Law 17/2014 of 30 September adopting urgent measures on corporate debt refinancing and restructuring

OFFICIAL STATE GAZETTE No. 238 Wednesday, October 1, 2014 Sec. I. Page 77261 I. GENERAL PROVISIONS THE HEAD OF STATE 9896 Law 17/2014, of September 30, adopting urgent measures in matters of corporate debt refinancing and restructuring.

FELIPE VI KING OF SPAIN

To all who see and understand this. Know ye: That the General Courts have approved and I hereby sanction the following law:

PREAMBLE I It is frequent that companies which are truly viable from an operational point of view (that is, capable of generating profits in their ordinary business) have become unviable from a financial point of view. In this situation, there are two alternatives: either liquidate the company as a whole, or heal it from a financial point of view, so that the remaining debt is supportable, thereby allowing the company to continue meeting its commitments in economic traffic, generating wealth, and creating jobs. It is evident that the second alternative is preferable to the first, and consequently, it is the obligation of public authorities to adopt measures favoring financial burden relief or "deleveraging."

That is precisely the purpose of this Law, which must be combined with the utmost respect for the legitimate expectations of creditors, who must participate actively and with maximum guarantees in these financial burden relief procedures.

Ultimately, this aims to favor for them too that an uncertain expectation of collecting a large amount (in terms of the debtor's payment capacity) becomes a reasonable certainty of collecting a smaller amount or one subject to a longer wait. It also aims to favor mechanisms so that debt can be transformed into capital.

Only through the relief of unsustainable debt will it be possible to achieve the return of credit flow, conceived not so much as a lever but as the true lifeblood of the economy, since credit is indispensable to address the gaps between receipts and payments inherent in business operations and to undertake truly productive investments, always – of course – provided that the corresponding debt is supportable.

II In the last two years, the specific needs for burden relief and de-leveraging of the various sectors demanding credit from the Spanish economy have been addressed in order of urgency.

The first measures, the most urgent and perhaps the most intense, were those adopted in matters of mortgage debt for the acquisition of housing. Thus, since March 2012, relevant measures have been adopted aimed at alleviating the difficult situation in which the most vulnerable debtors found themselves. The measures adopted since then in Royal Decree-Law 6/2012, of March 9, on urgent measures for the protection of indigent mortgage debtors, in Royal Decree-Law 27/2012, of November 15, on urgent measures to reinforce protection for mortgage debtors, and in Law 1/2013, of May 14, on measures to reinforce protection for mortgage debtors, debt restructuring, and social rental, have allowed for a balanced response regarding this group of debtors.

Subsequently, Law 14/2013, of September 27, on support for entrepreneurs and their internationalization, addressed a series of measures intended to benefit all types of companies and self-employed entrepreneurs, highlighting, among others, the regulation of the limited liability entrepreneur figure, the creation of the Successive Formation Limited Company, and the introduction of a mechanism for the out-of-court negotiation of entrepreneurs' debts, whether natural or legal persons.

This is the moment to undertake measures mainly intended for the viable restructuring of corporate debt. Indeed, once the necessary restructuring of the financial sector has been carried out, and bank balances have been cleaned up, credit entities and other financial creditors can and must contribute to the healing of companies that, despite their high indebtedness, remain productive.

III The paradox of the case is that, at present, the difficulty in reaching agreements between debtors and financial creditors derives not so much from a lack of will on the part of the parties, but from certain rigidities residing mainly in insolvency and pre-insolvency regulations.

The Spanish insolvency procedure concludes in a high number of cases with the liquidation of the debtor, so that the pre-insolvency phase is truly decisive for the financial restructuring of companies. For these purposes, refinancing agreements are the most suitable instruments for establishing new amortization schedules and financial conditions more in line with the market situation and the companies, in exchange for haircuts, moratoria, and capitalizations of debts.

Therefore, this reform focuses on improving the pre-insolvency legal framework for refinancing agreements, as it constitutes one of the strategically most relevant areas in that, as a result of consensus between the debtor and its creditors, it seeks to maximize the value of assets, avoiding the insolvency proceeding of the entity, and reducing or postponing liabilities.

To eliminate legal uncertainties, collective refinancing agreements and their judicial approval were introduced in Spain. These mechanisms grant legal protection to agreements reached by a sufficient majority of creditors so that, in the eventual case of an insolvency proceeding, the operations incorporated therein are not subject to rescission and, if applicable, certain effects can be extended to dissenting or non-participating creditors.

At this point, a series of limitations in the potential content of refinancing agreements have been detected, which are curtailing the efficacy and legal security necessary to undertake financial restructurings in companies. Therefore, measures are pertinent that contribute to guaranteeing the maintenance of these values.

Before entering into the detail of the modifications introduced, it is convenient to clarify that all of them ultimately seek the purpose of improving the debtor's asset position, measured ultimately in the proportion that their assets represent over their due liabilities, and within them in the part suitable for meeting their most immediate obligations. In this way, it is ensured that all these actions do not prejudice a potential creditors' insolvency, either because the danger of such insolvency is definitively averted (which is the most desirable), or because the actions prior to the insolvency have not prejudiced the debtor's asset position.

For this reason, whenever the agreements meet the requirements provided for in this Law, they will not be subject to the risk of rescindibility that has so far deterred the action of the parties in the pre-insolvency phase.

IV The operative part of this Law consists of a single article, by virtue of which several provisions of Law 22/2003, of July 9, on Insolvency, are modified.

Thus, first, Article 5 bis is modified, allowing the presentation of the communication initiating negotiations to reach certain agreements to suspend, during the period provided for carrying them out, the judicial executions of assets that are necessary for the continuity of the debtor's professional or business activity. The suspension of the rest of the singular executions promoted by the financial creditors referred to in Additional Provision Fourth is also permitted, provided that it is justified that a percentage of no less than 51 percent of financial liability creditors have expressly supported the initiation of negotiations aimed at signing the corresponding refinancing agreement. Procedures originating from public law credits are excluded from the suspension in any case. The aim is for Article 5 bis to foster effective negotiation without accelerating the debtor's insolvency situation due to a precipitated execution of guarantees on certain assets.

Several changes are also introduced in Title II of the Law, which regulates the regime of the insolvency administrator. First, the guidelines that must guide the new system of requirements to act as an insolvency administrator are established, with the objective of ensuring that persons performing the functions of insolvency administrator have sufficient aptitudes and knowledge. In this area, a novelty stands out: the possibility of requiring the passing of specific tests or courses and the creation of a fourth section of insolvency administrators and delegated assistants in the Public Insolvency Register, where all natural and legal persons meeting the requirements to be imposed must be registered, specifying the territorial scope in which they are willing to exercise their insolvency administration functions.

Second, the system for the designation of the insolvency administrator is reformed, the functioning of which will be developed by regulation. The pillars of the new system are established as the fourth section of the Public Insolvency Register, which replaces the current lists in the courts' chancelleries, and the classification of insolvencies based on their size. This classification aims to approximate, through size, the complexity expected of the insolvency to be able to modulate the requirements imposed on the insolvency administrator. Likewise, a new article collects the functions that administrators currently have attributed by law and which must be exercised taking into account the peculiarities of each type of procedure and depending on the specific insolvency phase to which they apply.

Third, modifications are introduced in the guiding principles for the remuneration of the insolvency administrator. The principle of efficiency is incorporated, which seeks to ensure that the remuneration of the insolvency administrator takes into account the quality and results of their work. In this way, it is sought that the tariff is not only a mechanism of remuneration but also an incentive mechanism that promotes the quality, diligence, and agility of the insolvency administrator.

On the other hand, Article 56 is modified to limit the cases of suspension of execution of assets endowed with real guarantees to those that are necessary for the continuity of their professional or business activity. And it is true that within the faculties that traditionally integrate the right of property (the ius utendi, the ius fruendi, and the ius disponendi), it is not always necessary for all of them to concur for a certain asset to be affected by business activity. In certain cases, it is possible to separate the faculty of disposal from the faculties of use and enjoyment, without any prejudice to the continuation of productive activity but with evident advantage for the creditor who can mobilize their own faculty of disposal earlier and who will therefore see the financial costs necessary for such mobilization reduced, ultimately resulting in greater financing possibilities for the debtor and a revaluation of their assets. Thus, executions are truly obstructive of the continuation of business activity when that separation of the right of disposal cannot be made without detriment to the faculties of use and enjoyment of the company. As an example, a case is introduced in Article 56 in which such dissociation can be made with relative ease without prejudice to the continuation of the activity: actions or shares of companies destined exclusively to the holding of an asset and the necessary liability for its financing are excluded from the suspension of executions. This aims to facilitate the financing of assets through structures and agreements that allow the eventual realization of the asset with the debtor retaining sufficient title, even if merely obligatory, to continue its exploitation.

The Insolvency Law returns to the original systematics by regulating entirely in Article 71 the so-called clawback actions.

What had previously been collected in paragraph 6 of said article as a case of non-rescindibility is collected separately in Article 71 bis along with a new case.

Thus, in paragraph 1, the regulation of what was previously provided in paragraph 6 of Article 71 is maintained in essence, although its scope is clarified, which will include businesses, acts, and payments, whatever their nature, that allow for a significant expansion of credit or the modification or extinction of obligations. Included within them are, as has been recognized in numerous judicial rulings, the assignment of assets and rights in payment or for payment. Additionally, the need for a report from an independent expert is eliminated, replacing it with certification by the statutory auditor accrediting the concurrence of the majorities required for its adoption.

In paragraph 2 of Article 71 bis, a new case is introduced in which the agreements reached are declared non-rescindible, without the need to reach certain majorities of liabilities, constituting a "safe harbor" that allows for the direct negotiation of the debtor with one or more creditors, provided that they simultaneously signify a clear improvement in the debtor's asset position, that is, that they do not entail a reduction in the rights of the rest of the non-intervening creditors. This configures a further possibility of agreement between debtor and creditor that is more restrictive than that of paragraph 1 of the same article regarding the cases but more lax regarding the participants. Indeed, if paragraph 1 requires the concurrence of three-fifths of the liabilities but speaks more generically of the improvement of financing conditions, in paragraph 2, in exchange for not requiring a concrete majority of liabilities, very strict requirements are imposed so that the agreements are also not rescindible for causes other than the non-compliance with the conditions that the article itself establishes. An example is letter c), which will imply in many cases the release of guarantees (capable of facilitating new financing) by the intervening creditor, which is not necessarily required in the case of collective refinancing agreements.

Since they are not rescindible, the agreements that meet the conditions of Article 71 bis will not be subject to the presumptions of paragraphs 2 and 3 of Article 71 even if they imply acts of asset disposal. Furthermore, the standing to exercise the rescissory action (which can only be based on the material non-compliance with the requirements of Article 71 bis by the agreements apparently adhering to it) remains restricted to the insolvency administrator and limited to the absence of conditions regulated, respectively, in the first two paragraphs of Article 71 bis. The standing to exercise the other challenge actions is also limited to the insolvency administrator.

Likewise, as a measure to incentivize the granting of new financing, the qualification of credit against the estate is attributed temporarily to all those originating new cash inflows, including those deriving from a refinancing agreement and those made by the debtor or specially related persons, excluding capital increase operations. This measure is adopted with an extraordinary and temporary character for all new cash inflows that occur within two years from the entry into force of this Law. After the two-year period from its grant has elapsed, they will be considered credit against the estate in the terms indicated in paragraph 2.11 of Article 84.

The foregoing is complemented by a modification of Article 92, which expressly provides that those who have acquired the status of partners by virtue of the capitalization of debt agreed upon in the context of a refinancing operation will not be considered as specially related persons for the purpose of classifying as subordinated the financing granted by them as a consequence of said operation.

In direct connection with the regime of refinancing agreements, a review of the judicial approval regime regulated in Additional Provision Fourth is undertaken. In particular, the subjective scope is expanded, extending the possibility of subscribing this agreement to all types of financial liability creditors, excluding commercial operation creditors and public law creditors.

Likewise, the extension to dissenting or non-participating creditors is made possible not only of moratoria but also, through a higher percentage of liabilities, of other measures agreed upon within the refinancing agreement, such as haircuts, debt capitalization, and assignment of assets in payment or for payment.

There are two novel elements in this Provision regarding creditors who hold real guarantees. The novelties do not affect so much the underlying legal or economic reality but the effects attributed to said reality, having been precisely the discrepancy existing until now between reality and effects one of the major obstacles to the viability of these agreements.

First, it must be recalled that until now a distinction was made between debtor with real guarantee and debtor without real guarantee, the former being practically immune to approved agreements except insofar as it might affect moratoria of limited duration or suspension of executions. But the truth is that not all creditors with real guarantees are in the same condition. Sometimes this circumstance is pure nominalism, since the guarantee held is of a rank subsequent to other preferential ones or may fall on an asset of very low value that covers a small part of the debt, or both situations may occur simultaneously. Consequently, what is relevant is not so much to make a subjective distinction, but an objective distinction between the part of the debt that is covered by the real value of the guarantee and that which is not, anticipating to some extent what could happen in case of insolvency liquidation. In this way, the determining concept is that of the real value of the guarantee, which is defined simply in paragraph 2 of Additional Provision Fourth in terms totally coherent with the legal and economic reality of the referred guarantee. From there, the treatment of the part of credits not covered by the guarantee is the same as that attributed to creditors without real guarantees.

The second novelty consists of giving greater relevance and clarity to a distinction that is already legally configured: that which occurs between principal obligation and accessory obligation. Sometimes this distinction is blurred, which also leads to an imperfect regulation of refinancing agreements. What has happened in legal and economic traffic is that, despite being an accessory obligation, the guarantee has acquired a value somewhat abstracted from the principal obligation, due to its progressive spiritualization, its intangibility, and the possibility of transmitting the object of the guarantee without diminishing it. But it cannot be lost sight of that the guarantee is always of a principal obligation and that, although the value of the second depends, also and among others, on the value of the first, each retains its essence and own characteristics. Therefore, if the principal debt can be affected in case of not having coverage by real guarantee by the agreement of a very qualified majority of other creditors, the debt covered with real guarantee must also be able to be affected, provided that the majority agreement is adopted in this case with even higher qualified majorities but calculated on the total of the guarantees, that is, by holders of guaranteed debt who are in a situation similar to that of the dissident or non-participant in the agreement.

In concordance with the foregoing, the possibility of extending the effects of the agreement to certain creditors with real guarantees is provided for, and the approval procedure is simplified, in which the judge knows directly of the request, in order to guarantee the speed and flexibility sought in this pre-insolvency phase, and in which it will only have to check the concurrence of the majorities required to agree on the approval. In any case, and in order not to prejudice the value of the guarantee in case of non-compliance by the debtor, special rules for the attribution of the result to the creditor are established.

On the other hand, a measure is established intended to avoid the artificial over-weighting of certain minority participations in syndicated financing agreements that until now had greatly hindered the approval of some agreements. In this way, a limit is established on the percentage of favorable votes in the syndicate when it is a global refinancing agreement of the debtor. Certain opportunistic behaviors are thus avoided that sought no other benefit than that linked to the overvaluation of a liability by the rest of the creditors who saw their own sacrifice increased in this way.

Certain measures are also established intended to favor the transformation of debt into capital, lowering the majorities required by the Capital Companies Law and establishing, with due caution and guarantees, a presumption of fault of the debtor who refuses without reasonable cause to execute a recapitalization agreement.

It must be remembered that the modifications of Law 22/2003, of July 9, on Insolvency introduced in this Law are confined exclusively to its scope of application and, therefore, special legislation will continue to govern the insolvency of financial entities and their pre-insolvency situations. Additionally, the provisions of Chapter II of Title I of Royal Decree-Law 5/2005, of March 11, on urgent reforms to boost productivity and improve public contracting, among others, remain safe.

V The final part of this Law consists