Act 38/2011, of 10 October, which reforms the former Spanish Insolvency Act, introduces a number of measures, including the possibility of obtaining court approval for refinancing agreements meeting certain requirements to extend the agreed debt rescheduling to certain creditors that have either opposed the refinancing agreement (i.e. dissident creditors), or that have not participated in it.
Additional Provision 4 of the Insolvency Act establishes that court approval for refinancing agreements may be sought by the debtor if they meet the following conditions:
- They must meet the conditions established in article 71.6 if the Insolvency Act in relation to non-rescindable refinancing agreements: i.e. (i) the refinancing agreement results in a significant increase in the available credit or a modification to obligations; (ii) the refinancing agreement must have been approved by 3/5 of the credits held on the date on which the agreement is adopted; (iii) an independent expert has issued a favourable report; and (iv) the refinancing agreement must have been formalised in a public deed;
- The refinancing agreement must have been signed by creditors that represent at least 75% of the credits held by financial institutions when the agreement is reached; and
- The approval cannot result in a disproportionate sacrifice for the creditor financial institutions that did not sign up to the agreement.
Additional Provision 4 expressly states that the effects of the rescheduling agreed in the court-approved refinancing agreement apply to "dissident or non-participant creditor financial entities whose credits are not secured".
However, on 28 June 2013, Commercial Court 5 of Barcelona rendered a decision in which it agreed to extend the rescheduling agreed in the process to refinance the Celsa group's debt to the creditors holding secured credits, thus suspending the enforcement of those creditors' security. Despite the media fallout of the court's decision due to the clarity of the legal grounds expressed and especially due to the precedent set for future refinancing processes, it was not the first court decision in this regard; Commercial Court 2 of Barcelona already rendered a decision on 10 April 2013 in which it extended the effects of the agreed rescheduling to certain mortgagees.
The arguments used in those court decisions to justify extending refinancing agreements to secured creditors were:
- In the decision dated 10 April 2013, the judge decided that debt rescheduling would also apply to two creditors secured by a mortgage. This was on the basis of article 56.2 of the Insolvency Act, which allows the suspension of a mortgage foreclosure when the assets are inherently linked to the debtor's business activity, as well as on the basis of other circumstances specific to the case, such as the debtor's viability, the brief moratorium agreed (6 months).
- In the case of the decision dated 28 June 2013, which was rendered in the context of refinancing the Celsa group's debt, the judge decided that the debt rescheduling agreed in the refinancing agreement would also apply to creditors that benefited from security. In this case, the judge understood that, as the security could only be enforced by a two-thirds majority of the secured creditors, and not individually by each one, the position of those creditors was more akin to that of unsecured creditors. In other words, from the moment the creditors agreed that they would not be able to enforce their security individually, only collectively, although nominally "it can be argued that their credits are secured, the fact is that, individually they are not" and the court therefore decided not to grant them immunity from the approved refinancing agreement.
The decision of 28 June 2013 also clarifies other issues of interpretation raised in relation to certain aspects of Additional Provision 4 of the Insolvency Act:
- Calculation of the creditors signing up to the refinancing agreement: the decision reconfirmed, as case law had done previously, that the requirement to obtain the approval of 3/5 of the credits held against debtor, as established in article 71.6 of the Insolvency Act, does not apply, making way therefore to the provisions contained in Additional Provision 4. Therefore, it is only necessary that the refinancing agreement be signed by 75% of the financial credits held against the debtor.
- Calibrating the proportionality of the dissident creditors' sacrifice as a result of approval: the judge deemed that sacrifice borne would be proportionate on the basis of the following factors: (i) the terms of the rescheduling should be consistent with the overall economic climate at the time and the business plan on the debtor's viability; (ii) certain judicial precedents establishing repayment moratoriums that are similar to those agreed in the refinancing seeking approval; (iii) the impact on the debtor of the refinancing agreement not being approved, and (iv) the percentage of dissident creditors. In relation to the latter point, the judge understood that the percentage of dissidence can be used to calibrate the proportionality of the sacrifice borne by the dissident creditors; thus, the lower the percentage of dissident creditors, the lower the sacrifice borne as a result of the refinancing, and vice versa.
- The contents of the rescheduling agreement: the decision confirmed that, as well as pushing back the maturity dates and the new repayment schedules according to which the credits would be repaid, events of mandatory prepayment may also apply to dissident creditors to ensure that all the creditors, both dissident and otherwise, receive payment of their credits on the same terms.
- On the other hand, the judge understood that the dissident creditors' waiver of default interest accrued from the maturity of their respective credits until the date on which the request for approval is submitted would not be part of the agreed debt rescheduling.
- Time limit of the repayment moratorium: the decision confirmed that the debt rescheduling applicable to the dissident creditors should not be limited to three years, as may be interpreted from the literal wording of Additional Provision 4. The time limit of three years contained in Additional Provision 4 refers to the time limit for the suspension of enforcements sought by creditors once the court approval has been awarded, and not the time limit for it to be extended to the dissident creditors.
Dissident creditors affected by the approval may challenge the Commercial Court's decision within 15 days. The grounds of the challenge will be limited exclusively to the required percentage of creditors and to the assessment as to the disproportionate sacrifice borne.
The judgment rendered on the challenge is not subject to appeal.