Recent court resolutions in respect of pre-insolvency homologation of refinancing agreements in Spain and, in particular, the ruling issued recently regarding the case of CELSA (Compañía Española de Laminación, S.A.), have significantly altered the existing understanding of creditors (secured and unsecured) in respect of the Spanish restructuring options. In particular these resolutions affect the 4th Additional Disposition of the Spanish Insolvency Act (the "SIA") which allows to, upon certain circumstances, force extensions to dissident creditors in Spanish restructurings through the intervention of a Court (hereinafter, the "Court Homologation").
The regulation on Court Homologations has been subject to different interpretations due to its lack of clarity. Its literal wording is unhelpful and unclear and thus market participants, and Courts, are having to interpret it on a case by case basis. At this point case law is becoming relevant to understand which interpretations seem to be prevailing, although contrary resolutions cannot be disregarded.
This note aims to briefly identify some of the issues which the said Court resolutions have established as regards the Court Homologation. For the purposes of this note the term "Insolvency Act" or "SIA" shall refer to Law 22/2003 as amended from time to time.
Concept of Refinancing Agreements
A “Refinancing Agreement” (as a defined term) is a particular transaction defined in the SIA which complies with the following conditions: (i) the Refinancing Agreement shall be aimed at substantially increasing the funds available to the debtor; and/or to amending the terms of the debt that is to be re-negotiated by means of the Refinancing Agreement; (ii) the Refinancing Agreement shall be a part of a short and mid term viability plan of the debtor; (iii) the Refinancing Agreement shall be approved by creditors representing, at least, 3/5 of the total liabilities of the debtor; and (iv) an independent expert appointed by the Spanish Companies House (Registro Mercantil) should issue a report assessing on, among other issues, sufficiency of the information provided, reasonability of the Refinancing Agreement, proportionality of its security and feasibility of the viability plan. From a formal standpoint the Refinancing Agreement shall be executed before a Spanish Notary Public and recorded in a public deed. The Refinancing Agreement concept was included in the SIA in order to provide a certain safe-harbor from claw-back risk (the possibility of rescinding certain acts within the two (2) year period preceding the declaration of insolvency, on the grounds that those acts are prejudicial to the insolvent’s estate) upon Spanish refinancing/restructurings.
Concept of Court Homologation
However, the Refinancing Agreement has other advantages in addition to providing a certain safeharbor from claw-back. In particular it has the capacity of being “homologated” by Court, certain aspects of such agreement being in this case forced to dissident creditors.
The 4th Additional Disposition of the SIA provides that any Refinancing Agreement that is compliant with the requirements set out above and is approved by financial entities holding at least 75% of the debt held by financial entities can be approved by the relevant Commercial Court (“homologación judicial”) through the said Court Homologation and, if so, some of its provisions can be forced to the other 25% of unsecured financial entities. Although the wording of the provision is unclear, the intention seems to be that once the Refinancing Agreement has been homologated, the stays in payments accepted by the financial entities adhering to it are extended to any absent or dissident unsecured financial entity. The relevant Commercial Court shall ensure the reasonability of the Refinancing Agreement and make sure that the mechanism is not disproportionate with respect to any absent or dissident creditors. Also the Court Homologation can effect an stay on individual enforcement actions by creditors for a period of up to three (3) years, it being unclear in the literal wording whether this stay will be of the unsecured creditors (by the homologation of the underlying extended debt) or of the secured (and thus can be used as a tool to effectively affect the secured creditors by not allowing them to enforce their rights as against the company).
The literal wording of the Court Homologation has opened a significant list of questions, among others: (i) do the 2/3 and the 75% requirement apply in a combined manner or is it enough to comply one of them?, (ii) are secured creditors protected from being homologated in their entire debt, or only up to the value of their security?, (iii) if so, who and how values such security?, (iv) who does it apply to, ie what’s the definition of “financial entities”? is a fund or a fund’s vehicle a financial entity to these effects?, (v) what can be homologated? Only the extension? If so, on which terms? How about changes in margins, prepayment obligations, covenants and other issues which would normally be present in restructuring alternatives?, (vi) is the extension of the homologated underlying debt limited to three (3) years or is the stay on individual enforcement for a maximum of three (3) years? and (vii) would all creditors vote together or should there be a concept of “classes”? . Most of these issues remain un-answered but some Courts have however taken an interesting view on some of them.
Some court precedents on Court Homologation
The three main issues regarding Court Homologation which recent interpretation deserves special consideration are in our opinion the following:
- Majorities’ requirement
There have been certain discussions as to whether the Refinancing Agreement to be homologated shall require both the 3/5 of total debt approval requirement which is inserted in the definition of “Refinancing Agreement” and the 75% requirement mentioned above or if, on the contrary, only the latter is required.
On this topic the Ruling of the Commercial Court number 6 of Barcelona dated June 5, 2012, and the Ruling of the Commercial Court of Barcelona number 2 dated April 10, 2013 confirmed that the homologation of a Refinancing Agreement only requires the approval of financial entities holding at least 75% of the debt of the debtor (and not 3/5 of the liabilities, as it is established in Section 71.6), since the homologation ruling should only affect financial creditors. This interpretation has also been followed by the Commercial Court of Barcelona number 5 in its ruling dated June 28, 2013 (the “Celsa Ruling”). The main argument here is that (i) the specific regulation of the 4th Additional Disposition shall prevail over the general principle of Section 71.6 of the SIA; and (ii) as mentioned in the paragraph above, the Court Homologation shall only affect financial creditors, being the 3/5 majority requirement only applicable in case the creditors were additionally seeking the safe harbor against clawback risks. Furthermore, the Ruling of the Court of Gijón dated July 10, 2012 and the Ruling of the Court of Santa Cruz de Tenerife dated January 18, 2013 also infer that the 75% of the bank debt shall be sufficient to homologate a Refinancing Agreement.
Other resolutions take a different approach, establishing that both quorums are required (i.e. the Ruling of the Commercial Court of Jaen dated February 7, 2012), however seem so far to be less common.
- Maximum stay period
As said, the 4th Additional Disposition includes a three (3) year limitation which has lead to confusion by market participants, being doubtful whether such three (3) year limit applies as a maximum duration of the deferral of payments capable of being imposed on dissident creditors or as the maximum duration of a restriction to individual enforcements (which could eventually even affect to secured creditors).
There are some Court precedents stating that the three (3) year period established by said Additional Disposition does not operate as a limitation of the maximum duration of the deferral of payments capable of being imposed on dissident creditors, thus if this interpretation is maintained longer extension periods could be imposed (Ruling of the Commercial Court of Barcelona number 6, dated June 5, 2012/Ruling of the Commercial Court of Seville, dated May 21, 2012/Ruling of the Commercial Court Seville dated December 11, 2012/Ruling of the Commercial Court of Jaen dated February 7, 2012).
There are certain court precedents which establish three (3) year period as a limitation of the maximum duration of the deferral of payments (i.e. the Ruling of the Commercial Court of Gijón dated July 10, 2012), however these seem so far to be less common.
- Binding secured creditors
In accordance with the literal wording of the 4th Additional Disposition of the SIA the stay on payments agreed in a Refinancing Agreement can be extended to dissident financial entities whose credits are not secured. Even when the draft of the SIA seems to be clear, recent Commercial Courts are moving into a wide interpretation of this provision, which in our opinion entails the most significant change operated by the Celsa Ruling.
Celsa Ruling resolves that it is possible to force a dissident lender holding In Rem security on the basis of the following arguments: (i) enforcemet of the collateral requires a majority of creditors under the terms of the applicable finance document, (ii) to the extent that majority cannot be reached because a majority of creditors has supported the restructuring, individual lenders should not be immune to the Refinancing Agreement; and (iii) a creditor (to a syndicate facility agreement) cannot be considered as a secured creditor individually if security is granted in favour of a group of lenders and can only be enforced by the majority of such group.
Further to the above, another Ruling of the Commercial Court of Barcelona number 2 dated April 10, 2013 seems to leave the possibility open for forcing a stay to a secured dissident creditor even in the event that the facility foresaw an individual enforcement of the security, by analogous application of section 56.2 of the SIA, which would allow the suspension of the enforcement once the insolvency of the debtor has been declared by the relevant Court, if the secured assets are affected to the debtor´s activity. For that purpose, it is argued that as long as the creditor cannot enforce the security within an insolvency process, he should not be allowed to enforce security within the pre-insolvency period, moreover when the intention of this period is avoiding an insolvency of the debtor.
However this interpretation has only been supported by the abovementioned Courts, there being several court precedents that adhere to the literal wording of the SIA, and which expressly state that the stay agreed under a Refinancing Agreement shall not bind secured dissident creditors, among others the Ruling of the Commercial Court of Madrid dated December 17, 2012; Ruling of the Commercial Court of Sevilla dated December 11, 2012; and Ruling of the Commercial Court of Gijón dated July 10, 2012.
As regards the main issues 1 and 2 described above, it seems that the most used interpretation followed by Spanish Courts tend to be that: (i) the three (3) year period established under the 4th Additional Disposition does not operate as a limitation of the maximum duration of the deferral of payments capable of being imposed on dissident creditors, but as a limitation to the duration of a restriction to individual enforcements; and (ii) the homologation of a Refinancing Agreement only requires the approval of financial entities holding at least 75% of the financial debt of the debtor.
Regarding the capacity to force secured dissenting creditors there is a significant difference between the interpretation that the Barcelona Courts are making (allowing it when the individual creditor is not capable of enforcing its security) and the literal wording of the law (supported by various other Courts throughout Spain).
Borrowers, banks and other –present or futurecreditors should follow the Court developments with significant care since the capacity to apply the Court Homologation in restructuring deals opens a very relevant and significant route to non-consensual pre-insolvency restructurings.