Amendments to the Insolvency law (Ley Concursal)

The Official Bulletin of March 8, 2014 published the official text of Royal Decree-Law 4/2014 of 7 March, whereby the Spanish government implemented urgent measures in the field of refinancing and restructuring of corporate debts.

According to the review made by the Council of Ministers, which adopted it last Friday, the new rules are aimed at ensuring the survival of companies that while being affected by an excessive financial burden are still viable from an operational point of view. And to such effects, the government has implemented an orderly and allgedely well balanced  system of agreements with creditors and a wider range of refinancing formulas.

The RDL modifies some particular aspects of the Insolvency Law (Ley Concursal) of July 9, 2003 with regard to the so called “pre-insolvency” stage, with a view to avoiding insolvency proceedings and the – normally likely - subsequent liquidation of insolvent companies. In particular, by amending the regime applicable to refinancing agreements that are approved by the courts, which may hereafter include rebates (quitas), the capitalization of debts or deferrals in payment ("waiting periods" in bankruptcy terminology). Once approved by the court, these refinancing agreements may extend its effects to dissenting creditor in case the agreements are favorably voted upon by the majorities required in each case.

These arrangements are aimed at allowing these stressed companies access to new financing, known as "fresh money".

Individual Refinancing agreements

The RDL introduces the possibility of reaching rfinancing agreements with one or more creditors without the need to secure the favorable votes of the majority of the credit holders; provided the debtor company improves its net worth position as a result thereof, The courts can terminate such agreements upon the request of the receivers (Administración Concursal) but only in the event the court would consider that the above requirements are not met in the specific case

Collective agreements of refinancing not judicially approved

These agreements are simplified by eliminating the need to produce a report from an independent expert. Such former requirement is replaced by a certification of the corporate auditor witnessing that the favorable vote of the holders of a majority of the liabilities exists.  In order to ensure legal certainty, these agreements will no longer be subject to subsequent termination (unless they fail to meet the requirements), if the company falls into judicial insolvency. This is intended to correct the current situation, where agreements are usually terminated when deemed harmful to the active mass of the insolvency.

Finally, the RDL intends to boost the capitalization of loans or credits by providing that in the event that the collective agreement includes such a capitalization, there shall exist an assumption of guiltiness on the part of the debtor if he refuses the capitalization without reasonable cause.  For this purpose, a “reasonable cause“ shall be deemed to exist when so witnessed by a report issued by an independent expert. It will be also necessary that the proposed agreement recognizes  - in favor of the partners or shareholders of the company - a pre-emptive right of purchase on shares subscribed by creditors as a result of these procedures, upon a subsequent sale or disposal thereof.

Collective agreements of refinancing judicially approved

In order to facilitate the fast and flexible completion of  these agreements, the judge will only have to prove that both the required voting majorities and the formal requirements necessary in connection with such approval exist. Once they are judicially approved, these agreements cannot be subject to termination if the company officially brings judicial insolvency procedures.

As in the case of collective agreements that are not judicially approved, the RDL eliminates the report of an independent expert formerly required. Such report is replaced by a supporting certification of the company accounts auditor witnessing that the holders of the majority of the liabilities have casted a vote favorable thereto.

The voting majority required to have the agreement judicially approved goes down from the former 55 per cent to 51 per cent (simple majority). This majority is no longer calculated with regard to the liabilities held by finance entities but to all holders of such financial liabilities. Said creditors shall encompass the holders any financial  debt (thus excluding commercial creditors and public law creditors), regardless of whether or not the creditors are subject to financial supervision by the Spanish authorities  However, other creditors can adhere to the agreement.

Another new feature is that it shall be deemed that creditors intervening in syndicated loans shall become a part of the refinancing arrangements when reaching the favorable vote of 75% of the liabilities represented by such loan; unless the rules governing such syndication shall establish a lower majority.

If 60 per cent of financial creditors agree on waiting periods (deferrals)  up to five years and the conversion of regular loans into participating loans for the same period, these measures will extend to the dissident creditors without the need to provide for in-rem guarantees. If the agreement is signed by 75 per cent of financial creditors, and involve (i) waiting periods between 5 and 10 year; (ii) rebates (quitas); (iii) capitalization of credits; (iv) participating loans; (v) conversion of debt into any other financial instrument and (vi) assignment of assets in cancellation of debts, the agreed terms shall be binding also upon dissenting creditors..

At present, refinancing agreements that are judicially approved do not extend its effects to loans with in rem collateral (mortgages, pleadges, etc). With the reform, these credits are also affected by the judicially approved agreements as follows:

- For that part of the credit that exceeds the amount of the in rem guarantee: the effects of the agreements referred to in the previous paragraph (waiting periods, conversion of credits, etc) are extended in the same terms as receivables without guarantee and with the same majorities.

- Up to the amount of the guarantee: The effects of the agreement referred to in the previous paragraph apply if approved with the same majorities of 65 and 80 per cent respectively, calculated pursuant to the amount of the guarantee of the creditors who voted in favor.

It is now possible for judicially approved refinancing agreements to include (and be binding upon dissenting creditors) the conversion of debt into equity. The resolutions must be adopted by the relevant Shareholders’ or Partners’ Meetings by simple majority, while offering dissenting creditors, at their option, the alternative of collecting with a rebate.

As in the case of non judicially approved agreements, the debtor shall be deemed to incur in fault when refusing the capitalization without reasonable cause.

Measures that are common to both approved and not approved collective agreements

Individual enforcements of assets necessary for the continuing professional or entrepreneurial activity of the debtor shall be halted for a period of four (4) months from the moment the court is served notice that the negotiations with creditors are in progress, with a view to prevent that individual enforcements of other creditors may accumulate.

Measures common to the approved and not approved individual and collective agreements

At present, only 50 per cent of fresh refinancing funds enjoy the privilege that credits shall be repaid in full upon maturity. This percentage is temporarily increased to 100 per cent in order to grant maximum protection to the grantors of these financial facilities. The aim is to encourage the granting of additional funding that may be essential to ensure the interim viability of the company and to assure that the refinancing agreement itself shall be workable.

This consideration (i) extends to income realised by the debtor himself or by closely related parties, (excluding capital increase operations); and (ii). will apply for two years from the entry into effect force of the Royal Decree (immediate) to insolvency proceedings accepted by the courts within the next four years.

Improvement in the treatment of the provisions made by financial institutions

The RDL instructs the Bank of Spain, to approve uniform rules to improve the ranking of the debt remaining after the conclusion of refinancing agreements.

Amendments to other regulations

*          The Law of Civil Procedure (Ley de Enjuiciamiento Civil), is amended to reflect the halting of individual enforcements (executions) for as long as the negotiations of the refinancing agreements shall last.

*          The Royal Decree of December 12, 2008, is amended to provide that the balance sheets  for fiscal years to be closed during 2014 shall not take into account (i) losses for deterioration of fixed assets, (ii) real estate investments; (iii) inventory; and (iv) loans or accounts receivables, to the sole effects of preventing that they may be the cause for  insolvency (and avoiding the ensuing judicial insolvency proceedings), reduction of capital or dissolution of the company.

*          The Royal Decree of 2007 on Public Offerings is amended to eliminate the need to secure, where required, the approval of the Securities and Exchange Commission  for certain transactions carried out as a direct result of a judicially approved refinancing agreements, subject only to the favorable report of an independent expert.

 *         The Restatement (Joint Text) of the Corporate Tax Law, approved by a Royal Decree of March 5, 2004 is amended to provide that no tax shall apply to the capitalization of debts other than those resulting from the derivative acquisition by the creditor at a value different from face value­.

In connection with the tax treatment of yieldings from discounts and waiting periods arising from the application of the insolvency legislation, the RDL provides for a deferred assessment that the income so generated may on the taxable basis of the company in the light of the financial expenses that may subsequently arise.

The Transfers Tax and Documented Legal Transactions Law approved by a Royal Decree of September 24, 1993 is amended  by expanding the existing tax exemptions also to deeds witnessing rebates or reductions in the amounts of loans, credits and other obligations, thus facilitating agreements on the payment or refinancing of debts.//