RSSG Thought of the Month March 2023

Spanish Insolvency Law 16/2022

Spain introduced a new Chapter to its Insolvency Act in autumn 2022, which is partly designed to implement the EU Directive on preventive restructuring frameworks that was published in 2019. This includes a restructuring plan which allows cross-class cram down and the first few Spanish restructuring plans are now beginning to emerge. But how effective is the new regime and how will the courts determine the critical question of what constitutes a class? Will we see more restructuring plans carried out in Spain, or will the trend of exporting the most complex restructurings to the UK or the US continue?

The new law includes a mechanism which enables a company that is or is likely to become insolvent to propose a restructuring plan which needs to be approved by requisite class majorities. It also includes the all-important mechanism to impose a compromise on a non-consenting class (i.e. cross-class cram down, or CCCD) subject to a number of safeguards, including that the dissenting class must be no worse off in the most likely alternative scenario (which is a hypothetical liquidation). There are also provisions to allow the appointment of a "restructuring expert," who may assist the debtor and the creditors in progressing the plan and providing evidence on the value break and the relevant alternative. This has obvious similarities to the UK restructuring plan and there is an interesting potential role emerging for financial advisers, similar to what we have seen in the UK. However, there are some tricky aspects of the new law: the limited guidance on class constitution; the inability to use cross-class cram down against shareholders where the company is not yet insolvent; and the exclusion of public debt. The new law also includes an absolute priority rule, although this can be disapplied if it is necessary to ensure the viability of the company and does not unjustifiably prejudice the classes who have voted against the plan. Whilst the new legislation seems to be based on sound principles, there are a number of areas where disputes may arise and we have some concerns as to whether the Spanish court system will be able to resolve these sufficiently quickly.

Cross-Class Cram Down en España

Clear guidelines on class constitution are needed in order for CCCD to work effectively. In the UK and the US, decades of case law provide guidance on what constitutes a class and when the class may be fractured. Whilst we don’t always have all the answers and the trend has varied between broad class construction (with creditor schemes) and narrower definitions of class (with restructuring plans), we generally have a decent idea of the parameters. In Spain, there is currently limited legislative guidance on what constitutes a class. There are some mandatory rules: that members of the class should have a common interest; that common interest is presumed where claims rank equally in an insolvency; and that public debt must be treated differently and cannot be compromised. There is also some non-mandatory guidance, such as that loans and "financial claims" may be grouped together, and that claims under similar contracts such as leases may be grouped together, but where there is a conflict of interest this may break up the group. There is also an expectation that claims in the same class will be treated equally.

It is possible that the more developed principles of class constitution in the UK and the US might have some relevance to determining class in Spain. For example, the UK principles of assessing the similarity of rights coming into a scheme or a restructuring plan and equality of treatment coming out might be of some help. These principles (and the market practice that has developed around them) might, for example, suggest that a reasonable work fee for an ad-hoc group can be justified without fracturing the class, or that debts with different maturities or differing coupons or currency may be classed together if they rank pari passu and are treated equally in the compromise. Whether or not these principles could have application in Spain is a moot point, but we think that at least the underlying arguments supporting class constitution or class fracture may be helpful.

However, one problem is that there is no automatic equivalent to a UK "convening hearing" where class constitution is determined quickly by the court at the commencement of the case within two to three weeks of the initial filing. Instead, it is normally up to the company to determine class and to hope that this is not challenged. Creditors can challenge class composition but this may take months to resolve. For example, in the recent Celsa case (see box below), a challenge was raised and it took over six weeks for the court to confirm the class constitution. Although the court's ruling seems fairly robust, it is effectively only preliminary guidance as the ultimate decision is deferred until approval of the scheme. The overall timing to obtain final court approval of a plan may therefore be pushed out considerably, particularly if there are challenges and appeals. Given the need for speed in restructuring situations, it seems likely that debtors will need to take a cautious approach to class constitution if they want the highest chance of getting a restructuring plan approved. But this may mean restructurings are less effective than they should be.

Distressed Debt Purchases

Buyers of distressed debt in companies that pursue a restructuring plan may encounter some difficulties, as under the new law the price paid for secondary debt purchases may set a ceiling on what they are able to recover before a lower-ranked class gets paid. Whilst bashing secondary debt traders may sound appealing to a populist audience, we don’t agree with this approach as liquidity in secondary debt markets will often facilitate a restructuring. Reducing or removing this market is unlikely to be in the interests of par lenders looking for an exit, the distressed debt community or, ultimately, the debtor, if this makes achieving a restructuring more difficult. The price at which debt is purchased should not affect the holder's rights or the outcome of a restructuring. We will need to see how this provision is approached, both by the courts and by the wider market.

Our Verdict: Tick or Tacky?

The new restructuring plan provisions are a welcome addition to the toolbox of Spanish restructuring options. By and large, the rules are sensible and well-founded. However, there are a number of areas that could prove controversial and we are concerned that the courts will not be able to step in quickly enough to resolve the inevitable challenges that regularly crop up in non-consensual procedures and the first instance judiciary may not have the experience to deal with the complex range of issues that may arise on a restructuring. Whilst the appellate courts have significantly deeper experience, it takes a considerable period for appeals to be heard, even on urgent restructuring matters. So it is not the rules of the game that are likely to be the problem, it is more the referee and the absence of VAR.

Does this mean that we may see a return to complex restructurings being exported to the UK or the US? Probably not. The new regime is sufficiently sound to allow domestic restructurings to occur in Spain, even if the court system may be less speedy and effective in resolving any issues. In some ways, this is part of a wider trend of diminishing European "bankruptcy tourism". This is partly driven by EU member states improving their domestic pre-insolvency regimes as required by the EU Directive on preventive restructuring frameworks 2019. It is also partly due to the uncertainty (post-Brexit) surrounding recognition of UK schemes and restructuring plans within the EU. The recent decision by the German real estate behemoth, Adler, to pursue a UK restructuring plan rather than a German StaRUG process may be an anomaly. We will have to see how that turns out.

Authors: Giles Boothman, Beatriz Satrustegui and Jose Christian Bertram