Spain’s New Restructuring Plans
Cruz Amado de la Riega and Carolina Ventura Nouche of Deloitte explore the new restructuring plans in accordance with the amendment recast of the Spanish Insolvency Law.
Cruz Amado de la Riega
Carolina Ventura Nouche
Law 16/2022
Law 16/2022, amending the recast of the Insolvency Law, was enacted on 26 September 2022.
The purpose of this regulation is to transpose into Spanish legislation Directive (EU) 2019/1023 of the European Parliament and of the Council, of 20 June 2019, on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt.
Law 16/2022 represents a significant change in Spanish insolvency and pre-insolvency scenarios. First of all, the amended recast of the Spanish Insolvency Law addresses three main topics.
- Anticipation: One of the main problems with the pre-existing Spanish insolvency regulations was that companies acceded to insolvency proceedings too late. This meant that their chances of overcoming their insolvency were too slim, and therefore they mostly went into liquidation.
- Communication of the beginning of negotiations with creditors to reach a restructuring plan: Although this mechanism was applicable before the amendment, it was rarely used. In general terms, Spanish companies used it as a way to simply have additional time to prepare themselves for their insolvency judicial proceedings.
- Restructuring plans: This new development is of particular relevance for insolvency regulations in Spain as well as for the purpose of this article.
“There is no doubt that many Spanish companies in complicated financial situations will turn to the restructuring mechanism going forward.”
The new restructuring plans as the tool to reverse insolvency situations
Restructuring plans are the tool available to companies in financial difficulties to reverse their situation in a scenario prior to their declaration of insolvency.
The current insolvency regulations provide that restructuring workouts are plans to modify the composition, conditions or structure of the debtor's assets and liabilities, or of its equity, including transfers of assets, productive units, as well as any necessary operational changes.
The regulations on insolvencies after the amendment provide that the new restructuring plans may contain any measure that serves to restructure companies’ assets and liabilities. Moreover, one of the main new features relates to the approval of the new restructuring plans.
In accordance with the provisions of Directive 2019/1023, creditors holding claims affected by restructuring plans shall vote grouped by classes of claims. Generally, the formation of such classes must take into account the existence of a common interest between the members of each class (for example, in general terms, secured claims constitute a separate class).
The system for approving the new restructuring plans differs greatly from the calculation of majorities for the approval of the old refinancing agreements. In such cases, the approval by certain majorities of the financial liability was necessary and said majorities could vary if the effects of the agreement were to be extended to other creditors who had not voted in favour.
The judicial endorsement of the restructuring plans
“Companies facing financial difficulties need to make a relevant change in their mindset.”
The regulations provide for the possibility of requesting the judicial endorsement of the restructuring plan (homologación judicial).
The requirements for such judicial approval will be different depending on whether or not the restructuring plan has been previously approved by all classes of creditors (cross-class cramdown).
In view of the foregoing, restructuring plans that are subject to the insolvency regulations should be subject to judicial endorsement for an extension of their effects to:
- creditors or classes of creditors holding affected claims who have not voted in favour of the plan; and
- to the shareholders of the company when they have not approved the plan.
Additionally, although an extension of the effects of the restructuring plan is not foreseen, it is also subject to such judicial endorsement when it is intended:
- to protect the interim financing or the new financing provided for in the plan itself;
- to protect the operations or businesses carried out in the context of said plan; and
- to recognise with respect to that interim or new financing the collection preferences that the regulations provide for in case of insolvency proceedings.
Notwithstanding its relevant advantages, the amendment presents several questions. For instance, Spain does not have a legal tradition concerning class formation. Moreover, it should be pointed out that public claims are subject to different and limited restructuring measures. This differs from the regulations of other EU member states.
Finally, it should be taken into consideration that the success of the restructuring and pre-insolvency tools depends on anticipation; hence, companies facing financial difficulties need to make a relevant change in their mindset.
There is no judicial precedent on restructuring plans, given the recent approval of the amendment of the insolvency regulations. Nonetheless, there is no doubt that many Spanish companies in complicated financial situations will turn to the restructuring mechanism going forward.
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