1. A common problem with re financing arrangements homologated (i.e., sanctioned by a court) pursuant to the 4th additional provision of the Spanish Insolvency Act (abbrev. LCon) is becoming apparent of late where the signatories to such an arrangement undertake to open or keep open lines of credit or otherwise provide the debtor with new resources and, once such arrangement has been homologated, funding needs complementary or different to those contained in the homologated refinancing arrangement arise. Would this new novatory or supplementary agreement for which a new homologation has not been obtained be shielded by the 4th additional provision? Would a new homologation, necessarily instigated by the creditors because the debtor would be hindered by para. 12 of the 4th additional provision, be required?
  2. We will not question now whether a homologated arrangement may contain financial undertakings that differ from the measures contained in paras. 3 and 4 of the 4th additional provision (forgiveness of debt, payment deferral, payment in kind, capitalisation, etc.). The courts are sanctioning, without any questioning, arrangements of this kind and are ‘cramming down’ on dissenting creditors terms thereof that go beyond the remedies listed in said paras. 3 and 4 - with the exception of arrangements that involve forfeiting security and security interests, where there is greater judicial resistance. Although the limits to this practice are not certain, such are not the subject of this paper.
  3. The problem, however, does not actually impinge on the cover given by the homologation. The only cover that is clear as a result of the court’s involvement is that the homologated arrangement cannot – following the opening of insolvency proceedings – be avoided under art. 71 LCon (para. 13 of the 4th additional provision). However, it is not the fear of avoidance that gives cause for concern in these cases. Almost by definition, the supplementary agreement will be non-detrimental to the debtor. In some cases, moreover, it may meet the conditions of art. 71 bis to obtain protection from a second anti-avoidance shield.
  4. Strictly speaking, the problem arises with the possibility of subordination of this new loan if the creditors affected by the homologated arrangement have capitalised their claims and effectively become non-arm’s length creditors – insiders – under the terms of arts. 92(5) and 93 LCon.
  5. The relevant provision is now the second para. of art. 93(2)(2) of the Insolvency Act, which states as follows: “Creditors who have directly or indirectly capitalised all or part of their claims in pursuance of a refinancing arrangement, adopted pursuant to (...) the Fourth Additional Provision, and notwithstanding their holding a position in the debtor’s governing body by reason of such capitalisation, shall not be regarded as the debtor’s insiders for the purposes of classifying the claims held by the latter against the former as a result of the refinancing granted under such arrangement”. This provision was originally introduced in the Insolvency Act by Act 17/2014 of 30 September and its current version comes from Act 9/2015. We are not aware of any case law on the construction of this provision.
  6. A literal interpretation of this article would lead to the conclusion that, once the refinancing arrangement has been signed and homologated, any additional financing – not provided for in the refinancing arrangement – may be deemed financing by the debtor’s insiders and therefore capable of being regarded as subordinated. The new financial backers would be in a situation similar to that ‘condemned’ in art. 84(2)(11) LCon: fifty per cent of the claims involving fresh money that have been granted under a refinancing arrangement, as provided in art. 71 bis or the 4th additional provision, are ‘privileged’, although “this classification does not apply to fresh money provided by the debtor or by insiders by way of an increase of capital, loans or acts with a similar purpose”.
  7. To avoid this unfortunate outcome, a literal interpretation would require – to avoid the potential risk of subordination to the original financing – that the new financing: (i) be granted as ‘refinancing’, under either art. 71 bis (be it (1) or (2)) or the 4th additional provision; and (ii) involve additional debt capitalisation. In theory, it would not suffice for the new refinancing to be covered by art. 71 bis and therefore not be ‘avoidable’; with this new refinancing a part, however minimal, of the previously refinanced debt must also be capitalised.
  8. This formalistic interpretation most likely would not be followed by the courts, at least when the new loan was good for the company. Note how a literalist interpretation triggers the classic paradox of all de minimis conflicts. Indeed, if the issue is to capitalise something, a fraction of the old non-capitalised debt or the new debt can be capitalised, thus achieving the desired result, with little change to the substance of it all.
  9. The matter becomes more pressing when the fresh money respects the limits of the amount agreed in the homologated arrangement, but is provided to the debtor in a different contractual format. For example, instead of a bond facility, a discount facility; instead of the discount, reverse factoring. In these cases, the granting of new financing different from that the entities “granted under such [refinancing] arrangement” is not being considered, but rather financing within the limits laid down in the homologated refinancing arrangement.
  10. This issue is problematic as an absolute carte blanche cannot be given to new shareholders resulting from the capitalisation to unconditionally continue providing new loans, perhaps security-backed, covering themselves against subordination with the earlier homologated arrangement. We believe, however, that there are forms of new loans that would be protected by the ‘halo of homologation’ and that could be treated as financing covered by the homologation. A creditor who has capitalised his claims in quasi-insolvency proceedings should be substantially free from all the dangers lying in wait for the historic insider providing fresh money.
  11. However, this risk is to be avoided by appropriate safeguard clauses in homologated arrangements, which leave open possibilities for future loans, even with early novation, which would be in the ‘halo o f the arrangement’ and for which a prospective court sanction would already be obtained.
  12. The possibility outlined above is all the more appropriate inasmuch as the new agreement, formally not covered by the homologation, could not be crammed down on creditors dissenting from the novation. This limit is not an objection to the appropriateness of saving the new claims from subordination at insolvency proceedings. But if, in addition, the instigating parties of the novation intend to bind dissenting creditors, the novation would have to not just be contained in the ‘halo’ of the homologated arrangement, but actually belong to the body of the homologation. For this the original arrangement would have to contain a court-sanctioned tying clause in respect of future novations included in the halo of the arrangement and sanctioned in advance, subject to the majorities that would be necessary if homologation of the same had been directly sought. In fact, if the group of creditors concerned are bound by a syndicate voting agreement, the general binding of the novation would already be assured with the favourable vote of 75% of the syndicate, without early homologation being required.
  13. The purposive construction here proposed for the relevant legal provision can also find support in the wording of the final sentence of art. 93(2)(2) LCon (note how these new ‘capitalised’ shareholders are released from the stigma of ‘de facto director’): “Nor shall those creditors, who have signed a refinancing arrangement, a composition with creditors or a mediated settlement agreement for the obligations assumed by the debtor in relation to a viability plan, be regarded as de facto directors, unless the existence of any circumstance that might support that capacity is proven”. Creditors who find here a safe haven need not have gone through a prior or concomitant capitalisation.
  14. To conclude. The controversial second para. of art. 93(2)(2) LCon should not be read as follows: the new loans offered by financial backers who have previously or simultaneously capitalised all or part of their pre-existing claims cannot be subordinated; but rather like this: the new loans offered by historic financial backers cannot be subordinated even if they have capitalised all or part of their pre-existing claims.