The Latest Amendment of Spanish Insolvency Law (2 and Farewell to Spanish Guestblogging)

This post will be my last one, and I would like to start it thanking Bob and the rest of the Credit Slips team for inviting me again to guest blog. I felt flattered and excited to share my experiences with Spanish insolvency law the first time, and the feeling remained throughout my second blogging stint. The experience has been so interesting (and a bit challenging) that I would not mind returning for a third time in the future.

My previous post covered the basics of the recent amendment of the Spanish Insolvency Law regarding refinancing and restructuring agreements. I left for this final post the analysis of two specific issues: judicial authorization and promotion of debt for equity agreements. The changes introduced by this amendment are, for sure, of great importance.

First, the judicial authorization mechanism for an important category of agreements, already present in the Spanish Insolvency Law since 2011, has been greatly amended in the new changes to the regime for refinancing and restructuring agreements. This authorization, which is limited to financial claims (the previous reference was made to financial entities, but was very problematic), entails the possibility of imposing on all of the creditors with financial liabilities the refinancing agreement, thus offering a way to extend the binding effects to dissenting creditors. The legal provision is long enough to deserve a post for itself and I will highlight just a couple of questions.

The first is the new and very complex way of calculating the majorities that serves as a precondition of the desired judicial homologation, that will entail the binding effect of the agreement even for creditors not parties to the agreement. The classical distinction between secured and unsecured creditors now refers to the amount of the credit that is to be considered secured, depending on the value of the collateral and the presence of priorities on that collateral. This new calculation will supposedly have a big effect as creditors previously considered secured may be treated as unsecured, thus affecting the calculation of majorities and, what is more important, the extent of the binding effect of the agreement (for instance, a partial write-off or postponement). This system is, in my opinion, highly problematic and I’m unsure if it is present in a similar way in other jurisdictions that could have served as an inspiration for the Spanish Law. The second issue is the inclusion of secured creditors in the binding effect of the agreement. Although higher majorities specifically counted in the amount of secured creditors are needed, the possibility that a secured creditor might be affected by the measures foresaw in the agreement is, without any doubt, very relevant.

The judicial authorization is clearly motivated by the intention of avoiding strategic behavior of minority creditors (whether secured or not) trying to obtain better conditions while bargaining with a veto to an agreement acceptable to the majority. However, I am not sure if the controls to ensure adequate protection of these minority creditors are strong enough to cope with the opposite risk. For instance, a large creditor could impose unfair conditions that hurt its competitors in the short term, allowing the creditor a competitive advantage. In this regard, my opinion is that the system makes it very difficult to effectively protect against this opposite risk even if the power not to authorize the agreement is given to the judge if he or she considers the agreement “unfair” to the dissenting smaller creditor.

I have left for the end the most surprising novelty. The amendment tries to make easier and more attractive the conclusion of agreements that provide for the exchange of debt for equity through innovative means, like favoring the creditors who accept them or solving some of their practical problems. It is well known that debt for equity agreements are a common solution to financial difficulties. They, however, pose a number of problems, such as (i) the risk of future subordination in a system like Spain’s, where debt not included in the debt for equity swap will be automatically subordinated if there is a certain amount and type of participation in the company by the debt holders; or (ii) the necessary connection with take over bids regulation (a basic outline to situation before the amendment can be found here). The amendment deals with these issues and also with the fact that the proposed solution depends on the shareholders’ decision because shareholders are the ones who must approve the capital increase that permits conversion. This part of the amendment stems from that fact that there have been cases where the refinancing agreement has been impossible to put into practice because the shareholders did not approve the debt for equity part. To assure that the shareholders do not block the debt for equity swap, a presumption of tortious insolvency is established in the event of the shareholders opposing the swap without reasonable cause. This may lead to the shareholders’ personal liability for the debts unpaid in case of liquidation. The provision is undeniably important and it will most likely play a big role in future negotiations (in a few weeks it has been already been raised in a few cases, see here and here, for instance).