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New measures about debt restructuring and refinancing

10/03/2014

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Spain

The Royal Decree 4/2014 of 7 March (Spanish National State Gazette 58 of 8/4/2014) modifies various aspects of the Spanish Bankruptcy Act to make restructuring and refinancing processes more flexible. The objective is to try to avoid sending companies that have the potential to be viable into bankruptcy proceedings due to their excessive financial burden.

This is an important turnaround regarding the principles traditionally maintained regarding the debts of businesses in restructuring processes, bringing us closer to the positions of other OECD countries. This change will provide companies with a more efficient position from which to face up to restructuring, and, though we have some way yet to go to achieve an agile restructuring system, this change is a welcome step forward in resolving the problem of financial over-indebtedness of businesses.

The main changes introduced by the new law are outlined below:

The “preconcurso” (preliminary insolvency proceedings)

The main new development regarding the preconcurso, as outlined in article 5 bis LC (Ley Concursal, Spanish Insolvency Law) is that, from the date of presentation of notice of insolvency it is no longer permitted to begin legal proceedings on goods that are needed by the debtor to continue professional or business activity. Ongoing proceedings regarding these goods are to be suspended if the debtor presents the communication as evidence in court.

While this reform is indeed to be applauded, we find it difficult to understand why this cessation is not extended to public proceedings. Once again the Government has demonstrated its double standards, calling for a sacrifice from ordinary creditors which government bodies avoid, when this sacrifice should be the same for all.

Also introduced is the public nature of the 5 bis LC notification, which must be published in the Public Insolvency Register, although the debtor can request that this notification be private. Since public law credit proceedings are not suspended, it would be advisable to always request a private notification.

Finally, there is now a limit on the use of the 5 bis LC notification. Once this notification has been delivered, another cannot be made for the same debtor.

Refinancing agreements

The legislation provides for two types of refinancing agreement, Individual Agreements which can be signed by one or more creditors, once they improve the debtor’s financial position, and Collective Agreements, which affect a group of creditors, financial and otherwise, or all financial creditors. Collective Agreements, in turn, can be legally approved or not legally approved.

The new law adds to the already familiar facts of non-termination of refinancing agreements and other business activities with creditors whose credits represent at least three fifths of the debt. These agreements increase available credit or modify the debtor’s obligations. The new law adds the option of cancelling debts through nonrecourse payments, or converting them into capital.

The most striking of the new developments is this possibility to convert debt into capital, which will certainly alleviate the financial burden on businesses, transforming their outstanding liability into equity. This option can be agreed on by a simple majority, and the law sets out a very severe penalty regime for any debtor that opposes this agreement, or shareholders of the company in debt, who oppose the increase in the General Meeting convened for this purpose. If the company does end up in insolvency proceedings, those who opposed the agreement could be considered accomplices to insolvency, according to their participation in forming the majority needed to reject the agreement.

The law also provides the debtor with right of first refusal in the event that the creditor sells the stocks or shares obtained by the capitalization of the debt.

Another new development has eliminated the need for a report from an independent expert, substituting this report for a certification from the auditor of the creditor that is agreed upon by the majority chosen to approve the agreement, which will make the process quicker and cheaper. However, the debtor and the creditors may request the nomination of an independent expert to provide a report on the soundness and achievability of the viability plan. Likewise, in some cases this report will still be necessary or convenient. For example, if the debtor wishes to avoid being declared guilty in the case of having turned down the capitalization of credits thereby blocking the achievement of a refinancing agreement.

Furthermore, as has been indicated above, the Individual Agreements between the debtor and any creditors cannot be cancelled before declaration of bankruptcy, once certain requirements are fulfilled concerning (i) previous proportion of assets to liabilities, (ii) current proportion of assets to liabilities, (iii) value of the new guarantees provided by creditors, (iv) type of interest applicable to the operations and (v) the public authorisation of the agreement in question, without which the debtor must reach the liability majority outlined in the previous section.

This allows for a more direct and flexible negotiation between the debtor and creditors, once this leads to an improvement in the debtor’s financial situation.

Approval of refinancing agreements

The percentage of financial creditors needed to sign a refinancing agreement so that it can be legally approved and thus not be cancelled, has been reduced from 55% to 51%. The scope of application of the financial creditors affected by the agreement has also been expanded. It now includes all creditors in possession of a financial liability, whether or not these are subject to financial supervision, except in the case of commercial operations or public law creditors. Furthermore, creditors who are considered to have a special relationship with the debtor but are still affected by the agreement will not be taken into account for the calculation of percentages to approve refinancing agreements.

In the case of financial creditors who have not signed, or who opposed, the refinancing agreement, certain effects of the refinancing agreement will still extend to them, all depending, of course, on the number of financial creditors who have signed the agreement. These effects may include possible waiting periods of up to ten years, unlimited debt release, conversions of debt into capital, participative loans or nonrecourse loans, or entitlements for payment of debts.

The new regulations do not consider creditors who have capitalized their credits and thus become partners of the insolvent company as having a special relationship with the debtor. This is to encourage this type of refinancing operation without the subordination of credits usually requires the party in question to hold the condition of shareholder in the insolvent company.

New cash revenue

The law establishes a regime that is favourable to new cash revenue produced in the two years following the entry into force of the Royal Decree. The following will be considered as credits against the estate: (i) 100% of cash revenue granted within the framework of the refinancing agreement, including by the debtor itself or a specially related person, (ii) interest accrued by this revenue and (iii) credits awarded to the insolvent debtor under the framework of an agreement.
Two years after the date of the credit granting, they will regain their previous state, that is; only 50% of the amount will be considered as credits against the estate.

Other relevant points

The law also introduces a series of relevant modifications:

a) Provides instructions to the Bank of Spain to modify the law on provisions.
b) Modifies the regime for tender offers for capital increases derived from refinancing agreements of quoted companies.
c) Establishes the absence of company tax in the event of capitalization of debt and determines a differentiated attribution system for income derived from acquittals and moratoriums.
d) Modifies Royal Decree of 12 December 2008 so that in Financial Year 2014 losses resulting from impairment of assets will not be calculated, so that they will not cause insolvency or dissolution and liquidation of the company.
e) Establishes the date of entry into force of the law as the day following its publication.

It is important to note in closing that the present Royal Decree will not be applied to refinancing processes in which the independent expert has already been appointed, unless the express choice is made in the refinancing agreement to opt for the application of the new regime.

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