Recent developments in Spanish Schemes of Arrangement
Iñigo Rubio and Ignacio Buil Aldana
In 2011, the Spanish legislator introduced the court-sanctioned refinancing agreement (‘Spanish
Scheme’) in the Spanish insolvency system. While the introduction of the Spanish Scheme has been
praised for providing new tools for debtors to reorganise out-of-court while addressing the collective
action problem, certain of its provisions have made this instrument too rigid and, thus, ineffective for
tackling Spanish restructurings. This has been especially the case in those instances where the
majority of the debt structure of the borrower is secured, which is a frequent situation in Spanish
work-outs.
However, certain recent case law developments may represent a major boost for the use of Spanish
Schemes in the out-of-court restructurings of Spanish corporate borrowers. Indeed, these
developments have turned ‘upside-down’ certain provisions of the Spanish Insolvency Act while
making an extensive interpretation of key aspects of the Act relating to Spanish Schemes. This article
will explain, by first outlining the current Spanish Scheme regulation, what these case law
developments have consisted of, and how they may impact Spanish restructurings going forward.
The legal regime of Spanish Schemes of Arrangement under the Insolvency Act
The Spanish Scheme is an out-of-court mandatory refinancing technique which consists of a privately
negotiated compromise between the debtor and its creditors that is subject to court approval after a
very formalistic process to which strict adherence is required.
In addition to having to meet certain formal requirements set forth by the Spanish Insolvency Act, the
Spanish Scheme must be supported by creditor financial institutions representing at least 75 percent of
the total liabilities held by these institutions. The debtor has to follow before the commercial court a
two-step process where the Spanish Scheme is preliminarily approved after the formal prima facie
review made by the clerk of the court. This preliminary approval, if so petitioned, can result in granting
in favour of the debtor a stay of individual enforcements during the period before the scheme is
finalised.
The court then considers whether the refinancing agreement meets the formal requirements set forth
by the Spanish Insolvency Act and does not represent a ‘disproportionate sacrifice’ for dissident
financial entities. Additionally, if so requested, the court may decide the stay of all enforcement actions
(personal actions primarily) that the creditor financial entities (i.e., the lenders) could initiate. Further,
the Scheme is binding with respect to the term of the payment moratorium agreed in the refinancing
agreement on creditor financial entities whose credit claims are not secured with an in-rem security
(such as pledges or mortgages).
Therefore, as per the literality of the law, the Spanish Scheme can only consist of an extension of the
payment moratorium and does not bind secured creditors for the secured part of their credit claim.
Furthermore, the Spanish Scheme and its effects are, from a strict interpretation of the law, limited to
financial institutions (entidades financieras), such as banks or cajas, and it is unclear whether it also
binds, for example, bondholders or hedge funds (which can be active participants of a restructuring).
1
The Celsa case
Celsa, a Spanish steel maker, recently completed a refinancing of its financial indebtedness
(approximately €2.8bn net debt) through a Spanish Scheme. The refinancing, as reported, has
consisted of a five-year extension of the different debt groups (which were originally due between
2013 and 2015) with a repayment schedule which is set to kick off in 2015. Celsa decided to proceed
through the Spanish Scheme in order to lower the lender consent threshold to 75 percent and, more
importantly, to bind hold-outs which represented approximately 9 percent of the creditors (with around
91 percent of creditors backing, in turn, the deal). The dissenting creditors were secured creditors and
benefited from certain in rem securities which secured their obligations under the relevant facilities.
In order to cram-down the dissenting entities, and despite the fact that these entities were secured
creditors, the Celsa group filed with the Commercial Court (Juzgado de lo Mercantil) No. 5 of Barcelona
the petition to approve the Spanish Scheme and cram-down these entities. The Commercial Court
approved, following the procedure set forth by the Spanish Insolvency Act, the Spanish Scheme,
making an extensive interpretation of the Spanish Insolvency Act and the Spanish Scheme legal
regime. In particular, the judge considered that dissenting secured creditors should in this case be
treated as unsecured creditors and, therefore, the Celsa refinancing should also be binding on these
creditors.
This decision was fundamentally based on two main grounds: (i) the secured Celsa creditors did not
have the ability to enforce security individually which is, in practice, equivalent to not having a secured
credit (creditors were “formally, but not materially” secured); and (ii) article 56.2 of Spanish
Insolvency Act, which allows the automatic stay of mortgage enforcements when the mortgaged assets
are linked to the activity of the debtor, should also be applied in a prepetition stage, particularly taking
into account that the purpose of the refinancing is precisely to prevent bankruptcy. Further, the judge
pointed out, unless such automatic stay applied, the success of the transaction and Celsa’s
restructuring could be seriously jeopardised. Moreover, the court forced dissenting creditors to accept
a payment extension of five years (and not the three years set forth by the Spanish Insolvency Act).
Insolvency Act).
This decision was challenged by certain dissenting creditors exclusively with respect to the payment
extension of five years set forth in the Court decision. The challenge was grounded on the fact that the
Spanish Insolvency Act only allows the Court to ‘term-out’ dissident creditors for a maximum three
year period (and not the five years set forth in the Celsa restructuring).
The Court, however, by virtue of a later decision issued in August, confirmed its original ruling and
provided that the maximum legal term of three years applied only to enforcement actions and not to
extensions of term and, therefore, such extension of five years was allowed under the Spanish
Insolvency Act. Additionally, the Court implied that such extension was necessary in order to ensure
the viability of the debtor and did not represent a “disproportionate sacrifice” for the dissenting
creditors.
The criteria of the commercial judges of Catalonia regarding Spanish Schemes
The Celsa decision is only the tip of the iceberg in connection with the case law developments that
Spanish Schemes are likely to suffer in the coming months. In this regard, the Celsa decision
anticipated, to some extent, the criteria issued shortly after by the Commercial Judges of Catalonia
during the course of one of the several seminars that they regularly held in order to unify
jurisprudential criteria when addressing certain insolvency matters. During the last seminar these
judges addressed the issues regarding Spanish Schemes that had been frequently raised during the
two years that this legal device has been in place.
In summary, the Commercial Judges of Catalonia with respect to Spanish Schemes provided the
following criteria:
2
Quorum. In connection with the debate as to whether the three-fifths majority of all lenders (which
applies to a general refinancing agreement for claw-back purposes) also applies to court-sanctioned
Spanish Schemes, or whether these schemes are only subject to the 75 percent majority of financial
creditors, the commercial judges determined that the 75 percent majority is the only majority
applicable to Spanish Schemes. The judges believe that, due to the fact that court-sanctioned Spanish
Schemes can only apply to financial entities, it does not make sense to take into account the
favourable vote of other creditors (i.e., trade creditors) which are not going to be bound by this
scheme. This can facilitate the achievement of the relevant majorities when it comes to courtsanctioned refinancing scenarios.
Disproportionate sacrifice. This concept is not statutorily defined and should, therefore, be defined
according to the specific circumstances of the case. The judges provide a set of guidelines as to how
the existence (or absence) of this sacrifice must be assessed, which consist of analysing: (i) the
general effects that the Scheme has with respect to the dissenting creditors; (ii) how the payment to
these creditors will be impacted as a result of the Scheme; (ii) whether or not the total assets of the
borrower are encumbered; (iv) whether security will be granted to dissenting creditors to secure their
credit rights under the restructuring; (v) the percentage of hold-outs (the lower the percentage of
existing dissenting creditors the more sacrifice that can be requested from these hold-outs); and (vi)
the term petitioned regarding stay of enforcement actions.
Enforcement stay. The judges clarify to which ‘stay’ the three-year maximum limitation period should
apply, providing that this stay applies exclusively to enforcement actions (with no distinction as to
whether this action is in rem or personal) and not to the extension of payment set forth in the
refinancing agreement which can be more than three years.
Compromise under a Spanish Scheme. The judges of Barcelona provide that the only compromise that
can be crammed-down to dissenting creditors in a Spanish Scheme scenario is a payment extension
(new maturity calendar, new mandatory prepayment regime, etc.) which must be justified by a
viability plan that allows the borrower to maintain its operations in the short and medium term.
Therefore, compromises consisting of new money financing or write-offs will not be approved in the
context of a Spanish Scheme. Therefore, with respect to this particular issue, the judges have narrowly
interpreted what a Spanish Schemes can consist of and, therefore, these Schemes continue to be less
flexible than, for example, English Schemes of Arrangement, where almost any type of compromise or
arrangement may be proposed: extensions, write offs, debt-for-equity swaps, etc.
Secured creditors. As provided in the Celsa case, the judges understand that secured creditors can be
bound by Spanish Schemes when these secured creditors do not have the ability to enforce security
individually. Further, these same judges understand that article 56.2 of the Spanish Insolvency Act,
which allows the automatic stay of mortgage enforcements when the mortgaged assets are linked to
the activity of the debtor, should also be applied by analogy in a prepetition stage considering that the
purpose of the refinancing is precisely to prevent bankruptcy and unless such automatic stay applies,
the success of the transaction could be seriously jeopardised.
Despite the fact that the above is a very relevant development, certain key issues have not been
addressed, such as, for example, how the concept of ‘financial entity’ should be construed when it
comes to Spanish Schemes. Therefore, this remains to be a relevant untested issue which could also
impact Spanish Schemes depending on how narrow or broadly judges interpret the concept.
Conclusion
The criteria set forth by the Commercial Judges of Catalonia cannot be considered case law and it is
instead subject to the different decisions that the Supreme Court, the Provincial Courts and the other
Spanish commercial courts may decide regarding this matter. However, we understand that the
conclusions reached by the Commercial Judges of Catalonia will likely act as a guide for judges to
interpret the legal provisions regarding Spanish Schemes going forward.
Therefore, it will be key for investors (and their advisers) to understand these criteria and how they
can impact their current and future restructuring transactions and investment strategies, as well as
3
closely monitoring other decisions which may be adopted by other Spanish courts that may or may not
follow the lead of the Catalonian judges.
Iñigo Rubio is a partner and Ignacio Buil Aldana is a principal associate at Cuatrecasas, Gonçalves
Pereira. Mr Rubio can be contacted on +34 915 247 603 or by email: [email protected]. Mr
Buil Aldana can be contacted on +44 (0)207 382 0400 or by email: [email protected].
4