Just six months after the last reform of the Law on Insolvency (Royal Decree-Law No. 4/2014 of 7 March) the Council of Ministers has promulgated a new amendment of the law with a view to facilitating, as far as possible, the continuity of financially viable businesses that become involved in insolvency proceedings.
These changes have been introduced by way of Royal Decree-Law No. 11/2014 of 5 September 2014 (the “Royal Decree-Law”).
In particular, the most significant aspects of this Royal Decree-Law cover matters relating to the adoption of creditors arrangements and the rectification of current deficiencies in the winding-up stage of insolvency proceedings.
Below, we briefly consider the most important changes brought in by this reform.
Main Changes Regarding Creditors Arrangements
Determination of security value
Following the principle that must rule the process of an arrangement with creditors, namely that of pars conditio creditorum, new provisions are laid down regarding the valuation of guarantees affected by special privilege with a view to obtaining their true value. To this end, the amount of any outstanding preferential debt affecting a secured asset is deducted from the fair value of that asset.
In other words, with this reform only the portion of the debt that does not exceed the fair value of the security will enjoy special privilege, while the remaining amount will be treated as either an ordinary or a subordinated debt, depending on its nature. This change merely involves a differentiated valuation of the principal and the ancillary rights, with a view to avoiding indefinite extension of privileges.
In this regard, it must be pointed out that this measure is only effective in the ambit of insolvency proceedings and does not therefore entail any change to registered securities or their enforcement outside of such proceedings.
Increase in the quorum for creditors’ meetings
There is a new provision granting voting rights to creditors who acquire their rights as creditors after insolvency has been declared, with the sole exception that such creditors must not have a special link to the insolvent party.
Nevertheless, in order to prevent this new power from giving rise to any fraudulent conduct to the detriment of the insolvency proceedings, the list of persons having special links to the debtor is broadened. However, because they are subordinate creditors, they will have no vote at creditors’ meetings.
Furthermore, the Royal Decree-Law has opened the way to transfers in lieu of payment in the ambit of creditors’ arrangements. It allows the transfer of assets and rights so long as they are not needed for the continuation of the business concerned and provided their value is fair.
New provisions with respect to the effects of creditors arrangements
One of the key changes brought in by the reform of the law is undoubtedly the possibility of implicating preferential creditors in agreements, for which majorities of between 60% and 75% are required, as the case may be. In this way, an insolvency agreement can be extended to include preferential creditors, even when they have not voted in favour of being brought in.
In order for this provision to be viable and effective, there is a requirement, in addition to enhanced majorities, for the creditors comprising such majorities to belong to the same class as those sought to be included in the arrangement. This means that any preferential creditor, including those of a public nature, may be linked to an agreement so long as the necessary majority is achieved among the creditors of the same class. For such purposes, four classes of creditors are established within the group of preferential creditors, namely: creditors with employment rights, public creditors, financial creditors and other creditors (mainly commercial ones).
At the same time, the terms of creditors’ arrangements are moderated by removing the limitation on reductions of less than 50% and five-year extensions of time and expanding the maximum limits of reductions and extensions of time to ten years. The basis of this system is that the greater the reduction and time extension, the greater the percentage of votes required.
Another new and important provision that should be highlighted is contained in the Third Transitory Provision of the Royal Decree-Law. This introduces the possibility of amending arrangements agreed at the start of the financial crisis which, due to the economic situation in Spain over the past few years, have turned out to be difficult to fulfill. Accordingly, any enterprise that considers itself unable to comply with the agreement entered into will be entitled, along with creditors representing 30% of liabilities, to seek modification of the corresponding arrangement by applying to the Mercantile Court overseeing that arrangement. Without prejudice to the foregoing, in order for such novation of the agreement to proceed, majorities of between 60% and 80% of creditors are required.
Particular provisions in the ambit of public procurement
Certain provisions of the Law on Insolvency concerning public procurement are amended in pursuit of the main goal of the reform, namely to allow businesses to continue operating. These changes are designed to ensure the continuation of the activity covered by the contract concerned (the provision of a public service) to benefit the successful bidders, so that these bidders will be subrogated in all legal aspects to the administrative contracts affected by the continuation of the business activity concerned.
The aforementioned contracts will be subject to particular provisions as laid down by applicable public procurement legislation and the specific laws governing each type of administrative contract. A special insolvency regime is established for companies that have been awarded public works and utilities contracts and businesses that enter into contracts with public administration bodies. With respect to this type of insolvency proceedings, if an arrangement is proposed that may affect all the proceedings that have been initiated, an order will be made for the joinder of those proceedings.
Main Changes Regarding Liquidation
The Royal Decree-Law also focuses on facilitating the progress of the insolvency stage of winding-up proceedings, the aim of which is the sale of all the insolvent party’s business and operations and any other productive assets.
Among other provisions it provides for ipso iure (automatic) subrogation of the buyer to the administrative contracts and licences held by the transferor, to the extent of excluding liability for prior debts other than those involving Social Security contributions or sums owed to employees, due to the particular nature of such debts.
There are also additional provisions with respect to transfers in lieu of payment, and the courts are empowered to withhold a proportion (10%) of the assets to meet possible future claims regarding the conduct of the liquidation.