- In 2011, the Spanish legislator introduced the court-sanctioned refinancing agreement (`Spanish Scheme´ or `Homologación judicial´) in the Span- ish insolvency system, amending its Additional Provision Four in order to create a new form of pre-insolvency, inspired by what is known in English law as a scheme of arrangement, making the possibility of refinancing the debt of a trading company with liquidity problems more attractive.
- The amendment responded to market demand, creating a form of pre-in- solvency that allowed courts to extend the effects of certain refinancing agreements reached by the debtor to certain creditors that had not exe- cuted them initially, if the agreements met a set of objective rules that the court with jurisdiction had to verify.
- Thus, where a refinancing agreement meets the conditions described be- low, the debtor (or any creditor that has signed the refinancing agreement) can apply for court approval of the agreement to the commercial court with jurisdiction for the declaration of insolvency. If approval is given, the court will declare that specific effects provided for in the agreement extend to the dissenting financial creditors in the terms set out below.
- Additional Provision Four limits access to court approval of refinancing agreements, as debtors may apply for only one approval per year.
2. APPLICABLE LAW
2.1. Spanish Insolvency Act 22/2003, of July 9, 2003.
3. OVERVIEW OF COURT-SANCTIONED REFINANCING AGREEMENT
Conditions for court approval of refinancing agreements
- To have refinancing agreements approved by the court, the following con- ditions must be met:
- Content: the agreements must “at least significantly increase the amount of available credit, amend, or terminate credit obligations by extending the due date or establishing other obligations to re- place the former, provided they are based on a viability plan that allows the company’s ongoing activity in the short and medium term.”
An order given by the Commercial Court No. 1 of Barcelona on Feb- ruary 22, 2013, among others, stated that the agreement must have a minimum alternative content: it must significantly extend the amount of available credit1 or reorganise the debtor’s liabilities, by amending their obligations, whether through extending the due date (amendment) or through establishing other obligations to replace the former obligations (cancellation).
- The refinancing agreement must meet the following conditions of those provided for in article 71 bis 1 of the Insolvency Act:
- A u d i t o r ’ s c e r t i f i c a t i o n : the refinancing agreement must be ac- companied by certification from the debtor’s auditor2 stating that there are enough consenting creditors3 for the agree- ment to be adopted.
- The courts and doctrine also refer to this as “fresh money”.
- If the debtor has no auditor appointed, it will be appointed by the commercial registry in the debtor’s domicile, or the parent company’s domicile in the case of a group of companies.
- The Accounting and Auditing Institute (Instituto de Contabilidad y Auditoria de Cuentas, the “ICAC”) (consultation no. 1 of the ICAC Official Gazette no. 102/2015) defines “debt” for the purposes of article 71.1 bis as the sum of the amounts payable to holders of debt claims or otherwise payable amounts. Calculation of this amount should start from the liabilities portion of the balance sheet and make adjustments to exclude any items that are not clas- sified as creditor claims due to not being backed by a debt claim against the company (e.g., deferred tax liabilities, provisions, prepayments and accrued income). Amounts must be calculated based on the debt principal, interest
- Form: the refinancing agreement must be executed in a deed before a Notary public.
- The agreement must be signed by at least 51% of financial cred- itors4 on the date of the agreement, although for its effects to be extended, the majorities specified in sections 3.13 and 3.15 below must be achieved. This quorum calculation will not include commer- cial creditors or creditors for labour claims that have voluntarily become parties to the agreement or any financial liabilities owed to creditors that are especially related to the debtor. Regarding syndi- cated loans, Additional Provision Four states that “in the case of agreements subject to a syndication system or arrangement, all creditors subject to these agreement will be understood to sign the refinancing agreement when those representing at least 75% of the claims affected by the syndication agreement vote for it, unless the syndication regulations establish a smaller majority, in which case the latter will apply.”
- The debtor and the creditors can request the appointment of an independ- ent expert to submit a report on the reasonable and feasible nature of the viability plan, the proportionality of the guarantees in keeping with normal market conditions when the agreement is executed, and other factors pro- vided for under applicable law.
- Where the above conditions are met, the debtor or any creditor that has signed the refinancing agreement is allowed to submit an application to the court with jurisdiction to judge the company’s insolvency for approval of the refinancing agreement reached, along with a copy of the refinancing agreement and the auditor’s certification regarding the sufficiency of the
and other amounts due on the date of the refinancing agreement, under the terms and conditions of the agree- ment. The book value can be used as an approximation for debts valued at amortized cost.
- Additional Provision Four defines financial creditors as holders of any financial debt, regardless of whether it is sub- ject to financial supervision (same definition is provided by article 94 of the Insolvency Act, as established by Royal Decree-Law 11/2014). Creditors for labour claims, public law creditors and commercial creditors are excluded. The ICAC, in consultation no. 1 of the ICAC Official Gazette no. 102/2015, considers as financial debt any claims paya- ble to creditors that have provided financing to the company through capital markets (including bonds and promissory notes) or on a bilateral or multilateral basis.
creditors accepting the agreement and, where appropriate, the report men- tioned in section 3.2 and the certificates, appraisals and reports for the valuation of the assets subject to guarantees. The application must clearly refer to the effects that they want to extend.5
- Having examined the application for approval, the court will admit it to processing and declare the suspension of any singular enforcement until the refinancing agreement is approved. The court secretary will order the Public Insolvency Register to publish the order in an announcement, stating, among others, the debtor’s particulars, the date of the refinancing agreement and the effects provided for in that agreement, stating that the agreement is available to the creditors at the relevant commercial court.
- The ruling for approval of the refinancing agreement will be handed down through urgent proceedings within 15 days, and will be published in an announcement in the Public Insolvency Register and in the Official Gazette of the Spanish State. The court can also order cancellation of any at- tachments ordered in proceedings for enforcement of the debts affected by the refinancing agreement.
- Within fifteen days from the date of publication, financial creditors affected by the court approval that did not sign the refinancing agreement or that rejected the agreement can challenge the approval because the quorum required for approval has not been met, or that the agreement’s covenants involve a disproportionate sacrifice. The burden of proving the dispropor- tionate sacrifice of the refinancing agreement lies with the dissenting creditor.
- The lack of a legal definition of disproportionate sacrifice made it nec- essary to (i) ascertain whether the dissenting entity suffered any sacrifice, using measurably objective parameters and (ii) whether the sacrifice was disproportionate. EU Commission Recommendation of March 12, 2014, on a new approach to business failure and insolvency, states that sacrifices imposed on dissenting creditors cannot reduce the rights of dissenting creditors below what they would reasonably be expected to receive in the absence of the restructuring; that is, if the debtor's business was liquidated or sold as a going concern.
- The judge will not extend ex officio more effects than those requested in the application, even when the majorities for the extension of these effects are met.
- The Commercial Court No. 3 of Barcelona ruling of July 29, 2014 affirms that the concept of disproportionate sacrifice can be approached from three perspectives: (i) the status the dissenter will have with regard to its current financial situation; (ii) its expectations to recover its credit if the agreement is not approved; and (iii) the dissenter’s position compared to creditors that have adhered to the agreement.
- All challenges will be processed along with the insolvency proceedings and the debtor and the other creditors who are parties to the refinancing agree- ment will be notified so that they may rebut the challenge. The ruling on the challenge of the approval must be handed down within 30 days and will not be subject to appeal. It will be announced in the same way as the ruling for approval.
- If the debtor does not fulfil the terms of the refinancing agreement, any creditor, regardless of whether it is a party to the agreement, can ask the same court for a declaration of default through a procedure of which the debtor and all the creditors that are parties to the proceedings will be given notice so that they can challenge that petition.
Effects of approval
- Before examining the effects of approval of a refinancing agreement, note that they will apply from the day following the date the court order for approval is published in the Official Gazette of the Spanish State, with no possibility of suspension.
3.12. The following sections describe the most important effects of approval.
Agreed effects extended to dissenting financial creditors
- Regarding the effects that an approved agreement will have on dissenting creditors, the Spanish Insolvency Act makes a distinction based on whether the creditor has an in rem security (i.e., mortgages and pledges). Accord- ingly, to extend the effects to dissenting creditors the following majorities must be met.
- In the first case (creditors with no in rem security), the extension of the effects requires (i) consent of creditors representing 60% of financial lia- bilities to extend moratoria for up to five years, and to convert debt into participating loans within five years, and (ii) consent of creditors repre- senting 75% of financial liabilities to extend moratoria for between five and ten years, and for debt reductions (unlimited), capitalisation of debts6, transformation of debt into ranking financial instruments, different ma- turity or conditions concerning the original debt, and assignments in payment.
3.15. The following rules will apply to dissenting creditors with in rem security:
(i) up to the secured amount, the same effects will extend as provided for creditors not possessing in rem security, but only where the agreement is approved by 65%, for the purposes of section (i) of the preceding para- graph, or by 80%, for the purposes of section (ii) of the preceding paragraph, calculated depending on the proportion between creditors with in rem security that have consented to the agreement and the total amount of debt secured with in rem security, and (ii) for the amount exceeding the value of the in rem security, the effects of the agreement will extend as stated above for creditors that do not have in rem security.
- The rule defines the value of the in rem security as the result of deduct- ing the outstanding debts covered by the pre-emptive security on a given asset from nine-tenths of the reasonable value of that asset, while that value must not be less than zero or greater than the value of the credit held by the creditor,7 or the value of the maximum secured liability agreed.
- “Reasonable value” is understood as (i) for listed securities, the average weighted price at which they have traded on one or more regulated markets during the last quarter before the date negotiations began to reach the refinancing agreement, in accordance with the certification issued by the company managing the corresponding market; (ii) for real estate, the value reached in an authorised entity’s assessment report; and (iii) for any other
- Dissenting creditors must state that they opt for capitalisation. Otherwise, they will be subject to a reduction of their credit by the amount of the share capital and issue premium to which they would have been entitled in the capitalisation.
- If the guarantee covers several assets, the results of applying this rule for each asset will be added together, while the joint value of the guarantees cannot exceed the value of the credit held by the creditor. In the case of a guar- antee held jointly by two or more creditors, the value of the guarantee pertaining to each creditor will be the result of applying the proportion corresponding to each creditor to the total value of the guarantee, in keeping with the rules for joint possession, without prejudice to any rules applying to the syndicated agreements.
assets, the value reached in the report issued by an independent expert in keeping with the generally accepted assessment standards for these as- sets. The reports in the latter two cases will not be necessary where the reasonable value has been determined by an independent expert within six months before the date negotiations began to reach the refinancing agree- ment, and for cash, current accounts, electronic money, or fixed-term deposits.
- Extension of the effects to syndicate creditors that did not vote in favour of the refinancing is currently under discussion. The wording of the articl e allows two different interpretations, depending on whether it is considered that the majorities mentioned in the above paragraphs must be met for the dissenter creditors of the syndicate to be affected by the agreement8, or whether it is sufficient that 75% of the syndicate has voted in favour of the adhesion to or the entering into the refinancing agreement.9
“Fresh money” privilege
- For two years following the entry into force of Act 17/2014 (October 2, 2014), all credits constituting new cash inflows granted under a refinanc- ing agreement entered into after that date will be considered administrative expenses, including where they are made by the debtor or by persons especially related to the debtor (unless they are made through capital increase).
- Once the two-year term expires, only 50% of the new cash inflows will be considered insolvency credits, not including those made by the debtor or by persons especially related to the debtor. The remaining 50% will be considered credits with general privilege.
- Madrid commercial court judges note that this regulation includes a rule for calculating majorities that only applies if the percentage required for the court-sanction of the agreement (51% of financial liabilities) is met. Conse- quently, dissenting creditors in the syndicated loan agreement are not bound by the refinancing agreement unless the majorities required to extend effects are met; to calculate these majorities, the syndicated credit will be com- puted in full if 75% of the syndicate vote in favour.
- Some authors consider that this article contains a substantive rule and, therefore, if the agreement is agreed by the majority of 75% of the syndicate and 51% of the financial liabilities have accepted it, all the creditors under the syndicate are part of the agreement and it binds all syndicated creditors with no other majority requirements. Thus, the combination of the 51% majority of the total financial debt and the 75% majority of the syndicated agreement allow the imposition of the extension of the refinancing agreement effects, since the dissenter or non-participating creditors are considered part of the refinancing agreement. This extension will not be limited to the effects referred to in sections 3 and 4 of the Additional Provision Four, but it will be broadened to all the effects in the refinancing agreement. That is: when 75% of the syndicated debt votes in favour of the agreement (irrespective of its subject matter), all the creditors in the syndicate are directly bound by the agreement.
Protection against claw back actions
- Court-sanctioned refinancing agreements cannot be subject to claw back and can only be challenged by dissenting creditors or by the insol- vency administration through actions for voidability or nullity (due to simulation or fraudulent circumvention of the law) or by the so-called Pau- lian action (in fraud of creditors).
De facto administration
- Creditors that have signed a court-sanctioned refinancing agreement will not be considered de facto directors (and as such, persons especially related to the insolvent debtor10) for the obligations the debtor assumes regarding the viability plan, unless proved otherwise.
Rights regarding joint and several obligors or guarantors
- Creditors of financial liabilities affected by the approval keep their rights vis-à-vis the guarantors and other parties that are jointly and severally obliged with the debtor, which will not be entitled to rely on approval of the refinancing agreement or on the effects of its approval to t he detriment of those guarantors or obligors. Creditors that have signed the refinancing agreement must abide by the covenants agreed in their respective legal relationships.
© 2016 CUATRECASAS, GONÇALVES PEREIRA. All rights reserved.
This document contains legal information prepared by Cuatrecasas, Gonçalves Pereira. This information does not constitute leg al advice. Cuatrecasas, Gonçalves Pereira owns the intellectual property rights to this document. Any reproduction, distribution , transfer or use of this document, whether fully or partially, will require the prior consent of Cuatrecasas, Gonçalves Pereira.