Significant developments have taken place in the Spanish insolvency legal framework during 2014, focusing mainly on these areas:
- Pre-insolvency instruments - Restructuring agreements, specifically with the purpose of enabling the survival of distressed companies which, despite their heavy leveraged situation, might still be viable if insolvency is avoided.
- Post-insolvency instruments which assist the purchase of business units of companies under insolvency proceedings.
PRE-INSOLVENCY RESTRUCTURING AGREEMENTS
Under the new laws, restructuring agreements which fulfil the following requirements will not be subject to potential clawbacks should the borrower be formally declared insolvent:
- Formalised in public deed;
- Extending or modifying the existing debt;
- Supported by a feasibility plan of the company for the short and medium term;
- Approved by creditors representing at least 51 percent of the financial debt of the company (regardless of the creditors not being financial institutions); and
- Approved by the Court.
Additionally, similar to the trend which we have seen with UK schemes of arrangement, if enhanced majorities of secured creditors are achieved, then non-consenting secured creditors will be crammed down by the restructuring agreement regarding some specific effects.
New cramdown majorities are also applied internally in syndicated loan facilities – it will be understood that the relevant lenders have approved the restructuring agreement when it is approved by lenders representing at least 75 percent of the syndicated debt (unless the facility agreement itself contemplates a lower threshold for such purposes).
PURCHASE OF BUSINESS UNITS OF COMPANIES UNDER INSOLVENCY PROCEEDINGS
The latest amendments to the Spanish Insolvency Act includes the removal of burdens arising in the transmission of production units, in order to encourage the purchase of business units so that business activity will continue and jobs will remain in place.
If the purchase of a business unit takes place under the formal insolvency proceedings, the purchaser will automatically substitute the seller in its position - i.e. rights and obligations - in contracts with third parties. However this is only the case if the aforementioned contracts are linked to the continuity of the business activity, e.g. lease agreements. Additionally, the buyer of the business unit will not be obliged to assume the insolvent debtor’s outstanding debts.
Finally, the Spanish Insolvency Act has included additional rules regarding secured creditors whose security were affected by the purchase of the business units (for instance, if the security right over the assets is to be sold).
These latest developments are part of high-level policy changes aiming to strengthen Spain’s economy and help businesses generally as the country struggles to recover from years of economic downturn. They are important new tools in that process.