Spanish Insolvency Reform
Law 16/2022, of 5 September, amending the revised text of the Insolvency Law, as approved by Royal Legislative Decree 1/2020, of 5 May, implements Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019, on the frameworks for preventive restructuring, discharge of debts and disqualification exemptions, and on measures to increase the efficiency of restructuring, insolvency and discharge of debts procedures, also amending Directive (EU) 2017/1132 of the European Parliament and of the Council, on certain aspects of company law (Restructuring and Insolvency Directive), and introduces a number of amendments to insolvency legislation. Some of its most relevant contents are highlighted below.
Main new features of the insolvency reform
The reform replaces the existing pre-insolvency instruments (refinancing agreements and out-of-court settlement agreements) with restructuring plans, providing greater flexibility and scope:
- Making it possible to act earlier in a situation of potential insolvency, that is, prior to imminent insolvency and well before the actual state of insolvency.
- Unlike in the current refinancing agreements, it will now be possible to restructure commercial or non-financial liabilities, the debtor's assets and equity, and even to consider the sale of the debtor's business or any of its production units.
- The grouping of liabilities by class is introduced on the basis of the "common interest", in line with what occurs in other jurisdictions in our environment (USA and England). Approval of the restructuring plan requires the favourable vote of, at least two-thirds of the relevant creditors class, or three-quarters where such class is comprised by secured credits.
- Under certain circumstances, the plan may be validated, even where not approved by all classes of the debtor company’s creditors or shareholders.
- Possibility of cramming down all classes of creditors, including the debtor company’s shareholders, on whom the creditors might impose certain measures of the restructuring plan.
- Concepts such as "interim financing" or "new financing" are defined, and rules are established for the protection thereof against resolution actions.
- Special emphasis is given to the contractual netting agreements and the financial collateral agreements under Royal Decree-Law 5/2005 being affected by no restructuring plan.
The reform codifies the pre-pack mechanism which, over the last few years, had been enshrined as a practice supported by certain commercial courts. It allows the filing for insolvency proceedings to include an offer to purchase the production unit, together with the binding written proposal of a creditor or a third party:
- Unlike in the previous regime, the opening of the liquidation stage will not be necessary.
- The appointment of the expert does not release the debtor from its duty to apply for the declaration of insolvency, within two months from the date the debtor knew or should have known the actual state of insolvency.
- The purchase offer shall be subject to a payment in cash requirement.
- In the event that an expert is appointed to collect offers for the purchase of the production unit, the judge, in subsequent insolvency proceedings, may ratify him/her as a receiver.
- The offer may be submitted by any creditor or third party, with one limitation: the offeror cannot act on behalf of the debtor itself.
- The offeror shall undertake the obligation to continue or to resume the activity of the production unit or units for, at least, three years, and failure to comply with this commitment will give rise to a claim for damages.
- The offer to purchase one or more production units shall be published in the insolvency liquidation portal of the public insolvency Registry (which is expected to be created within six months from the entry into force of the reform) on the same day the declaration of insolvency is published in section one of such registry.
- After the insolvency has been declared, creditors may submit their considerations on the proposal, and any interested party may submit an alternative binding proposal. The receivership will issue then a report assessing the offers, and the judge will approve the most beneficial offer for the proceedings’ interests.
It extends the scope of the clawback actions of the debtor's acts:
- On the one hand, it extends the "suspicion" term, by including actions performed by the debtor within two years prior to the date of the application for declaration of insolvency, as well as those actions performed between such date and the date of the declaration.
- On the other hand, it also includes actions carried out by the debtor within the two years prior to the date notice is served to inform of the existence of negotiations, or the intention to initiate them, as well as those carried out from such date until the date of the declaration of insolvency, even if there was no fraudulent intent, provided that the two following conditions are met:
- That no restructuring plan had been approved or, if it had, it had not been validated by the judge;
- That the insolvency has been declared within one year following the term of such notice, or its renewal period, if any.
Guarantees granted by the Spanish State
The reform clarifies the system applicable to guarantees granted by the Spanish State under Royal Decree-laws 8/2020, 25/2020 and 6/2022:
- Credits arising from public guarantees will be deemed as financial credits for all purposes provided under the Insolvency Act, including class formation and cancellation of outstanding liabilities.
- Such credits will be ranked as ordinary credits, without prejudice to the existence of another form of security granted to the main guaranteed credit, which will have at least the same rank in the order of precedence as the principal that is not guaranteed.
- Financial institutions will be responsible, for and on behalf of the Spanish State, in insolvency proceedings regarding credits arising from public guarantees.
- For the financial institution to be able to vote, for and on behalf of the Spanish State, in favour of restructuring plans granting deferrals, instalments or write-downs, it shall seek first the approval by the Collections Department of the Spanish Tax Authorities. Failure to do so may result in the loss of the guarantee for the part that had not been enforced or, otherwise, the Collections Department of the Spanish Tax Authorities keeping the rights for recovery and collection, without being affected by the contents of the plan or agreement.
- The restructuring and continuity plans, and the composition proposals that may affect the credits above shall not impose any of the following contents: changes to the applicable law; the change of the debtor, without prejudice that a third party may undertake, without the debtor being exempted, the obligation to pay; the amendment or termination of any guarantees held; or the conversion of the credits into shares, equity loans or credits, or any other credit of a different nature or ranks than those corresponding the original credit.
- In the event of the guaranteed debtor becoming insolvent, the declaration of insolvency, regardless of whether the execution of the guarantee had commenced or not, and whether payment has been made to the main creditor, shall cause, to the sole extent of its participation in the insolvency proceedings, the subrogation of the Ministry of Economic Affairs and Digital Transformation on the part of the guaranteed principal. Nevertheless, the relevant financial institution will continue representing the credits under the financial transaction as a whole, including the part of the subrogated principal.
Other new features
- It clarifies that notifying the relevant court of the starting of negotiations with creditors shall not affect the possibility of early maturity, resolution and termination of the contractual netting agreements under Royal Decree-Law 5/2005, will not prevent the execution of the financial collateral agreements subject to Royal Decree-Law 5/2005, and will not affect the possibility of early maturity of the secured obligations, for the part covered by such financial collateral.
- It creates the figure of the restructuring expert, and establishes the cases where the appointment thereof is mandatory.
- It provides for the approval, within the next six months, of various regulations (e.g. the one applicable to the insolvency receivership) and the publication of certain supplementary material, such as models and forms, or the electronic liquidation platform, among others.
Key changes in legislation
Revised Text of the Corporate Law, as approved by Royal Legislative Decree 1/2010, of 2 July 2010:
- Amends Section 365, by adding a new paragraph 3, which clarifies that the company directors will not be required to call a general meeting to adopt the resolution for the company’s winding-up, where they had applied for a declaration of insolvency of the company, or had notified the relevant court of the existence of negotiations with creditors to reach a restructuring plan. However, the call of the meeting will proceed immediately, as soon as the effects of such notice are no longer in force.
- Modifies Section 367, by clarifying some issues on the company directors’ joint liability for corporate obligations after the occurrence of the legal grounds for winding-up, adding the liability waiver in case the court is notified of the existence of negotiations to reach a restructuring agreement, or the application for the declaration of insolvency.
Royal Legislative Decree 1/2020, of 5 May, which approves the revised text of the Insolvency Law:
- Amends Additional Provision 1, by clarifying that a group of companies shall mean that defined in Section 42.1 of the Commercial Code, even if the control over the direct or indirect subsidiaries is held by a natural or legal person that is not a corporation.