In September 2022, a far-reaching reform of insolvency law came into force by virtue of Law 16/2022, of 5 September, on the reform of the consolidated text of the Insolvency Law (hereinafter ‘TRLC’).
Focusing on the issue of interest raised in relation to the provision of financing by third parties (mainly funds) to companies in financial difficulties (insolvent), one of the main changes brought about by this reform has been to promote the so-called Restructuring Plans, i.e. agreements to be signed between the debtor company and its creditors that allow it to refinance its debt and avoid the insolvency proceeding, as this judicial procedure has proved ineffective in Spain insofar as the vast majority of companies that are forced into insolvency are liquidated, with the consequent loss of business fabric and jobs.
In order to try to encourage and facilitate companies in difficulties to reach a Restructuring Plan with their creditors, the TRLC has introduced certain measures aimed at facilitating the entry of financing, which in most cases is necessary to achieve the approval of a Restructuring Plan, whether it is financing necessary to maintain the debtor’s activity during the negotiations to approve the Restructuring Plan (“Interim Financing”) or financing necessary to comply with the Restructuring Plan (“New Financing”).
The larger the size of the company in difficulty, the greater the financing possibilities. Thus, the financing channels for small and medium-sized enterprises (“PYMES”) usually rely on partners and traditional banks that are already creditors, while companies significantly larger than medium-sized, and especially large companies, have access to alternative financing channels such as financing from specialised national or international funds.
Before analysing the specific measures aimed at promoting the financing of companies in difficulties, it should be borne in mind that in order for interim financing and new financing to benefit from them, the granting of such financing must be provided for in the Restructuring Plan and the need for it must be justified, and judicial approval of the plan must also be required.
These measures are aimed at protecting the financing granted in the framework of the restructuring in the subsequent insolvency proceedings of the financed company which has not been able to meet its commitments under the restructuring.
These measures are the following two:
Of course, this classification does not prevent the financing from being granted with a security, in which case it would be considered as a credit with special privilege over the asset given as security. The part of the financing that, if any, is not covered by the asset, up to 50% of the total financing granted would be general privileged and the remaining 50% against the estate.
Thus, for example, if financing of 100 is granted with a mortgage guarantee on real estate valued at 40, 40 would be special privileged, 10 general privileged and 50 against the estate.
In both cases, for these measures to be applicable (protection against possible claw back actions and special classification), the approved and homologated Restructuring Plan must affect 51% of the debtor’s total liabilities. Otherwise, this financing will be subject to the normal termination regime as the rest of the operations carried out by the debtor, and to the ordinary qualification corresponding to the credit derived from de financing.
Thus, current Spanish insolvency law protects the creditors in possession (DIP) which finance companies in distress less than US Chapter 11 Bankruptcy because such DIP claims are considered in the US senior to all other debt, equity and any other securities issued by a company, violating any absolute priority rule by placing the new financing ahead of a company’s existing debts for payment, whereas Spanish insolvency law treats DIP claims similarly to other European laws. For the time being the experience of the legal changes show that interim or new financing to companies under re-structuring is provided by existing creditors (either bank or large suppliers) rather than by new creditors. Probably for new creditor to became interested in the rescue of trouble company it would be necessary to restrict significantly the privilege of taxes, social security and employees claim, a major overhand which is only thinkable in terms of a serios economic crisis of the Spanish economy.
Ver artículo completo aquí.