First decisions on the court-sanction of refinancing agreements and extension of effects to dissenting entities under the new text of the Fourth Additional Provision, and analysis of the concept of disproportionate sacrifice when there is opposition to the agreement

We emphasize these decisions, as they are some of the first on the court-sanction of refinancing agreements adopted after Royal Decree-Law 4/2014 came into force, substantially amending the regulation of these types of agreements and, particularly, the extension of the effects of the court-sanctioned agreement to non-adhering and dissenting financial institutions.

In the first, the refinancing agreement for which court approval was requested established two different systems depending on whether they were dissenting entities or entities signing the agreement. For the former, the agreement established a general system considering, inter alia, the following measures: a grace period and a uniform repayment scheme with a new maturity term of six years, the maintenance of working capital credit lines, the conversion into loans of the confirming lines and the conversion into participating loans, loans with capitalizable interest and subordinated loans, and the power to convert the credits into share capital. For the entities signing the agreement, a special system was regulated containing the same measures as the general system, but with the following amendments: the grace period was reduced to four years, new cash injections was granted through factoring, and those entailing the partial conversion into loans of the confirming lines and the novation of the bilateral working capital agreements.

The senior judge first examined the requirements under the Fourth Additional Provision of the Insolvency Act for the approval of the refinancing agreements and for  the extension of their effects. She verified that the necessary majorities to such end were reached (the agreement was signed by virtually 99% of the financial liabilities), as reflected in the group auditor’s certificate, and that the agreement and the documents attached to it had been placed on public record. She then approved the refinancing agreement, approval which, as she stated, had the effect of a transaction of a legal nature and, subsequently, rendered the effects of res judicata, ordered the extension of the general system of the agreement to the dissenting entities and the suspension of the individual enforcements that had started, and agreed the non-rescindable nature of the court-sanctioned agreement. She stated that she had not assessed whether a disproportionate sacrifice existed for the dissenting entities because, since the reform enacted by Royal Decree-Law 4/2014, judges should limit themselves to verifying whether the request complies with the mentioned requirements and, if so, approve the agreement and extend its effects to dissenting third parties, leaving the analysis of a possible disproportionate sacrifice for the case of an opposition to the agreement (as in the judgment summarized below).

The second ruling decided on the opposition of the ruling on the court-sanction of a refinancing agreement submitted by two dissenting creditors to which some effects of the agreement had been extended under the Fourth Additional Provision of the Insolvency Act (in the wording given by Royal Decree-Law 4/2014). Specifically, the ruling established the extension of the following regarding credits and guarantee lines that the insolvent company had subscribed with the non-signing entities:11 (i) a grace period of almost four years, (ii) debt relief in respect of any default interest accrued, (iii) the maintaining of the drawdown limits and conditions, (iv) the reduction of limits (in the guarantee lines), and (v) the extension of the early cancelation conditions agreed. The ruling also established the suspension of individual enforcements commenced by dissenting entities in relation to the agreements affected and the prohibition on commencing them.

The dissenting entities’ opposition was based on the agreement imposing a disproportionate sacrifice on them, due to the (i) non-application to dissenting entities of the new guarantees the agreement granted the rest of the financial creditors subscribing the refinancing, (ii) amendments the initial loans would undergo, (iii) effect the agreement could have on the solvency of the companies comprising the corporate group signing it, (iii) manner in which this affected the expectations of recovering their credit, and (iv) sacrifice involved in the suspension of the individual enforcements. 

Before assessing these arguments, the court described the refinancing agreement system under the Insolvency Act since its appearance in Royal Decree-Law 3/2009 up to the reform enacted by Royal Decree-Law 4/2014, emphasizing the concept of disproportionate sacrifice for the dissenting entity.12 It concluded that the lack of a legal definition made it necessary to first ascertain whether any sacrifice existed for the dissenting entity in accordance with measurably objective parameters and, second, whether the sacrifice was disproportionate, for which the position in which the dissenting creditor found itself would have to be compared to that of the creditors adhering to the agreement.

In respect of the former, it was clear to the judge that a sacrifice existed for the dissenting entities because the financial instruments affected would have matured if the agreement had not been approved. The judgment then evaluated the impact of the effects agreed on the debt of the dissenting entities. As regards the grace period, it considered that although the dissenting entities were obliged to extend the maturity date of their agreements, their repayment plans were also extended, enabling them to gradually reduce the risk until the end of the grace period . As regards the debt relief on default interest, the senior judge understood that this did not involve any disproportionate sacrifice, because the signing creditors with which an agreement was reached accepted not to make any petitions during the negotiation of the agreement, and because in a scenario of insolvency, this interest would be classified as subordinated credit. Finally, the decision analyzed the possible sacrifice involved in the commitment assumed by the companies of the group to constitute guarantees (in rem and personal) in favor of the signing entities. The judge concluded that the grant of guarantees did not alter the system of guarantees of the debt of the dissenting entities, which did not enjoy them. She also recognized that the grant of complementary guarantees in favor of the party acquiring new risks or contributing more money or new guarantee or credit lines was reasonable and proportionate. She understood that guarantees function as an incentive for fostering refinancing and that it is not disproportionate for the system of guarantees of the adhering creditors to be better than that of the dissenting entities. Furthermore, in a scenario of insolvency, the ordinary creditor’s expectancy of recovery is reduced percentage-wise, whereas the aim of the feasibility plan and refinancing agreement of the case was the payment of virtually all the dissenting entities’ risks. She also failed to observe any disproportionate sacrifice in the suspension of the enforcements of the dissenting entities, as this was an effect established by law and because, on the periods of the debt being extended by virtue of the agreement, the credits would not be enforceable and, therefore, one requirement enabling enforcement would be missing.

Based on this, the court dismissed the opposition and confirmed the approval of the refinancing agreement and extension of the mentioned effects to the dissenting entities.