The Latest Amendment of Spanish Insolvency Law (1), or a Guide to Run Away From Insolvency Procedures

As I mentioned in my previous post, in the final two posts in my stint as guest blogger detailing the latest amendment of the Spanish Insolvency Law, I’ll take a break from discussing personal insolvency to focus on another current issue in Spain that very recently led to a partial amendment to the Insolvency Law: out of court refinancing and restructuring agreements. I have a personal interest in sharing the situation here in Spain because I am deeply interested in hearing comments on the main issues I identify as regards the amendment. To begin, I will briefly outline the amendment’s main features. I’ll then identify four main issues with the amendment – two in this post and two in my final post.

The amendment is just a couple of weeks old (it was published in the Official Gazette on the 8^th of March, as –once again- a Royal Decree-Law on urgent measures regarding business debt refinancing and restructuring), though since 2009, preinsolvency refinancing and restructuring agreements have been a recurrent topic in the amendments of the Insolvency Law. This new amendment reinforces the tools upon which both creditors and debtors rely for solving these difficulties using out of court agreements. My view is that this amendment confirms that the Spanish legislature is convinced that the natural habitat  for achieving the preservation of companies in difficulties is not insolvency, but private negotiations and, therefore, that providing support for these types of agreements is especially necessary at a time when preservation of economic activities that are commercially viable but financially distressed should be an essential policy principle. The amendment represents the culmination of an evolution towards a system where the solution to financial difficulties does not necessarily have to be dealt with in court, offering to debtors and creditors an attractive out of court alternative. This latest amendment seems to be the final piece of a puzzle where the insolvency procedure will be used only for liquidation purposes (whether that be piece meal liquidation or sale of some of all of the business as a going concern, thus preserving the business activity). This change is more or less nominal, because, since its adoption, under the Insolvency Law both agreements and liquidation have always been possible solutions of the insolvency procedure, but the reality is that more than 90% of these proceedings end in liquidation. It is unclear whether this outcome is due to the stigma associated with the insolvency or because of the inability of the law itself to provide useful tools for conservation (excessive costs, duration, etc.). Nonetheless, it seems that the Spanish legislature has opted not to amend the insolvency procedure to deal with this outcome, but instead to focus on the tool apparently preferred by the players: out of court agreements.

The new regulation, which still needs to be confirmed by the parliament (where some changes might be introduced), preserves the basic configuration of the system of Spanish Insolvency Law as regards preinsolvency restructuring agreements. In particular, the regulation continues to (i) protect the negotiation period, (ii) protect the agreements against avoidance actions in case of a future insolvency, and (iii) allow judicial authorization, pursuant to a procedure, for certain kinds of agreements that will allow them to be imposed on dissenting financial creditors if certain majorities are reached among this class of creditors. While maintaining this structure, the amendment also introduces important changes that will impact deeply how preinsolvency restructuring agreements are used. I will focus on the four most relevant: two in this post and two in the next post.

The first great change is the protection given to the negotiation procedure. Until now, the mere negotiation of an agreement only affected creditors’ petitions to open the insolvency procedure of the debtor. A general automatic stay only followed after the formal opening of the insolvency procedure. In contrast, negotiations did not prevent creditors unaffected by the usual standstill agreement during the negotiation to initiate judicial enforcements that could render the final agreement useless. In fact, the new provision was simply intended to offer more time to the debtor, who under Spanish Law is forced to file for insolvency in two months after becoming insolvent. With the reform, an automatic stay is given for this negotiation period that may stretch for three months, although in a limited way: it will not be possible to initiate or maintain judicial enforcements of assets, but only as long as they are necessary for the debtor to continue its business activity. Although this might be arguable, I think that this provision can lead to inconvenient results, considering that no effective judicial control is apparently present to avoid its abusive use (notifying the negotiation seems to suffice for that purpose).

The second relevant innovation is the changes made to the protection of restructuring agreements against avoidance actions. The change clearly seems to be aimed at creating a wider and easier protection. For instance, the protection still requires, among other conditions, that the agreement is backed by a certain amount of the debt (3/5), but the amendment has removed the need for an independent expert report. Instead, a certification from the debtor´s auditor that the 3/5 majority has been reached is required. The elimination of the independent analysis of the benefits of the agreement that justified the special protection may be because the report ultimately usually was useless and introduced costs and complexities that outweighed its probable benefits.

In addition, the amendment also extends the range of agreements covered by this protection from avoidance actions. The protection will apply not only to these agreements (usually) backed by a majority of creditors (or collective agreements, as they are beginning to be referred to), but also to individual or collective agreements not reaching the 3/5 majority. In these instances, other conditions are to be met, which basically relate to an improvement of the financial situation of the debtor without an excessive protection of the participant creditor or creditors.

In my next post, I will discuss two other key changes: judicial authorization of certain category of agreements and the tools introduced to favor debt for equity agreements.