On Friday 5 September, the Spanish Council of Ministers approved Royal Decree Law 11/2014, of 5 September, regarding urgent measures on insolvency. The Royal Decree Law brings in a series of significant reforms to the Spanish Insolvency Act 22/2003, of 9 July (the "Insolvency Act"). The new Royal Decree Law entered into force on 7 September 2014.
1. It introduces an ex ante system by which to determine the scope of privilege in respect of credits enjoying special privilege. The scope of the privilege is determined on the basis of the security that generates the privilege
The new regulation establishes (in article 90.3) the scope of the privilege attaching to credits enjoying special privilege. It establishes that privilege will only extend to the portion of the credit that does not exceed the value of the respective security identified in the list of creditors.
Valuing the security
Article 94.5 includes provisions on how the security should be valued. For the purposes of classifying the credit, the security shall have a value equal to 9/10 of the fair value of the asset or right encumbered by security after deducting any outstanding debts that enjoy preferential security over the same asset.
If the security held by a creditor has been created over several assets, the security will be valued by adding the result of applying the above rule over each one of the assets covered by the security.
In the case of security created and held jointly in favour of several creditors, the value of the security held by each creditor shall be the result of dividing the total value of the special privilege in application of the rules and arrangements governing the joint ownership structure.
The value of the security shall never be lower than zero or higher than the value of the privileged credit or the value of the maximum liability agreed under the pledge or mortgage.
Determining the fair value of the assets attaching to security
The reform includes a series of rules on how to determine the fair value of the assets used as security
- Securities listed on an official secondary market or other regulated market or money market instruments: average weighted price at which they have been traded on one or several regulated markets in the quarter before insolvency was declared.
- Real estate: as contained in the report issued by an official appraisal company that is registered in the Special Register of the Bank of Spain.
- Other types of assets: the value as set out in a report issued by an independent expert.
In practice, these changes make it necessary – for preparing the list of creditors included in the insolvency administrators' report – to involve an expert to value the assets of the insolvency estate that are encumbered by security (except for securities listed on an official secondary market or other regulated market or money market instruments).
New experts' reports are not required if an independent expert determined the fair value in the six months preceding the declaration of insolvency. Equally, it will logically be unnecessary to involve an expert when the security is over of cash, bank accounts, e-money or bank deposits.
However, if there are new circumstances that could substantially modify the fair value of the asset, a new report would be necessary.
2. Different categories of creditors enjoying special and general privilege are created
Four categories are created (article 94.2) to classify creditors enjoying special and general privilege. The class in which a specially privileged creditor falls will be indicated in the list of creditors attached to the insolvency creditors' report:
- Employment-related: these are creditors under an employment relationship with the insolvent party. However, these exclude persons that had a senior executive employment relationship with the insolvent party insofar as it exceeds the amounts recognised as a general privilege under article 91.1º.
- Public: creditors pursuant to public law.
- Financial: the holders of any financial debt, irrespective of whether or not they are subject to financial supervision.
- Other creditors: including creditors pursuant to commercial transactions or any others that does not fall into the other categories.
3. Extension of the list of persons considered to be specially related with the debtor
In particular, the list of persons who are considered to be specially related with insolvent individuals is extended (article 93.1). Previously only an insolvent individual's spouse, certain family members (ascendants, descendants and siblings) and their spouses were considered to be specially related. That list now includes:
- The entities controlled by the insolvent individual or the above persons (spouse, ascendants, descendants and siblings and the spouses of ascendants, descendants and siblings).
- The entities that are part of the same group as the entities indicated in the above paragraph.
- The persons and entities referred to above (specially related individuals; companies controlled by them or the insolvent debtor; entities belonging to the same group as a company controlled by the debtor or the persons specially related to the debtor) that are directors or de facto directors.
When the insolvent debtor is a corporate entity, the list of specially related parties has changed (article 93.2) as article 93.2.1 now understands that, when a shareholder of the insolvent debtor is an individual, all the persons specially related to the individual according to the categories stated in article 93.1 shall be understood to be equivalent to shareholders for the purposes of assessing their special relationship with the corporate debtor.
4. The content and regime governing the approval of creditors' arrangements is modified, bringing in many of the mechanisms already in place for schemes of arrangement
Removal of limits on debt rescheduling and composition
The previous limits on debt composition (50% of each credit) and on the length of the rescheduling (five years) have been removed (article 100.1)
Possibility of the arrangement including assignments of assets
The reform expressly allows (article 100.3) arrangements to include assignments of assets or rights to discharge debts provided that certain conditions are met:
- The asset or right must not be necessary for the insolvent debtor to perform its professional or business activity.
- The fair value of the asset must be lower than or equal to that the credit satisfied by the assignment. If it is higher, the difference must be paid into the insolvency estate.
Inclusion of mechanisms that make it easier for the debtor's general meeting of shareholders to approve a debt-to-equity conversion
Consistent with the aim of trying to make it easier to implement restructuring processes that include debt-to-equity mechanisms (an aim that was already alluded to in the previous reform by including a presumption that shareholders that voted against the conversion of the debt were guilty of causing the insolvency), the new reform has made it easier to approve conversions as part of a creditors' arrangement.
Article 100.2, paragraph two, points out that the majority necessary to approve the conversion at the level of the shareholders meeting shall in these cases be the same as required in article 198 of the Spanish Companies Act (in the case of limited liability companies) and article 201.1 of the Spanish Companies Act (in the case of public limited companies), i.e. a simple majority in both cases. Furthermore, for the purposes of the requirements established in article 301.1 of the Spanish Companies Act regarding the launching of a share capital increase by means of a credit set-off, all the debts shall be understood to be liquid, due and payable.
Regime of majorities to approve proposals of creditors' arrangement
The regime of majorities required to approve proposals of creditors' arrangement is adjusted (article 124), establishing different thresholds depending on the content of the proposal:
- Favourable vote of a number of ordinary creditors that is higher than that which votes against: payment in full with rescheduling not exceeding three years or immediate payment with composition not exceeding 20%.
- Favourable vote of 50% of ordinary creditors: all ordinary creditors will be subject to composition equal to or lower than half the value of the credit; to rescheduling (whether in respect of principal, interest or any other amount) of no longer than five years; to conversion of debt into profit participating loans during that same term (excluding public and employment-related credits).
- Favourable vote of 65% of ordinary creditors: all credits will be subject to rescheduling of more than five years (but not longer than 10); to composition higher than half of the credit; and (excluding public and employment-related credits) to conversion of debt into profit participating loans for the same period, as well as any other mechanisms as provided in article 100.
Possibility of imposing the arrangement on privileged creditors
Another new element of the reform (article 134.3) is that privileged creditors may also be bound by the arrangement whether they vote for or against it. The reform establishes majority thresholds that will trigger the arrangement extending to all the privileged creditors of the same category (employment, public, financial and others) when a sufficient percentage of the creditors within that category vote in favour of the arrangement:
- The favourable vote of 60% of the credits held within a category will mean that the measures contained in the approved arrangement as referred to in paragraph (ii) above will extend to all the creditors within that category.
- The favourable vote of 75% of the credits held within a category will mean that the measures contained in the approved arrangement as referred to in paragraph (iii) above will extend to all the creditors within that category.
In the case of specially privileged creditors, the majorities will be calculated on the basis of the total proportion of the security that accepts the arrangement over the total value of the security within that category.
In the case of creditors enjoying a general privilege, the calculation will be made on the basis of the debt that accepts the arrangement over the total debt enjoying general privilege within that category of creditors.
A rule is established to calculate votes in the case of syndicated credits
Similar to what has already been taking place in relation to schemes of arrangement; in the case of a creditors' arrangement (article 121.4), where agreements exist that are subject to syndication once insolvency has been declared, it is understood that all the creditors within the syndicate vote in favour of the arrangement when it is backed by 75% or more of the debt affected by the syndication agreement.
However, if the rules governing the syndication establish a lower majority, that lower majority will prevail.
Qualification of the restriction on the right to vote on proposals of creditors' arrangement
The reform qualifies the restriction that prevented creditors – which were not subject to financial supervision – from voting if they had acquired their credit in the two years preceding the debtor's declaration of insolvency. The new wording in article 122.1 allows all creditors to vote on the proposal of arrangement unless they hold subordinated credits.
Different options in the event of breaches of a creditors' arrangement that affect specially privileged creditors
In the event of breach of an approved creditors' arrangement, creditors with a special privilege (article 140.4) bound to the breached creditors' arrangement may start or resume the separate enforcement of their security from the moment that the breach is declared. By doing so, the enforcing creditor will take possession of all resulting amounts that do not exceed the amount of the original debt.
This provision applies independently of how the enforcing privileged creditor became a party to the breached creditors' arrangement (by application of the majorities indicated in article 134.3 or voluntarily).
Special provisions at the creditors' arrangement phase in the event of insolvency of companies that have been awarded concessions for public works and services or that are contractors of the public administrations
The reform (Second Additional Provision Ter) allows the joining of ongoing insolvency proceedings where the insolvent debtor has been awarded concessions for public works or services, or if it is the contractor of the public administrations, when a proposal of creditors' arrangement is drawn up that could affect all of them.
The proposal of creditors' arrangement may be submitted by the public administrations (including the bodies, entities or companies linked to or dependent on them) and the proposal of creditors' arrangement may be conditional on the approval of proposal of creditors' arrangement in the other insolvency proceedings that are to be joined.
Regime governing creditors' arrangements that have already been approved
The Third Additional Provision establishes that, in the event of breach of an approved creditors' arrangement in the two years following the entry into force of the Royal Decree Law (by 7 September 2016), the debtor and the creditors representing at least 30% of the total debt existing at the moment the breach takes place may request the modification of the creditors' arrangement according to the measures introduced by Royal Decree Law 11/2014.
Schemes of arrangement sanctioned by a court in the year before this Royal Decree Law entered into force
The Second Transitional Provision establishes that, in the case of schemes of arrangement sanctioned by a court in the year before this Royal Decree Law entered into force (from 7 September 2013), the one-year limitation for requesting another court sanction as provided in Fourth Additional Provision of the Insolvency Act will not apply.
5. Modifications to liquidation
The reform also makes a series of changes to the liquidation process aimed primarily at ensuring, as far as possible, that the debtor's business is able to continue and making it easier, among other things, to sell all the debtor's establishments and businesses or any other productive units.
Special provisions on the transfer of productive units
The reform establishes (in new article 146 bis) that the acquirer must be assigned the rights and obligations arising out of contracts linked to the continuity of professional or corporate activity and in respect of which termination has not been requested. The acquirer will step into the position of the insolvent debtor without any need for consent from the other party to the contract in question. The acquirer will also be assigned the licences or administrative authorisations "linked to the continuity of professional or corporate activity and included as a part of the productive unit".
The transfer of a productive unit will not carry with it an obligation to pay the credits that the insolvent debtor has not satisfied before the transfer takes place (either insolvency credits or credits against the insolvency estate) unless the acquirer has expressly accepted that obligation or a legal provision exists to the contrary. This exclusion does not apply when the acquirers are persons that are specially related to the insolvent debtor.
Modifications to the possible content of the liquidation plan
The liquidation plan is now able to contain (except in the case of public creditors) the assignment of assets and rights in payment of the insolvency credits (while maintaining the limitations provided in article 155.4 in respect of assets encumbered by security).
A judge is also able to decide to retain in an account of the court up to 10% of the insolvency estate to cover any amounts payable to certain creditors as a result of appeals lodged against liquidation plans.
Modification of the supplementary rules applicable if the liquidation plan is not approved
The overall business or a productive unit thereof may be transferred directly or through a specialist person or entity. This shall apply, not only if the auction is unsuccessful, but also if the judge understands – in view of the report issued by the insolvency administrators – that it is the best way to safeguard the interests of the insolvency.
Certain rules are established regarding the auctioning of a company's entire business or productive units thereof. In this regard, "if the price difference between bids is not greater than 10% from that of the lowest bid", the judge may award the auction to the bid that best guarantees the continuity of the company (or, as the case may be, the productive units thereof), the staff's jobs and the payment of the creditors' credits.
As a general rule, assets attaching to specially privileged credits will be transferred on the basis of the provisions of article 155.4. However, if those assets are attached to premises, businesses and any other productive units that are transferred as a whole, the following rules will apply:
- If the former assets are transferred without the security being in place, "the privileged creditors must be given the proportional part of the price obtained equivalent to the value of the right or asset encumbered by security in respect of the overall value of the company or productive unit transferred".
If the price obtained does not match the value of the security, consent must be obtained from the specially privileged creditors that represent 75% of the specially privileged credits affected by the transfer and that belong to the same category of creditors. If those creditors give their consent, the portion of the value of the security not covered shall be given the corresponding credit classification.
If the price is equal to or higher than the value of the security it will be not be necessary to obtain the consent of the affected creditors enjoying special privilege.
- If the assets are transferred and the security remains in place, it will be not be necessary to obtain the consent of the privileged creditors and the credit will be excluded from the insolvency estate.
6. Other relevant aspects
Finally, other new provisions are brought in by the reform, such as (i) actions resulting from the application of article 5 bis and Fourth Additional Provision of the Insolvency Act are understood to be a restructuring measure (for the purposes of Royal Decree Law 5/2005); (ii) the establishment of a portal for online access; (iii) the creation of a commission to monitor refinancing and the reduction of over-indebtedness; and (iv) a specific provision whereby securities issued by asset securitisation funds aimed exclusively at institutional investors may only be transferred among that type of investors and may only be traded on a multilateral trading system in which subscription and trading is restricted to qualified investors.