Vol 11 (2014) - Issue 4

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Recently Enacted Spanish Out-of-Court Debt Restructuring Laws Join the Current European Trends for Efficient Restructuring and Lead Innovation for Restructuring Solutions

1. Context of the Spanish out-of-court restructurings reform
The recently enacted amendment to the Spanish Insolvency Law has changed the Spanish out-of-court restructuring framework drastically. Under the previous regulation (essentially contained in the previous Fourth Additional Provision of the Insolvency Law 'IL'), restructuring agreements reached in an out-ofcourt settlement by 55% of the claims held by financial institutions could only be imposed on dissenting or nonadhering creditors to the extent that (i) such creditors were financial institutions (i.e., a creditor that is not a financial institution holding a financial claim would not be crammed down by the restructuring agreement); (ii) the restructured claims were unsecured (even a heavily undersecured claim would not qualify for this purpose as unsecured); and (iii) the only term that could be imposed was a payment deferral up to 3 years (thus no debt write off or debt for asset solution could be imposed on dissenting creditors).
The restructuring agreements reached as well as the specific terms on debt deferral imposed on such dissenting creditors (with court approval which would only check the voting majorities and that the terms are not disproportionate) would benefit from protection against claw back actions in a potential future insolvency of the debtor.
This restructuring framework was totally inoperative as it targeted neither the creditors nor the debt restructuring solutions that the heavily over-leveraged Spanish businesses needed.
The debt of Spanish businesses which needs to be restructured is typically (i) secured debt, (ii) and debt owed by businesses overleveraged due to the strong reduction in EBITDA with respect to pre-crisis budgeted forecasts, on which basis such businesses were indebted (and thus a debt deferral is not the restructuring solution, only a debt write off would achieve the deleverage of the business); and (iii) originated by banks but in many cases now held by hedge funds (which in the previously described restructuring framework would not be crammed down to the extent that they are not financial institutions). This out-ofcourt restructuring agreement was so inefficient and unrealistic that debtors and creditors started to apply 'imaginative solutions' to restructure out-of-court secured claims. In this regard, the most important case was the Celsa case held before Commercial Court no. 5 in Barcelona (800/13-6). The debtor and the majority of creditors who held secured claims under a syndicated arrangement (and a syndicated security package) argued that minority dissenting creditors in a syndicate arrangement should be considered as unsecured creditors to the extent that they did not have the necessary votes to force the enforcement of the security package.
In this context, the new Spanish government was urged to convert this useless restructuring framework into an effective restructuring tool which would give both debtors and creditors the opportunity to deleverage the businesses with consensus, avoiding inefficient insolvency proceedings in court (they were lengthy and disrupted business) or minority opportunistic creditors hold-out positions (not only by hedge funds but also from established European financial institutions with little exposure to the Spanish market).
The need for an effective restructuring framework has been confirmed by the European Commission Recommendation of 12.03.2014 on new approach to business failure and insolvency ('the EU Recommendation'), when it states in section I 'Objective and subjective matter' that one of the two objectives is 'to encourage Member States to put in place a framework that enables the efficient restructuring of viable enterprises in financial difficulty.'