Privilege bestowed on (syndicated) creditors instigating the insolvency proceedings against the debtor
Equality among all creditors (the so-called par conditio creditorum) is a basic principle under Spanish insolvency rules. Only specific exceptions envisaged in the Spanish insolvency law allow for a particular creditor to take precedence over others in the recovery of its claims against the debtor.
Generally speaking, the following ranking applies to insolvency claims (excluding predeductible claims):
- Claims in a privileged position over specific assets of the insolvent debtor (claims ‘with a special privilege’, basically secured claims).
- Claims in a privileged position in general over all assets of the insolvent debtor other than those (and to the extent) affected by a claim with a special privilege (claims ‘with a general privilege’, basically senior unsecured – i.e. preferential - claims).
- Junior unsecured and unsubordinated claims (‘ordinary’ claims).
- Subordinated claims.
Insolvency proceedings understandably have become a sort of battlefield where all creditors seek the best outcome in terms of recognition of priority over the debtor’s assets.
Article 91(7) bestows on a creditor that has successfully instigated the insolvency proceedings of a debtor a general privilege (i.e. the ranking position described in point ii. above) in an amount equivalent to 50% of its unsubordinated claims. The rationale behind the “incentive” embedded in this 50% general privilege is to overcome the risk that any creditor instigating insolvency proceedings bears for the court fees and charges associated with the petition for insolvency proceedings failing and, potentially, the damage caused to the debtor (pursuant to Article 20(1) of the Spanish Insolvency Act).
In the case under consideration, a joinder of syndicated lenders instigated insolvency proceedings against the borrower.
The lenders requested the insolvency practitioner to acknowledge their general privilege in respect of 50% of their aggregate claims, excluding only those claims that, pursuant to the Spanish Insolvency Act, qualified as subordinated claims.
The insolvency practitioner, however, rather than accepting the lenders’ view, reflected the following in the borrower’s list of creditors:
- For the purposes of establishing the basis for calculation of the privilege bestowed on the instigating creditors, not only the part of the claim that, as expressly provided in article 91(7) of the Insolvency Act, would qualify as a subordinated claim should be deducted from their aggregate individual claims, but also the part of their respective claims that has a special privilege (see i. above).
- Further, the 50% general privilege should be apportioned among all instigating creditors pursuant to their internal pro rata share in their collective holdings (the percentage that their respective claim represents on the aggregate value of their claim). This is to say, the 50% general privilege shall be distributed among each of the instigating creditors bearing in mind their respective share in the aggregate claim.
In an example of two instigating creditors holding respectively 70 and 30 in claims, the claim of each of them shall be given a privileged position equivalent to the percentage of the 50% general privilege that its individual claim represents on the aggregate value of both claims. In this case, the creditor holding a claim of 70 would be given a privileged position over 35% of its claim (70% of 50%), while the creditor holding the claim of 30 would be given a privileged position over 15% of its claim (30% of 50%).1
The syndicated lenders challenge the conclusions of the insolvency practitioner contending that:
- Article 91(7) does not expressly provide for the deduction of the part of their claims given a special privilege but rather only excludes from the calculation of the general privilege the part of their claims that is tainted with subordination, and
- The criterion of internal distribution of the 50% general privilege should not apply in cases such as the one in hand where the claim of all instigating creditors stems from the same legal title (i.e. the syndicated facility).
Conclusions of the Spanish Supreme Court
The Spanish Supreme Court, in a judgement dated 21 December 2015, confirms in essence the arguments of the insolvency practitioner and concludes that:
- Article 91(7) of the Spanish Insolvency Act was created envisaging the most likely - although infrequent - scenario of an individual creditor seeking the opening of insolvency proceedings in respect of a debtor as a means of differentiating this same creditor (but only one creditor) over others that would remain subject to the par conditio creditorum principle.
- The rationale behind the rule contained in said article 91(7) is not based on the nature of the legal title on which the instigating creditor bases its petition for insolvency proceedings (i.e. the syndicated facility), but on the need to create an incentive that neutralises to some extent the risks associated with such a filing, namely, court fees and charges and potential damage in the event that the debtor should successfully ward the opening of insolvency proceedings off. It is apparent that those risks are not increased by the mere fact of the instigating creditor being more than one.
- If the risk associated with the instigation of insolvency proceedings is shared among the various instigating creditors, also the 50% incentive should be apportioned among them instead of being recognized to each of them in full. It seems that the rule of apportionment used by the insolvency court as described in b. above is a fair way of distributing the incentive.
- Each one of the syndicated creditors holds independent claims even if documented in one single contract, as evidenced by the fact that only three of the members of the syndicate agreed to instigate the insolvency proceedings and only in respect of its respective participation in the facility. Recognizing the privilege in full to all creditors that voluntarily join the petition for insolvency proceedings would allow opportunistic tactics not abiding by the principle of equal treatment of all creditors that should prevail in insolvency proceedings.
- It is true that article 91(7) only expressly excludes from the calculation of the privilege the subordinated claims of the instigating creditor. Nevertheless, it seems obvious that in this calculation the insolvency practitioner should also exclude the claims of those instigating creditors that hold any other sort of (special or general) privilege. As a consequence of this, the privilege should only be calculated on the basis of the unsecured and unsubordinated claims of the instigating creditors.