Vol 11 (2014) - Issue 1

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New Winds From Spain: Celsa’s Scheme, New Out-of-Court Restructuring Alternatives for Entrepreneurs and a (not so) Fresh Start

1. Introduction
There are two hot topics which are always subject to discussion regarding insolvency law in all jurisdictions: (i) how to structure efficient out-of-court restructuring mechanisms to avoid insolvency; and (ii) how to establish so called 'fresh start' regulations to allow individuals to exit insolvency and to once again start new businesses and investments, without being chained to the failures of the past.
Regarding the first topic, it is broadly agreed that insolvency destroys business value and that tools should be available to the debtor and creditors to try to restructure debts out-of-court, thereby minimising the disruption that this type of situation causes to the business.
The so called 'Spanish Scheme' ('homologación judicial de acuerdo de refinanciación') already allows an out-of-court cramdown for financial creditors subject to some terms and conditions.
Law 14/2013 (the 'Entrepreneurs Law') aims to promote the pre-insolvency option even further as a valid and effective mechanism to prevent the insolvency proceedings of debtors and definitely to achieve a business restructuring with better conditions than those which would result from an insolvency proceeding. In this regard, as we will explain below, the Entrepreneurs Law reduces thresholds and requirements of the Spanish Scheme and introduces a new Out-of-Court Settlement for Payments ('Acuerdo Extrajudicial de Pagos') (OSP) for entrepreneurs and small and medium enterprises (SMEs). In this regard, we will also take this opportunity to explain some recent case law on the Spanish Scheme (specifically the Celsa scheme).
As regards to the 'fresh start' for insolvent companies, there is a growing need to establish a discharge mechanism for entrepreneurs and individuals that enable them to really resolve the insolvency situation when there are insufficient assets to pay outstanding debts. If such a discharge mechanism is not available, entrepreneurs and individuals are forced into a permanent insolvency situation.
As we will explain afterwards, the new 'fresh start' mechanism established by the Entrepreneurs Law may not be sufficient in practical terms to effectively tackle the problem.

2. Pre-insolvency mechanisms
2.1 Refinancing Agreements and the Spanish Scheme. Celsa’s scheme
'Safe-harbour' mechanisms were introduced in 2009 in the Spanish Insolvency Law which provides protection against claw-back to new security granted under 'Refinancing Agreements' ('Acuerdos de Refinanciación') entered into out-of-court by creditors representing 60% of total liabilities (after 2011 excluding intragroup debt) with the aim of achieving the viability of the debtor according to a plan verified by an independent expert to be appointed by the Commercial Registry. Such expert analyses if the viability plan is reasonable, achievable and if the new security granted is proportionate. However, such Refinancing Agreements only bind those parties who support them and no cramdown mechanism would be applicable. This explains why some significant Spanish companies with financing subject to English Law – such as La Seda de Barcelona, Metrovacesa, Cortefiel or Orizonia – decided to make use of the English scheme in recent years despite the doubts and existing issues regarding the liability of directors, the lack of recognition of schemes of arrangement under the European Insolvency Regulation, etc.