debtor expects to repay the debt with the ordinary course cash flows).

For voting and recovery purposes, claims are classified into secured, generally privileged (unsecured but with priority in distribution), ordinary unsecured and subordinated claims. Secured and generally privileged claims are also classified into financial, trade, public and labour claims. Secured claims are stripped down in accordance with the security interest value (nine-tenths of collateral fair value). The deficiency claim is classified according to general rules.

Concerning voting, there is no cross-class cramdown or absolute priority rule. Spanish insolvency law relies on cram-in rules. Moreover, in spite of valuation, subordinated creditors, which have no voting rights, are entitled to the same treatment as ordinary unsecured claims (although deferred – if the composition agreement includes debt deferrals, each year deferred will amount to a three-month deferral for unsecured claims counted as from the expiry of the forbearance period of ordinary creditors). Finally, yet importantly, there are no equity cramdown mechanisms. The debtor can bargain with the right to petition for liquidation at any point in time (even if the composition agreement proposal comes from creditors and obtains the relevant majority thresholds).

According to the Draft Bill, a composition agreement can be modified two years after its entry into force. The modification needs to be essential for the continuity of the company's business and the risk of breach of the composition agreement must be unattributable to the debtor. The petition for modification needs to fulfil several formalities, including attaching a payment and a viability plan.

Composition agreements with haircuts of up to 50 per cent or term extension (or conversion into PPL) of up to five years require a majority of 50 per cent of ordinary unsecured claims. This threshold is 60 per cent for secured and generally privileged claims. Any other content requires a 65 per cent majority threshold for ordinary unsecured creditors and 75 per cent for secured and generally privileged creditors. A simple majority is sufficient if there is full payment within no more than three years or immediate payment with a haircut lower than 20 per cent. A specific voting rule is established for syndicated creditors. The whole syndicate accepts the composition agreement if 75 per cent of participants favour the proposal, unless a lower majority is provided in the syndicated agreement.

Sale of business unit (pre-pack sales)

Pursuant to the SIA, the business unit can be sold off at any time during the insolvency proceedings with the authorisation of the insolvency administrator and court approval (usually through online auctions, although direct sales or sales through a specialised entity are also possible). Moreover, the SIA provides a specific type of accelerated pre-packaged sale when a debtor, together with its request for insolvency, files a binding offer by a creditor or third party for the purchase of one or several business units.

The offeree needs to assume the obligation to continue or resume the business activity pertaining to the business unit during, at least, three years. Breach of this duty can entail damage claims by any affected party.

An important aspect of the sale of business units or pre-packaged sales is that the purchaser can assume or reject (without having to pay damages) executory contracts, licences and administrative permits. The purchaser can also leave behind the debtor's debts (both insolvency claims and administrative expenses) except for labour claims and social security claims (however, an important change has been introduced in the SIA, as only the insolvency court can establish the business unit). Cherry-picking certain claims (normally for business reasons) is also permitted. Importantly, no taxes or tax contingencies are transferred to the purchaser. In practice, however, the deal structure becomes paramount to minimise the accrual of taxes relating to the very sale of the business unit.

The business unit can also be transferred free of any liens and security interests (although the purchaser may elect to assume secured financial contracts, in which case the security interest is not cancelled). The statutory rule is that secured creditors that fail to enforce the security interest ahead of liquidation temporarily lose control over the collateral, although they maintain the right to receive part of the price equivalent to the weight of the collateral in the estate. The SIA foresees a veto right for secured creditors, although its scope and how it can be overridden are currently under discussion.

The traditional absence of specific regulation on the sale of business units in the SIA led some Spanish courts (i.e., Madrid, Barcelona and Balearic Islands) to elaborate protocols envisaging the pre-pack sale of business units. These protocols, which were not homogenous, aimed at commencing the process of sale of the business unit before the insolvency declaration. Their goal was to expedite as much as possible the sale process while ensuring that, in the case of direct sales, there has been sufficient market prospection and sharing of information with interested parties to maximise the business unit proceeds. However, the Draft Bill seems to have taken a step back in the purpose of expediting the sale of the business unit and has omitted most of the proposals included in the courts' protocols. Practice in the upcoming months will show whether Spanish courts consider that the Draft Bill still leaves them room enough to implement their pre-pack sale protocols, where they included measures more expeditious than those envisaged in the Draft Bill. For instance, the protocol approved by the Barcelona courts envisaged the appointment of a temporary insolvency administrator following the pre-insolvency notice filed by the debtor (Madrid courts, on the contrary, considered that they could not appoint an insolvency administrator prior to the insolvency declaration). Such a temporary insolvency administrator's purpose was to monitor the sale process conducted during the pre-insolvency process. Once a bidder is selected, the debtor files for insolvency together with the binding offer to acquire the business unit. The court, upon the filing of a report by such a temporary insolvency administrator, would authorise the transaction swiftly.

The Draft Bill foresees the appointment of a pre-insolvency expert whose purpose is to gather offers for the purchase of the business unit and who, ultimately, may be appointed as insolvency administrator and issue a report favouring a specific binding offer. However, the Draft Bill also foresees several terms for creditors and interested third parties to file allegations, which can potentially delay the authorisation of a business unit sale.

v Taking and enforcement of security in Spain

Taking security

Under Spanish law, obligations can be secured by in rem rights (e.g., mortgages over real estate or pledges (with or without transfer of possession) over movable assets) where a specific asset secures fulfilment of an obligation, or in personal guarantees, where a person guarantees fulfilment of an obligation. There are also material differences in proceedings for their enforcement (as explained below) and their treatment during insolvency under the TRLC and the Draft Bill where creditors with collateral over specific property or rights (e.g., mortgage or pledge) or equivalent rights (e.g., finance lease agreements) are classified as privileged creditors and are bound by the composition only if they accept it voluntarily or through cram-in mechanisms.

Real estate mortgages cover not only land and buildings built on it but also, automatically, proceeds from the insurance policies relating to the property, improvement works and natural accretions. Parties may also agree to extend the security interest over movable items located permanently in the mortgaged property for its exploitation, proceeds of the mortgaged property and any outstanding rent. They must be granted by means of a public deed before a public notary and filed at the relevant land registry.

Obligations can also be secured by means of a chattel mortgage. This particular type of mortgage can cover the whole business of the grantor (including leases, fixed installations, equipment, intellectual and industrial property, and raw materials and finished goods, if certain requirements are met), motor vehicles and aircraft. Industrial machinery and intellectual property rights can also have their own separate type of security. These mortgages must be executed by means of a public deed before a public notary and entered on the chattel registry.

Since March 2016, aircraft equipment can also be subject to international interest under the Cape Town Convention on International Interests in Mobile Equipment. The only requirements are to be set out in writing (identifying the object and the guaranteed obligations) and the guarantor's title to dispose of them. Entry on the International Registry of Guarantees is a requisite for enforceability against third parties. International interests have priority over any state security regulated by domestic law, even where the state security was created before, and are enforceable in insolvency proceedings if they were registered before the proceedings began (the international interest would be treated in the insolvency as a national in rem security).

For movable assets that cannot be the object of a chattel mortgage (because their specific identity cannot be registered) or of an ordinary pledge (given the legal or financial impossibility being transferred), Spanish law regulates the non-possessory pledge. Movable assets that may be involved in this sort of pledge are row materials and stock and machinery. Claims not represented by securities or considered financial collateral (under the Collateral Directive and its transposition under Spanish law) can also be used in a non-possessory pledge. The law requires entry on the chattel registry as a condition for validly creating the pledge.

Pledges can also be granted with transfer of possession to the creditor or a designated third party. For the pledge to be enforceable against third parties, a notarised agreement or a public deed must be created. The most common type of ordinary pledge is given over shares and credit rights (such as bank accounts, receivables, relevant agreements and insurance policies).

In Spain, a personal guarantee may be granted by means of an ancillary guarantee or by means of an aval or a first demand independent guarantee. The aim of a first demand guarantee is to provide the beneficiary with faster and summary means of enforcement, avoiding unnecessary costs and delays derived from certain benefits and privileges conferred by Spanish law to any guarantor under an ordinary guarantee or aval (i.e., exhaustion of remedies against debtors, division between several guarantors or main debtor and guarantor, and requesting payment only after seeking first from the main debtor). In terms of enforceability of first demand guarantees, the court should not analyse the guaranteed obligation because the first demand guarantee is an abstract, independent and autonomous obligation in respect of the loan agreement.

The most common types of security given in Spanish practice are personal guarantees and pledges over assets (i.e., shares) and claims because they are not subject to registration (and therefore not subject to registration fees or taxation). Stamp duty can be triggered when granting or assigning security if granted by means of a public deed and subject to public registration.

Property mortgages are also a very usual security when the value of the property justifies the payment of the stamp duty and other related costs. More recently, floating mortgages (Article 153 bis) have become popular because they can secure several financial obligations and, consequently, prove cost efficient, but they are available only to regulated credit institutions, hence are not a valid protection mechanism for non-regulated funds acting as direct lenders. Other securities also subject to registration (such as mortgages over machinery or trademarks and pledges without transfer of possession over stock or raw materials) are less common because of the stamp duty and costs involved.

Pledges over shares and bank accounts could be granted according to Royal Decree-Law 5/2005, which implemented the EU Directive on financial collaterals in Spain. As a result, such security could be enforced through straightforward proceedings and would be ring-fenced against any stay under the TRLC or the Draft Bill.

Lastly, some Spanish autonomous regions, particularly Catalonia, have approved local regulation on security interests that applies primarily to pledges and differs from Spanish common law in key aspects.

Enforcing security

Under Spanish law, mortgages and pledges can be enforced in judicial or notarial proceedings. In judicial proceedings, the asset can be realised by direct sale, by a specialist entity or through an auction. Notarial proceedings can be carried out only by auction. In both proceedings, auctions must be carried out through an electronic auction held on the official gazette of the Spanish state's auctions portal. Pledges over credit rights are usually enforced by offsetting or direct transfer. Direct sales are still controversial but (as confirmed by a recent resolution issued by Dirección General de Seguridad Jurídica y Fe Pública on 10 March 2022, following the criteria explained under resolutions dated 27 October 2020 and 15 March 2021) should be acceptable if they are executed at fair value, include escrow mechanisms for junior creditors and are freely agreed by the parties, which are acting in good faith.

Personal guarantees can be enforced through either declaratory civil proceedings or summary executive proceedings, the latter when certain conditions are met (granted by means of a public deed where the secured obligation is clearly specified). Summary executive proceedings are faster and more effective, whereas the declaratory civil proceedings are more time-consuming.

At pre-insolvency stages, the TRLC and the Draft Bill limit the ability to enforce collateral required for the continuity of debtors' professional or business activities (with the exception of financial collateral). In addition to the pre-insolvency notice (see Section II.ii above), upon insolvency declaration, enforcement may not commence until a composition is approved (which does not affect that entitlement) or one-year elapses without composition or liquidation (with the exception of financial collateral). For this purpose, the law extends the treatment to the recovery of movable property sold by instalments and those assigned by financial leases, as well as to the cancellation of real estate sales owing to failure on payment of the deferred price.

Significant transactions, key developments and most active industries

The crisis in Spain has severely affected all sectors. However, construction companies, real estate developers, retailers, manufacturers and some financial institutions have suffered the most.

i CATA and CNA Group: restructuring agreement and court homologation

Cata Electrodomésticos SL (CATA) is the parent company of an international group of companies called CNA Group, whose activity consists of the production and commercialisation of home appliances. Following the acquisition of the business units of renowned Spanish home appliances brands, which failed to perform as expected by the group and went bankrupt, on June 2018, the group reached a court-sanctioned refinancing agreement. From late 2019, the company had difficulties complying with its business and viability plan, which were aggravated by the impact of the covid-19 pandemic and eventually led the company and its creditors to seek third-party specialised investors to fund the company.

During the last quarter of 2021 and the beginning of 2022, Cuatrecasas advised the investor that decided to finance the company, as well as the company itself, in designing the restructuring scheme to better allow for the short- and medium-term viability of CATA and the CNA Group, while preserving the rights of the rest of the stakeholders (not all creditors formally adhered to the refinancing agreement). The international character of the group, as well as the amount of intragroup securities, turned the restructuring process into a highly complex transaction that required multi-jurisdictional legal assistance. Rules on the content and processing of restructuring plans included in the Restructuring Directive, which would soon be transposed in Spain, were also taken into consideration throughout the whole process.

In January 2022, CATA and one of its subsidiaries filed their request for homologation of a refinancing agreement, with the support of over 90 per cent of their financial indebtedness (both total and secured financial indebtedness), and requested the court to extend its effects to holdouts. The court homologated the refinancing agreement on 17 March 2022 and declared the cramdown of all its effects to holdouts. Interestingly, the court not only promoted the extension of those effects expressly foreseen in the Spanish Insolvency Law but also, in the interest of the restructuring, other ancillary effects not expressly allowed for by law, such as the novation of securities. Thanks to this broad interpretation of the Spanish Insolvency Law suggested by Cuatrecasas and upheld by the court, the CATA Group's viability will become a reality.

ii COEMAC Group (formerly Uralita): business unit sale

Cuatrecasas advised the COEMAC Group, formerly Uralita (whose ultimate parent was the listed company Corporación Empresarial de Materiales de Construcción), on selling its last operating business, namely a piping production unit, present in over 40 countries, which was developed by its subsidiary, Iberian market leader ADEQUA WS, S.L.U. This transaction represented the culmination of the COEMAC Group's divestment process, which began a few years ago. A share deal was impossible due to the contingencies affecting the company that owned the business, so Cuatrecasas designed, implemented and, finally, executed the transaction's strategy and structure, promoting an asset deal within the ongoing insolvency proceedings.

This is a highly innovative deal in Spain because of many technical aspects. First, the production unit was transferred at an early stage of the insolvency proceedings (right after filing for bankruptcy), which (1) streamlines the process, in contrast with transfers made during the liquidation stage of the proceedings; and (2) increases legal certainty, given the applicable legal remedies. Second, the structure of the transferred production unit was also innovative because it comprised not only ADEQUA's assets but also its parent company's assets; this required extending the scope of the concept of 'production unit' while promoting a joint and coordinated administration of the insolvency proceedings. Finally, we draw attention to the quick progress of the insolvency proceedings. The sale was finalised in less than six months.

Several economic aspects are particularly noteworthy. The transaction was valued at €45 million (including the financial, commercial, payroll, tax and social security debt attached to the production unit, which the acquiring company took on). Also, an additional compensation scheme was designed in case the acquiring company wished to divest quickly. Regarding employment, the designed sale included several guarantees to maintain all jobs of approximately 300 employees who were transferred along with the production unit.

International

The new European regulation on insolvency proceedings (EU Regulation 2015/848, recasting EU Regulation 1346/2000) entered into force on 26 May 2017. One of the goals of EU Regulation 2015/848 is the inclusion in Annex A of all new restructuring proceedings (alternative to full-blown insolvency proceedings) enacted across the EU. In the case of Spain, insolvency notices and homologation of restructuring plans are automatically recognised in the EU.

Concerning the reorganisation of companies with their COMI in Spain and multi-jurisdictional debt instruments, we expect homologation to remain the restructuring means chosen to deal with these cross-border cases. Homologation passed muster for the Chapter 15 recognition test in both the Abengoa and Isolux cases. Most importantly, absent a COMI shift, other alternatives (such as Chapter 11 and schemes of arrangement) present significant issues when it comes to cramming down dissenters with recourse to assets located in Spain. First, Spanish courts shall not recognise foreign main proceedings where the jurisdiction is not based on COMI location or a similar criterion. Second, any creditor would always be entitled to seek a non-main proceeding in Spain, undermining the benefits of a global and comprehensive reorganisation. Third, in the absence of a non-main insolvency proceeding in Spain, secured creditors with collateral located in Spain would be able to bypass the main insolvency proceeding automatic stay and be instead subject to the Spanish insolvency law automatic stay.

Finally, yet important, concerning clawback risk, Spanish courts shall provide protection to creditors, purchasers and other third parties under contracts subject to non-Spanish law, according to which the contract or act at hand would be unavoidable under the circumstances (see ruling from Palma de Mallorca Court of Appeals of 17 October 2017 – Orizonia case). Within EU territory, the European Court of Justice ruling of 8 June 2017 (Vinyls Italia SpA, C-54/16) has confirmed the ability of the parties to have a contract governed by foreign law even where all the links are tied to the same country (Italy), absent fraud, which must be determined by the insolvency court.

Footnotes

1 Fedra Valencia, Ignacio Buil, Rosa M Gual and Patricia Álvarez Alonso are partners at Cuatrecasas.

2 Quarterly report about Spanish economy published by the Bank of Spain at the end of Q1 2022 (Boletín Económico 1/2022). In turn, AIReF, Funcas and BBVA foresee a GDP for Spain of 4.3 per cent, 4.2 per cent and 4.1 per cent, respectively.

3 During the first week of May 2022, the Federal Reserve in the US announced an increase of 0.5 percentage points of the official interest rates to 1 per cent and expects to raise them again to 2 per cent by July 2022. Similarly, the Bank of England in the UK increased interest rates by 0.25 percentage points also to 1 per cent. In both cases, this was to reduce inflation levels.

4 Despite the above, shareholders cannot be crammed down by creditors in a situation of likelihood of insolvency, but only under a current or imminent insolvency (the latter when the debtor foresees that it cannot meet obligations due in the following three months).

5 If a restructuring expert has been appointed, the extension must be supported by their favourable report, and the court will be bound by such a decision.

6 For claims acquired on the secondary debt market, the discount at which the creditor acquired the claim will be taken into account when considering this potential ground for challenge.

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