In common with other European regimes, creditors to Spanish companies are now able to impose a restructuring plan on other creditors and shareholders — the so-called cross-class cram down — with other new features included such as protections on new money provision. 

Following the changes, restructuring plans are the only available pre-insolvency restructuring mechanism, replacing refinancing agreements (acuerdos de refinanciación) and schemes of arrangement (acuerdos de homologación).

The scope of restructuring plans has also been widened under the new law. Only debts arising out of tort or employment contracts will be unaffected.

Under the new law, an additional stage is added to the “imminent” and “actual” insolvency definitions, with the introduction of “likelihood of insolvency.” This allows for a restructuring plan to be implemented without the need for an insolvency filing. But conversely, creditors are unable to impose a cram down at this stage.

The amendments to the restructuring plan allows cram down over whole classes of creditors, even those ranking higher, and to shareholders as long as the absolute priority rule is preserved.

As reported, the cram down provisions could be tested by the latest Spanish restructuring, Food Delivery Brands(Telepizza), if it decides to use the new processes. However, whether its bondholders can impose a haircut on its ICO (guaranteed by the Spanish State Finance Agency (Instituto Oficial de Crédito)) loans is moot, as there is a lot of uncertainty on whether courts will impair government-guaranteed debt. 

Another interesting development under the new law include the ability to do pre-packs (either business units or assets).

Finally, liquidation plans are removed, and the appeals process has been simplified. 

Our report below goes into more detail into the various aspects of Spanish Insolvency processes, focusing on the most recent changes.

Likelihood of insolvency 

The new Spanish Insolvency law has a new pre-insolvency category, ‘likelihood of insolvency’ where it is likely that the debtor will not be able to meet debt obligations in the next two years if a restructuring plan is not agreed.

Similar to a Conciliation process in France, a company has to inform the courts that it is in negotiations with its creditors. It has to list all its creditors (trade as well as financial, and individual lenders/bondholder if known) and the amount of their claims, plus its assets and liabilities, but strangely it is not obliged to provide evidence of its financial position or its proximity to insolvency, notes Herbert Smith Freehills in a client update. 

Once filed, the company has a period of exclusivity and creditors are unable to enforce on their claims nor petition for compulsory insolvency. 

The period of exclusivity lasts for three months, with the ability to ask the court for a further three month extension if certain conditions are met. 

Given the tight restrictions on creditors, it is likely to lead to legal challenges and precedents need to be set to decide upon which stage a company is at, noted one Spanish insolvency lawyer.

The aim is allow time for the company and its creditors to reach agreement on a restructuring plan. As long as the requisite majorities are obtained, the content of the plan can be applied to all creditor types (financial, commercial, etc) regardless if they have accepted the agreement, without the need for formal insolvency procedures. 

If agreement cannot be reached, then the process can flip to 5bis [the old pre-insolvency imminent insolvency process], noted the lawyer.

5bis is back, but restructuring expert is new

Spanish company directors already have a duty to file a 5bis notice — if there is a risk of imminent insolvency, based on a cash flow test — within three months. 

Otherwise, there are stiff penalties for directors who can become liable not only to the company itself but also to creditors, either until civil or criminal law. 

The 5bis notice informs the court (this can be done confidentially) of a negotiation between a company and creditors. It has a suspensive effect, with a standstill on enforcement during this period. The aim is to produce and agree a restructuring agreement within three months (plus one for the notice). 

5bis was suspended to 30 June 2022 due to Covid-19. The new bill has some tweaks to the process. A further extension of three months is allowed to the standstill period, and there is an ability to appoint of a restructuring expert to educate, facilitate and deal with disputes. 

For non-consensual restructuring plans, the expert is also responsible for preparing a going concern valuation report. This is expected to improve creditors’ negotiating position by preventing shareholders and debtors from ‘hijacking’ negotiations by filing for insolvency as a last resort, note Cautrecassas in a client note. 

In a bind 

Unlike the previous regime, the restructuring plan can bind all classes of creditors and nearly all types of claims (including financial, commercial, contingent and public claims, but excluding tort, employment and tax claims) and also contemplates wider actions such a sale of the debtor, assets or specific business units to third parties. 

The negotiating parties can decide whether the plan will affect all or part of the debtors’ claims. The courts are only there to verify the affected debt perimeter. 

Under the old regime there were just two groups of creditors — secured and unsecured. The old regime didn’t recognise intercreditor agreements and the the presence of super senior debt and second lien. But the new regime does recognise liens, turnover provisions and sub-agreements.

A plan can be approved by a class if more than two-thirds vote in favour (75% if secured claims). If it is not approved by every class, a cramdown is possible if approved by a) a simple majority of classes, or b) at least one class, provided that at least one class would have privileged claims in an insolvency scenario; or c) by one class that would receive some level of repayment if the debtor is assessed as a going concern by a court appointed restructuring expert. 

There is also the concept of cram-in, which means that you can only vote on the value of the collateral securing your debt, the rest will be converted into unsecured claims. This amount is determined by an independent expert opinion.

Creditor classes are formed based on the existence of a class joint interest determined on an objective basis by the court. The reform remains silent on contractual subordination, however, and there is limited ability to challenge class formation post-sanction. 

Centre Court 

For the restructuring plan to be court-sanctioned, it must offer a reasonable prospect of avoiding insolvency, and ensure viability in the short and mid term, while imposing a proportionate sacrifice on creditors, with equal treatment among creditors of the same class. 

One of the grounds for a challenge is the ‘best interest of creditors’ rule. A challenge is allowed if the creditor could receive more in a hypothetical liquidation within two years after formalising the plan.

There is the option to ask the commercial court with jurisdiction to allow the affected parties to submit an objection to the restructuring plan before it is sanctioned, said the first lawyer. That “prior objection” has to be handled in the procedure for an ancillary insolvency proceeding and the judgment settling it cannot be appealed, they added.

Or alternatively, it can be heard after the court sanction, in which case the ruling will be binding but not final, being subject to appeal before higher courts.

Taking a DIP 

Transactions which are necessary for the restructuring plan to be successful are protected under the new regime, with interim financing granted during the negotiation of a restructuring plan and new money to fulfil the restructuring plan given privileged treatment in the event of a subsequent insolvency. 

Provided that this financing is approved by creditors representing 51% of total debts and the plan has been court-sanctioned, these are protected from clawback actions. Half will be claims against the insolvency estate, with the other 50% enjoying general privileges and ranking senior to unsecured creditors. 

Pre-Packs 

The new law allows the sale of business units, with an independent court expert appointed to collect potential pre-pack purchase offers. In subsequent insolvency proceedings they may be appointed as receiver. 

The transfer of the company or its business units can happen at one of three stages during insolvency proceedings — on the submission of a request for winding-up; during liquidation stage; or through a downstream bid. Previously, it was just at the liquidation stage. 

The purchase offer has a payment in cash requirement. It can be submitted by a creditor or a third-party. There is a requirement to continue or resume activity for at least three years — failure to comply can lead to damages. 

Expecting a Spanish Inquisition

While the changes are mostly looked upon as favourable by restructuring practitioners, some question marks remain, most notably the treatment of government-guaranteed loans. 

Prior to the new law, ICO loans (Instituto de Credito Oficial, a state-owned bank, attached to the Ministry of Economic Affairs and Competitiveness) were excluded from voluntary restructuring proceedings, said a second lawyer. The question is what happens in an involuntary or court-supervised process. 

“The answer seems to be that yes, these are now out of ICO’s hands and in the courts hands and they will be included in the process. But it’s not been tested yet,” said the lawyer.

They added that the treatment is likely to be assessed on a case-by-case basis, whether the bank facility (with an ICO guarantee) is secured by a pledge or mortgage or not (treated in line with other non-governmental creditors). 

As reported, Food Delivery Brands (Telepizza) could be the first test, with bondholders arguing that the ICO loans could be crammed down under the reformed Spanish insolvency law if necessary. However, the Spanish government last year authorised the State Attorney’s Office to block a restructuring plan if it goes against the interests of the state.

With Spanish restructuring processes highly politicised, foreign investors will be closely watching the upcoming Telepizza restructuring and the outcome of Spanish steel producer CELSA whose protracted restructuring is still going on. Led by Deutsche Bank and Goldman Sachs, a group of funds in the ‘jumbo’ debt have submitted a restructuring plan at end-September, which is opposed by the company. SEPI, the state-fund for troubled businesses, has offered to inject €550m, but where this money goes in is still disputed between the parties, with lenders’ consent needed to approve the injection. SEPI is keen for this to go in at a super-senior level, said a third lawyer. 

With the current shareholder continuing to block the deal, there is concern whether they can be crammed down, said the first lawyer, as under Spanish law they have a veto right, said the first lawyer. 

“Any settlement involving public credit has to be approved by ministers, said the second lawyer. This is why voluntary restructurings involving the state were hard, we don’t know how the court will approach it. As lawyers, we think it should go into the court’s hands.”