Anticipating decisions to save companies

The transposition of Directive (EU) 2019/1023 of 26 June 2019 has finally been carried out with the approval on 25 August of the new Insolvency Act, which will enter into force, with the exception of its Third Book concerning the Special Procedure for Microenterprises, on 26 September 2022.

The title of the Directive was "on preventive restructuring frameworks" and "on measures to increase the efficiency of restructuring and insolvency proceedings", which clearly shows that in view of the criticisms that have been made of the insolvency procedure up to now due to the high mortality of business projects, with a high rate of outright liquidations and failed agreements, the main objective is to anticipate decisions and for this purpose the establishment of preinsolvency scenarios.

Among the pre-bankruptcy paths in Book Two of the Law, we focus in this article on the Restructuring Plans (art. 614 et seq.) which have come to replace, by conceptual extension, the old refinancing agreements. 

If the refinancing agreement was, in short, a new arrangement of financial liabilities, the Plans will be those whose objective is to modify the structure of assets, liabilities (in a broad sense and not only financial creditors) and/or own funds, and may also include transfers of assets, production units or the whole of the company in operation, as well as the transfer of assets, production units or the whole of the company in operation.

A relevant aspect is that all of this will be able to occur not only in a scenario of current or imminent insolvency, but a new category is incorporated, that of probable insolvency, which will be that which could occur if the debtor considers that it will not be able to comply regularly with its obligations when they fall due if it does not successfully agree a Plan.

In cases of current insolvency or imminent insolvency, the debtor may notify the competent Court for a potential declaration of insolvency of the commencement of negotiations, the resolution of which may be requested to be reserved, without this having any effect on the powers of administration and disposal of assets, but obtaining the benefits of the protection on the validity of contracts or on the temporary suspension of enforcement proceedings that such notification grants. 

The agreements reached in the negotiation of the Plan must be subject to judicial approval if their effects are to be extended to those creditors who have not voted in favour or who have not even participated in the negotiation. Therefore, the principle of universality applies, as it will affect all credits with limitations or exceptions.

Among the limitations we find public law credits that may not, provided that they meet the requirements that both at the time of submitting the notice of commencement of negotiations and at the time of requesting judicial approval of the Plan they are up to date with payments and that the accrual of the outstanding amount, especially in the case of deferred credits, has an accrual date of less than two years, the amount must be reduced and must be paid within twelve months from the date of the approval order or six months, also from the same date, in the case of credits for which a deferral or instalment has been granted, always with the upper limit that they may not exceed a maximum period of eighteen months from the date of notification of the opening of negotiations.

Exceptions include maintenance claims arising from a family relationship, claims arising from non-contractual civil liability and claims arising from employment relationships other than those of senior management.

One of the golden rules of bankruptcy law to date is pars conditio creditorum, i.e. equal treatment of creditors within the classification by rank (Special Privilege, General Privilege, Ordinary and Subordinated).  This, which is still in force for the processing of an insolvency agreement, has always been a limitation in any restructuring because, although it is true that all creditors deserve equal treatment, it is no less true that not all creditors are equally important for the continuity of the company, nor do they all assume the same risks for it.

In order to reach agreements with creditors that make it possible to prevent insolvency, the Plan incorporates, with the aim of reaching agreements with creditors that make it possible to prevent insolvency, the overcoming of credit ranks by the concept of classes of credits, defined as those that have a common interest according to objective criteria and it will be assumed that this common interest exists between credits of the same rank.

As an example, let us think that within the creditors we can make a class for those creditors that continue to supply and another for those that will no longer supply, a class for those that are essential for the operation of the manufacturing facilities (let us think of energy supplies) and those that are not essential, among the financiers those that provide new money and those that do not commit to do so.

Creativity in the configuration of the classes of credits necessarily has certain limitations, including some for the protection of groups, such as the fact that when the creditors are small or medium-sized companies and the restructuring plan entails a sacrifice of more than fifty percent of the amount of their credit, they must form a single class.

The Law clearly determines what financial credits are, excluding as financial those derived from commercial transactions as long as they have not been assigned to a financial institution.  In turn, credits secured by the debtor's assets must form a single class, unless the heterogeneity of the encumbered assets or rights justifies the creation of more than one class, and public credits must form a separate class among the classes of the same insolvency rank.

The constitution of the classes will have as its objective the approval of a Plan that allows the fulfilment of certain predetermined objectives by the debtor that may facilitate its viability, but this constitution of classes may not be free of conflict.

To this end, the Law legitimises both the debtor and the creditors representing more than fifty percent of the liabilities to be affected by the Plan to request judicial confirmation of the correct formation of classes prior to the application for approval of the agreement.

For the approval of the Plan, all creditors whose claims may be affected have the right to vote and any modification or termination of employment relations must be carried out in accordance with labour legislation, especially with regard to information and consultation of employees.

The Plan shall be deemed approved for each class of claims when more than two-thirds of the amount of its liabilities have voted in favour, except where the class consists of secured claims, in which case more than three-quarters of the liabilities must have voted in favour.

In the event that the Plan has not obtained approval in each and every one of the classes, it may also be approved, and its effects extended to dissenting creditors, if it has obtained a simple majority in the classes as a whole, provided that at least one of them is a class of claims that in insolvency proceedings would have had the rank of special or general privilege or, failing this, that at least one of them is a class of claims that in insolvency proceedings would have had the rank of special or general privilege or, failing that, at least one class which can be presumed to have received any payment following the valuation of the debtor as a going concern provided that such a request is accompanied by a report of the restructuring expert on what the value of the debtor as a going concern is.

A limitation to the above paragraph is that creditors holding security rights who have voted against the Plan, provided that within that class the favourable vote was less than the dissenting vote, may request the realisation of the encumbered assets, although the Plan may provide for the substitution of that right by the option to collect in cash the part of the credit covered by the value of the guarantee within a period not exceeding 120 days.

Competence for approval shall correspond to the commercial judge who was competent for the declaration of bankruptcy and the application, signed by a lawyer and solicitor, must be accompanied by a full copy of the public instrument in which the Plan has been formalised, attaching the auditor's certification of the sufficiency of the majorities required by Law and the report, if any, issued by the restructuring expert. In the event that the Plan affects public credit, the relevant certifications must be attached.

In the execution of the Plan, in addition to the effect it has on the credits, if the Plan contains operational restructuring measures, they must be executed under the terms established in the Plan. In the same terms, the measures that require an agreement of the shareholders' meeting, if this has not already taken place, may be carried out by whoever the judge designates at the proposal of any legitimised creditor.

The commitment to the Plan, as a pre-bankruptcy scenario, provides a certain degree of protection for interim financing and new financing, even if it comes from persons especially related to the debtor. It also provides protection against certain termination actions.

In short, the pre-bankruptcy scenario not only aims to anticipate, as opposed to the alternative of filing for bankruptcy proceedings with the aim of reaching an agreed solution, but also provides the flexibility tools that facilitate, following agreement with creditors and other affected parties, the viability of business projects.