The recent reform of the Bankruptcy Act (operated under RD 11/2014 dated September 5, 2014) intended to extend the bankruptcy agreement modifications in favor of the pre-insolvency restructuring and refinancing agreements which were introduced in March 2014.

The reform has a special provision for privileged creditors with warranties subject to specific valuation formulas, to be adjusted to the actual financial value of the guaranteed credit. Any portion of debts that exceed this value will not be considered as privileged, but will be ordinarily classified.

The reform intends to avoid such privileges remaining an obstacle to the majorities needed in certain insolvency agreements.

In this regard, the first measure implemented results in a reduction of such special privileges which may relate only to the part of the bankruptcy credit that does not exceed the value of the collateral. The remaining value is then adjusted to its true economic worth of the debt. The portion of the credit that exceeds this value would go on to be qualified, as appropriate, as an unsecured claim.

For this purpose, the law establishes a criterion for assessing guarantees that, except in the case of listed securities, shall apply via reports prepared by independent valuation companies and fully approved.

The new reform also establishes a new classification of secured creditors, which will operate according to the class they belong to. The valuation resulting from the application of these formulas will be determined by the insolvency receiver in its report, and the list of creditors. It will be decisive for the purposes of computing the majorities needed for the adoption of various proposals for majority agreements. To form a majority, at least 60% or 75% is required, as appropriate.

The new bankruptcy reform also creates rules for secured creditors concerning the liquidation of the insolvent company, establishing a special treatment of guarantees that are charged on assets liquidated as part of the production unit. The rules introduced are dependent on whether the sale of the production unit is made or not free of liens and encumbrances.

If the sale is made free of liens and encumbrances, the secured creditors are entitled to receive a proportional cost on the equity value of the property.

However, assuming that the sales price is less than the value of the collateral, the sale would be conditional upon obtaining authorization from those who represent 75% of the guaranteed liabilities in the corresponding class.

If the production unit is sold subject to liens and encumbrances, the purchaser would take over the secured obligations without the preferential creditors having any power over the decision.

Privileged credit claims remain categorized in different groups, as appropriate, and will be valued at the actual value of the secured claim, resulting in a limitation of the power of secured creditors to be freed from the implementation of insolvency agreements as regards the part of their claims in excess of that value.

Consequently, a considerable limitation of the powers that until now had secured creditors who somehow find themselves refuted their guarantees. Also worth mentioning is also the lack of reference to the possibility of contesting the value that is granted to them if they remain dissatisfied.