Out-of-Court Restructuring in Spain
The procedure
Out-of-Court restructuring is a procedure in which an old debt is replaced by a new one. In practice, a debtor enters into a contractual agreement with its creditors in order to amend its debt obligations. The debt restructuring procedure demands a lot of time and effort due to the negotiation procedure with bankers, creditors, vendors, and tax authorities. Nevertheless, one cannot deny certain benefits of this procedure including, its cost effectiveness, minimized business operation impact, plan for financial stability, and survival of the business among others. Large corporations in many countries that are facing serious financial crisis and are seeking to avoid extinction have used out-of-court restructuring, also known as ‘workouts’.
In Spain, the new Royal Decree-Law 4/2014 (RDL) was completed by the fourth additional provision of the Insolvency Law (LC), more commonly known as the “Spanish schemes of arrangements”. The fourth amendment refers to the judicial approval of refinancing agreements and to the protection of these agreements. The object of the text is to overcome problems related to a lack of harmonization between legislation and to support the viability of businesses. The new law protects creditors by providing more secure proceedings, which are handled by specialized judges and trustees who only deal with insolvencies, and allowing creditors with small participations to block the restructuring process. In these “Spanish Schemes of arrangements”, all sorts of financial claims can be included, even those which are not financially supervised such as funds, vulture funds, and direct lenders. The “Schemes” cannot bind creditors holding commercial and public law claims. Financial creditors can accept conversions and transfers of assets as payment.
Creditors’ agreement
At least 51 per cent of the financial creditors must sign the agreement of the creditors or the refinancing agreement. This prevents any challenges to the validity of the agreement at a later stage. The 51 percent gives only a certain protection and it is not enough to make these agreements binding on non-participating or dissenting creditors. At least 60 per cent of the financial creditors must approve the agreement for a court to determine the binding character of any deferrals up to five years and conversions of debt into profit participating loans for the same term. These effects can apply to unsecured financial claims or secured financial claims that are not covered by the collateral value. In a case where there is a majority of 75 percent of the financial claims, binding deferrals can be made for up to 10 years. This also includes reducing the asset’s market value for the purpose of calculating the capital requirement, margin and fair market level. A majority above 75 per cent also allows conversion of the debt into a profit participating loan up to the same term as well as debt-equity swaps without limits and transfers of assets for debt payment.
Royal Decree RDL 4/2014 adds a presumption of negligence where the debtor’s representatives and the shareholders object to a refinancing agreement that includes a transaction where debts are exchanged for equity. This is to discourage debtors from objecting to such refinancing agreements.
Finally, out-of-court restructuring facilitates the life for both parties. The debtor gets a second chance to rearrange its debts in order to be solvable. The creditor, on the other hand, does not lose its share because the debtor is facing insolvency.
Riikka Tuomisto & José María Mesa
