Royal Decree-Law 11/2014 of 5 September on Urgent Measures in Bankruptcy Matters

OFFICIAL STATE GAZETTE
No. 217 Saturday, September 6, 2014 Sec. I. Page 69767
I. GENERAL PROVISIONS
HEAD OF STATE
9133 Royal Decree-Law 11/2014, of September 5, on urgent measures in bankruptcy matters.
I
Royal Decree-Law 4/2014, of March 7, which adopted urgent measures in matters of refinancing and corporate debt restructuring, relaxed the regime for pre-bankruptcy agreements in accordance with some basic premises. The first of these is to consider that the continuity of economically viable companies is beneficial not only for the companies themselves but also for the economy in general, and very especially for the maintenance of employment. The second premise was to accommodate the legal privilege to the underlying economic reality, as often the recognition of privileges lacking foundation was the main obstacle to pre-bankruptcy agreements. The third premise was to respect, to the greatest extent possible, the legal nature of real guarantees (but always, and taking into account the second premise, in accordance with their true economic value). This royal decree-law addresses the extension of the aforementioned premises to the bankruptcy agreement itself. II In addition to the above, a series of measures are adopted to facilitate the transfer of the business of the bankrupt or of some of its branches of activity, since currently there are some obstacles, whether during the processing of the bankruptcy proceedings or when the liquidation of the bankrupt is inevitable, that are hindering its sale. From this perspective, the modifications introduced in this matter ultimately have the same purpose as those relating to the bankruptcy agreement: to facilitate, to the greatest extent possible, the continuation of business activity, which must result not only in benefit to the company itself but also to its employees and creditors and to the economy in general. III The operative part of this royal decree-law consists of a single article, divided in turn into three sections, by virtue of which several provisions of Law 22/2003, of July 9, on Bankruptcy (hereinafter, the Bankruptcy Law) relating to the bankruptcy agreement and the liquidation phase, as well as other provisions of the same law intimately related to these aspects, are modified. Regarding the bankruptcy agreement, first, provisions analogous to those of the additional provision fourth of the Bankruptcy Law (as amended by Royal Decree-Law 4/2014, of March 7) regarding the valuation of guarantees subject to special privilege are introduced. To this end, articles 90 and 94 of the Bankruptcy Law are modified. In this way, a rule is maintained that seems not only the most reasonable from an economic point of view but also a synthesis of the rules in force in our law regarding the purging of subsequent guarantees, the maintenance of preferential ones, and the attribution of any surplus in case of execution by any of the holders of real guarantees. It seems, in fact, difficult to question that to obtain the true value of a guarantee it is necessary to deduct from the fair value of the asset on which it rests the amount of pending credits that enjoy preferential guarantee over the same asset. It
also seems a rule of prudence to reduce said fair value by ten percent, since the guarantee, if made effective, will require the execution of the asset or right on which it is constituted, which entails costs and delays that reduce the value of the guarantee by at least that percentage. cve: BOE-A-2014-9133

OFFICIAL STATE GAZETTE
No. 217 Saturday, September 6, 2014 Sec. I. Page 69768 Consider that if a measure like the present one is not adopted, it results that privileged credits can multiply ad infinitum when their guarantee falls on the same asset, without the value of said asset being in any way increased. To give a practical example, today it is possible to have five mortgages of 100 on an asset worth 100, reaching the absurdity of having a privileged liability for bankruptcy purposes of 500 guaranteed by an asset worth 100. It should not be forgotten, on the other hand, that one of the principles that must necessarily govern the bankruptcy is that of pars conditio creditorum and that the indefinite extension of privileges is a blatant contradiction of said principle. In addition, the practical result is that creditors who benefit from such guarantees will only have a right of abstention that will in no way benefit the agreement and the continuity of the company, and that in no case will guarantee the effective payment of their debt, even less so if the bankrupt must go to liquidation. Keep in mind that, in case of liquidation or even singular execution of the mortgaged asset, the creditor will receive at most the value of the guarantee. Of the rest of the credit not covered by the guarantee, they will not collect more than that part that would have remained unimpaired in the agreement, although very likely less in a context of liquidation and not of a going concern. Nor can the determination of the value of the guarantee be considered a cut of the secured credit. It is simply a differentiated valuation of the principal right and the accessory right. The principal right is not called into question, but it is allowed to clarify what part of it will benefit from the accessory right and what part will not, the latter receiving the same treatment corresponding to the credit according to its nature. Secondly, another relevant modification in the matter of bankruptcy agreements is the expansion of the quorum of the creditors' meeting, attributing voting rights to some creditors who until now did not have them. If the measures adopted in the matter of valuation of guarantees must already lead to the expansion of said quorum, the measures that recognize voting rights in general to creditors who had acquired their credit rights after the declaration of bankruptcy (always excepting those who have a special link with the debtor) must also do so. Until now, voting rights were only recognized to them when the acquisition had been by universal title, as a result of a forced realization, or (from 2012) when they were financial entities subject to supervision. The prevention that existed previously regarding these creditors was that such acquisition could hide some type of fraud that was sought to be disincentivized by depriving them of the right to vote. But fraud cannot lie in acquiring something (in this case a credit right) at a lower price than that for which it is sought to
be sold or realized, since this is ultimately what is proper to market economic activity. The real problem lies in the acquirer having contracted with the debtor to defraud the rest of the creditors. Therefore, not only article 122 but also article 93 is reformed to make a broader list of persons especially linked to the debtor who, for this reason, will have the status of subordinated creditors and consequently lack voting rights in the creditors' meeting. Attributing voting rights to creditors who acquire their credits after the declaration of bankruptcy has an additional effect that must be deemed beneficial for the rest of the creditors: fostering the existence of a market for such credits that allows them to obtain liquidity, in a situation of bankruptcy of their debtor, without having to wait for final liquidation. It will be the transferring creditor themselves who will value whether the sacrifice or discount required for this is acceptable, and it will be the acquired creditor, usually specialized in this type of acquisitions, who will suffer the risk that the acquisition and subsequent processing of the bankruptcy entails. cve: BOE-A-2014-9133

OFFICIAL STATE GAZETTE
No. 217 Saturday, September 6, 2014 Sec. I. Page 69769 Thirdly, certain additional provisions regarding the effects of the agreement in article 100 are introduced. As is done in the additional provision fourth, it is pointed out that capital increase agreements required when capitalization is involved will be adopted with the same majorities provided for in said additional provision. A reference is also made to the general regime for the transfer of productive units to what is provided in article 146 bis, which implies, with certain exceptions, their acquisition free of pre-existing unpaid obligations. In addition, the transfer in payment of goods is facilitated with certain precautions aimed at preventing fraudulent behavior. The fourth aspect of the modifications to the bankruptcy agreements refers to the voting and majorities in the agreement and to the expansion of the drag-along capacity of dissenting creditors in certain circumstances. The general limitation that previously existed for the effects of the agreement (discounts of 50 percent and stays of five years) is lifted, but to exceed these limits a reinforced majority of 65 percent is required. The rule already approved regarding pre-bankruptcy agreements concerning the maximum majorities required for syndication agreements, which will be 75 percent (article 121.4), is also introduced. And finally, a novel provision is introduced (new article 134.3), which also has a precedent in Royal Decree-Law 4/2014, of March 7, regarding the possibility of dragging certain credits with general or special privilege, even in the part covered by the value of the guarantee. Although for this a double requirement is demanded: in addition to even more reinforced majorities, that the agreement be adopted by creditors of the same class, introducing for the first time in our bankruptcy scope this consideration that already has precedents in comparative law, and in the pre-bankruptcy agreements of the additional provision fourth that affect creditors of financial liabilities. For this, four classes of creditors are distinguished, each of which has its own characteristics that justify specific treatment within the bankruptcy. First, labor law creditors; second, public creditors; third, financial creditors; and finally, the rest (among which commercial creditors should principally be included). The decision adopted by the qualified majorities required can be seen as a sacrifice of the creditor who is dragged along, which is true, but also from a positive point of view as a lesser sacrifice for the rest of the creditors who agree to the drag-along. The breadth of the qualified majorities required necessarily implies that they are agreements based on and consistent with the reality of the bankrupt and its creditors. Consider, moreover, that if 60 or 75 percent of the creditors (depending on the cases) agree to certain sacrifices for their privileged credits that seem indispensable for the viability of the
company and to recover as much of the pending credit as possible, such measures will have to be all the more harsh if the remaining 40 or 25 percent of the creditors, respectively, are not bound by the majority agreement. It seems that the qualified nature of the majorities and the fact that each will agree to the least possible sacrifice for themselves is sufficient guarantee that the agreements will not be adopted with the purpose of harming the interests of these creditors. This impossibility of harm is reinforced by the establishment of the four classes of creditors mentioned above so that in no case can agreements be imagined among one class of creditors to the detriment of another, especially labor or public ones, which by their nature deserve special protection. As in paragraph 11 of the additional provision fourth and in order to respect, to the greatest extent possible, the true value of the guarantee, it is established in article 140 that if, in the event, the creditor with privilege (who had voted in favor of an agreement or had been dragged along by it) has to execute the guarantee, it will be made with the total amount obtained that does not exceed the original credit. It must be insisted that all the measures introduced in this royal decree-law and in Royal Decree-Law 4/2014, of March 7, regarding the value of guarantees have their effectiveness cve: BOE-A-2014-9133

OFFICIAL STATE GAZETTE
No. 217 Saturday, September 6, 2014 Sec. I. Page 69770 in relation to the bankruptcy procedure but do not imply alteration of the registered guarantees or of the rules established for their execution outside the bankruptcy.
Additionally, certain specialties are introduced in the matter of insolvency of companies that are concessionaires of works and public services, or contractors of public administrations. Currently, there is a large number of companies awarded administrative contracts in bankruptcy situation. Urgent reasons of public interest oriented towards the assurance and maintenance of the provision of public services make it necessary to articulate solutions that allow continuity of the activity object of the contract, to the benefit of the awardees, the third parties who benefit from the execution of the administrative contracts, and the public administration. These solutions involve arbitrating a joint formula for all bankruptcy processes that implies the presentation of agreement proposals that may affect all these entities. In this sense, reasons of agility and procedural economy and of achieving a guarantee of success of the conceived solution, advise the accumulated processing of all bankruptcy proceedings declared in relation to such entities. The specialties of the administrative legislation of public sector contracts, both general and sectoral, and the necessary interrelation with the forms of development and termination of the bankruptcy procedure established in the Bankruptcy Law, make it necessary to establish a special regime applicable to the bankruptcies of companies that are concessionaires of works and public services and contractors of the public administration, whose legislative location must be situated both in the administrative legislation regulating administrative contracts (both general and specific), as well as in the Bankruptcy Law, through a new additional provision second.ter that collects the bankruptcy specialties in the matter. The Bankruptcy Law itself, in its article 67, refers the effects of the declaration of bankruptcy in the case of administrative contracts celebrated by the debtor with public administrations to its specific legislation. Likewise, it must be remembered that the competences of the bankruptcy judge and their mandatory intervention in the bankruptcy procedure must respect the competences of the administrative bodies regarding this type of contracts and the administrative procedures related to them. IV In the matter of liquidation, certain provisions of chapter II of title V of the Bankruptcy Law are modified with the object of facilitating the development of this phase of the bankruptcy procedure. As has been previously explained, it is about guaranteeing, as much as possible, the continuation of business activity, facilitating, fundamentally, the sale of the set of establishments and operations of the bankrupt or of any other productive units. Thus, the ipso iure subrogation of the acquirer in the contracts and administrative licenses of which the transferor was the holder (article 146 bis) is introduced, and mechanisms for exemption from liability for previous debts are arbitrated, except in certain
special cases that by their singularity continue to deserve special protection, such as debts to Social Security or to workers. Also, additional provisions are introduced in article 148 regarding transfer in payment or for payment and a novel provision consisting of the judge being able to agree on the retention of ten percent of the active mass destined to satisfy future challenges. This provision should lead to an acceleration of the liquidation phase.
Article 149 is also modified, in order to introduce certain supplementary rules regarding the alienation of productive units, especially regarding the rules of purging or subsistence of possible real guarantees to which all or some of the assets included in said unit may be subject.
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OFFICIAL STATE GAZETTE
No. 217 Saturday, September 6, 2014 Sec. I. Page 69771 V Finally, a modification of article 167 is addressed that clarifies the interpretative doubts existing around the term "class". This term can imply, in a strict interpretation, a reference to the "legal classification" of the respective credits, in the terms established in articles 89 to 92 of the Bankruptcy Law, such that only when all and each of the creditors classified in the bankruptcy process in the same way are affected by discounts and stays lower than what the provision stipulates, the formation of the classification section will not proceed. However, judicial practice has given it a more generic sense, including in such "class" a group of creditors that share common characteristics even if such group does not comprise all of the same bankruptcy classification, for the purposes of the treatment grantable in the classification section regarding non-burdensome agreement proposals. Given that article 94.2, in the wording given by this royal decree-law, incorporates a new definition of the term "class" applicable, according to article 134, to the situations where the agreement comes to drag privileged creditors and not exclusively ordinary ones, it is essential to clarify, to avoid greater doubts, that the mention made in article 167 must also be understood as referring to this definition, which affects a plurality of creditors benefited by the bankruptcy solution sufficiently broad to make the treatment equivalent for the purposes of the classification section. VI The final part of this royal decree-law consists of four additional provisions, four transitional provisions, a single repealing provision, and five final provisions. The first additional provision clarifies that the actions derived from the application of article 5 bis and of the additional provision fourth of the Bankruptcy Law will have the consideration of sanitation measures for the purposes of Royal Decree-Law 5/2005, of March 11. The second additional provision provides for the creation of a telematic access portal to facilitate the alienation of companies that are in liquidation or of their productive units. The third additional provision establishes the creation of a Commission for the monitoring of refinancing and over-indebtedness reduction practices, with functions of verifying compliance with the measures adopted by this royal decree-law and of proposing to the Government normative modifications to facilitate the pre-bankruptcy or bankruptcy restructuring of debt of economically viable companies. The fourth additional provision resolves interpretative doubts regarding the negotiation of securities issued by an asset securitization fund directed exclusively to institutional investors, which can only be subject to negotiation in a multilateral trading system in which the subscription and negotiation of securities is restricted to qualified investors. The first to third transitional provisions regulate the
transitional regime of certain provisions contained in this royal decree-law. The fourth transitional provision determines the execution procedures in progress to which the modifications introduced by the final provision third in Law 1/2000, of January 7, on Civil Procedure, are applicable. The first final provision expands, due to its imminent expiration, the vacatio legis provided for in the transitional provision of the consolidated text of the Capital Companies Law, approved by Royal Legislative Decree 1/2010, of July 2, regarding the right of withdrawal in case of lack of distribution of dividends. The second final provision nuances, in order to avoid restrictive interpretations, that credits transferred to the Management Society of Assets from the Banking Restructuring (SAREB) will be taken into consideration for the cve: BOE-A-2014-9133

OFFICIAL STATE GAZETTE
No. 217 Saturday, September 6, 2014 Sec. I. Page 69772 computation of the majorities necessary to adopt the agreements regulated in the additional provision fourth of the Bankruptcy Law.
The third final provision modifies Law 1/2000, of January 7, on Civil Procedure, to adapt it to the recent Judgment of the Court of Justice of the European Union of July 17, 2014. With this, the mortgage debtor will be able to file an appeal against the order dismissing their opposition to the execution, if it was based on the existence of an abusive contractual clause that constitutes the foundation of the execution or the amount due.
Finally, the fourth and fifth final provisions regulate, respectively, the titles of competence by virtue of which the royal decree-law is adopted, and its entry into force, which will take place the day following its publication in the "Boletín Oficial del Estado".
VII
In the measures adopted in the present royal decree-law, the circumstances of extraordinary and urgent necessity required by article 86 of the Constitution as an enabling premise to resort to this normative figure concur.
The urgency is determined by the need to guarantee the full coherence of the set of bankruptcy legislation after the novelties introduced in the regime of refinancing agreements by Royal Decree-Law 4/2014, of March 7.
As in the pre-bankruptcy phase, the future viability of part of the business fabric that is or will be imminently in bankruptcy depends, to a large extent, on the flexibilization of the bankruptcy agreement both with regard to its content and to the extension of its effects. With the modifications introduced, companies and their creditors will have more instruments for restructuring and refinancing of debt. In addition, the extension of effects to all privileged creditors, if the majorities provided for by class concur, will guarantee a proportional sacrifice of all of them, facilitating the financial sanitation of companies that can thus continue with their business activity. If this modification is not addressed, the bankruptcy will remain as it is currently in most cases, that is, a process of orderly liquidation of the patrim