Spain

Introduction

The Spanish insolvency regime has undergone major changes during the past eight years, with the aim of building a framework that facilitates out-of-court restructuring to secure the viability of distressed debtors and provide for an expedited route to facilitate the emergence of insolvent companies either through an accelerated composition agreement or anticipatory liquidation or sale of assets.

In this regard, the Spanish Insolvency Act (SIA) has been repeatedly modified – specifically as a result of the 2008 financial crisis – to ease the possibility for insolvent companies to reach a solution outside the insolvency proceeding. Thus, a pre-petition tool, known as ‘pre-concurso’ was introduced, which, among other things, grants the debtor a longer time frame to find a solution to its insolvency, as well as the amendment of the liquidation rules to ease the sale of the business, as explained herein.

Overview of key restructuring tools

Pre-petition framework

Available pre-petition tools fall under article 5 bis of the SIA, pursuant to which debtors who are insolvent may, within two months of the date the debtor is made aware or should be aware of his or her insolvency, inform the court of the commencement of negotiations with creditors to waive insolvency.

Upon the communication of the commencement of negotiations, debtors have an additional three-month period to seek any of the following restructuring solutions: entering into a refinancing agreement, in or out of court; an out-of-court payment agreement; and the achievement of sufficient accessions to an early composition agreement.

During this period, no judicial or out-of-court enforcements may be initiated over the debtor’s assets that are necessary to continue developing its activity, nor can a creditor file for the mandatory insolvency of the debtor.

Once the three-month term has expired, the debtor must, within one month, communicate to the court the achievement or not failure, as the case may be, of a refinancing agreement; an out-of-court payment agreement; the achievement of sufficient accessions to an early composition agreement; or the removal of its insolvency by any other means. If the debtor fails to request its insolvency declaration within this period, any creditor is entitled to request the commencement of an involuntary insolvency proceeding.

However, the central pre-petition tool introduced by the SIA is the refinancing agreement. For an agreement to fall under the scope of the SIA (i.e., to be considered a refinancing agreement), it must satisfy the following requirements set forth under article 71 bis 1, which are:

1. minimum content: the refinancing agreement must consist, at a minimum, of a significant increase of the available credit,^[2] or an amendment or cancellation of its obligations (extension of the maturity or replacement of the obligations), based on a viability plan that ensures the continuation of the business activity in the short and medium term;
2. majorities: the agreement has been entered into by creditors whose claims represent at least three-fifths of the liabilities of the debtor;
3. auditor certificate: the debtor’s auditor has issued a certificate ensuring the achievement of the required majorities; and
4. public document: the agreement has been formalised in a public document.

If the above-mentioned requirements are satisfied, the refinancing agreement and its acts and transactions included (including the granting of any security to secure the obligations assumed by the debtor under the refinancing agreement) will be protected from claw-back actions upon the insolvency declaration of the debtor.^[3] Moreover, the 50 per cent of new monetary claims will be considered claims against the estate.

In addition to these measures, debtors and creditors may seek additional protections by means of the tools provided by corporate law when it comes to corporate reorganisation performed by means of hive-downs, mergers, etc, and this may need to be performed in parallel with the debtor’s financial refinancing.^[4]

The debtor and any financial creditor who has been a party to the refinancing agreement are able to request its approval (i.e., judicial sanction) before the Commercial Court – where the debtor has its main centre of interests – to seek absolute claw-back protection^[5] and cramdown to any hold-out creditors the content of the refinancing agreement.

From a claw-back perspective, according to the 4th Additional Provision of the SIA, a refinancing agreement may be approved if it complies with requirements (i), (iii) and (iv) set out under Article 71 bis 1 and, in addition, it is entered into by creditors whose claims represent, at least, 51 per cent of the financial liabilities of the debtor. If the request for approval and refinancing agreement accomplishes the formal requirements set out under the 4th Additional Provision of the SIA, the Commercial Court will approve.

Furthermore, as explained above, the approval not only protects the refinancing agreement from future claw-back actions, but also allows the cramdown of certain dissenting creditors^[6] when the relevant thresholds are achieved, as well as to suspend ongoing foreclosure proceedings or even cancel seizures. For the extension of its effects to dissenting creditors the following majorities need to be met.

Once approval is published in the Spanish Gazette, dissenting creditors (ie, those who have been crammed down by the ruling) have 15 business days to challenge it. Both the standing to challenge and the grounds to do so are limited by the SIA. If the dissenting creditor is successful in his or her challenge, the claim will not be affected by the refinancing agreement.^[8] In any case, the court’s decision is not appealable.^[9]

Finally, there is the out-of-court payment agreement, which is a proceeding guided by a Spanish public notary (for natural persons) or by the Commercial Registry or an official chamber of commerce (for entrepreneurs and legal persons), who will appoint an insolvency mediator.^[10]

Insolvency processes

Under Spanish law, although all insolvency proceedings have the same ‘door’ of entry (there is no Chapter 11 or Chapter 7 dichotomy), all insolvency proceedings must end up in one of two ways: composition agreement or liquidation of the company.^[11] Furthermore, Spanish law permits to anticipate the opening of the composition or liquidation phase from the outset of the insolvency proceeding.

Anticipatory composition agreement

With respect to composition agreements, the SIA allow debtors to present a pre-arranged composition agreement along with the petition for insolvency,^[12] which has to be supported by a relevant number of creditors (20 per cent) and follow certain additional requirements (such as content requirements, together with not falling into prohibitions). If these requirements are satisfied, the court will declare the insolvency proceeding and open the composition agreement, which will probably be an expedite proceeding subject to Article 190.2 SIA:

• In the ruling declaring the company insolvent or in a subsequent ad hoc ruling, it shall order the insolvency administrator (IA)^[13] to assess, within 10 days, the composition agreement, the payments schedule and the viability plan attached thereto.^[14]
• The composition agreements shall mandatorily include a write-off of the debt or a moratorium of payment. In addition, the SIA allows for the composition agreements to foresee the sale of the debtor’s assets attached to its activity or the sale of one or more of its business units, to a given person. However, Article 100.3 SIA establishes that under no circumstances can the composition agreement foresee the total liquidation of the company, as the purposes of all composition agreements must be the continuation of the business activity.
• From the acceptance by court of the early composition agreement and until the expiry of the term to challenge the debtor’s assets and claims list,^[15] creditors can adhere to it.
• Once the term to challenge the assets and claims list has elapsed, the court will issue a ruling with the outcome of the accessions. If the relevant thresholds are achieved, and after the term for creditors to challenge it,^[16] the court will issue the ruling approving the early composition agreement.^[17]

If there are no challenges to the ruling approving the early composition agreement (or they are dismissed), all effects of the insolvency proceeding shall cease. With the only obligation for debtors, to inform the court quarterly on the satisfaction of the early composition agreement.

Anticipatory liquidation

Alternatively, the debtor can request the opening of the liquidation phase along with the petition for insolvency or at a later stage, and seek an accelerated sale of the business unit, which can take place at three different stages during the insolvency proceeding:

• At the earliest, when the debtors file together a liquidation plan with the petition for insolvency including an offer to acquire its business unit. In this case, according to Article 190.3 of the SIA, the court shall, by means of the ruling declaring the debtor insolvent, directly open the liquidation phase and conduct the proceeding through the expedite rules;^[18]
• During the common phase (i.e., the phase that is opened by default in those cases when the debtor does not present an offer to acquire the business unit together with the petition for insolvency nor requests the opening of the liquidation phase); and
• During the liquidation phase, in which the IA can seek to sale the business unit as one of the liquidation measures.

The sale of the business unit will be conducted in accordance with Articles 146 bis and 149 of the SIA whether it is implemented during the common phase or the liquidation phase. These articles set the framework for the sale of the debtor’s business unit within the insolvency proceeding by providing, in particular, the following:

• Existing agreements: the acquirer will automatically assume the debtor’s position in all agreements in force that are linked to the business unit, not allowing the counterparty the right to challenge that assumption.
• Administrative licences: all licences required to continue business activity will be automatically transferred by means of the sale of the business unit.
• Liabilities: the acquirer may cherry-pick which liabilities they will assume. Otherwise, the liabilities of the debtor (both pre-insolvency and claims against the estate) will not be transferred to the acquirer of the business unit.

This does not apply when: the acquirer of the business unit is a special related party to the debtor^[19] and the employees attached to the business unit are transferred along with the assets, as it is considered a ‘business succession’ for labour and social security purposes (Article 149.4), thus, being liable for such obligations.

In connection with this last point, Article 149 of the SIA sets forth the regime applicable, inter alia, to the labour and social security succession and the subsistence of existing in rem security:

• Labour and social security succession. If organised human resources are transferred along with the assets, the acquirer will assume all those unpaid liabilities, excluding the part covered by the Salary Gurantee Fund.
• In rem security. Paragraph 5 of Article 149 sets forth that the ruling adjudicating the business unit to the seller will assign the assets free and clear from any previous liens and encumbrances, unless the acquirer wants to maintain those liens or encumbrances over the assets.

If the business unit includes secured assets, the applicable regime varies depending on whether the security interests are kept in place or not following the sale of business unit:

• If kept in place: the transfer of the encumbered asset will not require the creditor’s consent.^[20]
• If the assets are transferred ‘free and clear’: the SIA differentiates between those cases in which the purchase price is equal or higher than the value of the security interest or, instead, is lower. In the first case, the special privilege creditor’s consent is not required. On the contrary, if the purchase price is lower than the value of the security interest, the release of the security interests will require the consent of those special privilege creditors who have separate right to enforce its in rem security (i.e., those who initiated the enforcement of their security prior to the insolvency declaration) and who represent at least the 75 per cent of the special privilege claims. If both requirements are not met (i.e., separate right to enforce and majority of 75 per cent) no consent of the secured creditor will be required.

Notwithstanding the foregoing, Spanish Supreme Court Ruling No. 625/2017, dated on 21 November 2017, clarifies that if the purchase price is lower than the value of the security interest, and there is only one special privilege creditor, the release of the in rem security requires its consent.

Upon the IA’s report on the offers submitted and the allegations by the parties, as the case may be, court will issue a ruling adjudicating the business unit to the offeror that is within five business days.

Can a restructuring be implemented on a pre-packaged basis?

Unlike in other jurisdictions, the SIA does not foresee a pre-pack solution. On the contrary, the SIA distinguishes between pre-petition and post-petition tools. Pre-petition tools are limited to financial debts and do not allow for the sale of assets or rearrangement of the financial liabilities.

Accordingly, there is no relevant pre-pack case law in Spain, despite, increasingly, legal practioners seeking to anticipate the sale of business units and expedite the insolvency proceedings. In this regard, the SIA foresees ‘pre-arranged’ insolvency solutions as the anticipatory composition agreement or liquidation, which shall be consented by the IA.

Which processes can be implemented in this way?

As mentioned, a pre-pack cannot be implemented in an insolvency proceeding and instead restructuring solution may be only implemented through a refinancing agreement or by means of the Spanish Structural Changes in Corporations Act.

In the first case, the debtor and its creditors may agree by virtue of the refinancing agreement to sell the business of the company to a third party and fund the creditors with the proceeds of the sale. Additionally, the transaction might be court-sanctioned through a homologation ruling, which will protect it from potential claw-back actions and allow it to cram down dissenting creditors.

However, there is ongoing debate around whether other measures from those expressly foreseen under the 4th Additional Provision of the SIA can be imposed to dissenting creditors.^[21] For example, if a hive-down is implemented through a refinancing agreement and a change in the debtor is agreed, not all Spanish courts will agree to impose, through the approval ruling, a change in the debtor, as it is not expressly foreseen under the 4th Additional Provision of the SIA and, according to the Spanish Civil Code, creditors must consent to a change in the debtor.

Second, a pre-pack measure might be achieved by means of a (total or partial) split or a hive down in accordance with the Spanish Structural Changes in Corporations Act. Although it will not be conducted as a direct sale of the company, the business, along with all its rights and liabilities, can be transferred to the ‘Newco’.

Regardless of the above, no insolvency measures, once the insolvency of the debtor has been declared, may be adopted without the acquiescence of the IA and the court’s approval, and upon objections by creditors, if applicable.

Can the aims of a pre-pack be achieved through other means?

On the understanding that the aim of the pre-pack is to avoid the control by the IA and court, as per the above, it can only be conducted through a refinancing agreement or a structural change in the company (i.e., as a pre-insolvency solution).

Notwithstanding, if the sale of the business is carried out in accordance with the rules of the sale of the business unit under the SIA, the purchaser shall benefit from, inter alia, a reduction in the price (as the company has been declared bankrupted) and the possibility to cherry-pick, inter alia, the debts, including tax liabilities which can be left behind in the insolvent company, but excluding labour liabilities; employees, as far as the acquirer is able to prove that not all the employees of the company are attached to the business unit acquired; and assets. Not only can the purchaser select which assets are transferred to the Newco, but the Commercial Court can order the transfer of those assets free from any encumbrances or in rem rights attached thereto, under certain circumstances.

Case studies

We will analyse three relevant case studies in Spain, namely the sale of the assets of Sacyr Vallehermoso Participaciones Mobiliarias S.L.U. (Sacyr) through the approval of a refinancing agreement; the sale of the business unit of Cacaolat S.A. (Cacaolat) conducted during the common phase of the insolvency proceeding, which lead to a change in the SIA to allow the sale of business units before the end of the common phase; and the sale of the business unit of Marme Inversiones 2007 S.L. (Marme) in accordance with the liquidation plan filed by the IA.

Sacyr

Sacyr is a holding company that holds shares in Repsol S.A. It entered into a syndicated loan agreement to acquire the 9 per cent of the share capital of Repsol S.A. (a significant minor participation of a listed company), being the final maturity of the syndicated loan, on 31 January 2015.

Sacyr did not have sufficient liquidity to attend the payment of the outstanding amount of the syndicated loan on 31 January 2015. Accordingly, Sacyr had two options: negotiate a refinancing agreement with its syndicated creditors, or petition for insolvency. The first option seemed to be the most desirable, as the insolvency declaration of one of the main shareholders of Repsol S.A. would have had major consequences for it by negatively impacting on its listing price.

Sacyr initiated negotiations to achieve a refinancing agreement with its syndicated creditors, which resulted in the signing of a refinancing agreement on 14 and 23 January 2015. The refinancing agreement foresaw, inter alia, the extension of the loan maturity until 31 January 2018 (with no redemption of the syndicated loan over three years); a decrease of the interest rate until 30 January 2017; and, prior to the new maturity date, the sale of its shares in Repsol S.A. if its listing price reached a certain amount. Subsequently, Sacyr requested the approval of the refinancing agreement.

As mentioned, for a refinancing agreement to be approved under the SIA, it must be based on a viability plan owing to the SIA’s (and the European Insolvency Regulation)^[22] aim to ensure the continuity of viable business and the wind-up of non-viable businesses.

The ruling granting the homologation of Sacyr’s refinancing agreement^[23] anticipated one of the arguments that dissenting creditors could have raised, namely the refinancing agreement infringed the purpose of the SIA as its viability plan did not ensure the continuity of the business because it foresaw the eventual sale of the sole asset of Sacyr, the 9 per cent of the shares of Repsol S.A. Accordingly, the court could not approve the refinancing agreement nor extend its effects to dissenting creditors.

The Commercial Court No. 7 of Madrid approved Sacyr’s refinancing agreement and extended its effects to the dissenting creditors based on the following: Sacyr belongs to a group of companies, being its parent company Sacyr S.A. (which is also a listed company with a turnover of €3,000 million) and its failure would not only have had a negative impact on Sacyr’s group but also in Repsol S.A. group, as the execution of the pledge over Repsol S.A. shares would lead to an instability in the listing prices of Repsol S.A.; and Sacyr’s failure would have determined its liquidation as, at that time, the sale of its shares in Repsol S.A. would have not allowed to attend all its due payments, which would have led to the execution of the rest of in rem security interests granted by the other companies of its group.

Therefore, the Commercial Court No. 7 of Madrid concluded that the viability plan ensured the continuity of Sacyr (as well as the continuity of the whole group) and, accordingly, approved the refinancing agreement, which foresaw the eventual sale of its sole asset, 9 per cent of the shares of Repsol S.A.

Cacaolat

On 31 March 2011, Cocaolat was declared insolvent by the Commercial Court No. 6 of Barcelona. The ruling issued by the Commercial Court established the opening of the common phase of the insolvency proceeding and the continuation of the directors of the company.

Cocaolat’s main activity was the production, distribution and sale of a famous chocolate beverage in Spain, mainly in Catalonia. Unlike the other companies of its group, Cocaolat had a significant commercial and financial value and there were several companies interested in acquiring its business unit. However, both time and the management of the company by the directors, who were reluctant to sell the business, were detrimental to its value, which continued to decrease.

In 2011, the SIA did not foresee the possibility to sale the business unit during the common phase, and there was no case law that allowed the sale of the business unit before the opening of the liquidation phase. Consequently, if the debtor sought the approval of a composition agreement or to finalise the common phase, there was, in theory, no possibility to sell the business unit (i.e., until the company failed to approve the composition agreement or decided to request the opening of the liquidation).

As timing was crucial, the parties interested in acquiring Cocaolat, together with the IA, offered a solution to the court. Although, at the time, the SIA did not foresee the sale of the business unit during the common phase, Article 43.2 established that ‘until judicial approval of the composition agreement is secured or the winding-up is commenced, the properties, goods and rights forming the aggregate assets may not be disposed of or encumbered without approval by the Court’. While Article 155.3 authorised the sale, at any stage of the proceeding, of those assets secured by in rem security interests. The above is based on the best interest of the insolvency proceeding (i.e., the maximisation of the recovery by creditors).

On the basis of the best interest of the insolvency proceeding, the IA requested to the court the authorisation of the sale the assets necessary to ensure the continuity of the business activity, together with certain liabilities (i.e., the sale of the business unit with all the privileges attached thereto).

The Commercial Court No. 6 of Barcelona authorised the sale of the business unit of Cocaolat by means of the ruling dated on 20 July 2011^[24] on the grounds of overall accomplishment of the rules of the sale of the business unit (complying with the judge’s agreement dated on 23 March 2011); the sale granting the continuity of the business activity and safeguarding the maximum number of working places; and as a matter of urgency, impeding the opening of the liquidation phase.

As a result of the above, the SIA was modified and, currently, there is no restriction regarding when the sale of the business unit can be conducted. Thus, at any time of the proceeding, the sale of the business units will benefit of the advantages set out under Articles 146 bis and 149 of the SIA.

Marme

Marme acquired a huge estate of buildings in Madrid, known as the ‘Ciudad Financiera del Banco Santander’, valued at around €3 billion. The premises were leased on December 2008 to a Banco Santander S.A-owned entity until 2040.

Although the rent agreed between the parties, Marme was unable to attend its due payments under the facilities entered into to acquire the Ciudad Financiera. Consequently, Marme petitioned for insolvency and was declared bankrupted, together with two companies of its group, on 4 March 2014 by the Commercial Court No. 9 of Madrid.

Prior to the final approval of the liquidation plan filed by the IA, several creditors and interested parties planned to acquire the Ciudad Financiera (Marme’s main asset) via Article 176.4 of the SIA, which allows the conclusion of the insolvency proceedings at any stage, if the situation of insolvency has been removed. Thus, they submitted to the IA a plan to fully repay all Marme’s liability and acquire the Ciudad Financiera.

Meanwhile, the liquidation plan was processed and became final.

As the liquidation plan filed by the IA, with the amendments introduced by the first and second instance Ccurts, became final, the offerrors and the IA had to comply with its rules. The liquidation plan provided for the opening of a term of submission of offers, which had to comply with certain requirements. After the filing of the offers, the IA selected the three best offers, allowing the offerrors to improve it. Upon the submission of the improved offerrors, the IA selected the best offer in accordance with the rules set out in the liquidation plan and informed the court of the winner of the bid.

The Commercial Court No. 9 of Madrid issued a ruling on 14 January 2019 announcing that the best bidder was Sorlinda Investments S.L.U. (Sorlinda) and granted Sorlinda a two months (extendable) term to implement the offer. Upon the implementation of the offer by Sorlinda, the Commercial Court No. 9 of Madrid issued a ruling on 16 July 2019 allotting the Ciudad Financiera to Sorlinda Investments S.L., which is not yet final as it has been challenged by certain parties.

Conclusion

Is a pre-pack possible in Spain?

After analysing all the restructuring tools available under the SIA, we may conclude that no pre-pack solution may be achieved once the debtor is insolvent. Otherwise, all pre-pack solutions, including the sale of the business unit at any time during the insolvency proceeding, must be assessed by the IA and sanctioned by a court.

Potential for future legislative changes

Early in 2019, the Spanish government initiated the process to amend the SIA (Proyecto de Real Decreto Legislativo Ley por el que se aprueba el Texto Refundido de la Ley Concursal).

There are three main purposes of the amendment: to reorganise the current act; to introduce measures to encourage pre-insolvency solutions (i.e., refinancing agreements and their homologation versus bankruptcy petitions) and to bring in the seated case law.

Although a pre-pack measure could fall under the scope of one of the above-mentioned objectives, the Spanish government did not introduce any novelty to this end. In our view, we are still far from introducing an insolvency solution that does not require the acquiescence of the IA and the approval by court.

Notes