The ruling called for rescission of previously agreed valuations to divide a company’s assets into two portions in a process for total spin-off in favour of two pre-existing companies. One of the beneficiaries was ordered to refund the other beneficiary company (undergoing insolvency proceedings) the excess valuation the former h ad received during the total spin-off.
The receivers brought a reversal action to rescind a transaction for total spin-off of a company through its wind-up, and to divide its assets into two portions for transfer to two pre-existing companies (one being the insolvent company). The receivers sought partial rescission of the spin-off on the grounds that the valuations made for equal division of the spun off company were incorrect and inequitable, and requested the other beneficiary company of the spin-off to pay the insolvent company the difference in the value that had been allocated to it in excess along with legal interest from the date of the spin-off. They alleged that the equity had been distributed unfairly2, benefitting the other beneficiary company to the detriment of the insolvent company, as a result of which the insolvent company’s creditors had suffered damages that needed to be remedied.
In its ruling of December 12, 2011, Las Palmas Commercial Court No. 2, after citing mercantile doctrine regarding the impossibility of rescinding a structural modification predating an insolvency, held that it had been proved that most creditors of the com panies involved in the spin-off were banks. As none of them, after being informed of the spin- off, exercised the right to challenge provided for in section 243 of the Public Limited Companies Act (now section 44 Structural Changes Act), it concluded that any detriment to the insolvency estate was unlikely.
However, the Las Palmas Provincial Court ruling upheld the appeal brought by the receivers against the Commercial Court ruling. In its ruling, the Las Palmas Provincial Court called for rescission of the previously agreed valuations to divide the spun off company’s assets into two portions. It held that the valuations granted an excess of approximately €4 million to one of the beneficiaries, and ordered that company to refund the amount to the insolvent beneficiary company to be included in the insolvency estate.
In short, the Las Palmas Provincial Court raised the following arguments:
- The rescission action provided for in section 71 of the Insolvency Act can be brought to challenge structural modification transactions. The salient factor is whether the elements established in section 71 of the Insolvency act are present, i.e. , whether the spin-off transaction can be considered detrimental to the insolvency estate accomplished within the two years preceding the declaration of insolvency.
- Exclusion of the insolvency rescission action cannot be argued based on the limitations on challenge to structural modifications provided for in section 47 of the Structural Changes Act, nor on the creditors’ right to challenge the spin-off under section 44 of the same act3.
The creditors’ right to challenge is not an obstacle to exercis ing the insolvency rescission action, as exercise of the action for reversal is provided for in the context of insolvency, while the right to challenge is provided for in a scenario of solvent companies that are able to perform their obligations.
The protection of creditors of the companies involved in the spin-off provided for in section 259 of the Public Limited Companies Act (now section 80 of the Structural Changes Act) does not cover creditors of the beneficiary companies that were not previously creditors of the spun off company, and the damages provided for in section 71 of the Structural Changes Act affect all creditors and not just those of the spun off company at the time of the spin-off (the crucial issue is the impossibility of recovery of all the insolvent company’s obligations stemm ing from the act concerned in the challenge).
In short, the differences of intent, object, justification of recognition of actions and parties entitled to exercise them rule out (in the Provincial Court’s opinion) the possibility that the protection given to creditors by the right to challenge might “replace” the protection provided by the actions for reversal or serve as grounds for excluding the exercise of action for rescission.
- In the Provincial Court’s view, the two conditions for an action for rescission of structural modifications to succeed are met in this case (i.e., it was carried out within the two years before the declaration of insolvency and detriment to the insolvency estate existed):
- The spin-off plan was completed on July 3, 2008, the deed was executed on September 11, 2008, and the declaration of insolvency was made on January 22, 2010.
- In addition to the timing factor, the Provincial Court held that detriment had been proven, as the insolvent company, one of the beneficiary companies of the spin-off, should have received 50% of the real value of the spun off company’s equity, but instead received a much lower equity value (by approximately €4 million). Regardless of the detriment being considered proven, the Provincial Court held that that detriment arose through an act that , by its nature, made the excess allocation of equity to the other beneficiary company gratuitous, and therefore section 71.2 of the Insolvency Act applied.
- Regarding the effects of the rescission action being upheld, the Provincial Court noted that it would be impossible to reverse the situation to the date preceding the spin-off (the spun-off company could not be “resuscitated” to receive the return of the assets delivered to the beneficiary companies of the spin-off). Consequently, in accordance with the claim brought by the receivers, it ordered the benef iciary company that had received the excess valuation to return the difference in the value of the equity allocation to the insolvent company.