Legal framework for restructuring and insolvency proceedings in Spain
The legal framework for restructuring debt is a broad system of rules that governs the decision making process of restructuring debt, which includes a reorganization of obligations, often achieved by reducing the burden of debt by decreasing interest rates and increasing the payback period. The restructuring of debt is extremely beneficial for a company that wants to increase its ability to meet responsibilities. Furthermore, creditors may forgive some debt in exchange for a position in the debtor company.
In Spain, the procedure for restructuring debt has already met expectations and showed its importance. There have been major modifications to Spanish legislation to set up the current legal framework and secure companies’ general and financial management.
Previously, formal insolvency proceedings ended with the liquidation of a company, which could be explained by the inefficiencies in legislation as well as a cash flow shortage and defaults on payments. Royal Decree-Law 4/2014 (RDL) has improved pre-insolvency business reorganization mechanisms that aim at the recovery of businesses. After the 2014 reform, a number of companies have financed their debts. Additionally, there have been many purchase deals made for the payment platforms of financial institutions, which have offloaded these purchases to various funds and investments. In 2013 and 2014, there has been a trend of industrial investors and foreign private equity firms buying insolvent companies’ production units. While these deals can take place during the opening of insolvency proceedings, they usually appear during the final phase of proceedings. The sale of operating business units in insolvency proceedings is a very common practice in Spain because the law does not impose buyers to accept existing employment terms and conditions nor settle the former owners’ tax or social security liabilities. The transactions of refinancing companies in crisis and the development of new mechanisms that help preserve companies will continue in the future.
Presentation of restructurings
In short, there are two types of restructuring methods: in-court-restructuring and out-of-court restructuring.
In-court-restructuring consists of different stages. The pre-insolvency (preconcurso) can be sought when negotiating a refinancing agreement or an advanced proposal for creditors’ arrangement. In this stage, a debtor notifies the commercial court about the negotiations with its creditors and has a four-month period of protection against insolvency proceedings. The insolvency phase is launched by filing a petition for an insolvency order. After the examination of the petition, the judge makes an insolvency order. Creditors are expected to notify their claims within one month of the publication of the order. Additionally, the court appoints an insolvency manager. The insolvency manager examines the acts of the insolvent debtor and issues a report about the debts involved. If the creditors do not oppose the report, the manager submits the final version on which the judge will base his or her decision when ordering the beginning of the arrangement phase, which contains the repayment schedule, viability plan, alternative repay proposals, etc. The Spanish Constitutional Law offers liquidation as an alternative to a reorganization plan. In case of approval of liquidation, all the debtors’ assets are sold off and claims are paid to the creditors, following the statutory order.
Out-of-court restructuring is a procedure consisting of replacing an old debt with a new one. The negotiation is made directly between a debtor and its creditors. Out-of-court restructuring demands lots of effort due to the negotiation procedure with bankers, creditors, vendors, etc. The so-called “Spanish Schemes of arrangements” allows deferrals to be made binding on financial claims, debt-equity swaps, debt-for profit participating loan, conversions, etc. The court must sign the refinancing agreement and 51 percent of the financial claims must approve the agreement. However, this is not enough to make the agreement binding on non-participating or dissenting creditors. Deferrals for up to five years may be binging on all creditors if a majority of 60 percent of the financial claims approve the agreement. In the case of a majority of 75 percent of the financial claims, deferrals can be made binding for up to 10 years.
In conclusion, the legal framework for restructuring is extremely complex and aims to cover all possible situations when it comes to restructuring and insolvency proceedings. The new Spanish legislation covering the subject can be regarded as successful because it has a clear framework and yet manages to cover all the numerous situations related to the matter.
Riikka Tuomisto & José María Mesa