RESTRUCTURING, TURNAROUND AND INSOLVENCY
REFORM OF SPANISH INSOLVENCY LEGISLATION
On Friday 7 March 2014 the Spanish Council of Ministers approved Royal Decree-Law 4/2014, of 7 March, which adopts urgent measures on the refinancing and restructuring of corporate debt. The above Royal Decree-Law introduces a series of significant reforms to the Spanish Insolvency Act 22/2003, of 9 July, (the "Insolvency Act"). The Royal Decree-Law has entered into force on 10 March 2014.
In essence, and notwithstanding the analysis in further detail contained below, the most significant elements of the reform are:
1. It suspends judicial enforcement affecting assets required by the debtor to carry out its business and, in certain cases, the individual enforcement by financial creditors.
2. The assets required by the debtor to carry out its business do not include the shares held in companies whose exclusive purpose is to hold an asset and the liabilities necessary to finance them. As a result, once the debtor has been declared insolvent, any pledges created over those assets may be enforced without having to wait for the one-year suspension period to elapse as required article 56 of the Insolvency Act.
3. Refinancing agreements no longer require a favourable report from an independent expert to protect them from voidance; however, the debtor's auditor must now certify that the refinancing agreement has been approved by at least 3/5 of the debtor's liabilities.
4. A new category of non-voidable actions and agreements has been created.
5. For two years from the entry into force of the reform, fresh money injected both by creditors and the debtor or insiders related to the debtor shall be considered to be credits against the insolvency estate.
6. Creditors that capitalise their credits under a refinancing agreement are not considered to be especially related to the insolvent debtor from the perspective of the classification of their credits against the debtor as a result of the refinancing.
7. A new case is defined where it is presumed that wilful intent or gross negligence exists on the part of the debtor, its shareholders, legal representatives, administrators or liquidators in causing or aggravating the insolvency when they have, without good cause, refused capitalisation of credits or
10 MARCH 2014
Contents 1. Suspension during the pre-insolvency stages of judicial enforcement affecting assets required by a debtor to conduct its business 2 2. The concept of "assets required by the debtor to conduct its business" is clarified, excluding "shares held by the insolvent debtor in companies whose exclusive purpose is to hold an asset and the liabilities necessary to finance them" 2 3. Modification of the regulation applicable to refinancing agreements and the conditions that they should include so as not to be voidable as a result of a clawback action 3 4. Improved treatment of "Fresh Money" 3 5. Loans granted by creditors that become shareholders in the context of refinancing agreements are excluded from the category of subordinated credits 4 6. A new case where it is presumed that wilful intent or gross negligence is present in causing or aggravating the insolvency 4 7. Modification to schemes of arrangement in Additional Provision 4 4 8. Modificación del régimen de ofertas públicas de adquisición de valores (RD 1066/2007, de 27 de julio) 5 9. Accounting and tax reform 6 10.Contact 6
the issue of securities or convertible instruments, thus preventing a refinancing agreement from being reached
8. Court sanction can be sought for schemes of arrangement that have been approved by 51% of the debtor's financial debt. If so, debt rescheduling or recomposition, debt conversions, and the delivery of assets to discharge debts may be extended to dissident creditors (even if they are secured creditors) when certain conditions are met.
9. There is no longer a need to launch a mandatory takeover bid when control is acquired over a listed company as a result of converting debt into shares under a court-sanctioned scheme of arrangement, provided that an independent expert has issued a favourable report.
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1. Suspension during the pre-insolvency stages of judicial enforcement affecting assets required by a debtor to conduct its business
Article 5 of the Insolvency Act establishes an obligation to file for insolvency within two months following the date on which the debtor became aware or ought to have been aware of its position of insolvency. However, article 5 bis of the Insolvency Act allows the debtor to serve notice to the court that it has started negotiations to reach a refinancing agreement (meeting the requirement foreseen in article 71 bis 1 or Additional Provision 4 of the Insolvency Act) or to achieve acceptances for a prior proposal of creditors' arrangement. If so, the debtor must file for insolvency within three months of the notice unless it is no longer in a position of insolvency.
Once the above notice had been made, during the three-month period given to the debtor to reach a refinancing agreement (or acceptances for a prior proposal of creditors' arrangement) there was nothing to prevent creditors from claiming their credits in court and performing separate or judicial enforcements over the debtor's assets, which in practice could very well prevent the successful achievement of a refinancing agreement.
In order to rectify this scenario, a modification is made to article 5 bis of the Insolvency Act to the effect that once the notice has been served to the court and until a refinancing agreement has been formalised, the application for a scheme of arrangement has been submitted, the necessary acceptances have been received for a prior proposal of creditors' arrangement or insolvency has been declared:
(a) all judicial enforcement over assets required by the debtor to conduct its business will be suspended:
(b) new enforcement procedures cannot be started for the same purpose;
(c) individual enforcement by creditors holding financial debts are suspended where evidence is presented that creditors holding a percentage of at least 51% of the debtor's financial debt have supported the opening of negotiations to reach a refinancing agreement, undertaking not to start or continue with separate enforcement actions against the debtor during the negotiations (standstill);
(d) secured creditors may enforce their security over the rights and assets underlying the security; however, enforcement will be frozen once the procedure begins.
It should be noted that enforcement processes aimed at enforcing publicly held credits are excluded.
Once a debtor has served the notice established in article 5 bis of the Insolvency Act, it shall not be able to serve another such notice with one year.
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2. The concept of "assets required by the debtor to conduct its business" is clarified, excluding "shares held by the insolvent debtor in companies whose exclusive purpose is to hold an asset and the liabilities necessary to finance them"
Once a debtor has been declared insolvent, article 56 of the Insolvency Act prevents creditors with security over the assets required by the debtor to continue conducting its professional activity or business to enforce or realise that security until an arrangement has been approved that does not affect the exercise of that right or one year elapses from the moment the debtor is declared insolvent without liquidation having begun.
The reform includes an additional provision is included in article 56.1 of the Insolvency Act, which excludes certain items from what are to be considered assets necessary for a debtor to conduct its business or professional activities: "shares held by the insolvent debtor in companies whose exclusive purpose is to hold an asset and the liabilities necessary to finance them". It will therefore be possible to enforce pledges over those assets without having to wait for the one-year suspension period to elapse as required by article 56 "provided that the enforcement of the pledge over those assets does not trigger an event of termination or modification of the contractual relationships to which the company is subject and that allow the debtor to exploit the asset or that are necessary for it to conduct its business". This final event that would prevent enforcement could arise where, for example, the company whose shares are pledged has signed contracts that are essential for its operations and that could be terminated in the event of a change of control.
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3. Modification of the regulation applicable to refinancing agreements and the conditions that they should include so as not to be voidable as a result of a clawback action
The reform also introduces a new article 71 bis which focuses on the features that refinancing agreements and other processes will have to contain so as not to be voidable. Said new article contains the regulation previously included in article 71.6, but with the following changes:
(a) Clarification is offered on the scope of immunity against clawback of the specific actions provided in the refinancing agreements regulated in the former article 71.6 (which, after the reform, will now be regulated in article 71 bis 1). From now on, "transactions, actions and payments (as established in the agreement), whatever their nature […]" will not be voidable. The aim of this qualification is, among other things, to clarify that the transfer of assets and rights to discharge debts as provided in the agreement also enjoy protection against future voidance.
(b) There is no longer a need for an independent expert to issue a favourable report on the refinancing agreements contained in article 71 bis 1 (although it is still possible for an independent expert to do so when considered appropriate). Nevertheless, the auditor of the debtor must now certify compliance with the requirement that creditors making up at least 3/5 of the debtor's debts have participated in the agreement. Therefore, according to the reform the requirements that a refinancing agreement must meet so as not to be voidable are:
(i) it must significantly increase the available credit or amend or supress its obligations, either by extending their maturity or by establishing new obligations that replace them, provided that they are in line with a viability plan that allows for the continuity of the debtor's business in the short and medium term;
(ii) the agreement must have been signed up to by creditors that represent at least 3/5 of the debtor's debts at the date of the refinancing agreement;
(iii) the auditor of the debtor must issue a certification that the level of debt required to approve the refinancing agreement has been reached; and
(iv) the agreement must have been executed in a public deed or instrument.
(c) A new category of non-voidable actions is also included (article 71 bis 2), which will enjoy protection even when they do not meet the requirements necessary to fall within the category of non-voidable agreement under article 71 bis 1, provided that they include the following elements:
(i) they increase the debtor's previous ratio of assets over liabilities.
(ii) current assets are, as a result of the agreement, equal or higher than current liabilities.
(iii) the value of the guaranties created in favour of the creditors that participate in the agreement, plus the existing guaranties, does not exceed 9/10 of the outstanding debts due to them nor the proportion of guaranties over the outstanding debt prior to the agreement (for the concept of “value of guaranties” please refer to section 7 below).
(iv) the interest rate applicable to the debt surviving or resulting from the refinancing agreement due to the participating creditor or creditors does not exceed 1/3 of the interest applicable to the debt before the agreement.
(v) the agreement must have been made in a public document executed by all the parties involved; the agreement must also express its underlying reasoning of and the various different actions and transactions involved.
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4. Improved treatment of "Fresh Money"
The reform improves (temporarily) the treatment given to "fresh money" in the insolvency proceedings. For two years as from the date on which the reform enters into force (10 March 2014 until 10 March 2016) all cash injections made in the context of a refinancing agreement reached as from 10 March 2014 will from now on be classified as a claim against the insolvency estate, up to the amount of cash injected if the debtor receiving the funds is declared insolvent (article 84).
The privilege enjoyed by fresh money also extends to credits granted under the refinancing agreements by the debtor or insiders who are especially related to the debtor provided that the cash income is not received as a result of a share capital increase.
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5. Loans granted by creditors that become shareholders in the context of refinancing agreements are excluded from the category of subordinated credits
A new paragraph is included in article 92. 5 of the Insolvency Act that excludes from being classified as subordinated those credits that, as a result of refinancing carried out in accordance with article 71 bis or Additional Provision 4, are ultimately held by the creditors that have capitalised their debt under the refinancing (and have therefore become shareholders of the debtor).
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6. A new case where it is presumed that wilful intent or gross negligence is present in causing or aggravating the insolvency
Article 165 of the Insolvency Act is extended (by adding a paragraph 4) by including a new case where it is presumed that wilful intent or gross negligence exists (unless evidence to the contrary is provided) on the part of the debtor, its shareholders (in view of their degree of collaboration in obtaining the necessary majority to reject the capitalisation or issuing proposal), legal representatives, administrators or liquidators in causing or aggravating the insolvency, when they have, without good cause, rejected the capitalisation of credits or the issue of securities or convertible instruments, thus preventing a refinancing agreement being reached as provided at article 71 bis 1 or Additional Provision 4. The insolvency will be classified as culpable as a result of a refusal to approve the refinancing agreement only if the agreement acknowledged a right of first refusal to the shareholders of the debtor in the event of a subsequent sale of the shares acquired by the creditors when enforcing the agreement.
This provision goes on to point out that recapitalisation is for good cause when so confirmed in a report issued by an independent expert before the debtor's refusal.
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7. Modification to schemes of arrangement in Additional Provision 4
The reform makes significant changes to the regime governing schemes of arrangement contained in Additional Provision 4. Of those changes, the following should be taken into account:
(a) Schemes of arrangement are eligible for sanction when they have been signed by creditors representing at least 51% of the debtor's financial debt, they meet the requirements established under article 71 bis 1 (except for the requirement that the agreement be signed by 3/5 of the debtor's total debt).
For the purpose of calculating the above majority, financial debts held by creditors classified as insiders or especially related creditors will not be taken into account (although they could be captured by the sanctioned scheme of arrangement)
As regards the concept of financial debt, this category is understood to include the holders of any financial debt (excluding creditors from commercial transactions), whether or not they are subject to financial supervision. The creditors of public debts are also excluded.
In the case of syndicated loans, it is understood that the creditor lenders sign up to the refinancing agreement when at least 75% of the debt represented by the loan vote in favour of the agreement, except where the internal provisions of the syndication establish a lower minority (in which case that lower percentage will prevail).
(b) The specific provisions of a scheme of arrangement that may be imposed on dissident creditors will vary depending on the financial debt present in the scheme of arrangement:
(i) where schemes of arrangement combine financial debt equal to or higher than 60% but lower than 75% the following may be extended to dissident creditors:
• debt rescheduling (espera) (whether of principal, interest, or any other amount due) with a term not exceeding five years; or
• the conversion of debt into PPLs for the same term.
(ii) where schemes of arrangement combine financial debt equal to or higher than 75% the following may be extended to dissident creditors:
• debt rescheduling up to 10 years;
• debt recomposition (quita);
• the conversion of debt into shares of the debtor, in which case the dissident creditors are given the option of a debt recomposition equal to the nominal value of the shares to which they would be entitled and, if any, the
issue premium. If the creditor fails to identify an option, it is construed that the creditor has chosen debt composition;
• the conversion of debt into PPLs for a period not exceeding 10 years, convertible bonds or subordinated loans, capitalised interest loans or any other financial instrument with a ranking, maturity or features that differ from the original; (v) the delivery of assets or rights to creditors to discharge all or part of the debt.
(iii) the reform is silent on schemes of arrangement signed up to by creditors representing more than 51% but less than 60% of the financial debt. It seems in this case that none of the above measures (debt recomposition, rescheduling, debt conversion and debts discharges) would extend to dissident creditors. As such, the purpose of the scheme of arrangement would seem to be different in that case, such as to render it non-voidable or the ability to claim an exemption from the obligation to launch a takeover bid, as explained in section 8 below.
(c) Modifications are also made to the dissident creditors to which the scheme of arrangement will ultimately extend once sanctioned. As a result, the sanctioned scheme of arrangement will extend to the following debtors:
(i) creditors holding unsecured financial debts.
(ii) creditors holding secured financial debts, although only in respect of the portion of the credit exceeding the security.
The "value of the security" is defined as the result of deducting the outstanding debts secured by the asset from 9/10 of the reasonable value of that asset, whereas the value of the security can in no event be lower than zero or higher than the value of the credit held by the creditor in question.
Specific rules are also established to determine what is understood as an asset's reasonable value:
• in the case of securities listed on a secondary market, the average weighted listing price during the last quarter before negotiations started in relation to the agreement;
• in the case of real property, as set out in a report issued by an authorised appraisal company;
• in all other cases, as determined in the report issued by an independent expert.
If the security created to secure a single creditor is created over several assets, the result of applying the above rule to each of those assets should be added together, although the combined value of the security cannot exceed the value of the credit held by the creditor in question.
In the case of security held jointly by two or more creditors, the value of the security inuring to each creditor will be determined according to the proportion held by each creditor over the total amount of the security, as established by the rules governing the joint ownership relationship, although without prejudice to provisions applicable to syndicated loans.
(iii) The scheme of arrangement may also extend to the portion of the credit of a dissident creditor included within the value of its security, provided that the effects of the arrangement that it aims to extend to the dissident creditor are supported by:
• in respect of the elements of the scheme of arrangement signed up to by 60% or more of the financial debt (see section 7(a)(ii) above): a majority of 65% of the value of the security held by the entities accepting the refinancing over the total value of the security granted;
• in respect of the elements of the scheme of arrangement signed up to by 75% or more of the financial debt (see section 7(b)(ii) above): a majority of 80%of the value of the security held by the entities accepting the refinancing over the total value of the security granted.
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8. Modificación del régimen de ofertas públicas de adquisición de valores (RD 1066/2007, de 27 de julio)
Final Provision Three of Royal Decree-Law 4/2014 modifies letter d) of article 8 of Royal Decree 1066/2007, according to which it is no longer necessary to launch a takeover bid nor, as appropriate, apply for dispensation from the CNMV when reaching a controlling interest in a listed company due to conversion or capitalisation into shares of the debtor as a direct result of a court-sanctioned scheme of arrangement compliant with Additional Provision 4 of the Insolvency Act, provided that a favourable report has previously been issued by an independent expert in respect of the scheme of arrangement or refinancing agreement.
9. Accounting and tax reform
(a) The Bank of Spain is instructed to establish and publicise, within one month, unified criteria to classify transactions restructured as a result of a refinancing agreement as having normal risk.
(b) The Spanish Corporate Income Tax Act is modified in relation to the tax treatment of debt for equities or capitalisations of loans.
With the modification of the Spanish Corporate Income Tax Act, and with effect for tax periods starting as from 1 January 2014, capitalisations of loans will not be taxed at a borrower level. Those transactions will be valued for tax purposes in accordance with the equity injection carried out from a corporate/legal perspective, independently of their accounting treatment. The reform has therefore removed certain tax restrictions that had in the past hindered debt restructurings.
However, payment of the tax could be passed on to the contributing lender as, if it acquired the capitalised debt at a discount, it would have to compute for Corporate Income Tax purposes the difference between the nominal value of the capital increase and the tax basis for the lender of the capitalised debt.
(c) A modification is also made to the Spanish Transfer Tax and Stamp Duty Act. As a result, public deeds containing debt recompositions or reductions to loans, debts or other obligations of the debtor included in the refinancing agreement shall be exempt from those taxes.
(d) Financial years closing in 2014 will not take into account depreciation losses posted in the annual accounts in respect of fixed assets, investments in real property, inventory assets, loans or accounts receivable, when it must be assessed whether losses have triggered (i) the obligation to carry out a mandatory share capital reduction, (ii) the obligation to pass a resolution to wind up the company or (iii) the existence of an objective situation of insolvency.
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Gonzalo Martín de Nicolás Partner
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