2nd Edition - GA P · between parallel insolvency proceedings” that have frequently been...

2nd Edition

December 2013

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© Gómez-Acebo & Pombo, 2013. All rights reserved

We are a leading independent Iberian law firm dedicated to providing our clients with added value through innovative and successful legal strategies. Our expertise covers all the practice areas that business involves, combining legal know-how and practical experience with the requirements that are specific to each client’s business sector.

Our firm is recognised both nationally and internationally for the quality of its legal services and has received numerous awards and nominations throughout the years for its management, customer service, innovation, and technical excellence in all its legal practice areas. Year after year, our lawyers are included in the most well-known international directories. In 2013, sixty-two percent of our partners were mentioned as experts in their relevant fields by Chambers and Partners Global and Europe, Legal 500, IFLR 1000 and Best Lawyers.

Our Banking, M&A and Insolvency teams work side by side, and across all offices, bringing a best in class advice in credit situations. Our expertise includes primary lending, distressed transactions, out of court restructuring process and in-court insolvencies.

COMBINING STRONG LOCAL KNOWLEDGE WITH INTERNATIONAL EXPERTISE

IntroductionThis document compiles the different notes, memoranda and analysis which have been published by Gómez-Acebo & Pombo since 2010 and which are relevant for credit transactions in Spain. This document includes information on the legal issues affecting transactional work as well as on some regulatory changes affecting the Spanish financial sector and which may have a direct effect on the credit market as a whole. This document will prove particularly useful for investors looking at Spain on single name corporate credit, debt portfolios or new rescue financing alternatives. Please note that the different memoranda are dated as at the date of each article and thus may be subject to legislative amendments thereafter. To the extent that the Firm has published a paper covering any such legislative changes, such publications are also included in this document.

This document is an initial guide to the legal issues presented. It should not be relied upon as an authoritative statement of the law or as legal advice. Please obtain detailed legal advice before taking any specific action.

In Madrid:Rafael Aguilera ÁlvarezPartner, MadridTel.: (34) 91 582 91 [email protected]

In New York:Rubén Ferrer FerrerPartner, New YorkTel.: +1 (646) 736 [email protected]

For any queries please contact any of the following members of Gómez-Acebo & Pombo:

In Brussels:Miguel Troncoso FerrerPartner, Brussels Tel.: 32 (0) 2 231 12 [email protected]

In London:Miguel Lamo de Espinosa AbarcaPartner, LondonTel.: 44 (0) 20 7329 [email protected]

In Lisbon:Fermín Garbayo Renouard Partner, LisbonTel.: (351) 21 340 86 [email protected]

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Cross-border Insolvency Proceedings Coordination AgreementsKnowledge Management Department, Gómez-Acebo & Pombo

Relocation of a Spanish Company’s Registered Office to AnotherEU Member Country and Jurisdiction for Insolvency Proceedings Knowledge Management Department, Gómez-Acebo & Pombo

Legal Issues to be Considered by Purchasers of Distressed Debt in SpainBanking and Capital Markets Department, Gómez-Acebo & Pombo

Amendment of the current Banking Provision SystemBanking and Capital Markets Department, Gómez-Acebo & Pombo

Spanish Law Reform on Saving Banks: Royal Decree-Law 11/2010Banking and Capital Markets Department, Gómez-Acebo & Pombo

Amendment of Circular 4/2004 on Banking Provisioning SystemBanking and Capital Markets Department, Gómez-Acebo & Pombo

Understanding the Enforcement Proceedings for Spanish Mortgages.Overview of the Regulation after Royal Decree 8/2011Banking and Capital Markets Department, Gómez-Acebo & PomboLitigation and Arbitration Department, Gómez-Acebo & Pombo

Redemption of Unrelated Third Party Debts and Payee’s Reimbursement RightBanking and Capital Markets Department, Gómez-Acebo & Pombo

Amendment of the Spanish Insolvency Regulationsand their Implication in Spanish Restructuring/Distressed DealsBanking and Capital Markets Department, Gómez-Acebo & Pombo

Financial System Reform: Royal Decree-Law 2/2012Banking and Capital Markets Department, Gómez-Acebo & Pombo

Rescue Financing Alternatives in SpainBanking and Capital Markets Department, Gómez-Acebo & Pombo

Ranking of a Secured Guarantor upon Payment of Claim of Unsecured CreditorBanking and Capital Markets Department, Gómez-Acebo & Pombo

General Information on Debtor’s Insolvency under the Spanish Insolvency ActBanking and Capital Markets Department, Gómez-Acebo & PomboLitigation and Arbitration Department, Gómez-Acebo & Pombo

Index

Investing in Spanish Credit: some relevant legal issuesaffecting distressed debt investing, primary lendingand restructuring processes in Spain

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Insolvency Stays on Enforcement of Security on InventoryBanking and Capital Markets Department, Gómez-Acebo & Pombo

Spanish Loan-to-Own: Capital Increases in Exchange of DebtBanking and Capital Markets Department, Gómez-Acebo & Pombo

Update on the Spanish Financial Restructuring: Legal RegimeApplicable to Restructuring and Resolution of Credit InstitutionsBanking and Capital Markets Department, Gómez-Acebo & Pombo

Financial Collateral Law and Practice in Spanish CourtsKnowledge Management Department, Gómez-Acebo & Pombo

The Ruling of Commercial Court Nº. 6 of Barcelona, dated 5 June 2012Banking and Capital Markets Department, Gómez-Acebo & Pombo

Rescission under the Spanish Insolvency ActBanking and Capital Markets Department, Gómez-Acebo & Pombo

Subordinated Credits under the Spanish Insolvency ActBanking and Capital Markets Department, Gómez-Acebo & Pombo

Some Legal Issues on Spanish Pre-Insolvency Debt RestructuringsBanking and Capital Markets Department, Gómez-Acebo & Pombo

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Act 1/2013, Dated 14 May on Certain Measures Aimed at Reinforcingthe Protection of Mortgage Debtors, the Refinancing of Debtsand the so-called “Social Lease”Litigation and Arbitration Department, Gómez-Acebo & Pombo

Recent Case Law Regarding Court Homologations underthe Spanish Insolvency Act: a New Route to Bind Dissident Creditorsin Spanish Pre-Insolvency Restructurings?Banking and Capital Markets Department, Gómez-Acebo & Pombo

Index

Investing in Spanish Credit: some relevant legal issuesaffecting distressed debt investing, primary lendingand restructuring processes in Spain

114Recent Amendments to the Spanish Insolvency Act and How These Affectthe Ability to Bind Minority Creditors in Spanish RestructuringsBanking and Capital Markets Department, Gómez-Acebo & Pombo

Knowledge Management Department, Gómez-Acebo & Pombo

Cross-border Insolvency Proceedings:Coordination Agreements

April 2010

Section 27 of the UNCITRAL model regulation on cross-border insolvencies establishes the possibility of entering into agreements concerning the coordination of insolvency proceedings as a cooperation tool for cross-border insolvencies concerning the same debtor. The UNCITRAL Practice Guide on cross-border insolvency cooperation was adopted on 1 July 2009 and provides guidance for entering into these agreements on the basis of previously adopted and concluded proceedings. These rules can be used for coordination of different insolvency proceedings opened for the same debtor and the Guide points out the possibility of using them also for the coordination of insolvency proceedings of groups of companies.

The rules take a very broad perspective in relation both to the people who may execute the agreements and to the form and content that they may take. Those questions depend on the law that applies to each of the procedures to be coordinated. The insolvency representatives, the debtor, and occasionally the creditor’s meeting, have been part of these agreements. It is sometimes permitted that agreements are reached between the different courts involved, and in other cases, even if the courts are not party to the agreement, they will have to authorise it.

Although common law rules are more flexible in this respect, the possibility of executing these agreements in insolvency proceedings governed by civil-code laws is more difficult. Some analysts feel that the civil-code courts are unlikely to approve such agreements unless there is an express statute permitting them (e.g. the approval of the Uncitral Model Rules in those jurisdictions). Others consider that depending on the content of the agreement, it might be signed either by the liquidators or by the court. In practice, however, agreements are executed between civil-code and common law jurisdictions (i.e. Nakash, AIOC, ISA-Daisytek matters) and also between civil-code jurisdictions (EMTEC case), although it is most frequent between common law practices.

The types of agreements reached to date vary greatly: they may simply declare general legal principles or regulate specific issues (such as the declination of jurisdiction in favour of other court, procedures for the communication between the courts involved, coordination of measures to retrieve assets for the benefit of the creditors, filing of credits and their rank, management of the debtor’s assets and, harmonization of the reorganization plans etc.).

Executing the Agreements Under Spanish Law

The question as to whether these agreements are admitted under Spanish law arises essentially in the cases outside the scope of Regulation 1346/2000 on Insolvency Proceedings since for the cases covered by it there are already specific cooperation mechanisms .

In the remaining cases where Chapter IX of the Spanish Insolvency Act (“SIA”) applies, reaching this type of agreements may be quite useful. This Chapter has several provisions (Section 227 onwards) on the “coordination between parallel insolvency proceedings” that have frequently been criticised for being impractical as they are unenforceable in foreign insolvency proceedings, but which could be the legislative cover for the adoption of these agreements. More specifically, Section 227.2.3º of the SIA forsees “the approval and application by courts and other competent authorities of agreements in relation to coordination of procedures”.

The above means that there are limits to the cooperation possibilities allowed by law. In particular:

a. According to Section 227 of SIA, an agreement may be executed to coordinate insolvency proceedings opened for the same debtor.

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10│Investing in Spanish Credit

b. The foreign proceeding which should be coordinated with the Spanish one must have been recognised in Spain.

c. The agreement shall be executed by the liquidators, although this being “subject to the supervision of the judges, courts or competent authorities” (as established by Section 227.2.3).

d. The agreements may include those cooperation possibilities which are forseen by the SIA, such as: exchange of data and information, coordination of the decisions concerning the administration and supervision of the debtor’s assets and activities; delivery of proposals of agreements with the creditors, winding up plans or any other form of disposal of the assets of the debtor’s estate or of payment of its credits (Section 227 contains a non-exhaustive list), communication of credits under different proceedings, the representation of creditors (Section 228); and rules on the allocation of the remaining proceeds of sale of a proceeding (Section 230).

The first limit (in paragraph A) seems to exclude the possibility of using an agreement of this characteristic in insolvencies of group company insolvencies. However, an extensive interpretation should not be disregarded on the basis that Section 227 only contemplates the cooperation among procedures for the same debtor. Neither the SIA nor the Insolvency Regulation contemplate insolvencies of groups of companies; they base the jurisdiction criteria for the opening of those procedures in the interest of the debtor to which they refer, without taking into consideration its integration in a more complex structure.

Since, the starting point for both legal texts is the consideration of each debtor/company individually, regardless of their belonging to a group, the rest of the questions, including the coordination of proceedings, are ruled on the same assumption. But the reasons for not joining proceedings of groups of companies in international insolvencies do not extend to situations in which they are not joined, but just coordinated. That is why it is not possible to exclude the possibility of an interpretation that the legislation supports the execution of such agreements in these cases.

The requirement of the recognition of the foreign proceeding in Spain raises certain operative problems. First, under the SIA, the opening proceeding of a foreign resolution is not automatic, as it is subject to prior recognition (as established by the old Section 954 et seq. of the Spanish Civil Procedures Rules of 1881, together with the requirements of Section 220 of the SIA). This delays proceedings and does not favour the execution of such agreements.

It could be argued that this recognition is not strictly necessary and that given the wording of Section 227 (“cooperation by law”), the requirement might not apply to cases in which collaboration agreements are held voluntarily in non-recognised proceedings (according to that Section itself, by definition, it refers not only to proceedings opened in Spain, but also, foreign proceedings: “the liquidator of an insolvency declared in Spain and the liquidator or the representative in a foreign insolvency proceeding in relation to the same debtor recognised in Spain, shall be subject to a duty of cooperation under the supervision of their own judges, courts and the appropriate authorities”). Unfortunately, this is not a realistic interpretation. The aim of the rules on recognition is to ensure that the foreign judgment is admissible from a Spanish legal standpoint, not only to ensure it does not contravene unavoidable basic rules such as public order, but also, to respect certain criteria that help to maintain reasonable grounds (that is the reason for the rule that controls the basis on which the court opened the proceedings in the first place). On the other hand, in insolvency proceedings the interests of both the debtor and the creditors have to be considered. This justifies that coordination agreements can only be accepted in cases in which the foreign proceeding has passed the control checks to confirm that the proceeding is admissible in Spanish law.

In relation to the scope of the agreement, the SIA itself provides an orientation towards the contents that would be permitted. However, it does not seem to be limited exclusively to those contents. It might be possible to agree on certain additional fields, providing that they comply with the imperative rules in the proceeding (such as credit ranks for example, where it is not possible to reach an agreement).

Another issue is whether any model of cooperation can be agreed upon. In other words, whether it is possible to admit cooperation between proceedings on the basis of one of them being the primary

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proceeding and the rest being secondary and, as a result, classifying insolvency proceedings as primary or secondary, following rules different to those found in Section 10 of the SIA. According to that Section, the international jurisdiction of the Spanish courts is conferred in two situations: if the debtor has the centre of its main interests in Spain (situation in which the insolvency shall be declared universal) or if the debtor has an establishment in Spain (a situation in which the insolvency shall be declared territorial). Even if Section 10 does not specifically resolve that point, Section 227, together with the logic of the SIA’s system (which is explicit in the Regulation), state that universal insolvency shall prevail over territorial insolvency. The issue would be whether through an agreement by the parties the category of the insolvency proceeding could be inverted. The answer is no, at least not in cases in which the proceeding opened in Spain is classified as universal. In these cases the Spanish proceeding should be considered as the centre of the system, given that the jurisdiction of the Spanish judge is exclusive, the proceeding under its supervision is universal and is, hence, the coordinating point. Moreover, the definition of universal as equivalent to primary is implicit in the State rules.



Relocation of a Spanish Company’sRegistered Office to AnotherEU Member Country and Jurisdictionfor Insolvency Proceedings

July 2011

The current economic environment and the recession that the Spanish economy is suffering have caused many troubled companies to analyse alternatives in order to facilitate the continuity of their operations with the least economic impact.

To such end, within the EU environment there are jurisdictions that are laxer than Spain and have enacted rules that provide advantages for insolvent debtors and offer generally faster and more dynamic proceedings.

Faced with that situation, some businessmen and managers have set their eyes on those regulatory bodies, among them, quite evidently, the regulations of the United Kingdom, even contemplating the possibility of relocating the main centre of business of the companies to other countries for the purpose of filing there for the commencement of insolvency proceedings and thus benefiting from more flexible rules.

We analyse below the possibility of carrying out the relocation of the registered office of Spanish companies to other states, and the consequences of such relocation over the determination of competent jurisdiction related to the companies’ insolvency proceedings.

1. RegulationoftheRelocationofaCompany’sRegisteredOfficeUnderSpanishLaw:theLawonStructuralModifications

The relocation of the registered office of a Spanish company to a foreign jurisdiction maintaining such company’s legal personality is allowed under Articles 92 and following of Law 3/2009 on Structural Modifications of Corporations (hereinafter, “LME”). It offers a possibility contemplated by Spanish legislation, but which is not required neither by European legislation nor by European case law, and as such, has no reason to be admitted in equivalent manner by other member states. This means that Spanish rules may allow the companies’ relocation to other states, but the relocation’s effectiveness, and especially its nature as such (which allows the continuity of the legal personality of the relocated company, without requiring its dissolution and reincorporation) does not only depend on Spanish legislation, but also on the approach adopted by the laws of the host foreign jurisdiction.

The requirement of Article 9 of the Spanish law on companies (Ley de sociedades de capital “LSC”), that any company whose main seat of business is located in Spain must also establish its registered office in this jurisdiction, brings, as a result, that the relocation to Spanish territory of the main business of a foreign company should entail the transfer to Spain of its registered office as well. In addition, if a Spanish company relocates its registered office to a foreign jurisdiction, it should likewise move its main business to such jurisdiction.

The LME only contemplates the relocation of companies incorporated under Spanish law, but excludes those under liquidation or which are undergoing insolvency proceedings. It would seem that such reference to the insolvency proceedings must be interpreted as a prohibition to relocate companies in respect of which such proceedings have been initiated, being unclear whether the insolvency filing is sufficient or the formal declaration of its opening is necessary. The prohibition is not applicable to those cases where there has not been a formal filing for insolvency, even though the conditions for it actually exist.

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Articles 95 and subsequent of the LME regulate the relocation procedure. Among the most relevant aspects of such procedure is the requirement that the management of the company draft a relocation “Project”, which must include the information of Article 95 of the LME, and that they file it with the relevant Registry of Commerce. The Project will afterwards be published in the BORME (Official Bulletin of the Registry of Commerce). The required Project information comprises the memorandum and Articles of Association that will govern the company after its relocation, including (if relevant) the new company name.

Given that after relocation the company will be ruled by new company’s legislation, its new Memorandum of Association must comply with such legislation. It must also adequately fit with one of the company types available in the new jurisdiction, which requires the prior election of the type that will best match with that used by the company until then.

The Project must also state the rights contemplated for the protection of partners, creditors and workers, and include a managers’ report explaining and justifying the relocation project from a legal and economic standpoint as well as its consequences for the above stakeholders (Article 6).

The relocation must be decided through a partners’ meeting summoned with at least two months’ prior notice. Among other requirements, the summoning notice must state the right to withdraw afforded to partners who voted against the agreement, the right of opposition granted to creditors, and the way such rights may be exercised (Article 98). The agreement must be approved by a partners’ meeting which meets the requirements and formalities established by Spanish law for each relevant type of company.

Article 101 stipulates that the Spanish registry shall certify compliance by the relocating company with the required acts and formalities before relocation, and that such certification brings about the closure of registration. However, the relocation only becomes effective at the date of enrolment in the new registered office’s registry, and the cancellation of the company’s registration in Spain is executed only after evidence of such enrolment is provided and the publicity requirements of Article 103 of the LME are met.

2. Consequences of the Relocation with Respect to the Competent International Jurisdiction for the Opening of Insolvency Proceedings.

Article 3.1 of Council Regulation (EC) No 1346/2000 on insolvency proceedings (“RPI”) states that “the courts of the Member State within the territory of which the centre of a debtor’s main interests is situated shall have jurisdiction to open insolvency proceedings. In the case of a company or legal person, the place of the registered office shall be presumed to be the centre of its main interests in the absence of proof to the contrary”.

The notion of “centre of main interests” is not defined in the articles of the RPI, but in Section 13 of the introduction, where it is considered that “the ‘centre of main interests’ should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties”.

From that perspective, the presumption of Article 3.1 is a rebuttable presumption, meaning that it can be overturned upon a showing of sufficient proof. This means that any conflict between facts and forms will be resolved in favour of the former. However, in the absence of rebuttable elements, the legal statement of the presumption should be taken as truthful. This has been the ruling by the Court of Justice of the European Union (“CJEU”), in which it held that a company’s centre of main interests is located in the Member State where it has its registered office and that presumption “can be rebutted only if factors which are both objective and ascertainable by third parties enable it to be established that an actual situation exists which is different from that which location at that registered office is deemed to reflect. That could be so in particular in the case of a company not carrying out any business in the territory of the Member State in which its registered office is situated” (CJEU, May 2 2006, Eurofood C-341/04).

On the other hand, the procedural stage which is relevant to determining the international court of competent jurisdiction is that of the filing of the request for the opening of the insolvency proceedings.


The later relocation to a foreign jurisdiction of the debtor’s centre of main interests does not modify the court’s jurisdiction, not even if carried out prior to its opening by the competent court (but after the filing of the request). The above rule is not modified even when the relocation takes place immediately before the filing of the request because the RPI does not establish any minimum period requirement for the registered office of the company to serve as the source of determination of jurisdiction. Nevertheless, a formal relocation is not sufficient. It is necessary that the new location be based on facts, and that the debtor carry out from the new location the administration of his or her business on a regular basis.

Contrary to the above, Article 10.1 of the Spanish Insolvency Act ("SIA"), after establishing a rule of territorial and international jurisdiction similar to that of Article 3.1 of the RPI, requires that any change of the registered office of a company carried out within six months prior to a filing for insolvency proceedings shall be invalid. However, this rule should not be applicable within the ambit of the European Union. In cases in which the RPI is applicable, should be is the only pertinent rule in relation to the determination of the international court of competent jurisdiction on insolvency and it does not contain, as we have seen, any period requirement for the registered office of the company prior to the filing for insolvency. The rule of the SIA can therefore only be understood with domestic effectiveness, that is once the jurisdiction of the Spanish courts is conferred by application of the RPI, and in order to resolve discrepancies among Spanish courts. Nevertheless, there are no court precedents on this issue.

3. Conclusion

i. The LME does not allow the relocation of the registered office of companies which are subject to insolvency proceedings, remaining unclear whether a declaration of insolvency proceedings is required or a filing for that purpose is sufficient.

ii. The company’s relocation prior to the filing for the insolvency proceedings is possible. The authorities of the state where the new registered office is located can open such proceedings because the new location is the centre of the company’s main interests. However, the presumption of coincidence between the company’s registered office and its centre of main business can be disabled. The relocation, in order to be effective with respect to the change of jurisdiction, must reflect factual and not purely formal elements.

iii. The rule of article 10.1 SIA, according to which any change in the registered office of a company carried out within the six-month period prior to the filing for insolvency proceedings is ineffective for the determination of the court of competent jurisdiction should not be applicable within the scope of the EU environment. It is only valid to delimit the local territorial jurisdiction among the Spanish courts that have been considered competent by operation of the RPI. However, there are no relevant court precedents in this respect, and therefore there is a risk of mistaken interpretation of this rule by Spanish courts.

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Banking and Capital Markets Department, Gómez-Acebo & Pombo

Legal Issues to be consideredby Purchasers of Distressed Debt in Spain

1. Introduction

1.1. The current economic conditions have enhanced the interest of a high number of investors in opportunities within the distressed debt market. The distressed debt market has significantly increased in the US and Europe, but creditors in Spain are still reluctant to sell their credits at a discount. In general, banks and financial entities have a preference for reaching restructuring agreements with their Debtors.

1.2. In Spain the sale and transfer of credits is generally governed by Articles 1526 to 1537 of the Civil Code1 (the “Code”), but it is important to bear in mind other statutory provisions which may provide with formal requirements and/or limitations which may be applicable to a transfer. The Insolvency Act2 (the “Act”) also plays a key role as it provides with certain particularities for transactions carried out once the Debtor has entered into an insolvency procedure and determines the restructuring procedure within an insolvent company. Also the ranking of the purchased credit (and whether the ranking of the seller is maintained after the transfer) in a potential insolvency of the debtor is fundamental when acquiring distressed debt.

1.3. Unlike in other jurisdictions (eg. England & Wales), Spanish Laws do not make any differences between legal and equitable interests, thus the purchase of debt in Spain will generally imply transfer of ownership of the credit.

1.4. As per the above, it is recommendable for any foreign investors to seek advice of Spanish local counsel when: (i) the debtor is a Spanish company or the credit is guaranteed by a Spanish company, (ii) the credit or debt is subject to Spanish Law; or (iii) the credit is secured with Spanish assets or Spanish security.

1.5. For the purposes of this paper: (i) the investor acquiring or targeting the distressed debt will be indistinctly referred to as “Purchaser”, “Buyer” or “Transferee”; (ii) the owner of the credit selling it to the investor, indistinctly as “Seller”, or “Transferor” and (iii) the debtor of the assigned debt will be defined as the “Debtor”. Also, the credit right of the Seller against the Debtor will be defined as the “Debt” or the “Credit”.

1.6. This document only refers to Spanish Law. This document does not intend to be comprehensive. Legal advise should be obtained on a case by case basis.

2. Legal Issues

2.1. Restrictions and need of consent: the general rule under Spanish Law in respect of transfers of credits is that a credit may be freely transferred without the need to obtain the consent of the Debtor, and

1 Royal Decree 24th July 1889, as amended.

2 Act 22/2003, dated 9 July on Insolvency, as amended.

May 2010


they can be executed against the Debtor’s will. However, contractual arrangements reached between Seller and Debtor may limit the transfer of the debt or subject it to certain conditions. In particular, it is fairly common that syndicated loans provide for certain conditions to transfer, such as the same being for a minimum amount or on particular dates (such as at the end of interest periods so that break costs are eliminated or mitigated). Also, many contractual arrangements limit the right of a Seller to transfer to a Purchaser if the latter is not a bank or a financial institution or if any withholding or increased cost on the side of the Debtor arise (generally covered by the respective gross-up provision). This must be specially taken into account by funds and other non-bank investors.

2.2. Transferring the Credit or the Participation: special care needs to be taken when purchasing a position in a facility where amounts are still to be disbursed. Need to clearly identify that it is the Credit which is being purchased, but not the whole participation in the loan (which would imply an obligation to disburse available funds, if applicable). This possibility may be limited contractually and must be carefully reviewed.

2.3. Notice to the Debtor: as a general rule notice to the debtor is not required for effectiveness of the transfer. However, a Debtor who pays the Seller before having been notified about the transfer would be released from its obligations. Once the Debtor has been notified, the transfer will be fully effective and no payment made by the Debtor to the Seller will have extinctive effects on the Debtor. There are special rules upon situations of multiple Debtors, whereby: (i) if joint Debtors, each Debtor shall be notified; and (ii) if joint and several Debtors, any of them to be notified, indistinctly. Also, the agreement reflecting the Credit may (and generally will) establish the obligation of giving notice to the Debtor.

2.4. Transferring the Debt and its security: the general rule is that upon transfer of a Credit the same will remain in existence between the Purchaser and the Debtor with all its ancillary rights and securities, if any. However, upon certain circumstances certain formalities need to be complied with in order to maintain enforceable security by the Purchaser. Special care needs to be taken when the Credit is secured by registered security (this is, any security which requires registration for its effectiveness).

2.5. Formalities: Spanish Law does not impose on Buyer and Seller any formal requirements, thus transfers may be executed either in a private or in a public document. However, transferring a Credit through a public document is always recommendable in order to be able to evidence the ownership of the Credit vis-à-vis third parties and the date on which such ownership was transferred. Also, a Spanish Public Document will generally be required in scenarios where the Credit is secured by registered security and the Purchaser wishes its position to be registered within the applicable Spanish registries. A reasonable recommendation (although to be analysed on a case by case basis) should be that if the Credit is documented as a public document the acquisition of the same should also be made as a public document. It is advisable for any Buyer of a Spanish secured Credit to register its acquisition by following any statutory formalities whenever the original Credit or its security is registered. Otherwise the entries in the relevant registry will not be accurate thus being the Buyer at the risk of not being able to enforce the security for not appearing as the registered beneficiary of the security.

2.6. Recourse to the Seller: as long as the credit is not sold as doubtful credit and unless otherwise stated, upon a transfer of a credit right the liabilities of the Seller are very limited and restricted to: (i) the existence of the credit; and (ii) the legitimacy of the credit. The Seller shall not be liable for the solvency of the Debtor, unless otherwise agreed with the Buyer or the insolvency of the Debtor was pre-existent and publicly known, therefore being any distressed debt acquisitions susceptible of being affected by this provision. The responsibility of the Seller regarding the existence and legitimacy of the credit, unless otherwise agreed with the Buyer shall be limited to: (i) the purchase price; (ii) the expenses incurred in respect of the sale and purchase agreement; and (iii) any other legitimate payment made by reason of the sale of the credit (Articles 1529 and 1518 of the Code).

2.7. Credits in Litigation: special care must be put on transfer of the so-called “Credits in Litigation” (“créditos litigiosos”). A credit shall be considered in litigation from the day the plaintiff submits to

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the Court its response to a formal claim, the object of which is the existence of the Credit. Those Credits in Litigation will be considered as such until a final court order (“sentencia judicial firme”) has been issued in respect of the claim. The main peculiarity of Credits in Litigation is the right that Article 1535 of the Code vests on the Debtor so that he can cancel the credit, provided that: (i) the transfer of the credit shall have been made to a third party other than the parties in litigation; and (ii) the right to cancel is exercised by the Debtor within nine (9) days from the date of claim of payment by the purchaser of the credit. To cancel the credit, the Debtor shall pay the purchaser: (i) the purchase price; (ii) any litigation costs incurred by the purchaser; and (iii) any interests on the price paid by the purchaser accrued from the day on which the same was satisfied to the Seller. Once all the above amounts are satisfied by the Debtor, the credit will be extinguished, thus being the judicial claim finished.

2.8. Stamp Duty for transferring the credit: as a general rule the transfer of a Credit from a Seller to a Purchaser does not imply stamp duty. However, the granting of public deeds the object of which is any act that is subject to registration in any of the Spanish public registries will trigger the obligation to pay Stamp Duty Tax. Thus upon execution of a public deed of assignment of a credit secured with a registered security or with a security that may be registered, Stamp Duty Tax will be due. Special care needs to be taken on mortgaged backed loans.

2.9. Purchase of Credits against an Insolvent Company after commencement of insolvency proceedings: Section 122 of the Act (hereinafter, “S. 122”) is paramount. S. 122 establishes that subordinated creditors or those who have acquired their claim by inter vivos acts after the insolvency proceedings have commenced shall not be entitled to vote at the creditors’ meeting, except if the acquisition took place by: (a) universal title, eg. upon acquisition being made as a consequence of a merger or split-up of the transferor; or (b) as a consequence of an enforcement, such as the foreclosure of a pledge over receivables, etc. S. 122 does not forbid the transfer of credits after the commencement of insolvency proceedings, thus being valid and binding not only for the assignor and the assignee but also against the Debtor, however it does limit the right of the Purchaser to vote (This provision was subsequently amended as described in the article “Amendment of the Spanish Insolvency Regulations and their Implication in Spanish Restructuring/Distressed Deals”).

2.10. Purchaser’s situation upon subsequent insolvency of the Debtor: subject to certain exceptions generally the position of a Purchaser in a subsequent insolvency proceeding of the Debtor will be such as the position held by the Seller. In this respect, Section 89 of the Act establishes the following ranking of credits: (i) privileged, (ii) ordinary and (iii) subordinated. Subordinated credits (“SCs”) are those that rank subordinated to ordinary and privileged credits and are listed in Section 92 of the Act. Among the list of SCs the following are of special importance: credits that the parties wish to consider as subordinated, credits due to interest (including default interest but excluding those secured by a right in rem up to the value of the asset) and those credits owned by parties specially related to the insolvent. Section 93 of the Act lists who may be considered “specially related to the Debtor”. In respect of corporations, the following shall be considered as “specially related to the debtor”: (i) any shareholders of the Company who, at the moment of the debt arising, are holders of at least 5% of the share capital (listed companies) or 10% of the share capital (non-listed companies); (ii) the directors, de jure or de facto, the liquidators, if any appointed, of the Company, and the proxies with general powers of the company, as well as those who have acted as such during the two years preceding the declaration opening the insolvency proceedings; and (iii) any affiliates of the Company and their shareholders as long as they fulfil the conditions in (i) above. Section 93 of the Act also establishes that unless proved otherwise the purchasers of credits from persons “specially related to the Debtor” will be “specially related to the Debtor”, and thus subordinated, to the extent the purchase took place in the two years preceding the insolvency.

Therefore, in general terms, a Purchaser needs to ensure that the credit which is purchasing: (i) was not subordinated when due to the Seller and (ii) will not become subordinated once purchased by the Purchaser.


2.11. Restrictions of the Act for creditors to request the commencement of insolvency proceedings against the Debtor. Either the debtor, through its governing or winding-up body, as the case may be (“Voluntary Insolvency”) or any of its creditors (“Compulsory Insolvency”) are entitled to request the commencement of proceedings. In any event, a plurality of creditors must hold credit rights towards the debtor. Otherwise a singular judicial procedure would suffice to deal with an insolvency of the Debtor. In general, a debtor must petition for a declaration opening the insolvency proceedings within the (2) two months following the date on which it knows, or should know, its situation of insolvency. In the same manner, creditors shall be entitled to request the commencement of proceedings against the Debtor as soon as they are aware of the occurrence of any of the presumptions set out in the Act in respect of the effective insolvency of the Debtor3, and after having claimed the debt and not being paid (plus certain requirements being met). This notwithstanding not all creditors will be entitled to request commencement of proceedings against the debtor. Section 3.2 of The Act provides that any creditors who have acquired claims by inter-vivos acts (eg. via acquisition of debt) and by a singular title, after maturity thereof (e.g. non-performing loans, distressed debt, etc.) within the six months prior submission the application of commencement, shall not be entitled to request commencement of proceedings. This shall be borne in mind if the object of the acquisition of the Credit is to obtain leverage with the possibility of requesting the commencement of insolvency proceedings against the Debtor.

2.12. Risks of rescission: an additional risk may be imposed on the Purchaser when acquiring debt from a Spanish Seller in financial distress. If eventually the Seller filed for insolvency, Section 71 of the Act allows for the possibility to rescind certain acts carried out by it during the two (2) year period preceding the declaration of insolvency, on the grounds that those acts are prejudicial to the insolvent estate and regardless of whether those acts had been performed with the aim of deceiving the interests of the creditors or not. Upon an insolvency proceeding being commenced, those actions which are judged detrimental to the estate of the insolvent party and which have been carried out during the two (2) years preceding such date, may be rescinded even in the absence of fraudulent intention.

3. Tax Issues

3.1. EU Residents: if the Purchaser is a tax resident of a European Union Member State, the interests received by it under the Credit will be exempt from taxation in Spain, provided that the tax residence is duly justified with a certificate of tax residence issued by the Tax Authorities of the correspondent State.

3.2. Non EU Residents: if the Purchaser is a tax resident of a foreign State not being member of the European Union, the interests will be subject to taxation in Spain at a fix tax rate (currently 19%), except if a Double Taxation Treaty applies and establishes a lower tax rate, provided that the application of the Treaty is duly proved with a tax certificate issued by the Tax Authorities of the correspondent State that makes reference to the Treaty.

3.3. Spanish Tax Residents. Withholdings: If the Purchaser is a Spanish tax resident, the interests will be subject to withholding tax, on account of Corporate Income Tax, at a fixed rate of 19%, except if the Purchaser is a finance entity duly registered with the Bank of Spain.

3 I.e., (i) general suspension of the current payment of the debtor’s obligations; (ii) the existence of seizures for executions

pending with an overall effect on the debtor’s estate; (iii) unlawful removal or hasty or ruinous liquidation of his assets

by the debtor; (iv) generalised breach of obligations of any of the following classes: those of payment of the requisite tax

obligations during the three months prior to applying for insolvency; those of payment of Social Security contributions,

and other joint collection items during the same period; those of payment of salaries and compensations and other

remunerations arising from the relevant employment relations of the last three monthly payments.

│19

3.4. Price finally received. Interests: On the other hand, it should be noticed that, as the Credit will be acquired by the Purchaser at a discount, the difference between the price paid and the principal finally received would be taxed as interest, according to the rules explained above.

3.5. Tax formalities: Even if the interests are exempt by application of the above-said rules, a Non Residents Income Tax Return should be filed within the Spanish Tax Authorities declaring the exemption and the legal grounds of the exemption.

3.6. Indirect Taxation: Regarding indirect taxation, the transfer of the Credit will be exempt from VAT.

3.7. Stamp Duty Tax: As referred in paragraph 2.5, the transfer of a credit guaranteed with a registered guarantee or with a guarantee that may be registered, Stamp Duty Tax will be due, being the tax rate 1%, applicable on the total amount secured.

4. Conclusion

4.1. Acquiring distressed debt in Spain is a straightforward process, as credits may be freely transferred without neither requiring the consent of the Debtor, nor complying with specific costs or formalities (save as otherwise described above).

4.2. On any transaction we would recommend to ascertain whether any obligation of disbursements is in force and it shall be ensured that such obligation, if any, is not transferred to the Purchaser, so that it only acquires a part or the whole of a credit (i.e., the economic credit rights); not a full participation.

4.3. When purchasing a credit, any security will generally also be transferred to the Purchaser, some of which may need compliance with some formalities.

4.4. Be wary of any acquisitions of: (i) credits in litigation, as the Debtor may exercise its right to repay the credit at the purchase price; (ii) purchase of subordinated credits or credits against an insolvent company, as any voting rights in a Creditors Meeting will be restricted; (iii) credits from parties especially related to an insolvent company; and (iv) credits from any Seller who may be in financial distress as the transaction may be rescinded if the Seller files for insolvency and the insolvency administrators deem it to be prejudicial to the Seller’s estate.

4.5. When calculating the costs, taxes and expenses for the acquisition of distressed debt, it needs to be taken into account that: (i) Stamp Duty Tax may be due in respect of transactions recorded in a public deed which may need to be filed in a public registry (1%); (ii) if the Purchaser is not an EU member, payments of interests will be subject to taxes at a taxable rate of 19%; (iii) if the Purchaser is Spanish tax resident, interests would be subject to withholdings at a fixed rate of 19% unless the creditor is a financial institution registered within the Bank of Spain; and (iv) any difference between the price paid by the Seller and the price paid by the Purchaser will be taxed as interests.

4.6. In general, Spanish local counsel should be sought before and during the closing of a distressed debt transaction to ensure that the Credit being purchased is duly transferred, has the envisaged ranking and attached rights and there are no unexpected costs involved.


The Bank of Spain (BoS) has recently published a proposal of amendment which intends to simplify the system of accounting provisions for Spanish financial institutions (the Spanish Lenders), the main difference being the shortening of the periods for the provisioning of credits, and the amendment of the valuation of assets acquired by Spanish Lenders in satisfaction of payments linked to defaulted credits.

To date, the system imposed by the BoS with regards to the calculation of the deterioration of the value of the credit is set forth in the Circular 4/2004, of 22 December (the Circular), and entails the application of certain minimum coverage percentages which result from a schedule of progressive deterioration of the credit/debt. These calculations have historically taken into account the specific nature of the credit to tailor the calendar of deterioration, thus being up to five different calendars and coverage percentages used by Spanish Lenders.

On 26 May 2010, the BoS has announced and released a public consultation addressed to the Spanish Lenders, with the proposed amendments to the Circular, which if finally enacted, would comprise: (i) the creation of a single calendar of deterioration for all doubtful credits or “Créditos Dudosos” (the Doubtful Credits); (ii) the reduction of the schedule of provision of the losses caused by Doubtful Credits; and (iii) a specific treatment for the valuation/provision of real estate security and repossessions carried out by such Lenders.

If the Circular is finally amended, among others the following changes will apply:

1. Creation of a single calendar and unique coverage percentages applicable to all Doubtful Credits. The amount of any Doubtful Credit shall be provisioned by Lenders as loss following the percentages and time-frames set forth in the chart below (Chart 1).


Amendment of the currentbanking provision system

September 2010

Fromthedateoffirstdefault Percentage of the credit to be provisioned as a loss

Up to 6 months 25%

Default between 6 and 9 months 50%


Any default beyond 12 months 100%

For the purposes of applying the above percentages, the date of application would be that of the earliest payment default or instalment defaulted.

2. With regards to credits secured by rights in rem over real estate properties, the value of the property securing a Doubtful Credit shall be reduced in the percentages set forth in the chart below, in accordance with the specific type of the property (Chart 2):

│21

The provisioning of losses of the above referred credits would be calculated taking into account the outstanding amount of the credit exceeding the value of the secured property reduced in the percentages set out in Chart 2, and subsequently applying the rules of provision set forth in Chart 1 above.

3. The last of the amendments to the Circular would affect any repossessions/repayments of credits through real estate assets. In this respect, the value of any assets acquired by Spanish Lenders in satisfaction of their credits would be reduced by 10% on the date of acquisition. Furthermore, once the asset enters into the balance sheet of the Lender, and unless the Lender receives any offers from potential buyers regarding the asset received in payment which may be indicative of a higher value, the asset should be provisioned in the balance sheet in accordance with the chart below (Chart 3):

Type of property Value to be reduced

Fully constructed main residence of the debtor 20%

Rustic land, offices and business premises in general 30%

Any other fully constructed residential properties 40%

Plots of land and any other real estate assets 50%

Time elapsed from the date of acquisition

of the asset by the Lender

Value of the asset to be reduced

in the balance sheet

More than 12 months 20%



1. Introduction

1.1. With the aim of pushing forward the Spanish financial system, Royal Decree-Law 9/2009 was enacted on 26 June 2009 (hereinafter, “RD 9/2009”). RD 9/2009 set up the “Fund for the Orderly Restructuring of the Banking Sector” (hereinafter, the “FROB”). The main purpose of the FROB was to provide support to any merger or similar amalgamation between financial institutions (in particular, to support the merger of saving banks ) in order to increase their efficiency and strengthen their position in the market.

1.2. From the enactment of RD 9/2009, restructuring processes have mainly been carried out through mergers or amalgamations. The aim of each of those mergers has been to create the so-called “Institutional Protection Systems”, also known as “cold mergers” (hereinafter “IPSs”). IPSs are entities (the “IPS holding Company”) created through the agreement of a group of other financial institutions (the “Founders”) with the aim of providing each other with enough solvency and liquidity to face their respective obligations vis-à-vis the market and their customers.

1.3. This notwithstanding, the Spanish legislature realized that the financial meltdown required the enactment of new provisions targeting the Saving Banks, the framework of which would be aimed at: (i) providing the Saving Banks with more flexibility of access to capital markets; and (ii) the possibility for Saving Banks to fund raise through investors and institutions.

1.4. In light of the above, on 14 July 2010, Royal Decree-Law 11/2010 on Saving Banks’ internal regulations (hereinafter, the “RDL 11/2010”) came into force. RDL 11/2010 regulates the following main areas:

a. Enhancement of the possibilities of Saving Banks to raise core capital in the same conditions as those of other financial institutions through the amendment of the regulations of the Saving Banks’ participative quotes (“cuotas participativas”).

b. Regulation of the Saving Banks’ governing bodies in order to guarantee their full independence and professionalism.

c. Strengthening and boosting of the IPSs as the most effective restructuring alternative for ailing financial institutions, thereby easing their access to financing resources.

d. Implementation of the possibility for Saving Banks to divert their financial activities from their social fund, so that the financial branch can have access to capital markets.

1.5. RDL 11/2010 envisages in its Second Transitory Disposition the obligation of all Autonomous Communities to adapt and amend, where appropriate, their respective regional regulations regarding Saving Banks in accordance with the provisions of RDL 11/2010.

1.6. This brief note is aimed at providing the reader with an overview of the main aspects and amendments of RDL 11/2010. However, it is not the purpose of the authors to thoroughly explain all the Spanish regulations and amendments recently enacted with regards to the Saving Banks.


Spanish Law Reform on Saving Banks:Royal Decree-Law 11/2010

September 2010

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2. Main aspects of RDL 11/2010

2.1. Amendments regarding the regulations of Participative Quotes. To date, Saving Banks have not been attractive to investors due to their limited liquidity and limitations regarding voting and political rights conferred on the Quotaholders. In the light of the previous scenario, RDL 11/2010 attempts to provide investors with a better investment vehicle by introducing the following amendments to the structure and regulations of Saving Banks:

2.1.1. Political rights. Any investors holding quotas of a Saving Bank shall be vested with political rights pro rata with their interest in the capital of the Saving Bank.

2.1.2. Administrative Authorization. From the enactment of RDL 11/2010 onwards, Saving Banks will be allowed to issue Participative Quotas without requiring previous administrative authorization. These new Participative Quotes shall vest the bearer/holder with voting and political rights.

2.1.3. Acquisition of the Saving Banks’ own Participative Quotas. The general rule is that Saving Banks would not be entitled to acquire their own Participative Quotas (“Adquisición Originaria”). This notwithstanding, Saving Banks may be entitled to carry out a derivative acquisition (“Adquisición Derivativa”), as long as such acquisition does not exceed 5% of the quotes of the relevant Saving Bank. This limitation shall not be applicable to IPSs.

2.1.4. Merger and exchange of quotas. Upon merger of two or more Saving Banks, their respective Participative Quotes will be exchanged by a number Participative Quotes of the resulting Saving Bank in accordance with the economic value of each of the respective merging Saving Banks.

2.1.5. Retribution of the Quotaholders. No administrative authorisation shall be required for the retribution of the Quotaholders. This nevertheless may not affect any of the authorities that may be granted to the Bank of Spain under any relevant regulations enacted or amended from time to time.

2.1.6. Listing regulations. All Participative Quotes should be listed in a secondary/alternative market when the issuing of such quotes is addressed to the general public. No limitations as to maximum percentages of interest in a Saving Bank shall be imposed on investors.

2.2. Amendments regarding the independence and professionalism of the Saving Banks’ governing bodies. Title II of RDL 11/2010 focuses on the professionalization and independence of the Saving Banks’ governing bodies and the implementation of the voting rights of the Quotaholders. The following regulations have been introduced/amended:

2.2.1. New corporate bodies. The Saving Banks are governed by a General Assembly, a Board of Directors and a Controlling Commission (the “Governing Bodies”). In addition, and holding complementary office and duties, RDL 11/2010 has established two new corporate bodies: the “Retribution and Appointments Commission” (formerly, the Retribution Commission) and the “Social Fund Commission”.

2.2.2. Retribution and Appointments Commission. The duties and authorities of the Retribution and Appointments Commission are the following: (i) to keep the Board of Directors, the Controlling Commission and any directors and managers of the Saving Bank informed about the policies on salaries and benefits; and (ii) to guarantee that each of the members of the corporate bodies of the Saving Bank complies with the relevant regulations in force from time to time.

2.2.3. Social Fund Commission. The Social Fund Commission shall ensure that the Saving Bank complies with its social duties.

2.2.4. Duties of the General Assembly. Furthermore, new authorities have been vested to the General Assembly: (i) the General Assembly shall be in charge of passing any resolutions


regarding the amalgamation or merger with any other Saving Bank(s), (ii) and to approve the relevant resolutions regarding the transformation of the Saving Bank into a “foundation of special characteristics” (see Section 2.4.3 below), and (iii) to resolve the diversion of the financial activities and the social fund. The approval of any resolutions regarding the aforesaid authorities would require higher quorums and majorities.

2.2.5. Appointment of members. The members of all the corporate bodies of the Saving Banks shall be highly-reputable experts in each relevant field, who shall be fully committed to the interest of the Saving Bank and its social fund. Impeccable business credentials are paramount and individuals with criminal records would be rejected as potential members of the Saving Banks’ governing and corporate bodies. The refusal will also be applicable to any of those individuals subject to restrictions with regards to the exercise of political roles or positions in financial institutions; and to politicians and high-members of the government’s administration. In the same manner, and in the interest of the Quotaholders, the number of members of the Saving Banks’ Boards of Directors would be increased up to 20 members, who could remain in the position for an indefinite period of time.

2.2.6. Diversion of the financial activities and the social fund of the Saving Bank. In any event, if any Saving Bank diverts its financial activities through the assignment of its assets in favour of another financial institution (see Section 2.4 below), it shall be entitled to appoint its representatives on the Board of Directors of such entity in accordance with the representative groups of its own Board. Furthermore, any individuals holding a position in other financial institutions, acting on behalf of the Saving Banks, shall also be entitled to be appointed as General Managers (“Consejeros Generales”).

2.2.7. Collective interests and representation in the General Assembly and other corporate bodies. All Saving Banks shall ensure that the following collective interests are duly represented in their General Assembly: (i) local corporations; (ii) deposit holders of the Saving Bank; (iii) the founders of the Saving Bank; (iv) the Saving Bank employees; (v) any other relevant representative union of the Saving Bank, if any.

In any event, the participation and interest of the foregoing groups of interest in the corporate bodies of the Saving Banks shall remain within the following percentages:

a. Deposit holders: 25% to 50% of the voting rights in each of the corporate bodies.

b. Employees: the percentage shall be between 5% and 15% of the voting rights in each of the corporate bodies.

c. Other representative unions: the percentage should not be higher than 10% of the voting rights in each corporate body.

Moreover, the enactment of RDL 11/2010 has introduced a limitation so that political institutions such as regional and local institutions may only hold a limited interest in Saving Banks (no higher than 40% of the total voting rights of the Saving Bank). In addition, no regional representatives (“Representante de la Comunidad Autónoma”) shall be members of the Controlling Commission (“Comisión de Control”).

2.2.8. Transparency. Further to the requirements of independence and professionalism, the RDL 11/2010 also enhances the requirements of transparency of the governing bodies. To ensure compliance with this, all Saving Banks shall publish their Corporate Governance Reports on a yearly basis.

2.3. Amendments regarding IPSs. The third main objective of the RDL 11/2010 aims to strengthen the position and stability of IPSs. The key facts of the amendments are the following:

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2.3.1. Incorporation of the IPS Holding Company. Regarding the IPS Holding Company, they must be incorporated as Public Companies (“Sociedades Anónimas”).

2.3.2. Shareholders of the IPS Holding Company. The Founders of an IPS shall have an interest in the IPS Holding Company of at least 50% of its shares. The aim of this regulation is for the Saving Banks to remain in control of the SIPs. If, at any time, such control is lost, the Saving Banks shall be transformed into foundations of special characteristics, and assign their financial activities to a different financial institution.

2.4. Diversion of Activities of the Saving Banks. From the enactment of RDL 11/2010, the Saving Banks shall be entitled to divert their activities in the following manner:

2.4.1. Indirect exercise of the financial activities of the Saving Banks. Each of the Saving Banks shall be entitled to assign all their financial activities to a financial institution controlled by them (hereinafter, the “Financo”). This alternative allows the nature and structure of Saving Banks (i.e. not only a financial institution but also a social entity) to remain whilst their financial activities are carried on by a parallel institution.

2.4.2. Controlling interest of Financo. Any Saving Bank whose business is diverted shall be in control of at least 50% of the shares of its respective Financo. Once the whole of the financial activities has been transferred to the Financo, the Saving Bank would remain in full charge of the social fund and of the management of their affiliates. It is important to note that in any event, the Financo will be an instrument of the Saving Bank, thus being able to advertise and identify itself as such before the general public and investors.

2.4.3. Transformation into Foundations of special characteristics (“FEC”). The second alternative granted to Saving Banks under RDL 11/2010 implies the transformation of Saving Banks into FECs. By means of this alternative, Saving Banks are entitled to “assign all their assets regarding their financial activities to another financial institution, in exchange of shares of the later, and shall be transformed into foundations with special characteristics, thus losing their condition of credit entities”. Henceforth, on the one hand, Saving Banks become “foundations,” as they must contribute all their profits (arising from investments, affiliates and, in general, all their assets) to charity. And, on the other hand, Saving Banks become “special” foundations, as they would be entitled to carry out the management of their financial portfolio whilst also promoting financial business education, but in any event, would lose their condition of lending institution.


The Bank of Spain (BoS) has recently enacted a new regulation (Circular 3/2010, of 13 July, on Credit Entities, the Circular) which simplifies the system of accounting provisions for Spanish financial institutions (the Spanish Lenders). The main difference from the previous system set forth in the Circular 4/2004, of 22 December (the 4/2004 Circular), are the shortening of the periods for the provisioning of credits, and the amendment of the valuation of assets acquired by Spanish Lenders in satisfaction of payments linked to defaulted credits.

Until the enactment of the Circular, the system imposed by the BoS through the 4/2004 Circular with regards to the calculation of the deterioration of the value of the credit entailed the application of certain minimum coverage percentages which resulted from a schedule of progressive deterioration of the credit/debt. These calculations had historically taken into account the specific nature of the credit to tailor the calendar of deterioration, thus being up to five different calendars and coverage percentages used by Spanish Lenders.

The Circular was finally enacted after a public consultation process addressed to the Spanish Lenders, which proposed the following amendments to the Spanish banking system: (i) the creation of a single calendar of deterioration for all doubtful credits or “Créditos Dudosos” (the Doubtful Credits); (ii) the reduction of the schedule of provision of the losses caused by Doubtful Credits; and (iii) a specific treatment for the valuation/provision of real estate security and repossessions carried out by such Lenders.

In the light of the above, the Circular introduced the following novelties:

1. Creation of a single calendar and unique coverage percentages applicable to all Doubtful Credits. The amount of any Doubtful Credit shall be provisioned by Lenders as loss following the percentages and time-frames set forth in the chart below (Chart 1).


Amendment of Circular 4/2004on Banking Provisioning System

September 2010

Fromthedateoffirstdefault Percentage of the credit to be provisioned as a loss

Up to 6 months 25%



Any default beyond 12 months 100%

For the purposes of applying the above percentages, the date of application would be that of the earliest payment default or instalment defaulted.

2. With regards to credits secured by rights in rem over real estate properties, the value of the property securing a Doubtful Credit shall be reduced in the following manner:

│27

a. Fully constructed main residence of the debtor. The value to be estimated would be 80% of the lower value of (i) the acquisition cost of the property (set forth in the purchase deed) and (ii) its updated market valuation.

b. Rustic land, offices and business premises in general. The value to be estimated would be 70% of the lower value of (i) the acquisition cost of the property and (ii) its updated market valuation. The acquisition cost of the property shall be the amount set forth in the purchase deed or the amount set out in the deed of purchase of the land, plus all the construction costs (excluding financial and commercial costs) if the properties are offices or business premises in general constructed by the debtor.

c. Any other fully constructed residential properties. The value to be estimated would be 60% of the lower value of (i) the acquisition cost of the property (set forth in the purchase deed) and (ii) its updated market valuation. With regards to the financing of real estate constructors and developers, the acquisition cost would be the amount set forth in the purchase deed of the Land, plus costs incurred in the construction of the property (excluding financial and commercial costs).

d. Plots of land and any other real estate assets. The value to be estimated would be 50% of the lower value of (i) the acquisition cost of the property and (ii) its updated market valuation. The acquisition cost of the property would be the amount set forth in the purchase deed plus any urban planning costs and expenses incurred as well as the costs stated in point 2.c) above regarding the financing of real estate constructors and developers, if any.

The provisioning of losses of the above referred credits would be calculated taking into account the outstanding amount of the credit exceeding the value of the secured property reduced in the percentages set out in points a) to d) above, and subsequently applying the rules of provision set forth in Chart 1 above.

3. The last of the amendments to the 4/2004 Circular affects any repossessions/repayments of credits through real estate assets. In this respect, the value of any assets acquired by Spanish Lenders in satisfaction of their credits shall be reduced by 10% on the date of acquisition. Furthermore, once the asset enters into the balance sheet of the Lender, and unless the Lender receives any offers from potential buyers regarding the asset received in payment which may be indicative of a higher value, the asset shall be provisioned in the balance sheet in accordance with the chart below (Chart 2):

Time elapsed from the date of acquisition

of the asset by the Lender

Value of the asset to be reduced

in the balance sheet





Litigation and Arbitration Department, Gómez-Acebo & Pombo

Understanding the EnforcementProceedings for Spanish Mortgages.Overview of the Regulationafter Royal Decree 8/2011

July 2011

1. Introduction

Spanish real estate is attracting an increasing amount of interest from international investors. On many occasions the interest lies directly on the potential acquisition of a real estate asset which is thought to be underpriced or otherwise attractive but, on some other occasions, transactions including distressed debt acquisition and further foreclosure of security becomes an interesting possibility to approach an asset.

Investors generally find it difficult to understand the procedure for foreclosure of security in Spain and up to what extent such procedure can be creditor-controlled. Issues such as the impossibility of directly appropriating an asset, credit bidding or grounds for opposition within a proceeding become fundamental in the analysis. Also various press releases, some controversial Court rulings affecting the recourse against the debtor for amounts not covered by the security and the enactment of Royal Decree 8/2011 dated July 1st (“RD 8/2011”) amending certain features of the judicial enforcement have made this an actual and interesting topic.

This note intends to provide a general overview on the foreclosure mechanisms for real estate assets located within Spain and subject to Spanish security. This note describes two different foreclosure proceedings for real estate assets and it includes the amendments resulting from RD 8/2011 (for the purposes of identification we have marked the areas where the changes have been implemented together with a

Last 15 May 2013, Act 1/2013, dated 14 May, on certain measures aimed at reinforcing the protection of mortgage debtors,

the refinancing of debts and the so-called social lease (hereinafter, “Act 1/2013”) was published in the State Official Gazette,

entering into force on the same date as such publication. According to its Recitals, Act 1/2013 is mainly aimed at “alleviating

the situation of mortgage debtors”, as well as at reinforcing its protection, constituting the result of the development of Royal

Decree 27/2012, dated 15 November, on urgent measures to protect mortgage debtors without resources, validated by the

Congress of Deputies and which was carried out through urgent proceedings for its processing.

Act 1/2013, which amends, among others, the Mortgage Act dated 8 February 1946 or the Civil Procedure Act 1/2000,

of 7 January, introduces several measures with the above-mentioned purpose, which mainly affect judicial and extra-judicial

enforcement proceedings carried out over first residences. Particularly, we can highlight, among such measures, (i) the

suspension of evictions of first residences, when the debtor meets certain requirements, for a term of two (2) years following

the entry into force of the Act, (ii) the attribution to Notaries and Judges of new faculties to control the potential abusive

nature of clauses included in public deeds of mortgages, (iii) a new regulation to strengthen the independence of appraisal

companies and, finally, (iv) the development of certain measures contained in the Code of Good Practice by financial entities.

This analysis should be read in combination with the one named Act 1/2013, Dated 14 May on Certain Measures Aimed at Reinforcing the Protection of Mortgage Debtors, the Refinancing of Debts and the so-called "Social Lease" also

included in this work.

│29

description of the former regulation). Please note that any reference to approximate terms, other than those explicitly established in the Spanish legislation, is based on our experience and shall be taken as approximate. For obvious reasons, it is very difficult to predict the precise timing for each of the steps of the proceedings since many determining factors are not under the creditor’s control. This Note only refers to Spanish Law. This note is an overview which does not consider all the different alternatives or outcomes. It shall not be relied upon in order to take decisions in particular matters. Legal counsel’s advice should be obtained before acting.

2. Enforcing Real Estate Security

The main principle is that according to Spanish law a secured creditor may not directly appropriate real estate assets given as security upon default of the secured obligation. Should the secured obligation not be satisfied, the secured creditor will have to proceed with a foreclosure proceeding. There are two different public auction proceedings: (i) the judicial proceedings, to be followed before the Spanish Courts and (ii) the extrajudicial proceedings to be followed before a Notary Public. The extrajudicial proceedings may only be used if agreed by the parties, generally in the security documents and in practice is rarely used due to certain technicalities1.

2.1. Judicial Proceedings

The process will generally be as follows:

a. Essential breach by the borrower

After an essential breach the creditor will most likely declare the early termination or acceleration of the secured obligation. Ordinarily after such termination/acceleration the borrower will have a short term to repay the total outstanding amount, this is, principal plus interests accrued. Should the borrower not repay the requested amounts, the secured creditor may initiate the corresponding enforcement proceedings.

b. Enforcement claim

The enforcement claim must be made against the borrower, and if applicable, against the non-debtor mortgagor and the third party owning the mortgaged assets. The secured creditor shall have to attach to the writ of claim certain specific documents expressly designated in the Spanish legislation and, among others, an enforceable copy of the public deed of mortgage – that is, in principle, a first copy of such public deed -, a certificate of the outstanding debt issued by a Notary Public in accordance with the terms of the agreement, a copy of the notarial request of payment made to the borrower, granting it, at least, a ten (10) working-days term for the repayment and finally, a certificate issued by the Land Registry regarding the property and its encumbrances.

c. Grounds for opposition

In practice, the borrower has very little grounds to challenge foreclosure in case the enforcement claim has been correctly filed. In any event, once the challenge has been filed, the Court Clerk shall stay the enforcement and shall summon the parties to a hearing before the Court.

1 It must be noted that there has been a long discussion on the legality of the extrajudicial proceedings that, up to date, has

not been definitively settled. This uncertainty refrains creditors usually from choosing this proceeding, trying to avoid the

risk of a judicial pronouncement addressed to stop its development.


d. Auction

Once the above has been complied with, and at the request of the claimant, the borrower or the third party owner, the property or asset mortgaged shall be auctioned. Auction will generally be made through a closed-envelope process but could also be made through live-verbal bids before the Court on the date fixed for the holding of the public auction. In order to attend the auction, bidders must deposit 20% of the auction price (it was 30% before the 8/2011 RD). The enforcing party may only bid when there are other bidders and will not be required to make a deposit. These are the possible scenarios in the auction:

i. Bid equal to or higher than 70% of the price for which the asset is auctioned (which shall have to be determined in the public deed of mortgage and shall remain without prejudice to the actual value of the asset at the time of enforcement, the “JP Appraisal Value”): the Court Clerk shall, by order issued on the same or the following day, award the foreclosed asset to the highest bidder. Within a time limit of twenty (20) days, the highest bidder shall pay to the consignments account the difference between the amount initially deposited and the total price of the final bid. If the bidder is the enforcing creditor, it will only pay the difference, if any, between its bid price and the outstanding amount owed to it for principal, interest and court fees (thus credit bidding is allowed).

ii. Bid higher than 70% of the JP Appraisal Value with deferred payment: if only bids in excess of 70% of the JP Appraisal Value are made, but offering to pay in instalments with sufficient bank or mortgage guarantees of the deferred price, such bids shall be notified to the enforcing creditor who, within the next twenty (20) days, may request the adjudication of the property at 70% of the JP Appraisal Value. If the enforcing creditor does not make use of this right, the foreclosed asset shall be awarded to the most favourable of said bids.

iii. Bid lower than 70% of the JP Appraisal Value: if the best bid placed at the auction is lower than 70% of the JP Appraisal Value, the foreclosed debtor may, within a time limit of ten (10) days, present a third party improving the bid by offering an amount in excess of 70% of the JP Appraisal Value or that, albeit lower than such amount, is sufficient for the complete satisfaction of the amount owed to the enforcing creditor (principal, interest and court fees). If, upon expiry of said time limit the foreclosed debtor has failed to proceed as set out in the above the enforcing creditor may, within a time limit of five (5) days, request the awarding of the property for 70% of the JP Appraisal Value or for the amounts owed to him (principal, interest and court fees), provided that this amount is higher than 60% of the JP Appraisal Value and the highest bid (it only had to be higher than the highest bid before the 8/2011 RD).

iv. Bid higher than 50% of the Appraisal Value: in absence of all of the above, the asset will be awarded to the best bidder at 50% of the JP Appraisal Value or, if the best bid is lower such 50%, if it at least covers the amount at which the foreclosure has been ordered (principal, interest and court fees).

v. Bid lower than 50% of the JP Appraisal Value: if the best bid does not meet the above requirements, the parties may allege whether or not the award is admissible and the Court Clerk will resolve on the basis of a series of circumstances, mainly the attitude of the foreclosed debtor regarding its obligations under the agreement. If the Court rejects the award, the rule to be applied is that the secured creditor may request the adjudication of the asset for an amount equal or greater than 50% of the JP Appraisal Value or for the amount owed to him (principal, interest and court fees) but just in case such price is equivalent to or higher than the 50% of the JP Appraisal Value.

vi. No bidders: if there are no bidders to the auction the secured creditor may request the adjudication of the asset for an amount equal or greater than 60% of the JP Appraisal Value

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(it was 50% before the 8/2011 RD). When the secured creditor fails to use this power within a time limit of twenty (20) days, the Court Clerk will order the lifting of the attachment over the asset at the request of the foreclosed debtor.

2.2. Extrajudicial Proceedings

The extrajudicial proceeding shall only be followed if it has been agreed in the mortgage deed and in case the debtor, in such public deed, has appointed a representative for the sale of the asset and has also determined the value of the asset to be used in the public auction (the “EP Appraisal Value”).

The main differences of this process are as follows:

a. Required Deposit

The secured creditor will be able to bid in the auctions without having to make any deposit. Other bidders will have to deposit 30% of the price for the first and second auctions and 20% (of the second auction price) for the third auction.

b. Auction

Once thirty (30) days have elapsed as from the payment request, the process for the sale of the asset in public auction will start. Possible scenarios are as follows:

i. First Auction: no bids under the EP Appraisal Value may be accepted. If no bid is accepted, the secured creditor within the next five (5) days may request the appropriation of the asset as payment of the debt, accepting the persistence of previous charges. The secured creditor will then discharge the total amount of the secured claim.

ii. Second Auction: if the secured creditor does not make use of his right of appropriation a second auction may take place where the value will be 75% of the EP Appraisal Value and no bid under such price may be accepted. If no bid is accepted, the secured creditor within the next five (5) days may request the appropriation of the asset as payment of the debt, accepting the persistence of previous charges and fully discharging the secured debt.

iii. Third Auction: if the secured creditor does not make use of this appropriation right a third auction may take place. This auction will not be subject to any minimum value, but if the best bid placed is lower than the value set for the second auction the non enforcing creditor, the owner of the property or any third party authorized by them may improve the bid within the time of five (5) days. In this auction, in case no bidders attend it, the creditor is not entitled to obtain the adjudication following the same process set out for the judicial proceedings.

c. Payment and credit bidding

After the public auction the highest bidder shall pay the difference between the amount initially deposited and the total price of the final bid. If the bidder is the foreclosing party, it will only pay the difference, if any, between its bid price and the outstanding amount owed to it for principal, interest and court fees (thus credit biding is allowed).



Redemption of Unrelated Third Party Debts and Payee’s Reimbursement Right (Resolution 339/2011, dated May 26 2011)

Introduction

The transfer of debt in any of its multiple forms, whether by means of assignment, novation, subrogation or otherwise, has been (and remains) a matter of major importance for financial institutions and hedge funds throughout the entire financial crisis.

Topics such as the implications of the assignment or novation in the case of the insolvency of the assigned debtor, debt restructuring post acquisition, clawback provisions and hardening periods in the applicable insolvency regulations, the impact of the assignment technique used on the security package and other rights associated with the assigned debt have been discussed at length in the context of distressed or non performing debt transactions.

Nevertheless, more subtle issues remain outside of the centre of focus of professional purchasers of receivables. In the following paragraphs we shall briefly discuss one of these issues, namely, the legal consequences of the redemption of debts by unrelated third parties in light of the recent Spanish Supreme Court Resolution 339/2011, dated May 26 2011.

The case

In the case at hand, Company A, a company specifically incorporated with the purpose of paying third party debts, pays the amounts owed by Company B to three different creditors (a Spanish municipality, the Spanish social security authority and the Spanish tax revenue authority). Company B only learns about this payment by Company A at the time the latter files a claim for reimbursement of such amounts. Both companies are Spanish. It later transpires, that the aim of Company A was to enforce the debt against Company B and specifically, to seize and appropriate certain real estate assets of the latter at a low price.

Theapplicablelaw:Article1.158oftheSpanishCivilCode

Payment may be made by anyone, whether or not holding an interest in the fulfillment of the obligation and whether or not the debtor knows and agrees to or ignores such payment.

He that pays a debt for the account of a third party may claim from the debtor the amount paid unless payment had been made against the express will of the debtor in which case the payer shall only hold a claim for the actual advantage produced in the debtor by such payment.

The arguments of the claim (essentially, those of Company B)

The payments of Company A were made against the express will of Company B as manifested after the claim for reimbursement was brought by Company A and therefore only payment of the actual advantage of Company B (as opposed to the full amount paid by Company A) can be sought.

The payments of Company A not only did not generate any advantage to Company B but rather were the origin of the latter’s insolvency as frustrated any renegotiation or settlement possibilities that Company B would have had with the original creditors.

September 2011

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The conduct of Company A is in breach of the principle of good faith and jeopardizes social harmonic co-existence. It also fulfils the objective and subjective requirements of the abuse of right, namely: (i) intent of causing damage, and (ii) excess and abnormal use of such a right.

The court resolution

Since paragraph 1 of Article 1.158 of the Spanish Civil code allows for the payment of third party debts including in circumstances where the debtor ignored such a payment, it transpires that the express rejection by Company B, of the intended payment by Company A of the debts of Company B should have been expressed, in order to produce the effects depicted in paragraph 2 of said article, prior to or at least simultaneously with the payment but not after such payment had been made.

The general expectation to achieve a beneficial settlement with the original creditors cannot operate as an impediment to the acquisition of third party debts, as this possibility persists with the new creditor.

The incorporation of a company with the aim of acquiring third party debts cannot be considered illegal, illegitimate or antisocial in itself as it is evident that the legal doctrine permits payments by an unsecured creditor of a secured debt against the same debtor in order to release the security on the encumbered asset and enforce the debt on that very same asset.

The advantage mentioned in Article 1.158 of the Spanish Civil Code should be understood as the patrimonial increase sustained by the debtor as a consequence of the reduction of the liability side of its balance sheet resulting from the payment of the debt.

It is implicit in the regulation contained in the Spanish Civil Code with respect to subjects such as (i) payments for the account of third parties (ii) third party subrogation in the rights of a creditor and (iii) assignment of debts; the legal legitimacy of the potential upside of the payer of third party debts, namely, that implicit in the full recovery of accounts receivable purchased at a price below its nominal value1.

1 This important conclusion (and indeed of the outmost importance in cases of distressed debt and non performing

transactions), is however not part of the court ruling but is merely included obiter dictum as a reinforcement argument of

the actual conclusions of the case.



Amendment of the SpanishInsolvency Regulations and their Implication in SpanishRestructuring/Distressed Deals

October 2011

1. Introduction

In the light of the current economic climate, some of the restrictive provisions of the Insolvency Act and the fears of rescission of transactions carried out in relation to companies in distress have resulted in a high number of the petitions of insolvency to end up in liquidation of the debtor. Also, the existing Insolvency Act (the “Insolvency Act”) has somewhat acted as a deterrent to a Spanish distressed market and certain of its provisions have proven to be too strict to facilitate proper restructurings. This has forced market participants to find imaginative solutions, which in some cases include the use of foreign laws to carry out a restructuring plan.

With the aim of preserving the business activities of companies in distress, to induce capital investment in distressed companies and to facilitate pre-insolvency restructurings, a substantial reform of the Insolvency Act has been approved on 4 October, 2011 (the “Reform”). The Reform introduces concepts which have been unknown to the Spanish market such as pre-insolvency cram-down mechanisms or dip financings and allows for certain purchasers of debt of insolvent companies to keep their right to vote in a composition of creditors. We have tried to list those issues within the Reform which we think directly affect restructuring/distressed deals, rather than citing all proposals made within the Reform.

2. RefinancingAgreementsandDipFinancing(FreshMoney)

One of the biggest fears of investors in distressed companies is the two-year hardening period established by the Insolvency Act (the “Hardening Period”). Section 71 of the Insolvency act establishes that any acts carried out by the insolvent company within the two year period preceding the date of declaration of insolvency may be set aside, subject to evidence being provided by the challenger that the particular act is prejudicial to the insolvent company’s estate. Further to that, this same section provides that certain specific acts of the debtor, carried out during the hardening period, are deemed to be prejudicial to the debtor’s estate, hence the burden of proof1 being shifted to the parties to the contract or arrangement at stake2.

For a debtor to be refinanced/restructured in an agreement with its creditors, mitigating the risks of rescission brought up by the Hardening Period, any agreements reached (the “Refinancing Agreements”) by the debtor’s creditors and the debtor in a pre-insolvency stage have to comply with the following requirements:

a. The purposes of the Refinancing Agreement shall be: (i) to substantially increase the funds available to the debtor; and/or (ii) to extend or amend the terms of the debt that is to be re-negotiated by means of the Refinancing Agreement;

1 That no prejudice is caused to the debtor by this particular arrangement.

2 This shift of the burden of proof only takes place where the presumption is iuris tantum (rebuttable) as some of these

presumptions are iuris et de iure and no evidence to the contrary is allowed hence claw back being automatically applied.

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b. The Refinancing Agreement shall be a part of a short and mid term viability plan of the debtor;

c. It shall be approved by creditors representing, at least, 3/5 of the liabilities of the debtor;

d. It should be executed before a Spanish Public Notary and recorded in a public deed; and

e. An independent expert appointed by the Companies Registry should issue a report assessing: (i) sufficiency of the information provided by the parties (in particular, by the debtor); (ii) reasonability of the Refinancing Agreement and that the viability plan is sensible and feasible; and (iii) the security package of the Refinancing Agreement being proportional to the usual market practice.

The Reform tops-up the seniority of new money put in within a Refinancing Agreement by widening the categories of Credits Against the Estate and Privileged Credits. In this regard, new wording of Section 84.2.11º of the Insolvency Act provides that the insolvency ranking of any additional funds made available to the debtor in a Refinancing Agreement (“Fresh Money”) shall be enhanced by giving them the treatment of Privileged, in respect of 50% of its amount and Pre-deductible, in respect of the remaining 50%.

This provision will entail more certainty and an incentive to any lending institutions and investors willing to carry out rescue financings. Note that the Refinancing Agreement will not necessarily require now 100% consent of the creditors (See 2 below), thus this solution is especially interesting when there would otherwise be no consent for an intercreditors agreement to be put in place recognizing seniority to the new money.

It should be noted however that the safe harbor or protection provided to those Refinancing Agreements complying with the aforementioned requirements only refers to the challenges of other creditors. It is arguable that the insolvency administrators are still entitled to challenge the arrangements contained in a Refinancing Agreement if, despite the preventions adopted, they understand that they were indeed prejudicial to the estate of the debtor.

3. CramdownMechanismsresultingfromRefinancingAgreements

To date, there were no provision under Spanish Law to entitle a majority of creditors to carry out a restructuring of the debtor without the consent of the minority creditors in an out-of-court situation (i.e. where no insolvency proceedings have been commenced).

The above has lead to a situation were if 100% consensus was not obtained the company would file for insolvency as the only way to de-leverage, unless imaginative solutions were found such as foreclosing holdco security and applying release provisions under intercreditors agreements (when found, which is not the case in most Spanish Law financings) or foreign laws providing for lower consensus requirement were applied. To these effects the Reform introduces a new provision allowing for any Refinancing Agreements complying with the requirements set forth in Section 2 above being approved by the relevant Commercial Court (“homologación judicial”).

The only requirement for this court homologation is basically the Refinancing Agreement being approved by financial entities holding at least 75% of the “bank debt” of the debtor3.

Once the Refinancing Agreement has been homologated, the stays in payments accepted by the financial entities adhering to it shall be extended to any absent or dissident unsecured financial entity, with the limit of 3 years.

3 Please note that Law 14/2013 of 27th September, which has amended the Spanish Insolvency Act (i) reduces the percentage

of financial entities which can cram-down unsecured financial entities from 75% to 55%; and (ii) clarifies that the approval

from the 55% of the financial entities is sufficient to homologate a refinancing agreement (therefore the approval from 3/5

of the total liabilities mentioned in Section 71.6 not being required).


The homologation resolution may also provide for the stay in individual enforcement proceedings for so long as the deferral of payments of unsecured and unsubordinated claims is in place in accordance with the Refinancing Agreement (subject to the 3 year maximum stay referred to above).

The relevant Commercial Courts shall ensure the reasonability of the new arrangements and make sure that the mechanism is not disproportionate on any absent and dissident creditors.

As per the above, it becomes obvious that the impact of the homologation on dissident creditors is subject to certain boundaries such as:

a. Secured lenders will not be affected by the stay in payments but may be affected by the stay in enforcement proceedings;

b. Lenders may not be obliged to condone the debt. Unsecured lenders may only be forced to extend and stay (“espera”); and

c. Lenders may not be obliged to capitalise the debt (debt-for-equity).

It seems obvious that the restrictions depited in (a) through (c) above make this mechanism less efficient for deleveraging a company in distress. However, it does open certain routes to avoid minority creditors blocking a restructuring and is a first step which will most likely be welcomed by market participants.

4. Incentives for creditors to request Compulsory Insolvency of a debtor

In the event of lack of agreement between creditors in a pre-insolvency stage, the Insolvency Act establishes that insolvency proceedings can be commenced at the request of (i) the debtor (“Voluntary Insolvency”) or (ii) by the debtor’s creditors (“Compulsory Insolvency”).

With regards to Compulsory Insolvencies, the Reform provides that upon request of commencement of proceedings by a Creditor, the claims held by such (unsubordinated) Creditor shall be considered as generally privileged up to 50% of their amount.

This new provision enhances the likelihood of creditors filing debtors for insolvency and will most likely open an interesting investment angle for investors (among others, when the distressed debt is trading below 50 cents).

5. VotingrightsandPurchasers

Maybe the biggest hold off for purchasers of distressed debt in Spain so far has been the lose of their potential voting rights in a creditors’ Meeting when acquiring any debt of an insolvent debtor. Section 122.1.2.º of the Insolvency Act provided that any Purchasers who had acquired their claim by inter vivos acts after the commencement of an insolvency proceeding of the debtor were declared open had no voting rights in a Creditors’ Meeting, except if the acquisition took place by universal title or as a consequence of an enforcement of security.

The Reform has introduced novelties so that any potential voting rights that would have been allocated to a Purchaser will remain vested on the Purchaser for as long as it is an entity subject to financial supervision. This wording seems to deliberately include financial entities as well as funds which are subject to supervisions and will open the scope of potential debt investments to situations where the company has already filed for insolvency.

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Financial System Reform:Royal Decree-Law 2/2012

February 2012

The Spanish Government enacted on 3rd February 2012 the Royal Decree-Law 2/2012 (the “RDL”) for the rationalization of the Spanish financial system. The main purposes of the RDL are the cleaning up of real estate exposures from the financial institutions’ balance sheets and the promotion of further concentration among them, with the aims to strengthen markets’ confidence and, ultimately, reestablish their function of channeling funds into the economy.

The main new measures implemented by the RDL focus on the followings areas:

i. new provisioning and capital requirements in relation to real estate exposures;

ii. changes in the types of support investments to be made by the Fund for Orderly Restructuring of Financial Entities (“FROB”); and

iii. additional corporate governance requirements for savings banks and remuneration limitations for financial institutions that have received FROB support.

1. Real Estate Exposures

The RDL sets out new provisioning and capital requirements for real estate exposures of financial institutions as of 31 December 2011, affecting those exposure that are classified in their balance sheets as foreclosed (i.e. assets foreclosed or received in payment of debts), problematic (doubtful or substandard) or normal (i.e. non-problematic).

The new requirements include: (i) increased minimum levels of specific provisions, (ii) new generic provision, and (iii) capital add-on. The main difference between these requirements is that specific provisions respond to an incurred losses rationale, while the generic provision and the capital add-on work more as capital buffers in contemplation of potential future losses.

1.1. Specific provision

The increased minimum levels of specific provisions apply to such real-estate exposures that as of 31 December 2011 were classified as foreclosed, doubtful or substandard, even if they are refinanced after such date.

With respect to assets related to land and real estate under development, the main difference with respect to the existing provisioning requirements is that fixed percentages of minimum provisioning levels are established that will be applied over the value of the loan, without deducting any of the collateral. Such percentage is 60% for land and 50% for real estate under development (which can be brought down to 24% if the development is on-going).

Additionally, the provisioning requirements for completed real estate (including first residence) have been enhanced. Mainly, the provision percentages for foreclosed completed real estate are increased and a fourth year of provision is added (40% for fist residence and 50% for others); also, the minimum provisioning levels for doubtful and substandard loans are required without exceptions.


In principle, any additional provisions that have to be created pursuant to these new requirements will be charged against P&L.

1.2. Generic Provision

Financial institutions shall create a new generic provision amounting to 7% of real estate financial exposures that as of 31 December 2012 were classified as normal. This generic provision may only be used going forward to cover future migration of such exposures to the problematic or foreclosed portfolios.

It should be noted that this generic provision is a one-time provision and differs from the dynamic generic provision that was already contemplated by the accounting regulations. Actually, the Bank of Spain has indicated that those financial institutions that have any remaining dynamic generic provision may use it to create this new one-time generic provision.

In principle, this new provision will be charged against P&L.

1.3. Capital Add-On

The capital add-on applies to such real-estate exposures related to land and real estate under development that as of 31 December 2011 were classified as foreclosed, doubtful or substandard, even if they are refinanced after such date.

Such capital add-on is calculated as a percentage (80% for land and 65% for real estate under development) over the value of the exposures, after deduction of any provisions created over them. Only one exception applies to substandard loans related to on going real estate developments.

This capital add-on is added to the core capital (capital principal) requirements of 8% (10% for non-listed) established by Royal Decree-Law 2/2011. It will have no impact on P&L.

Following is a summary chart of the impact on equity of the new provisioning and capital requirements established by the RDL with respect to real estate exposures:

FORECLOSED DOUBTFUL SUBSTANDAR NORMAL

LAND

Provisions 60%

One-time generic provision:7%

Capital

Add-On20%

Total 80%

REAL ESTATE

UNDER

DEVELOPMENT

Provisions 50% Stopped: 50% On going: 24%

Capital

Add-On15% Stopped: 15%

On going: 0%

Total 65% Stopped:65%Ongoing:24%

COMPLETED

REAL ESTATE

NOT INCLUDING

FIRT RESIDENCE

Provisions

<12 months: 25%+12 months: 30%+24 months: 40%+36 months: 50%

25%

20%

(24% without in rem guarantee )

FIRST

RESIDENCEProvisions

<12 months: 10%+12 months: 20%+24 months: 30%+36 months: 40%

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Although not clear from the RDL, it seems that it will be possible to release provisions as an asset moves from land to real estate under development and finally to completed real estate.

As to timing, the foregoing measures need to be complied with by financial institutions by 31 December 2012. For such purposes, by 31 March 2012 they shall deliver to the Bank of Spain a plan to comply with new measures, which shall be approved by the Bank of Spain within fifteen working days.

However, such financial institutions that undergo an integration process during 2012 will be given some extra time to comply with the measures, provided certain requirements are met. For such purposes, these institutions shall present an integration plan by 31 May 2012, which shall be approved by the Ministry of Economy within one month. Such institutions will then have 12 months as from such approval to comply with the measures. Another advantage of undergoing an integration process is that the new provisions of the acquired entities will not be charged against P&L.

In order to benefit from this extended timing, the integration process shall comply with the following requirements:

• resulting entity’s balance sheet shall be at least 20% bigger than that of the largest institution participating in the integration;

• integration shall be done through a merger or corporate restructuring (not through simple contractual arrangements, IPS type);

• improvements in corporate governance shall be made and a remuneration plan for directors and senior management shall be presented;

• objectives to increase credit to households and SMEs and to reduce real estate exposures during three years following integration shall be set;

• resulting entity shall be economically viable; and

• integration shall be approved by corporate bodies of relevant entities by 30 September 2012 and shall be concluded by 1 January 2013.

2. FROB Investments

In addition to increasing the FROB by 6 billion euro, the RDL sets forth that the FROB may provide support to financial institutions in the following forms:

i. By subscribing shares at market value determined by independent experts, to be sold through competitive procedures within a maximum period of 3 years. The financial institution will have to present a recapitalization plan and the FROB will have Board presence.

ii. By subscribing convertible bonds of those financial institutions that have decided to undergo integration processes. The bonds will be converted into shares after 5 years, or before if the Bank of Spain considers improbable the repurchase or amortization of the bonds by the issuer. Conversion into shares will be done at market conditions. The bonds will compute as basic equity and core capital with no limitations.

Therefore, the RDL provides the following incentives for the financial institutions to undergo further integration processes:

1. Extend the term to comply with new provisioning and capital requirements by 6 months;

2. Ability to charge additional provisions directly to equity, with no P&L impact; and


3. Ability to receive funds from FROB in the form of convertible bonds (as opposed to shares) during a 5-year period (as compared to only 3 years).

3. Corporate Governance and Remmuneration

The RDL establishes additional corporate governance requirements for savings banks (cajas de ahorros) and remuneration limitations for financial institutions that have received FROB support, which can be summarized as follows:

3.1. Savings Banks

i. The structure and operational requirements of saving banks that develop its activity indirectly (due to the assignment of the banking business to a new bank) are simplified. Managing bodies are reduced to General Assembly, Board of Directors and, optionally, the Control Commission and their composition and operation is simplified.

ii. Savings banks may not allocate more that 10% of their freely available surplus to expenses other than Social Work.

iii. Saving banks that either cease to control, or reduce voting rights below 25% in, the bank through which they develop indirectly their banking activity shall renounce to authorization as bank and be transformed into special foundations. The Ministry of Economy will supervise those special foundations whose geographical scope exceeds one region (which are most, if not all, savings banks).

3.2. Remuneration limitations

The following limitations will apply to remuneration received by directors and senior management of financial institutions that have received FROB support, until payment, amortization, redemption or sale of securities held by FROB:

i. If majority shareholding held by FROB: (a) no bonus shall be payable; (b) maximum remuneration for directors shall be 50,000 euro per year; and (c) maximum remuneration for senior management shall be 300,000 euro per year.

ii. Other type of FROB support: (a) bonus shall be deferred 3 years and be conditioned to achieving certain results; (b) maximum remuneration for directors shall be 100,000 euro per year; and (c) maximum remuneration for senior management shall be 600,000 euro per year.

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Rescue Financing Alternatives in Spain

1. Introduction

Given the situation of Spanish market generally —and the latest reforms on restructuring of the financial sector more particularly— it seems that cash flow shortage may be ongoing in the near to mid term future for some Spanish corporations. Upon this situation stressed or distressed companies may consider rescue financing alternatives in substitution —or in addition to— other traditional funding. Generally within a broadest restructuring deal, non-bank lenders may have an interesting role to play in providing for liquidity facilities.

We have tried to set out below the main provisions of the Spanish Insolvency Act (“SIA”) which may affect the provision of fresh money to companies in stress (“Rescue Financing”) updated with the novelties introduced by the reform passed towards the end of last year. This document does not pretend to be comprehensive and should not be relied upon.

The implications and effects of the SIA’s regulations on Rescue Financing shall basically depend on the scenario in which the Rescue Financing occurs.

2. Rescue Financing prior to commencement of insolvency proceedings

Prior to the commencement of any insolvency proceedings a debtor may seek Rescue Financing —and a lender may grant the same— without any particular formalities or requirements based on the SIA. However, if such Rescue Financing is granted within a refinancing agreement (as defined in the SIA and described below, a “RefinancingAgreement”) the situation for the rescue financier may improve significantly as regards two major issues: clawback and ranking.

2.1. Rescue Financing outside a Refinancing Agreement

a. Clawback: financing can be implemented but clawback risks need to be analyzed in detail. Upon insolvency of the debtor any such Rescue Financing –as well as any security attached to it- may be subject to rescission if: (i) granted within the two-year hardening period set out under the provisions of the SIA, and (ii) considered detrimental to the insolvent estate —and regardless of whether those acts had been performed with the aim of deceiving the interests of the creditor or not—. Is the granting of new financing detrimental to the estate? There are several questions that need to be answered here, among others: (i) has the new financing artificially extended an obsolete business worsening the chances of recovery of other creditors?, (ii) has the new financing provided any benefit to the stakeholders of the company as a whole? (iii) has the new financing been used to repay existing creditors thus the total liabilities of the company being equivalent —and maybe taking security out of the pari passu treatment—? Also importantly, under the SIA new securities granted for old money —or for new money refinancing old money— and prepayments of non-matured obligations are presumed to be detrimental —thus rescindable—. Conclusion is that, although Rescue Financing alternatives without a Refinancing Agreement are available, the risk of the financing, its security, or the payments made with the new cash being rescinded cannot be ruled out.

b. Ranking: being a rescue financier will not provide in this scenario any benefit on ranking against other creditors of the debtor. In most cases the debt would rank secured (if security with sufficient value is granted and not subject to clawback) or ordinary (if no security is granted). There are

February 2012


obviously different situations as, for example, when the financing is provided by shareholders or directors.

2.2. Rescue Financing within a Refinancing Agreement

a. Clawback: claw back risk can be mitigated if the Rescue Financing agreement is granted within a broader Refinancing Agreement that meets the requirements established in Section 71.6 of the SIA: (i) the purpose of the refinancing agreement shall be to substantially increase the funds available to the debtor; and/or to amend the terms of the debt that is to be re-negotiated by means of the Refinancing Agreement; (ii) the Refinancing Agreement shall be a part of a short and mid term viability plan of the debtor; (iii) the Refinancing Agreement shall be approved by creditors representing, at least, 3/5 of the liabilities of the debtor; and (iv) an independent expert appointed by the Companies Registry should issue a report assessing on, among other issues, sufficiency of the information provided, reasonability of the Refinancing Agreement, proportionality of its security and sensibility of the viability plan. The Refinancing Agreement shall also be executed before a Spanish Notary Public and recorded in a public deed to which all documents evidencing the content of the Refinancing Agreement as well as the fulfillment of all the above-mentioned requirements shall have to be attached. If the above are complied with and the Rescue Financing is included within a broader Refinancing Agreement the clawback risk of the financing or its security is severally mitigated.

b. Ranking: with the latest reform of the SIA some incentives for lenders willing to carry out rescue financings have been introduced. In particular Section 84.2.11º of the SIA provides that any credits representing income for the debtor obtained within a Refinancing Agreement as set out under Section 71.6 shall be deemed 50% credit against the estate or pre-deductible —i.e. super senior as regards the unsecured claims— and 50% privileged —senior to ordinary claims and junior to pre-deductible claims, in both cases as regards the unsecured claims—. For the avoidance of doubt this will not apply if the fresh money is obtained from the debtor itself, its shareholders or persons specially related to the debtor.

3. Rescue Financing provided after the commencement of insolvency proceedings

Rescue Financing can also be provided once a company has filed for insolvency. Once insolvency proceedings have been initiated the Court shall determine the management powers and authorities over the debtor. As established in Section 40 of the SIA, If the insolvency proceeding is “voluntary” (initiated by the debtor itself) the debtor shall keep the managing and disposal faculties although these shall be subject to the intervention of the Insolvency Administrators by means of approval or consent. If the insolvency proceeding is “compulsory” (initiated by the creditors), the Insolvency Administrators appointed by the Court shall directly hold the managing and disposal faculties over the assets of the insolvent debtor. Accordingly, after the initiation of insolvency proceedings approval by the Insolvency Administrators shall be required for any Rescue Financing being implemented.

a. Clawback: if the Rescue Financing is granted within an insolvency process clawback risks are fundamentally inapplicable.

b. Ranking: according to Section 84 of the SIA payments resulting from contracts validly entered by the debtor after insolvency will be credits against the estate or pre-deductible —i.e. super senior as regards the unsecured claims—.

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Ranking of a Secured Guarantor uponPayment of Claim of Unsecured CreditorOn the ruling of Commercial Court No. 1 of Oviedo, dated

25 May 2011 (Article 87.6 of the Spanish Insolvency Act)

The case

In this case a creditor holds an unsecured and unsubordinated claim against an insolvent debtor. A guarantor had provided a guarantee to the creditor and taken security on assets of the debtor to secure repayment of the debt in the event of enforcement of the guarantee.

The court ruling decided on the ranking of the claim of the guarantor upon payment of the amounts owed by the debtor to the original creditor.

Thelawapplicable:Article87.6oftheSpanishInsolvencyLaw

Article 87. Special Cases of Acknowledgement [of claims against the estate of the insolvent debtor]

1. […]

2. […]

3. […]

4. […]

5. […]

6. The claim of a creditor [against an insolvent debtor] holding a personal guarantee provided by a third party shall be acknowledged in full without prejudice to the substitution of the holder of the claim in case of payment of the debt by the guarantor. Provided subrogation [by the guarantor] for payment of the debt takes place, in the acknowledgement of the claim [of the guarantor] the ranking of that which is less onerous to the insolvent’s estate shall prevail, by comparing the seniority of the original creditor with that of the guarantor.

Background

Article 87.6 of the Spanish Insolvency Act foresees that in those circumstances where the debt of a company is guaranteed by a third party (guarantor), if the claim is satisfied by the guarantor, the recovery rights of the guarantor shall rank, in the case of insolvency of the debtor, with the seniority which is least onerous to the insolvent’s estate, by comparing the seniority of the original creditor with that of the guarantor.

This article had been heavily criticized for its potentially indiscriminate scope as this could be applied in many types of cases well beyond what academics and practitioners assumed to be the mischief towards which it was directed (i.e. where a party related to the debtor provides a guarantee to an unrelated creditor).

March 2012



In order partly to clarify the meaning of the rule contained in article 87.6, and to avoid the use of the downgrade mechanism against an unrelated creditor prior to the satisfaction of the claim by a guarantor, Real Decreto Ley 3/2009 introduced the requirement underlined above. Accordingly, under this reform, the above rule would only apply where the guarantor had honored the debt; the original creditor had been paid out, and hence the guarantor became the new holder of the claim.

In the opinion of legal writers, despite the above reform, many other cases not theoretically addressed by article 87.6, were still strictly speaking going to be captured such as the one discussed in this court ruling; that is to say, a secured guarantor paying and subrogating in an unsubordinated claim.

The arguments of the parties

On the one side, the guarantor requested the acknowledgement of its recovery rights against the insolvent’s estate as a secured claim because it held a mortgage over real estate property of the debtor. In support of this request the guarantor used the arguments of the majority legal doctrine in Spain, which restricts the application of the rule in article 87.6 of the Insolvency Act to those circumstances where at least one of the claimants (original creditor and guarantor) is a party especially related to the debtor, and hence a subordinated creditor.

On the other, the receivers in bankruptcy (administración concursal) argued for the literal wording1 of article 87.6 of the Insolvency Law to apply and since the less onerous ranking of the claim against the insolvent’s estate was that of the original creditor (unsecured and unsubordinated), they maintained that the guarantor’s claim should be deprived of the benefit of the mortgage and be merely acknowledged as an unsecured and unsubordinated claim.

The court resolution

Following other minor2 court resolutions3, the Commercial Court of Oviedo has held that the recovery rights of any secured guarantor should maintain the privilege provided by the security, whatever remedies for reimbursement available to it may be triggered (e.g. subrogation in the claim of the original creditor under article 1838 of the Civil Code and reimbursement of payments made by guarantors under article 1838 of the Civil Code).

Furthermore, the court held that in the absence of the subordination of a claim on the grounds of the holder’s relationship with the debtor (i.e. equitable subordination), there is no reason to downgrade a guarantee arrangement which had been executed to assure a preferred ranking of its recovery rights in the case of insolvency of the debtor.

1 Although some legal writers use the literallity of the rule in exactly the opposite direction.

2 Rulings of first instance tribunals.

3 Commercial Court No. 1 of Madrid, 5 July 2005.

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General Information on Debtor’s Insolvency under the Spanish Insolvency Act(Ley 22/2003, de 9 de julio, Concursal)

May 2012

I. Introduction

1. The Spanish Insolvency Act (hereinafter, the "SIA") establishes two simple and straightforward options designed to bring a solution to the Debtor’s insolvency: 1) either enter into a legal transaction with the creditors in which the free will of the parties is evidenced (this is known as composition of creditors or creditor’s agreement) or; 2) commence the winding-up of the company.

2. The SIA has been amended several times over the last four years in order to adapt this new model of Insolvency Proceedings to the ongoing financial and general crisis. In particular, both Royal Decree-Law 3/2009, dated 27 March 2009, on urgent measures in tax, financial and insolvency matters and the SIA Amendment Act 38/ 2011, which entered into force on 1 January 2012, have meant substantial changes to the original model.

3. The purpose of this Note is to briefly summarize the main aspects of Insolvency Proceedings under Spanish legislation, focusing exclusively on corporate insolvency. This Note does not enter into technical and complex issues, nor does it deal with exceptional cases.

II. Filing of an application for Insolvency Proceedings under the Provisions of the SIA – Application and Competence

4. It should first be noted that the SIA is applicable to Insolvency Proceedings where the Debtor has its Centre of Main Interests on Spanish territory1.

5. According to the SIA, the jurisdiction to handle Insolvency Proceedings lies within the Commercial Courts located in the territory where the Debtor has its Centre of Main Interests (Section 10).

In case the Debtor’s registered address in Spain does not match with its Centre of Main Interests, the Commercial Courts of either territory will have jurisdiction and the creditor will decide which one will hear the case.

6. The jurisdiction of the Commercial Courts is exclusive. Thus, they will also have jurisdiction on any other incident relative to the insolvency that arises during the course of the proceedings (Section 8 of the SIA).



1 The Centre of Main Interests of the Debtor is the place where the Debtor usually performs the management of its interests,

in a form recognizable by third parties (i.e. publicly). Regarding corporations, their Centre of Main Interests is presumed to

be at the place where their registered address is located.


III. Debtor´sObligation to File anApplication for Insolvency:Alternatives to the Filing forInsolvency within the Statutory Terms

7. Under the provisions of Section 5 of the SIA, the Debtor is obliged to file the corresponding application for Insolvency Proceedings within a term of two (2) months after the date in which it knew or should have known about the insolvency situation. Debtors´ lack of compliance with the provisions will significantly increase chances of being held liable.

8. By virtue of the mentioned amendments of the SIA2, a new possibility for the Debtor was introduced in Section 5.bis, whereby the duty to request a Declaration for Commencement of Insolvency Proceedings is not required for a Debtor who, in a state of present insolvency, initiates negotiations to reach a refinancing agreement aimed at avoiding Insolvency Proceedings or aimed at obtaining adhesions to an early composition of creditors within those Proceedings and, within the statutory term of two (2) months, informs the competent Commercial Court of this situation.

9. It must be noted that no special evidence has to be demonstrated to the Court in order to apply for that extension of the statutory terms.

10. Pursuant to Section 5.bis of the SIA, the Debtor is then entitled to “buy” some time to try to reach agreements with its creditors in order to either avoid the opening of the corresponding Insolvency Proceedings or, if opened, to have an early composition of creditors agreed upon. This alternative provides the Debtor with the right to put on hold its obligation to file for insolvency for a term of three (3) months, extendable to four (4).

When the three (3) / four (4) month term has elapsed, there are three main possibilities:

a. The Debtor has been able to reach an agreement with its creditors so that there is no longer an insolvency scenario (i.e., an agreement with 100% of the creditors or that otherwise eliminates the general suspension of payment required). Should this happen, there is no need for the Debtor so as to file the application for Insolvency Proceedings: as to legal terms, there is no remaining insolvency.

b. The Debtor is able to reach an agreement with more than 50% of the ordinary creditors yet the technical insolvency still remains. In this event, the Debtor will have to file for insolvency but it will have already reached an early composition. In this scenario, Insolvency Proceedings must be conducted, but they will be shortened.

c. The Debtor is not able to reach an agreement with the required majorities. In this scenario, the Insolvency Proceedings begin and are followed in an ordinary manner. Thus, the Debtor is obliged to file the corresponding application for Insolvency Proceedings within that last month of the abovementioned three (3)/four (4) months term.

IV. SpecialReferencetotheRefinancingAgreements

11. Prior to the recent amendments of the SIA3, considering the evolution of the economic situation, lenders of the Debtor faced a high risk of rescission when entering into restructuring or refinancing agreements of a company whose financial position showed indications of insolvency.

12. In particular, Section 71 provides certain benefits for all refinancing agreements, which meet the following requirements:

2 Royal Decree-Law 3/2009, dated 27 March 2009 and the SIA Amendment Act 38/2011.

3 Originated first by means of Royal Decree-Law 3/2009 and then by the 38/2011Act.

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a. Refinancing Agreements are aimed at either: (i) substantially increasing the funds available to the insolvent; and/or (ii) amending the terms of the debt that is to be re-negotiated by means of the Refinancing Agreement by, for instance, extending the maturity of a credit, etc.

b. Refinancing Agreements are approved by creditors amounting to at least 3/5 of the liabilities of the Debtor.

c. Refinancing Agreements are positively informed in a financial expert report, signed off by an independent expert appointed by the Spanish Commercial Registry, who will issue a report assessing: (i) if all the information provided by the parties (in particular, by the insolvent company) is sufficient; (ii) that the Refinancing Agreement is reasonable and the viability plan is sensible and flexible; and (iii) any security guaranteeing the Refinancing Agreement is construed and executed following usual market practice.

d. Refinancing Agreements are executed before a Spanish Notary Public and incorporated in a public deed with all the relevant documents attached. However, and since notarization is not compulsory, they may be also judicially approved as will be discussed below.

13. The consequences of meeting the aforesaid requirements are:

a. Clawback: Clawback risk of the financing or its security is severally mitigated if the financing is granted within a broader Refinancing Agreement that meets the requirements established in Section 71.6 of the SIA.

b. Ranking: As will be discussed at a later point in this Note, the amended Section 84.2.11º of the SIA provides that any credits representing income for the Debtor obtained within a Refinancing Agreement as set out under Section 71.6 shall be deemed 50% credit against the estate or pre-deductible —i.e. super senior as regards the unsecured claims— and 50% privileged —senior to ordinary claims and junior to pre-deductible claims, in both cases as regards the unsecured claims—.

Obviously this will not apply if the fresh money is obtained from the Debtor itself, its shareholders or from the persons specially related to the Debtor.

14. Although it seldom occurs, the possibility of a Refinancing Agreement entering into force after commencement of Insolvency Proceedings cannot be ruled out. Refinancing Agreements, being different from (and logically previous to) a composition of creditors or an early composition of creditors, can also be provided once a company has filed for insolvency. However, after commencement of Insolvency Proceedings, approval by the Insolvency Administrators is required in order for any Refinancing Agreement to be implemented.

a. Clawback: If the refinancing agreement is granted within Insolvency Proceedings, clawback risks are fundamentally inapplicable.

b. Ranking: According to Section 84 of the SIA, payments resulting from contracts validly entered into by the Debtor after insolvency will be credits against the estate or pre-deductible —i.e. super senior as regards to the unsecured claims—.

15. Additionally refinancing agreements, may also benefit from further features if they become judicially approved as set forth in the Additional Section 4th of the SIA. In order to obtain such

benefit, all requirements4 of Section 71.6 of the SIA have to be met as well as a majority






of 75%5 of credits hold by banks or financial entities at the time of approving the said refinancing agreement. Furthermore, there also has to be an announcement within Spanish State Official Gazette (Boletín Oficial del Estado). Should there be judicial approval of the aforesaid terms, the main consequence of this judicial approval is, once a first stage of possible challenges is overcome, the extension of effects by means of imposition of the terms contained in the refinancing agreements as to the stay of payment period and not regarding the discharge of credits to the 100% of banks, even those that voted against it, except for those credits holding in rem security.

V. Start of the Proceedings - The Declaration of Insolvency

16. Insolvency will be considered Voluntary if it is the Debtor, who, through his prudence and good will, files an application for insolvency before the competent courts. If, however, the Debtor does not act accordingly, Insolvency Proceedings can be commenced before the Courts by any of its creditors, thus leading to Compulsory Insolvency Proceedings6.

17. It is not easy for a creditor to give evidence on the Debtor´s insolvency situation so as to apply for Insolvency Proceedings. For this reason, the Debtor’s state of insolvency is presumed upon any of the following situations (Section 2.4 of the SIA):

• General suspension of the current payments of the Debtor’s obligations.

• The existence of pending seizures for enforcements with an overall effect on the Debtor’s estate.

• Unlawful removal or hasty liquidation of his assets by the Debtor.

• Generalized breach of obligations of any of the following classes: breach of payment of tax obligations during the three months prior to applying for insolvency; the payment of Social Security contributions, and other joint collection items during the same period; breach of the obligation of payment of wages and compensations and other remunerations arising from relevant employment relations during the previous three months.

18. Once the Court receives the application for Insolvency Proceedings, it will examine it and, in the event that the Court deems it complete, it will decide on its admissibility. If, on the contrary, the Court considers that the application is in any way incomplete, it will grant the applicant with a period no longer than five days for its correction (Section 14 of the SIA).

19. The Judge may award the creditors claim for a Declaration of Insolvency against their Debtor with precautionary measures seizing the Debtors´ assets and sometimes their administrators´ assets so the classification of insolvency as an independent plea to establish possible Debtor´s or its director´s liabilities at the end of Insolvency Proceedings is effective.

20. In this regard, the Court is entitled to order the seizure of wealth and rights of the corporation’s directors and of those who have held this position. However, inure of such measures will depend on the eventual classification of the insolvency. In case the insolvency is classified as tortuous, then the measures will remain. On the other hand, the measures will be cancelled if the insolvency is not classified as tortuous.

5 Cfr. note 4.

6 It is important to point out that in any event, we must have a plurality of creditors who hold credit rights towards the Debtor,

otherwise, a singular judicial procedure would suffice.

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21. In the event that proceedings have been initiated by the Debtor and the Court considers that there is clear evidence of an insolvency situation, the Judge will issue a Court Order declaring commencement of Insolvency Proceedings. If, on the other hand, proceedings are initiated by a creditor, the Court will admit the petition provided it meets all of the procedural requirements. The Debtor will then be summoned to accept it or to file its opposition within a term of five (5) days.

22. However, the Court will dismiss the petition if the Debtor is under the protection of the abovementioned Section 5.bis of the SIA. This section provides that the Debtor is protected against the opening of Insolvency Proceedings within the term of three (3) months (extendable to one (1) additional month) from the filing of the writ requesting that protection. Thus, only the claims for insolvency filed after that 3-month term (plus 1 additional month if extended) will be accepted by the Court but they will not be examined until the fourth month is completed, and provided that no application for insolvency has been filed by the Debtor itself, which will examined with priority.

23. After the above, within a term of ten (10) days, the parties will be summoned to hold a hearing after which the Court will issue a Court Order either declaring insolvency or refusing it (Section 15 et seq. of the SIA). This Order is appealable. Both in the first and second instance, if the claim for insolvency was unfair, damages will be liquidated (apart from legal costs).

24. Insolvency is effective from the date in which the Court Order declaring the insolvency is issued. From this moment on, the proceedings, as well as the notices and formalities, will be made public by different means. In particular, an excerpt of the declaration opening the Insolvency Proceedings will be published with the greatest urgency and free of charge in the Spanish State Official Gazette (Boletín Oficial del Estado) (Section 21 et seq. of the SIA) and, as will be further analyzed, every creditor of the Debtor should be individually contacted by letter by the insolvency administrator, in order to be informed of the proceedings, as well as of the method and deadline to communicate the credits.

VI. Effects of the Voluntary and Compulsory Insolvency Proceedings

25. Insolvency Proceedings affect a broad variety of features:

i. The intervention or suspension of the Debtor’s abilities of administration and management of its assets;

ii. The integration of all the Debtor’s creditors into the aggregate liabilities of Insolvency Proceedings;

iii. The effects on legal actions and proceedings commenced in other jurisdictions;

iv. The suspension of any judicial or out-of-Court enforcements against the Debtor may not be initiated and any actions in process will be suspended from the date of the Declaration of Insolvency, and secured creditors will not be entitled to foreclose or forcibly release the guarantee;

v. The general prohibition of the compensation of the insolvent’s credits and debts as well as the suspension of the accrual of legal or contractually agreed interests;

vi. The Declaration of Insolvency will not affect the validity and performance of contracts with reciprocal obligations pending fulfillment by both parties.

a. Effects on the Debtor: The Insolvency Administrator or Administrators

Consequences on individuals arising out of the Declaration of Insolvency will vary depending on whether the request was filed by the Debtor (Voluntary Insolvency Proceedings) or a creditor (Compulsory Insolvency Proceedings).


1. Voluntary Insolvency Proceedings

26. When the Debtor has taken the initiative and has filed an application for Voluntary Insolvency Proceedings it will retain, as a general rule, the ability to carry out the business management and, therefore, will also maintain the powers of management and disposal of its estate, the exercise of which will only be subject to intervention by the insolvency administrators (Section 40.1 of the SIA).

2. Compulsory Insolvency Proceedings

27. When it is a creditor who has filed a request for commencement of Compulsory Insolvency Proceedings, the exercise of the Debtor’s management of its business, as well as the disposal of its assets, will be suspended and substituted by the Insolvency Administrator or Administrators (Section 40.2 of the SIA)7.

3. The Insolvency Administrators

28. In relation to the above, it is important to point out that once the Insolvency Proceedings have commenced, the Commercial Court will have to appoint one Administrator8, both in Compulsory and Voluntary Insolvency Proceedings. However, in Compulsory Insolvency Proceedings, as explained above, the exercise of the Debtor’s management of its business, as well as the disposal of its assets, will be suspended and substituted by the Insolvency Administrator. Thus, the Insolvency Administrator will take over the functions of the Board of Directors.

29. Furthermore, it also needs to be taken into account that in case of Insolvency Proceedings of Special Relevance, a second Insolvency Administrator will be appointed. Basically, Insolvency Administrators will monitor the Company Directors’ management and will have to be consulted for most of the relevant decisions regarding the company’s activity during Insolvency Proceedings (i.e. to commence civil actions, to sell relevant assets other than the ordinary sale of goods of services manufactured or provided by the party under Insolvency Proceedings).

30. The appointment of the Administrators is not left up to the parties involved in Insolvency Proceedings. Instead, the Commercial Courts have exclusive authority to appoint the Administrator or Administrators.

31. As a general rule, the Administrator is selected by the Court amongst those individuals who have expressed their availability to perform the duty of Administrator on the relevant professional association (as set out in Section 27 of the SIA), in particular:

• A lawyer with at least five (5) years of effective professional experience and a Master’s Degree in this particular area; or

• An auditor, economist or mercantile graduate with at least five (5) years of effective professional experience and also specialized in this professional field.

7 Notwithstanding the above, it must be noted that the Court has the authority to establish suspension in the event of

Voluntary Insolvency Proceedings or may ordain the intervention within Compulsory Insolvency Proceedings. The grounds

for choosing between any of them depend on imminent risks and/or on any advantages for the proceedings there may be.

8 This is a remarkable novelty in the amended SIA. Previously, the rule was to appoint three Insolvency Administrators even

though in the cases of abbreviated proceedings there was just one (1) Insolvency Administrator.

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Candidates should be selected from lists of professionals submitted by the relevant professional associations to the Courts on a yearly basis.

However, special rules are established to meet the special requirements of Insolvency Proceedings of (i) entities that issue negotiable instruments traded in the stock market and; (ii) financial or insurance entities, taking into account that in both cases these entities are under the supervision of the Public Agencies. In such cases, the respective Public Agency proposes candidates and the Judge accepts one of them.

Finally, Section 28 of the SIA sets forth a series of limitations to the appointment of the Insolvency Administration.

32. After the appointment, Insolvency Administrators must perform their duties with due diligence and the obligation to act as loyal representatives of the insolvent company.

Section 36 SIA provides for joint liability of Insolvency Administrators and Delegate Assistants towards the Insolvent and the Creditors for damages and losses caused to the estate by acts or omissions which are unlawful or conducted without the necessary due diligence. Nonetheless, Delegate Assistants may be exempted from such liability provided that they acted with sufficient due diligence to prevent or avoid the detriment.

These actions, carried out in the interest of the estate, must be substantiated before the Court handling Insolvency Proceedings. Moreover, such actions expire after four years (i) from the claimant having knowledge of the damage or loss the claim concerns and; (ii) in all cases commencing when Insolvency Administrators or Delegate Assistants have ceased to hold office.

If the Ruling rendered contains an order awarding compensation for losses and damages, the creditor exercising the action, in the interest of the estate, will be entitled to reimbursement of the necessary expenses borne against the sum received.

Furthermore, and irrespective of bringing “actions in the interest of the estate”, creditors or third parties are also entitled to bring liability actions for acts or omissions of the Debtor that damage them directly, known under Spanish legislation as “individual actions”.

33. In addition, it must be noted that:

• Both the Debtor and Insolvency Administrators have very limited powers to sell assets during the Insolvency Proceedings, especially during the Common Phase, thus generally requiring the Court’s approval within the special procedural plea set forth in Section 43 SIA.

• In general terms, the powers and authorities of the Insolvency Administrators will be tailored and supervised by the Court. Thus, the more relevant decisions are to be validated by the Court and/or can be challenged before the Court.

34. Finally, it must be pointed out that the Insolvency Administrators also draft three reports that highly influence the course of the Insolvency Proceedings:

• Firstly, the Insolvency Administrators’ Interim Report, which must be submitted to the Court within the first two months (extendable) of assuming this position. In that report, the Insolvency Administrators will provide the creditors with a general financial view of the Debtor through both its assets and liabilities. The liabilities are listed in the Interim Creditors List with the credits that have been communicated and then approved by the Insolvency Administrators, along with any other credits that they


must include because they result from the Debtor´s accounting records. The assets are reported in the Interim Inventory. Both the Interim Creditors List and the Interim Inventory are subject to challenges by, respectively, a creditor that is not included or not correctly listed (the amount or the classification of its credit is not correct), or a third party that alleges that an asset of its property is incorrectly recorded in that inventory as owned by the Debtor.

• Once all those claims of challenges are decided, the Insolvency Administrators´ Definitive Report will be submitted to the Court, updating the Credits List and the Inventory, providing a general overview of the Debtor´s situation and frequently announcing rescission claims and other relevant civil or criminal actions to be initiated by the Insolvency Administrators. The judicial approval of that Definitive Report means the end of the so-called Common Phase of the Insolvency Proceedings, thus giving rise to the opening of the next phase, to settle the Insolvency Proceedings (by means of a composition of creditors or a winding-up phase to liquidate its assets, see below Section VII).

• Finally, the Insolvency Administrators also draft the Guiltiness Report at the beginning of the special procedural plea to classify the Insolvency as fortuitous or tortious. This report, together with a similar report issued by the Public Prosecutor, establishes the framework of the discussion about that classification. Thus, in the event that both reports recommend a classification as Fortuitous, there are no chances to change that classification. , On the contrary, in case both of them propose a classification as Tortious, the defendants will have to allege against such decision (see below Section VIII).

b. Effects on contracts

35. The Declaration of Insolvency should, in principle, not affect the validity and performance of contracts with reciprocal obligations that are pending fulfillment by both parties. This principle has various legal consequences:

36. Firstly, the SIA provides a very important prohibition —commonly established on foreign jurisdictions— preventing the parties from reaching an agreement setting forth the termination of a contract due to the event of insolvency of either party. This agreement will be considered, as a general rule, null and void in contractual terms. Notwithstanding, Section 63 SIA refers to special legal rules still in force after the SIA was enacted: (i) legal abilities of early termination in some special agreements (i.e. contract of mandate) and (ii) legal provisions granting the validity of performing an early termination agreements in connection with an event of default provided by a given insolvency clause. That is the case of financial collateral arrangements regulated under Royal Decree Law 5/2005.

37. Secondly, even if the declaration opening the Insolvency Proceedings does not in itself affect the validity of contracts with reciprocal obligations pending fulfillment, both by the insolvent Debtor or the other party, it does not mean that the declaration eliminates the power to terminate contracts alleging a breach of contract neither with grounds on the general provision in Section 1.124 of the Spanish Civil Code nor grounded on a clause of early termination agreed between the parties (provided that the early termination is not only founded on the insolvency but on a real breach of contract).

However, early termination on grounds of breach of contract within Insolvency Proceedings has important special rules:

• Single performance contracts can only be terminated for breach of contract that has taken place after the Declaration of Insolvency Proceedings.

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• After the Declaration of Insolvency Proceedings, the termination action is brought before the Insolvency Court and will be substantiated as an insolvency procedural plea (thus, a single out-of-court formal notification by the in bonis party based upon a particular agreement or based on Section 1,124 of the Spanish Civil Code will not suffice).

• The Debtor may defend against the remedies on grounds of breach of contract by relying on the general defenses and finally a special one: the allegation of “the interest of the estate”. In other words, the relevance of the contract for the survival of the insolvent company and the payment of the creditors. However, courts very rarely dismiss claims for the termination of contracts with grounds based on this exceptional ability of the court. If the court, considering the interests of the Insolvency Proceedings, resolves to fulfill the contract, the services already due or to be performed by the insolvent debtor will be paid immediately from the estate.

• Once the termination of the contract is resolved, all the obligations pending maturity will be extinguished. With regard to those that have already matured, if the breach by the insolvent debtor was prior to the declaration of Insolvency Proceedings, and the creditor has fulfilled its contractual obligations, Insolvency Proceedings will include its credit among the Creditors List. If the breach were posterior to the Declaration of Insolvency, the complying party’s credit would be considered a credit against the estate and it would therefore receive preferential treatment. In all cases, the credit must include the appropriate compensation for damages and losses. Thus, the time in which the contract was not honoured has relevant consequences both in limiting the possibility of an early termination (single performance contracts can only be terminated for breaches of contract that have taken place after the Declaration of Insolvency) and in the classification of the credits of the non-insolvent party to the contract.

• The Insolvency Administrator, through its own initiative or by request of the Debtor, may (i) reinstate the loan contracts and other financial agreements early terminated by the party in bonis due to failure to pay the principal or the interest accrued, provided that the breach of contract has taken place within the three (3) months preceding the Declaration of Insolvency; and (ii) reinstate the contracts to acquire moveable or immoveable goods for a consideration or via payment in installments whose rescission has occurred in the three (3) months preceding the Declaration of Insolvency.

38. Finally, the Debtor or the Insolvency Administrator, the first one in the case of voluntary proceedings and the second one in the case of compulsory proceedings, are vested with the authority to request the setting aside of a a contract (rescission) if they deemed it convenient to the interests of the estate (the general interest of the creditors within the Insolvency Proceedings). The Court will then hold a first hearing just to mediate between the parties so as to reach a settlement about the termination of the contract and its economical consequences. In the event the parties do not reach an agreement, it is up to the competent court to agree to the rescission (if the court finds that the early termination is indeed in favour of the general interest of the creditors) and to establish the consequences: awarding the in bonis party forced to prematurely terminate the contract not only with the restitution for all of its property but also with compensation for damages, to be drawn from the estate.

39. Finally, it is useful to recapitulate the special rules regarding contracts of continual performance which the SIA contains:

i. The in bonis party who has complied with its obligations may terminate a contract with the insolvent Debtor by alleging breach of contract, even if that breach was previous to the Declaration of Insolvency.


ii. According to most of the judicial precedents and authors, credits born from a contractual breach that took place before the Declaration of Insolvency will be included in the Creditors List, and those credits born from later contractual breach will be drawn from the estate.

c. Effects on Credits and Interests

1. Integration of all credits. Creditor´s burden of communication. Exception

40. Once the Insolvency Proceedings are opened, all the Debtor’s creditors, whether ordinary or not, regardless of their nationality and domicile, are legally integrated into the aggregate liabilities of the Insolvency Proceedings, with no exceptions other than those set forth by the SIA.

41. It can be said in general terms that creditors have the burden to communicate their credits to the Insolvency Administrator at the very beginning of the proceedings, in order not to definitively lose those credits. For that purpose, creditors are granted with the term of one month to file their respective claim or writ of communication of credit from the day after the publication of the Declaration of Insolvency on the Spanish State Official Gazette. Foreign creditors should receive a notification in their registered address informing them of the Declaration of Insolvency. Nevertheless, as far as the one-month term to file the communication of credits is concerned, the relevant date is still the date on which the Insolvency Proceedings are published in the Spanish State Official Gazette.

42. However, that burden has exceptions under the provisions of amended Section 86.2 of the SIA, according to which the Creditors List must include the claims that have been recognized by an arbitral award or judicial ruling, even if they are not final, as well as those that have been registered in documents with executive force, those recognized by administrative certification, those secured with an in rem security entered at a public register, and the claims of employees whose existence and amount are recorded in the books and documents of the Debtor, or that are evinced in Insolvency Proceedings for any other reason (but some of these claims may be nevertheless challenged by the Insolvency Administrators as provided for in the mentioned Section 86.2 of the SIA). Thus, the creditors that are ready to evidence the existence of their credits with one of those documents will not definitively lose their credits, even if they have not been communicated complying with the following rules.

2. Formalities and deadline to communicate credits.

43. The writ should state the name, address and other identifying data of the creditor, as well as those related to the claim, its reason, amount, dates of acquisition and maturity, characteristics and classification intended.

44. The Act 38/2011 introduced important novelties to simplify this process. Creditors must now lodge their writs directly before the Insolvency Administrators and they can do it even via e-mail.

45. However, it remains our recommendation to do it in writing, enclosing as many original attached documents as possible, in order to defeat in advance any possible opposition from the Insolvency Administrator and to reliably evidence the date of reception.

46. Additionally, it is our view that in economically relevant cases, although it is not compulsory either, in parallel to the lodging of the writ before the Insolvency Administrator, the option of appearing before the Court as an interested party still exists, and it entails the advantage of having access to the whole file of Insolvency Proceedings, thus being duly informed of any developments in those proceedings.

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47. Deadline for the communication of credits is set at a one (1)month term or, in some cases, a fifteen (15) day term will be granted to all creditors to lodge their credits, starting from the day after the publication of the Declaration of Insolvency at the Spanish State Official Gazette (see section V above). A late communication of credits will generally mean a subordination of the credit with the abovementioned exceptions.

3. Classification of credits

48. The SIA, taking into consideration the principle of par conditio creditorum —which defends the equal treatment of all creditors—, establishes a ranking of credits paramount to creditors since it will provide them with higher or lower expectations of recovering the whole amount of their claims. Those credits are fully integrated in the Insolvency Proceedings, thus called “within-the-proceedings” (concursales) and they are to be paid with the estate in an orderly liquidation of such estate and to be paid in their legal order.

49. However, some credits will be drawn directly and immediately from the estate (créditos contra la masa) and thus are not fully integrated in the Insolvency Proceedings, as they are super senior (except from those specially privileged credits that will seize their security exclusively, as a rule).

50. The classification9, or legal10 order or seniority of payment of the within-the-proceedings credits set forth in the SIA is as follows:

i. Privileged credits: Junior to “the credits against the estate” but senior to any other credits that can be either Specially Privileged or Ordinary Privileged:

a. Special ly privi leged credits: Their privilege is absolute —even to the “credits against the estate”— but only cover the value of the security:

i. Credits secured with a mortgage, or lien on mortgaged or pledged assets based on registry instead of possession (privilege of seizure of the secured registered asset).

ii. Credits secured with antichresis (privilege of seizure of the secured fruits).

iii. Refactionary credits including those of employees (privilege on objects manufactured by them while those assets stay in property or in possession of the Debtor).

iv. Credits for financial leasing quotas or installment purchase of moveable or immoveable assets, in favour of the lessors or sellers and, when appropriate, the financers (privilege on assets leased with reservation of title, with prohibition on disposal or with a termination condition in the event of failure to pay).

v. Credits guaranteed by securities represented by book entries (privilege of seizure of the securities).

9 Please note that the Sections referring to the Classification of Credits have been profoundly amended by the 38/2011

amending the SIA.

10 The agreements of subordination are valid, but not the agreements of privilege that are not effective against other creditors

within the Insolvency Proceedings.


vi. Credits secured by notarial pledge, based on possession instead of registry (privilege on assets as long as their possession remains). In case of pledge over credits, the possession is replaced by notarized documents with reliable date of issuance. However, registry is also advisable for these pledges over credits according to the special rules of pledge of future credits, particularly because of the discussions raised by Act 38/2011 amending the SIA.

b. Ordinary privileged credits: Their privilege is just a general preference. They are to be paid after the credits against the estate but before any ordinary credit:

i. Salaries and compensations for early termination of labour contracts that are not recognized as especially privileged up to a special protected amount.

ii. The relevant amounts for tax and Social Security withholdings owed by the insolvent Debtor in fulfillment of a legal obligation.

iii. Claims for freelance work and those due to the author itself for the vesting of exploitation rights of works protected by copyright, accrued during the six months prior to insolvency being declared open.

iv. Tax claims and Social Security claims not specially privileged and only up to half their amount.

v. Compensation for damages and compensations to the revenue from white-collar offences.

vi. Fresh money from Refinancing Agreements under the provisions of Section 71.6 SIA, for the 50% not to be paid as credit against the estate.

vii. The claims held by the creditor who has applied for the insolvency to be declared and which are not subordinated, up to half their amount.

ii. Subordinated Credits: among others:

a. Claims that, not having been duly communicated by the creditor, are included lately in the list of creditors by the Insolvency Administrators or by the Court on settling a challenge of that list; except for that above-mentioned credits that will be automatically integrated in the Creditors List, even though lately communicated, under the provisions of amended Section 86.2 of the SIA.

b. Claims that, under a contractual arrangement, are subordinated in nature with regard to all the other claims filed against the Debtor.

c. Interest claims of any kind, including those interests or any other form of extra charges for late payment, except for those claims with a security in rem, up to the sum of their respective guarantee.

d. Claims for fines and other monetary penalties.

e. Claims held by any of the persons especially related to the Debtor (i.e. directors or shareholders, companies of the same group as the Debtor, etc.).

f. Claims arising from a rescinded agreement when it has been declared that the creditor has acted in bad faith (see VI f below).

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g. Claims arising from the contracts with reciprocal obligations, which the creditor has repeatedly hindered fulfillment of the contract to the detriment of the general interest of the creditors.

According to the provisions of Section 89.3 of the SIA, all other claims not classified as privileged or subordinated will be understood to be classified as ordinary claims, being thus payable after credits against the estate, after general privileged credits, before any subordinated credits and at the same time of the specially privileged credits over the part not covered by the in rem security.

iii. Credits against the estate (Créditos contra la masa) are super senior (except to the specially privileged credits that, as a general rule, will exclusively seize their security exclusively).

Only creditors within the specific cases listed in Section 84.2 SIA are entitled to those credits. The cases are summarized as follows:

1. Wages for the last thirty days prior to commencement of Insolvency Proceedings in an amount not exceeding double of the minimum interprofessional salary.

2. Judicial costs and expenses.

3. Costs of maintenance for the Debtor and of persons to be maintained ex lege.

4. Costs generated by the exercise of the professional or business activity of the Debtor after the Insolvency Proceedings are declared open.

5. Costs arising from services provided by the insolvent Debtor under reciprocal contracts and obligations pending fulfillment that remain in force after Insolvency Proceedings are declared open.

6. Costs deriving from payment of claims with special preference, rehabilitation of contracts or stoppage of eviction.

7. Costs corresponding to insolvency revocations of acts performed by the Debtor.

8. Costs arising from obligations validly contracted by the insolvency administrators during the proceedings, or with their authorization or approval, by the insolvent Debtor subject to intervention.

9. Costs arising from legal obligations or liability of the insolvent Debtor between commencement of Insolvency Proceedings and effectiveness of the composition or their conclusion.

10. Any other claims pursuant to the SIA.

Those listed cases are essentially credits arising as a result of the Insolvency Proceedings or for the sake of the continuity of the Debtor´s activity. Hence, they are strongly protected to favour the continuity of the economical activity of the insolvent, in interest of all creditors.

In particular, regarding continuing contracts, and according to most of the precedents and authors, the contractual features born before the Declaration of Insolvency will be contained in the List of Creditors and those that arise after the Declaration of Insolvency will be drawn from the estate. This applies in both cases


if the contract is legitimately terminated and if it is still binding. However, this joint interpretation of Articles 61, 62 and 84 of the SIA is not uncontested, and certain scholars or isolated judicial precedents consider that the in bonis party should be paid directly from the estate for the whole accrued debt when a continuing contract is terminated with grounds based on a contractual breach subsequent to the Declaration of Insolvency.

The court hearing the Insolvency Proceedings will have exclusive jurisdiction to hear any claim regarding those super senior credits or even their enforcement. That enforcement is lawful after the first year of Insolvency Proceedings or an earlier opening of the winding-up phase or composition of creditors. In some cases, the insolvency administrator is entitled to alter the normal seniority of the credits against the estate (based on their maturity date).

iv. Credits of special treatment: Section 87 SIA sets forth some particular regulations of credits regarding recognition of claims. Hence, Section 87 SIA provides regulation for (i) conditional credits, such as the ones containing a clause of denunciation; (ii) contingent credits, such as those with a condition precedent or which amount is to be determined by means of administrative decision or judicial proceedings and; (iii) special cases of guarantees where the insolvent is the guarantor or the guarantee.

4. List of credits by the Insolvency Administrator. Its challenge

51. Once the Insolvency Administrators have received all the creditors’ claims or writs of communication of credit and have gathered the Debtor´s relevant documentation, they will elaborate a Provisional Creditors List according to Section 94 SIA.

52. However, any creditor who disagrees with the classification or amount of the credit acknowledged by the Insolvency Administrator can challenge this decision within the ten (10) day term provisioned on Section 96 SIA. Another novelty introduced by the amendment of the SIA is that an extraordinary chance of claim is made available for certain creditors who were not able to file the writ of communication of credit before the drafting of the Provisional Creditors List. Other extraordinary amendments of the Provisional Creditors List in the Definitive Creditors List are also provisioned on the newly introduced Section 97 bis SIA. Notwithstanding those extraordinary amendments of the Provisional Creditors List, the Definitive List is normally the Provisional list with the corrections awarded by the Commercial Court to the challenges presented by creditors.

5. Other effects: compensation, accrual of interests, etc.

53. Once the Insolvency Administrators have received all the creditors’ claims or writs of communication of credit and they have gathered the Debtor´s relevant documentation, they will elaborate an Interim Creditors List (see section VI a above).

54. The SIA establishes a general prohibition of the compensation of credits and debts of the insolvent, exceptionally accepting it in those cases where the requirements for the compensation have been satisfied before the Declaration of Insolvency. However, Royal Legislative Decree 05/2005 sets forth a special system for financial entities.

Any dispute arising from the compensation will be heard by the Insolvency Court in a special procedural plea.

55. Regarding interests, the commencement of Insolvency Proceedings will entail that accrual of legal or contractually agreed interests will be suspended, except for those linked to

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obligations guaranteed with securities in rem. In respect to secured obligations, interests will carry on accruing up to the maximum amount set forth in the deed of security.

56. In the case of salary claims, the suspension of accrual of interests will not operate.

57. Other important effects of the declaration of insolvency over credits are:

• Creditors lose any retaining or possessory lien (Derecho de retención) over the property of the Debtor.

• The interruption of the limitation period of any claim of credit against the Debtor, but not of the actions against its guarantors, as well as of any claim against directors and, in general, of the actions suspended during the Insolvency Proceedings.

d. Effects on Enforcement Proceedings and Enforcement of Securities in rem

58. One of the most important changes addressed by the SIA is the special treatment given to enforcement proceedings and enforcement of securities in rem. The inherent nature of the in rem security is respected but some restrictions are imposed on the creditor to ensure that the separate enforcement of the lien neither disturbs the proper course of Insolvency Proceedings nor prevents it from solutions that may be convenient to the interests of the Debtor and of the aggregate liabilities.

59. In general, once Insolvency Proceedings start, no judicial or out-of-Court civil enforcement against the Debtor may be initiated and any action in process shall be suspended from the date of the Declaration of Insolvency. Public creditors (i.e. State, Inland Revenue, etc.) have a more favourable treatment. Furthermore, the Insolvency Administrator has active legal standing to claim in the Insolvency Court for the removal of any seizure of assets of the Debtor, as a consequence of pending enforcement proceedings, in the interest of the Insolvency Proceedings. The Court will hear also the aggrieved creditor.

60. As to securities in rem (in general, mortgages or pledges over goods, rights or receivables), once proceedings have commenced, secured creditors:

• Will not be entitled to foreclose or forcibly release the guarantee until a composition of creditors is reached (the content of which does not affect the exercise of the enforcement) or until one year elapses from the date of commencement of proceedings.

• Will also have their enforcement proceedings suspended until the composition of credits is agreed or one year has elapsed from the Declaration of Insolvency.

Unless (1) those creditors obtain a declaration stating that the mortgage or asset pledged is completely irrelevant to the commercial activity of the Debtor from the Insolvency Court; or (2) it is evidenced that the Insolvent is the owner but not the Debtor of the mortgage or another secured credit; then the foreclosure or enforcement should be independent from the Insolvency Proceedings.

In the first case and, in general, when a foreclosure or enforcement is initiated within an Insolvency Proceedings before the opening of the winding-up phase, these proceedings will be followed according to the general provisions for those enforcements set forth in the Civil Procedural Act and they will be heard by the Insolvency Court.

Once the winding-up phase is opened, on-going foreclosures and other enforcements over pledges can continue but not be commenced. That means that the mortgage over pledged


assets will be liquidated under the normal regulations of that winding-up phase. However, the secured creditor will maintain its privilege over the value of the security as has already been analyzed.

e. Effects on Legal Actions/Proceedings

61. The commencement of Insolvency Proceedings will inevitably have effects on legal actions and proceedings commenced in other jurisdictions such as civil, contentious-administrative or employment, as well as on arbitration proceedings. The following effects will occur:

62. Applications corresponding to Civil and Employment Courts will be instead heard by the Commercial Court pursuant to the provisions established in this Act. In case such applications are lodged before Civil and Employment Courts, these must abstain from hearing them, warning the parties to avail themselves of their right before the Insolvency Court. Any proceedings should be set aside; otherwise, they will be null and void.

63. Additionally, actions of joint liability against directors must be, pursuant to the amended SIA, stayed during the handling of the proceedings (see above Section VIII), as happens with direct claims of subcontractors against the commissioner of a turnkey agreement (avoiding the filing of a claim against the Insolvent as the contractor to that commissioner) according to the provisions of Section 1,597 of the Spanish Civil Code. Other liability against directors will have limited legal standing for the Insolvency Administrators (see above Section VIII).

64. Courts of law for the contentious-administrative, employment or criminal jurisdictions before which actions that may be of a great significance to the assets of the Debtor are brought after the Declaration of Insolvency will summon the Insolvency Administrators and admit them as a party to defend the estate, if they deem it appropriate to appear.

65. Any declaratory proceedings in process at the moment of commencing the Insolvency Proceedings in which the Debtor is a party, will continue to be heard by the same court, which is a different court from the Insolvency Court, until the ruling is final, with the exception of the existing claims against the Insolvent Directors that will be joined to the Insolvency Proceedings.

66. On-going arbitration proceedings at the moment of declaring the Insolvency Proceedings open will continue until a final award is rendered.

67. All the rulings and arbitral awards rendered by any court, different from the Insolvency Court will be binding to the Insolvency Court.

68. In the event of the suspension of the Debtor’s powers of management and disposal, the Insolvency Administrators, within the scope of their powers, will substitute it in the ongoing judicial proceedings, to which end they will be granted, once they have appeared, a term of five (5) days to study the proceedings, although they will need the authorization of the insolvency Court to waive the lawsuit either fully or partially, or reach a compromise. Additionally, the Insolvency Administrators will also substitute the Debtor in the new judicial proceedings, thus holding the active legal standing for any claim in the name of the Debtor and in the general interest of the creditors. Any creditor may request this exercise of actions by the Insolvency Administrators and, if there is not a positive response within the following two months, they may exercise the action by themselves in the general interest of the creditors, but at their expense.

69. However, in the event of intervention, the Debtor will preserve the capacity to act in trial, although it will require authorization by the Insolvency Administrators to fully or

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partially waive a lawsuit or agree on a transaction within the proceedings when the subject-matter of litigation may affect its estate;

f. Effects of Rescission in Insolvency

70. Section 71 of the SIA is of paramount importance since it introduces the possibility of rescinding certain acts carried out by the Debtor during the two (2) year period preceding the Declaration of Insolvency, on the grounds that those acts are prejudicial to the insolvent estate and regardless whether those acts had been performed with the aim of deceiving the interests of the creditors or not. Within the Insolvency Proceedings, the Debtor´s acts or agreements that are considered to be detrimental to the estate and that have been carried out during the two (2) years preceding the Declaration of Insolvency, will be rescinded even in the absence of fraudulent intention.

71. The provisions of Section 71 of the SIA are, in particular, aimed at: (i) ensuring that the insolvent’s estate is not reduced to the detriment of its creditors; and (ii) safeguarding the par conditio creditorum in Insolvency Proceedings.

72. It is absolutely assumed, iuris et de iure, that the damage to the estate has been caused by the Debtor in the event of actions of disposal without consideration (except for usual liberalities), and payments or other actions aimed at discharging obligations with an original date of maturity subsequent to the date of the Declaration of Insolvency, except in the case of a secured credit, as we will immediately see.

Furthermore, detriment is presumed but it can be rebutted in the event of (i) disposal actions carried out in favour of a party related to the insolvent party; (ii) the creation of securities in rem in favour of pre-existing obligations or new obligations replacing the obligations previously existing; and (iii) payment to a secured creditor (with pledge, mortgage, etc.) before the maturity date.

Finally, in the case of actions not included in any of the above two categories, the detriment must be evidenced by the person bringing the action of rescission.

However, the SIA sets forth some ironclad payments and agreements that in no way will be rescinded: (a) ordinary acts and contacts, usual in the particular market and under normal market conditions; (b) compensations and payments under the provisions of special regulations of securities and finance (i.e. Royal Legislative Decree 05/2005.); (c) securities to guarantee public credits; and (d) ironclad Refinancing Agreements when they meet the above mentioned requirements.

73. The claim of rescission is heard in a special procedural plea. In case the discussed matter is a Refinancing Agreement, only the Insolvency Administrator has legal active standing, not any creditor.

74. The effects of rescission under Section 73 of the SIA are the following: (i) the ineffectiveness of the act; and (ii) the restitution of the goods or services provided by the parties involved in the act that is rescinded, plus interests and other benefits, if any.

If the rescission is declared but the Debtor can no longer return the goods or services received to the creditor, the creditor will receive, as a rule, monetary compensation drawn from the estate. At the same time, the creditor will return what it received from the debtor.

Notwithstanding the above, if the court declares the creditor has acted in bad faith, it will receive that monetary compensation within the Insolvency Proceedings and as subordinated credit.


The special claim of rescission under the provisions of Sections 71-73 SIA does not deprive creditors of all ordinary remedies against fraud.

VII. TerminationoftheCommonPhase:CompositionofCreditors,Winding-up,orDeclarationofInsufficientEstate

75. Insolvency Proceedings will unavoidably end in one of the following ways: either the Debtor reaches a composition with its creditors, it is wound-up, the insolvency is terminated due to insufficient estate or the creditors are fully paid by the Debtor or a third party.

a. Composition of Creditors

76. In the course of Insolvency Proceedings, it is the will of the legislator that the Creditors must attempt to reach an Agreement with the Debtor by means of a “Composition of Creditors”. Hence, reaching such agreement will ensure that the Debtor will be able to carry out its business without an eventual winding-up.

77. The SIA establishes two types of Compositions to be reached.

78. Firstly, it provides the possibility of submitting an Early Composition Proposal (ECP). ECPs are to be filed by the Debtor that has not applied for winding-up, between the time period of the request for Insolvency Proceedings and the deadline for communication of claims. Secondly, an Ordinary Composition of Creditors may be reached. In case that the Common Phase ended without the Debtor´s application for the Winding-up Phase, the court will call a Creditor’s Meeting to try to reach a composition so as to avoid the winding-up. Both the Debtor and Creditors (representing at least 1/5 of liabilities) are entitled to submit proposals of ordinary composition of credits to be discussed in that meeting.

79. Early and ordinary compositions of credits have a different procedure to be voted on and then judicially approved. In every case, the Insolvency Administration must evaluate the Proposal and the Court will then approve the Composition of Creditors.

80. In the case of an ECP, once it has been evaluated, if no opposition has been made to such proposal and if the majority of creditors have adhered (in writing) to it and no alternatives have been submitted to the Court, the Court will have the authority to approve the proposal and it will be effective immediately, without the need to call for a Creditors’ Meeting (Junta de Acreedores).

81. On the other hand, in case of an Ordinary Composition of Creditors, Creditor’s Meeting will be called in order to oppose or adhere to it. Nonetheless, in those cases where the number of Creditors is above 300, written adhesions may be filed to the Creditor’s Meeting, thus exempting Creditors from attending to it.

82. In order for the meeting to accept a proposal of composition, favourable voting of at least half the ordinary creditors is required. Please note that subordinated creditors do not have voting rights11. Privileged creditors only vote regarding their credits because the composition of credits does not affect them, but they could waive their security (and therefore, their privilege of credit) and then vote as an ordinary creditor.

11 As it happens with the creditors that had acquired their credits after the Declaration of Insolvency.

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83. However, when the proposal is (i) to postpone the payment of the ordinary credits up to three years, or (ii) to reduce the credits by up to twenty per cent (and with immediate payment), it will suffice to have more votes (regarding the amount of the credits) in favour of the proposal than against it.

84. In cases of written proceedings, the creditors who oppose these proposals must, when appropriate, formulate their negative vote following the procedure established for positive adhesions pursuant to Section 103 of the SIA and within the deadlines provided in Sections 108 and 115 bis of the SIA.

b. Winding-up

85. The winding-up phase, or the winding-up alternative, may be triggered either by: (i) the Debtor, voluntarily, as is the case here; (ii) by the creditors if a Composition of Creditors is not reached; or (iii) by the court if no proposal of Composition of Creditors has been submitted, if none of the proposals has been accepted, or if the Composition of Creditors is declared null or in breach by a court resolution.

86. There are two main novelties introduced by the last amendments of the SIA regarding the opening of the winding-up phase within the Insolvency Proceedings. Unfortunately, the connection between them is unclear at this stage: The amended Section 142.1 of the SIA entitled “Opening the winding-up at the request of the Debtor or creditor or the Insolvency Administrators” establishes that the Debtor may petition for winding-up at any time and that within the next ten (10) days the Court must issue a Court Order opening the winding-up phase.

87. However, a new paragraph has been introduced in Section 96 of the SIA stating an exception to the rule pursuant to which the common phase must be ended before the opening of the Composition of Creditors/Winding-up phase proceedings. When the challenges affect less than 20% of the inventory and the Creditors List, the Court may put an end to the common phase of the Insolvency Proceedings.

88. Therefore, there are doubts as to how these two articles are to be interpreted with regards to the other. A literal interpretation of Section 142.1 of the SIA seems to state that in cases where the Debtor files for Insolvency and it requests, at the same time, the winding-up, the winding-up phase would immediately start, without waiting for the Debtor’s assets and debt to be determined. It is unclear whether this article should be read separately or together with Section 96 of the SIA, which states that winding-up may not begin until the term to lodge incidental writs has expired, and only if those writs lodged affect less than 20% of the inventory and the Creditors List. A possible hypothesis is that the Court may order the commencement of the winding-up phase only with regards to the liquidation of assets, without paying the creditors until the list and order of priority have been determined.

89. Once the winding-up has been decided, the Insolvency Administrators will present a liquidation plan to dispose of all the properties, goods and rights comprised in the Debtor’s estate, which will be presented to the Debtor and the employees’ representative, if any, for review and proposal of amendments, if they deem it appropriate.

90. The aim of the SIA in the winding-up phase is to try to dispose of all the Debtor’s assets as a whole, unless it is in the insolvency’s interest to act otherwise. In any event, the assets are disposed of following the general Rules of Civil Procedure, i.e. they are disposed of in public auctions and with the prohibition to the Insolvency Administrators to acquire any of the Debtors’ assets.


91. The opening of the Winding-up phase has a number of consequences:

• The powers of management and disposal of its estate will be immediately suspended and conferred to the Insolvency Administrators.

• It gives rise to the early maturity of all credits within the Insolvency Proceedings and it will turn the pending services into money, delivery of goods, or any contractual obligation of the Debtor.

92. Insolvency Proceedings, in the case of winding-up, end when the assets have been disposed of, creditors have been satisfied in accordance with their credit rankings and the principle of par conditio creditorum and the winding-up of the Debtor have been recorded at the Commercial Registry.

c. Termination Due to Insufficient Estate

93. The amendment to the SIA has brought about a new way to end the Insolvency Proceedings when there is insufficient estate. This case is similar to a winding-up but the proceedings are terminated at the very beginning, without waiting for more assets to show up in the course of the Insolvency Proceedings, nor putting forward a plan for the winding-up. Basically, credits against the estate are paid with the available assets following the special order of priority which is different from the general rule established in the SIA (see Section VI c above).

d. General payment of creditors

94. In exceptional cases, where there is no need of a composition of creditors or a winding-up, due to an out-of-court agreement or to the intervention of a third party (i.e. a parent company avoiding any possible liability of itself or of its directors), the Debtor is able to fully pay all its debts or to obtain a general renouncing of its creditors. In such cases, Insolvency Proceedings are ended by means of a judicial decision under the provisions of Section 176 of the SIA.

VIII. Liability of the Company´s Directors

95. Pending the Insolvency Proceedings, the possibility to undertake legal actions against its Directors is subject to a specific regulation. These actions may be brought forward within the framework of Insolvency Proceedings or as a separate civil action. After the SIA’s amendment, the following hypothesis of liability can be considered:

a. Classification of the Insolvency as Tortious

96. The opening of the winding-up phase or the termination of Insolvency Proceedings with a composition of credits involving discharge of debts in more than 1/3 or the stay of payments for more than 3 years will give rise, among others things, to the opening of the insolvency classification procedural plea (Sección de Calificación de la Insolvencia).

97 The Court’s judgment will declare the insolvency as fortuitous or tortious.

a. Fortuitous Insolvency

This kind of Insolvency is triggered by the Debtor’s distressed financial situation, which arose in its normal course of business.

b. Tortious Insolvency

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In this case, the insolvency situation has arisen from a malicious intent or grave negligence of the Debtor’s management, which has subsequently aggravated its financial situation. With regard to this matter, the SIA provides (i) a general rule according to which certain circumstances, if evinced, determine the classification of the Insolvency Proceedings as tortious and (ii) a series of presumptions of the insolvency being tortious, some of them iuris et de iure or absolute and others iuris tantum hence, rebuttable. This is examined below:

i. General Rule: The insolvency will be classified as tortious when the generation or aggravation of the state of insolvency has involved malicious intent or gross negligence by the Debtor or his legal representatives, if it has any, or, in the case of a legal person, its de iure or de facto directors or liquidators.

ii. Presumptions: The SIA lays down certain presumptions on the director’s liability.

In the first set of circumstances, the insolvency is classified as tortious in any case i.e. there will be no need to evidence the facts, when any of the following cases arise:

• When the Debtor legally obliged to keep accounts substantially breaches that obligation, keeps double accounts, or has committed a material irregularity impending adequate comprehension of the subjacent economic or financial situation.

• When the Debtor has committed a severe misrepresentation in any of the documents attached to the petition to declare commencement of Insolvency Proceedings or in those documents submitted during such proceedings, or when it has attached or submitted false documents.

• When opening the winding-up has been resolved by a Court acting on its own motion due to breach of the composition for causes due to the insolvent Debtor.

• When the Debtor has embezzled all or part of its assets to the detriment of its creditors, or it has performed any act that delays, hinders, or prevents the effectiveness of a seizure of any kind of enforcement commenced or whose commencement is foreseeable.

• When, during two (2) years prior to the date that the Declaration of Insolvency has been declared open, properties, goods or rights have been fraudulently detracted from the Debtor’s estate.

• When before the date on which Insolvency Proceedings are declared open, any legal act aimed at simulating a fictitious state of assets has been performed.

Furthermore, the existence of malicious intent or gross negligence will be presumed, in the absence of evidence to the contrary, when the Debtor, or if appropriate, its legal representatives, directors, or liquidators:

• Has breached the duty to petition for a declaration opening Insolvency Proceedings.

• Has breached the duty to collaborate with the court in charge of Insolvency Proceedings and the Insolvency Administrators have not provided them with the necessary or convenient information for the interests of Insolvency


Proceedings, or they have not attended the creditors’ meeting, personally or by means of proxy.

• Or, if the Debtor who is legally bound to keep the accounts has not formulated the annual accounts, has not submitted them to audit when being bound to do so, or, once approved, it has not deposited them at the Commercial Registry in any of the three (3) business years preceding insolvency being declared.

98. The following persons (individuals and/or legal entities) may be held liable, under the SIA, for the insolvency or its aggravation:

• Debtor.

• Officially appointed directors12, liquidators and legal representatives of the legal person whose insolvency is classified as tortious, and those who have acted as such during the two (2) years prior to the date of declaring the insolvency.

• De facto directors: a person who discharges the functions of a director without doing so by virtue of a formal appointment will be considered to be de facto director and has acted as such during the two (2) years prior to the date of declaring the insolvency.

Additionally, those persons who, with malicious intent or gross negligence, have aided the Debtor, or its general proxies, or its directors or liquidators, both de iure and de facto, in the performance of any act that has led to the insolvency being considered as tortious will be deemed accomplices of that tortious insolvency.

99. The Ruling of the Court will declare the insolvency as fortuitous or tortious. In the latter case, the court will state the cause or causes on which the classification is based. This ruling classifying the insolvency as tortious must also contain the following pronouncements:

• Establishment of the persons affected by the classification, as well as, when appropriate, those people who are declared accomplices. If any of the persons affected was acting as a de facto director or liquidator of the Debtor when a company and not and individual, the ruling must reason the attribution of that condition.

• Barring of persons affected by a classification to administer third-party’s goods for a period ranging from two (2) to fifteen (15) years, as well as to represent or manage any person during that same period, in all cases according to the severity of the facts and the scope of the damage.

• The loss of any right that the persons affected by the classification or declared accomplices may have as insolvency creditors or against the aggregate assets and the order to return the properties, goods or rights they may have unduly obtained from the Debtor’s estate, or that they may have received from the aggregate assets, as well as to indemnify for the damages and losses caused.

100. When the Classification Section has been formed or reopened as a consequence of the opening of the winding-up phase, the ruling may also condemn the de iure or de facto

12 In accordance with the case-law of the Barcelona Commercial Courts, where the managing body is a collective body (Board

of Directors), each of the members will be liable for their own acts and it will be necessary to prove the malicious intent or

gross negligence of each of the members.

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13 According to provision 238 of the CEA.

14 According to provision 241 of CEA “actions for indemnity that may be incumbent upon partners or third parties for directors’

action that is directly detrimental to their interests shall be excepted”.

15 Section 367. Joint liability of the directors:

1. Directors who fail to convene the mandatory general meeting within two months to adopt the decision on winding up,

as appropriate, shall answer jointly and severally for corporate obligations incurred after the legal cause for winding-up

is forthcoming. Directors who fail to apply for a Court ruling to wind up the company or, as appropriate, to institute

Insolvency Proceedings within two months of the date scheduled for the meeting, when it was not held, or from the day

of the meeting, when the winding-up proposal was defeated, shall be equally liable.

2. In such cases, corporate obligations constituting the object of claims shall be regarded to be subsequent to the legal cause

for winding up the company unless the directors can substantiate that they are dated prior thereto.

directors or liquidators of the legal person whose insolvency is classified as tortious, and those who have acted as such during the two (2) years prior to the date of declaring the insolvency to pay the insolvency creditors the full or partial amount of their claims that they did not receive from the liquidation of the aggregate assets.

b. Collective action

101. Apart from the specific procedural plea to classify the Insolvency as Fortuitous or Tortious, the general collective action with grounds on the Spanish Capital Enterprises Act (hereinafter, the "CEA")13 may be initiated against the company’s directors. However, as set forth in Section 47 during Insolvency Proceedings, this action may be only carried out by the Insolvency Administrators.

c. Liability on the company´s directors: individual action

102. An “individual directors´ liability action” can usually be carried out by the members of the company but also, by third parties who have experienced damages as a result of the mentioned negligence. The compensation obtained will not be added to the assets of the company but it will be directly paid to compensate the damages suffered by the affected individual14. However, the recently amended law is unclear on this matter and scholars discuss if this action, under the amended provisions, may still be carried out independently from Insolvency Proceedings (and thus be brought before a different Court).

d. Directors’ Joint Liability for Any Debts incurred After Breaching the Obligation to Dissolve the Company

103. The CEA establishes that Directors must call a mandatory general meeting within two months from the date on which they realize that the company is insolvent15. Unfortunately, actions of joint liability against directors must be, pursuant to the modified SIA, stayed during the handling of the proceedings. In other words, they cannot be initiated after the Declaration of Insolvency and they will be suspended until termination of Insolvency Proceedings.



Insolvency Stays on Enforcementof Security on Inventory (On the ruling

of Commercial Court No. 6 of Madrid, dated 30 January 2012)

Expedited enforcement and foreclosure is critical to secured creditors seeking recovery of debts, but Spanish insolvency law may impose limitations and restrictions on enforcement proceedings which need to be carefully considered as part of the risk analysis for each transaction. It is however not only the actual legal texts that matter as associated case law is capable of generating uncertainties in apparently clear legal provisions.

This court ruling is a clear example of this.

The case

A creditor is pursuing the enforcement of a mortgage on a real estate asset of the debtor. The corporate purpose of the debtor is the development and construction of houses and the building at stake is the only asset in its balance sheet at that point in time. The debtor had filed for insolvency prior to the completion of the enforcement process.

In order to resume the execution of the mortgage, the secured creditor requests from the commercial court dealing with the insolvency proceedings of the debtor, a declaration that the asset is not attached to the entrepreneurial or economic activity of the debtor and hence not subject to the stays provided for in article 56 of the Spanish Insolvency Act.

Thelawapplicable: Article56oftheSpanishInsolvencyAct

Article 56. Stay on enforcement proceedings of security arrangements and equivalent recovery proceedings

1. Creditors holding security on assets of the insolvent debtor attached to its professional or entrepreneurial activity or to that of one of its production units shall not be allowed to commence enforcement or realization proceedings until a composition of creditors the content of which does not impair such enforcement has been approved or the liquidation phase of the insolvency proceedings have not been opened within one year from the declaration of insolvency.

[…]

2. The enforcement proceedings referred to in the previous paragraph shall be suspended as from the date on which the declaration of insolvency has been recorded in such proceedings, regardless of whether or not the auction of the asset or right has been announced. This suspension shall only be raised and the enforcement resumed upon receipt and recording in the enforcement proceedings of a testimony of the insolvency judge’s order declaring that the assets or rights are neither attached nor necessary for the continuation of the professional or entrepreneurial activity of the debtor.

The court judgement

The judge understands that the reference contained in article 56.1 to assets attached to the professional or entrepreneurial activity of the debtor and hence the scope of the stay on enforcement ought to be construed in light of (i) paragraph 2 of that same article which allows for the resumption of the enforcement proceedings

June 2012

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upon declaration by the judge that such assets are neither attached nor necessary for the continuation of the professional or entrepreneurial activity of the debtor and (ii) article 44.1 of the Spanish Insolvency Law that provides for the continuation of the activity of the debtor notwithstanding the declaration of insolvency.

Commercial Court no. 6 of Madrid accepts the position in this respect maintained by other Commercial Courts and Tribunals of Appeal1 of expanding the scope of the stay to include not only the assets directly devoted to the production and manufacturing processes of the debtor (manufacturing machinery, tools and equipment), but also those goods or assets manufactured or produced by the company. That is to say, those assets held by the debtor with the purpose of being sold in the ordinary course of business (the inventory) which, from an accountancy perspective, in the case of construction companies, are the dwellings built to be sold.

This is however a matter still under debate as other Tribunals of appeal2 have maintained a restrictive approach as to what should be the reach of the enforcement stay, circumscribing its application to security arrangements on assets of the company devoted permanently to providing services or manufacturing goods, and hence excluding inventory precisely on the grounds that inventory is made up of assets which are ultimately destined to be sold3. These judgments clarify that the stay should only affect enforcement proceedings on production means, that is to say, the assets that are required for the production or manufacturing processes.

Other decisions have dealt with this topic in a more subtle way excluding inventory (completed assets to be sold) from the stay but not the raw materials and parts still undergoing the manufacturing or construction process4.

Bearing in mind the discrepancies of Spanish courts and the important implications for creditors in this matter, it shall be for the Spanish Supreme Court to establish what is the ultimate objective and scope of article 56 of the Spanish Insolvency Act, and hence the scope of the stay on enforcement: either (i) the protection of the production means of the debtor only, as implied in the more restrictive court rulings, or (ii) in the more expansive resolutions, the preservation of the capacity to operate in the market, including the means which enable the debtor to generate cash in the ordinary course of business.

1 Resolution of the Provincial Court of Alicante, Section 8, dated 18 December 2009.

2 Resolution of the Provincial Court of Las Palmas, Section 4, dated 12 January 2006 and of the Commercial Court of Barcelona

no. 8, dated 19 July 2011.

3 Therefore the enforcement of security on these assets should not jeopardize the continuation of the activity of the company.

4 Resolution of the Commercial Court of Barcelona no. 8, dated 17 April 2009.



Spanish Loan-to-Own: Capital Increases in Exchange of Debt

September 2012

The main purpose of this note is to briefly explain some of the different procedures by virtue of which a creditor can become a shareholder (controlling or not) of a Spanish company. Leaving aside some more complex strategies, the conversion of debt into equity will generally be effected through a capital increase or through the enforcement of security over the respective shares. Loan to own through enforcement of security is not included in this analysis and will be discussed in a different paper. Obviously creditors will generally not agree to become equity holders as a stand-alone deal (since they would be subordinating their claims) but this is generally a useful tool when used in combination with a further debt restructuring (i.e. some creditors agree to equityse subject to some others agreeing to an amendment of their debt terms).

According to Section 295 of the Spanish Companies Act (“SCA”), the share capital of a company can be increased by issuing new shares or by increasing the par value of the existing ones. In both cases the capital can be increased through monetary or in kind contributions, including the set-off of credits that any creditor may hold against the company. Up until recent times the conversion of debt into equity was made through a capital increase through set-off (i.e. the debt was extinguished by set-off against a certain number of shares in the debtor). For the reasons explained below this process has proven technically difficult in various Spanish restructurings, particularly when – within a syndicated financing - some members wish to equityse and some do not and individual acceleration is not allowed under the terms of the finance documents. The other option that has been used (not without some serious scholarly discussion) has been to increase the capital through contribution in kind, where the asset contributed is the debt against the company itself. In this case the debt is extinguished automatically by confusion (since debtor and creditor would become the same person) but it is not a set-off that is taking place, but rather an actual transfer of the debt of all or part of the creditors to the debtor-company. Below we are including some brief analysis on these and thereafter some of the practical differences between one approach and the other.

1. Capital increase through set-off

The conversion of debt into equity through set-off implies a capital increase with an equal value to the cancellation of a credit that the holder bears against the company. Since the capital increase is envisaged to be made through set-off, the following requirements shall be met under Spanish laws:

i. in the case of Limited Liability Companies (S.L.s), all credits which are being equitysed must be due and payable; and

ii. in the case of Joint-Stock Companies (S.A.s), at least 25% of the credits must be due and payable, and the due date of the remaining must not exceed 5 years.

In addition to the above when the General Shareholders Meeting is called a report from the Board of Directors shall be made available to the shareholders. The report shall include the main characteristics of the credits to be set-off, identity of the creditors, number of shares to be created and other fundamental information. In addition in the case of an S.A., the company’s auditor shall certify that, upon review and examination of the Company’s accounting, the details regarding the credits provided by the Board are accurate and complete.

The majorities and quorums are those generally applicable for modifications of corporate By-laws. In the case of an S.L., a majority vote in favor by more than 50% of the share capital with voting rights is

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required. In the case of an S.A., more than 50% of the share capital with voting rights must be present at first call, in which case the resolution may be adopted by a simple majority. At second call, the quorum goes down to 25%; however, when less than 50% of the share capital is present, the vote in favor by at least 2/3 of the share capital either present or represented at the meeting is required.

There are no preemption rights for the existing shareholders in this type of capital increase

2. Capital increase through contribution-in-kind

A contribution in kind is a non-cash input which is received by a company in exchange of shares. This is fundamentally different to a set-off since it is an asset (in this case the credit) which is transferred to the company in exchange of shares, the shares not being in consideration for the actual set-off but in consideration for the transfer of the asset.

The application of the capital increase through contribution in kind when the asset is a credit right held against the company has been the subject of strong discussions (since in some way it leads to a result equivalent to the set-off but by applying different requirements).

In our opinion, the option of contributing a credit as an in-kind contribution should be deemed as possible under Spanish corporate laws. There are some recent precedents where the contribution in kind of a credit held against the company has been also accepted by Spanish Mercantile Registries and, consequently, duly registered and completed.

The SCA (in article 58) allows contributions of any goods or rights whose value may be assessed, and credits undoubtedly fall within this definition. Article 65 of the SCA expressly governs the contribution of credit rights to share capital, requiring that the contributor guarantee the legitimacy of the loan and the solvency of the debtor. The fact that the Law provides for a specific procedure for increasing capital through set-off does not in our opinion mean that a credit cannot be contributed to the debtor company in accordance with the general system for capital increases by way of in-kind contributions. Otherwise, the possibility of contributing a credit against the debtor company itself when it is not payable in the terms described above would be excluded and, in our opinion, such exclusion would have no legal grounds. It is quite another matter that in these cases the report from the Board of Director and the auditor’s certificate mentioned above in point 1 will not be sufficient; rather, the procedures established by Law for in kind contributions must be followed in order to guarantee the value and existence of the contributed credit.

As regards such requirements here again there are some differences between the S.A.s and the S.L.s, the main one being that within the S.A.s the contribution shall be evaluated by an independent expert appointed by the Commercial Registry, such report including a description of the contribution (i.e. the debt) and its value. There are some exceptions to the need of a report, such as: (i) when the securities are listed on a secondary market; (ii) when the contribution consists of assets, other than those previously mentioned, whose fair value has been determined, within the previous six months to the effective date of the contribution, by the independent expert; (iii) when the capital increase is aimed to provide the shareholders with new shares of an acquired or split company and a report on the proposed merger or division has been prepared by an independent expert, or (iv) when the capital increase is aimed to give the new shares to shareholders of a company subject to a takeover bid.

The majority and quorums required in these cases are the same as for capital increases though set-off. And, just as with the latter, there are no preemption rights in the case of an in kind contribution.

3. Some differences between the two options

Using the set-off route or the contribution in kind route for a loan-to-own has various practical consequences which need to be analyzed in detail. Apart from the different procedures noted above, there are other examples, some of which are described below:


i. Need to accelerate the debt: if capital increase is done through set-off most or all of the debt needs to be due and payable (as described above). This, in the case of a corporate credit ―for example―will generally require that the same be due or otherwise accelerate it (totally or partially). Partial acceleration of credit facilities in Spain is generally not included in Spanish financings and thus its highly likely not a possibility. If acceleration is required this opens other issues, among others what is the status of creditors owing a piece of the syndicate debt and which are not willing to equityse (they will be left with an accelerated claim against a company with a better balance-sheet which, needless to say, is generally not a comfortable position for the equitysing group). Note that it is not uncommon that finance documents do not allow for individual acceleration of a lender’s participation and thus majority decisions will generally be needed (and such decisions will be binding on dissenting lenders). Conversion of debt into equity through contribution in kind does not require debt to be due and thus there is no need to accelerate the debt.

ii. Individual or collective decisions: if the increase is to be made through set-off and once the debt is accelerated, what decision must be adopted by a syndicate to accept a set-off? Will this be a majority decision (which can be taken with the consent of the majority lenders, binding any hold-outs) or will it be a unanimity decision (for which purposes all lenders need to agree)? This would need to be analyzed on a case by case basis, however it is more than likely that unanimity is required to effect a set-off since this will have the effect of changing the “money terms” of the deal (it will imply receiving paper in exchange of cash). If capital increase is done through contribution in kind it is the credit right which is to be contributed, and therefore each lender as owner of such credit right will have the capacity of transferring it to the company in exchange of shares (absent contractual limitations). In an ordinary Spanish syndicated facility one would generally find some restrictions which would not enable for the assignment of the debt to the debtor itself and thus it is likely that contractual amendments would need to be implemented. However, the decision to amend the assignment provisions can be of those that only require a majority vote (to be analyzed on a case by case basis).

iii. Are newly issues shares captured by sharing provisions?: particular care needs to be given to reviewing the sharing provisions under the respective credit agreement to see if they capture the set-off (which generally will do) and/or the proceeds for an assignment with consideration in shares (which generally will not).

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Update on the Spanish FinancialRestructuring: Legal RegimeApplicable to Restructuringand Resolution of Credit Institutions(Royal Decree-Law 24/2012)

September 2012

1. Introduction

On August 31, the Spanish Council of Ministers approved Royal Decree-Law 24/2012, on the orderly restructuring and resolution of credit institutions (“Real Decreto Ley 24/2012, de 31 de agosto, de reestructuración y resolución de entidades de crédito”) (hereinafter, “RDL 24/2012”), which was published and came into force on that same day1.

This complex and technical rule contains a structural reform of the Spanish financial system, required by the situation in which it is immersed since the Minister of Economy announced last June the need for a European bail-out of the Spanish banks and, in particular, by the Memorandum of Understanding on Financial-Sector entered into by Kingdom of Spain (hereinafter “MoU”).

Main purposes of RDL 24/2012:

a. Regulate and introduce alternative procedures to manage difficulties of credit institutions different from those foreseen in previous applicable regulations and the Spanish Insolvency Act.

b. Redesign the functions of the Fund for Orderly Banking Restructuring (hereinafter, “FROB”), establishing a new legal regime for the FROB and repeal Royal Decree-Law 9/2009, of 26 June, on banking restructuring and reinforcement of own resources of credit institutions (hereinafter “RDL 9/2009”).

c. Establish a new legal framework for hybrid instruments in accordance with the requirements envisaged in the MoU.

d. Establish a legal framework for the creation of an Assets Management Company (hereinafter “AMC”) (also known as “bad bank”).

2. Principles governing restructuring and resolution procedures

In accordance with art. 4 of RDL 24/2012, restructuring and resolution of credit institutions shall be based on the following principles:

• Shareholders will be the first to bear any losses.

1 Please note that any references made in this document to the RDL 24/2012 shall be made to Law 9/2012, of 14th of

November.


• Subordinated creditors will bear losses derived from the restructuring or the resolution after shareholders and according to the order of priority established in the Spanish Insolvency Act, with the exceptions set forth in RDL 24/2012.

• Creditors with equal rank will be treated equivalently.

• No creditor will bear any losses above those it would have born if the institution were liquidated in accordance with the Spanish Insolvency Act.

• In case of resolution, directors will be substituted.

• Directors will be made liable for losses and damages caused in proportion to their participation in, and to the seriousness of, the damage, in accordance with insolvency, corporate and criminal regulations.

For the purposes above, in no event shall the FROB be treated as a shareholder or a creditor.

3. New procedures introduced by RDL 24/2012

RDL 24/2012 establishes three groups of procedures: (i) early actions, (ii) restructuring and (iii) orderly resolution. The main features of the referred procedures are the following:

i. Early action measures are envisaged for credit institutions that do not (or is reasonable to expect that they will not) comply with solvency, liquidity, organizational structure or internal control requirements, but are capable of returning to compliance by their own means, without prejudice to exceptional and limited public financial aid in the form of instruments convertible into shares (cocos) with a maturity of two years.

When a credit institution is involved in any of the circumstances referred to in the paragraph above it shall notify so immediately to the Bank of Spain and shall file with the Bank of Spain an action plan within fifteen days from such notification.

In the case that the Bank of Spain acknowledges that the credit institution is involved in such circumstances and the credit institution fails to notify, the Bank of Spain will require to the credit institution to analyze its situation and file an action plan within fifteen days from the requirement.

Actions and measures to be taken by the credit institution will respond to the action plan that must be approved by the Bank of Spain within a month from its filing.

In addition, in the case that public financial aid is requested, the action plan will also need a favorable report from the FROB.

The action plan shall include a business plan setting forth specific objectives and commitments regarding solvency and improvement of efficiency, rationalization of management, improvement of corporate governance, reduction of structural costs and resizing of productive capacity. The implementation period of this plan cannot exceed three months from the date of approval, unless specifically authorized by the Bank of Spain.

From the moment the Bank of Spain acknowledges that a credit institution is involved in any of the aforementioned situations, it may adopt the following measures:

a. Call a shareholder meeting to adopt specific resolutions or agreements.

b. Remove or replace members of the board or general managers.

c. Require a plan to restructure debt with creditors.

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d. Temporarily substitute the board.

e. Require recapitalization measures.

ii. Restructuring procedure is envisaged for institutions that (i) present transitory weaknesses that can be superseded by injecting public funds to guarantee their viability and it is expected that such aid will be reimbursed or recovered or (ii) may not be resolved without serious damaging effects on the stability of the financial system.

The credit institution involved in any of the circumstances mentioned in the paragraph above will immediately inform the FROB and the Bank of Spain. Within fifteen days from the notification, the credit institution must present a restructuring plan setting forth the measures envisaged to secure the long term viability of the institution.

In the case that the Bank of Spain acknowledges that the credit institution is involved in any of the circumstances mentioned above and such credit institution fails to notify, the Bank of Spain will require to the credit institution to analyze its situation and file an action plan within fifteen days from the requirement.

The period in which the action plan shall be approved by the Bank of Spain and the execution period of such action plan will be the same as the periods envisaged in the early action procedure, but note that before the approval of the restructuring plan by the Bank of Spain:

• The FROB will file with the Ministry for the Economy and Competitiveness and the Ministry of Finance and Public Administration an economic report regarding financial impact on public funds, and the Minister of Finance and Public Administration may oppose to it within five days from the filing of such report.

• The FROB may require amendments or additional actions over the restructuring plan.

• The Bank of Spain must request a report from competent authorities of relevant Regional Governments where the saving banks have their registered address.

The instruments to restructure the credit institutions are:

a. Financial aid by FROB through guarantees, loans or credits, acquisition of assets or liabilities or recapitalization measures (shares, capital contributions or convertible instruments to be subscribed/made by FROB and to be repurchased/redeemed/sold in a maximum term of 5 years).

b. Transfer of assets or liabilities to an asset management entity.

iii. The orderly resolution procedure applies when an institution is non-viable and it is necessary to avoid its liquidation in a bankruptcy procedure due to public interest and financial stability reasons.

When a credit institution is involved in any of the abovementioned circumstances, the Bank of Spain, at its own initiative or at the FROB’s proposal, will declare the immediate opening of the resolution procedure.

Once the resolution procedure is opened, the Bank of Spain will order the substitution of the credit institution’s governing body by the FROB. Within two months from its designation as governing body, the FROB shall prepare a resolution plan for the credit institution in which, among other things, it will establish the period of implementation of such plan.

In application of this procedure, the business of the non-viable institution will be sold, or its assets or liabilities will be transferred to a bridge bank, or its assets or liabilities will be transferred to an asset management company.


Nevertheless, previously to the opening of the resolution procedure, when the Bank of Spain considers that the conditions to the resolution are presented, it may adopt certain actions.

In addition, financial aid (guarantees, loans or credits, acquisition of assets or liabilities or recapitalization measures) may be provided to business purchasers, bridge bank or asset management company, if required to facilitate implementation and minimize use of public funds.

4. FROB’s new regulation

The FROB is a public entity with legal personality and with public and private capacity for the development of its purposes.

In line with the MoU and for the purposes of addressing the difficulties in which the Spanish financial system is immersed, RDL 24/2012 amends the existing legal regime for the FROB, clarifies the function of the Spanish Deposits Guarantee Fund and establishes a clear separation between the functions attributed to the Bank of Spain and the Ministry for Economy and Competitiveness regarding authorization and sanction of credit institutions, allocating to the Bank of Spain some functions that before were allocated to the Ministry for Economy and Competitiveness.

RDL 24/2012 reinforces the FROB’s authorities, becoming, together with the Bank of Spain, the public institution responsible for the restructuring and resolution of credit institutions.

It will be funded from the General State Budget and may raise funds from third parties with a limit for 2012 of €120 billion.

It will have a Management Committee composed by representatives of the Ministry of Economy and Competitiveness, the Ministry of Finance and Public Administration and the Bank of Spain and will count with a general director with full executive functions.

The RDL 24/2012 establishes that the adoption of an early action, restructuring or resolution measure will not, on its own, constitute a breach nor will allow to declare an event of default or the early termination of any transaction or agreement or start enforcement or set off of rights or obligations arising from such transaction or agreement. Clauses establishing the aforementioned must be deemed as not included.

It is important to point out that the FROB may, as an administrative act:

• Suspend any payment or delivery obligation arising from any agreement signed by the credit institution within a maximum period that starts with the publication of the exercise of this power up to 5 p.m. of the following business day.

• Prevent or limit the execution of guarantees over any of the assets of the institution for a limited period of time that the FROB considers necessary to achieve the goals of the resolution procedure.

• Suspend the right of the counterparties to declare an event of default or early termination or enforcement or set off of any rights or obligation arising from financial collateral arrangement and netting agreements as a result of the adoption of any resolution or restructuring or early termination action for a maximum period that starts with the publication of the exercise of this power up to 5 p.m. of the following business day. On the completion of this period, if the assets or liabilities mentioned in the financial collateral arrangement and netting agreements have been transferred to a third party, the counterparty may not declare an event of default or the early termination or enforce or set off the rights or obligation arising from this transaction and agreements if the assets and liabilities have been transferred in accordance with the resolution instruments.

Notwithstanding the aforementioned, the counterparty of a credit institution may declare an event of default or early termination of the guarantee or contractual compensation agreements or the

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correspondent operations and demand the enforcement or set off of any rights or obligations related with such agreements or operations as a consequence of an alleged —previous or subsequent to the transmission— breach, and not related with it.

In addition, RDL 9/2009, which created the FROB, is expressly repealed. Therefore, any references made to RDL 9/2009 shall be deemed made to RDL 24/2012.

5.Managementofhybridinstruments

Taking into account to what is established in the MoU and the impact of the hybrid capital instruments and subordinated debt in the Spanish financial system, RDL 24/2012 establishes a special regime for the management of this type of instruments that is merely summarized below.

Restructuring and resolution plans must include actions regarding management of subordinated debt instruments and hybrid capital instruments issued by the institutions, in order to secure an equitable distribution of restructuring or resolution costs, in compliance with EU State aid rules and with the objectives and principles established in RDL 24/2012 and, particularly, to protect financial stability and minimize the use of public funds.

The actions included in restructuring and resolution plans can affect hybrid instruments, such as preferred shares or convertible bonds, bonds and subordinated bonds or any other type of subordinated debt, with or without a maturity date, obtained by the credit institution, either directly or through a fully owned subsidiary.

Such management actions of subordinated debt instruments and hybrid capital instruments can affect all or some of the issues or financings referred above, but they must take into account the different order of priority that they may have among themselves.

In essence, for the allocation of restructuring costs, a mechanism is established by which holders of hybrid capital instruments may be obliged to assume part of the losses of an institution in crisis.

The actions to manage hybrid capital instruments and subordinated debt may involve, among others:

• Exchange offers for capital instruments.

• Repurchase through direct payment in cash or conditional to the subscription of capital instruments or any other banking product.

• Reduction of the debt’s par value.

• Early redemption at a value different than par.

These actions must take into account the market value of the hybrid capital instrument or the subordinated debt instrument, applying a discount to the par value according to European rules. To the effects of determining the market value a report from an external expert is needed.

Management actions of hybrid capital instruments and subordinated debt agreed by the FROB, as well as the actions of the credit institution to comply with them, cannot be considered as an event of default or early termination of the obligations of the credit institution with third parties. In particular, such management actions as well as credit institutions’ actions to complete and perform them, may not be claimed by third parties as an alteration to the ranking of the payment of the institutions’ debt where invoked in litigation. As a result, management actions of hybrid capital instruments and subordinated debt shall not modify, suspend or extinguish credit institutions´ third party relations, and shall not give rise to new rights or impose new obligations on the credit institution towards third parties.


In addition, to avoid the problems derived from miss selling of this type of securities, the Spanish Securities Market Law (“Ley del Mercado de Valores”) has been amended by RDL 24/2012 introducing certain restrictions to the commercialization of hybrid capital instruments and subordinated debt going forward to guarantee the protection of retail investors and increase transparency in the commercialization of these products. From now on, a minimum placement of 50% among institutional investors is required and a minimum investment of €100.000 for non-listed entities and €25.000 for listed entities. To these effects, the competences of the Spanish Securities & Exchange Commission (CNMV) are reinforced and non-suitable retail investors are required to hand write that they have been warned that the product is not suitable for them.

Moreover, and to protect investor’s interests, RDL 24/2012 introduces other amendments to the Spanish Securities Market Law, regarding the prospectus information, the thresholds for offers that are exempt from the obligation to publish a prospectus and the information obligation.

6. Asset Management Company (AMC)

In accordance with the MoU and notwithstanding what has been previously regulated, RDL 24/2012 announces the creation of an asset management company, merely drafting its role and that shall be further developed through implementing regulations.

Within 3 months from the date RDL 24/2012 entered into force, the FROB will incorporate such asset management company, to be named Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria, S. A., that will acquire the assets of those credit institutions determined by the FROB.

It will have the form of a corporation (sociedad anónima) and will be subsidiarily subject to the Spanish Corporations Act (“Ley de Sociedades de Capital”) (hereinafter “SCA”). It will be entitled to issue bonds and other securities that recognize or create a debt without being subject to the limitation set forth in art. 405 SCA (i.e. the total outstanding amount of AMC’s issued debt securities may exceed the subscribed capital plus reserves).

This mechanism will facilitate the removal of problematic assets from the balance sheet of credit institutions receiving public aid to ease their reorganization and viability. Therefore, it has a temporary nature. The FROB may cause the credit institutions receiving public aid to transfer to AMC their problematic assets, which will be determined in further regulation. The first assets to be transferred to AMC will be those of credit institutions in which the FROB now owns a majority of its shares and those institutions that, in the Bank of Spain’s opinion after due assessment, will require a restructuring or resolution procedure.

Additionally, it will be possible to create groups of assets and liabilities of an asset management company that will be deemed as separate estates without legal personality, but which may be holders of rights and obligations as provided in RDL 24/2012. The legal regime of these entities shall conform to RDL 24/2012 and, subsidiarily, to the regulations applicable to venture capital funds and companies, securitization funds and mortgage securitization funds, as applicable, except they shall not be subject to the rules regarding portfolio quantitative and qualitative composition.

7. Other aspects

1. RDL 24/2012 modifies the core capital requirements to be complied by credit institutions and consolidated groups, which were established in Royal Decree-Law 2/2011, of February 18th, for the reinforcement of the financial system (hereinafter “RDL 2/2011”). Specifically, the current requirement of 8%, in general, and 10% for institutions with difficult access to capital markets and for those in which wholesale financing predominates, will become a single requirement of a 9% that must be fulfilled by every institution as from January 1, 2013.

RDL 24/2012 also modifies the definition of core capital to adapt it to the one used by the European Banking Authority in its recent recapitalizing exercise and Basel III. This amendment does not

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result a material alteration of the current requirements, except that now financial participations and certain securitization exposures will be penalized.

2. RDL 24/2012 Decree-Law establishes a lower limit to the fixed compensation for all concepts to be perceived by executive presidents, managing directors and directors of the credit institutions that, even when the FROB does not hold a majority share in their capital, receive financial aid. That maximum limit is lowered from the current 600,000 Euros to 500,000 Euros, but will not be applied to directors and board members who where appointed after the initiation of the integration process.

Schedule I

Executive Resume

Factual situation Relevant stages Instruments Recapitalization measures

Early action mesures

Credit institutions that do not comply with or there are objective reason for believing that they will not be able to comply with the solvency, liquidity, organizational structure or internal control requirements but is in a position to return to compliance by their own means, without prejudice to exceptional and limited public financial support.

1. Presentation of the plan of action to the Bank of Spain.

2. Approval by the Bank of Spain of the plan of Action.

The approval of such plan will require a favorable report from the FROB, when the institution requires public financial aid.

3. Monitoring of the plan and report to the FROB

The Bank of Spain may adopt the following measures:

a) require to call the shareholder meeting or directly call it to adopt specific resolutions or agreements.

b) require the removal and replacement of members of the board or general manager, etc.

c) agree the temporally replacement of the board of directors.

d) adopt any measures established by the rules applying to organization and discipline of the credit institutions.

On an exceptional basis, the Bank of Spain may require recapitalization measures.

The FROB may acquire ordinary shares or subscribe share capital contributions or convertible instrument, in which the period for repurchasing or redeeming into shares dos not exceed two years.


Restructuring

Credit institutions that (i) require financial support to guarantee their viability an it is expected that such support will be reimbursed or recovered, or (ii) where the resolution implies seriously damaging effect on the financial system’s stability.

1. Presentation of the restructuring plan to the FROB and to the Bank of Spain.

2. The FROB may require a modification in the plan, before transferring it to the Bank of Spain.

3. Requirement of a report to the competent organisms of the Spanish Comunidades Autónomas where the credit institutions have their registered address.

4. Transfer from the FROB to the Ministry of Finance and Public Administration and the Ministry for the Economy and Competitiveness of an economic report detailing the economic impact of the plan.

5. Approval of the restructuring plan by the Bank of Spain.

a. Financial support:

i. Issue of guarantees

ii. Granting of loans or credits

iii. Acquisition of assets o liabilities

iv. Recapitalization measures

b. Transfer of assets or liabilities to an asset management entity (bad bank).

The FROB may acquire ordinary shares or subscribe share capital contributions or convertible instrument, in which the period for repurchasing or redeeming into shares dos not exceed five years.

Resolution

Credit institutions that are unviable or is expected to become so in the near future, and for reason of public interest and financial stability it is necessary to avoid winding it up in accordance with the Spanish Insolvency Act.

1. Aperture of the resolution procedure.

2. Substitution of the governing body.

3. Enacting of the resolution plan by the Bank of Spain.

4. Enacting preliminary measures.

a. Sale of the entity’s business

b. Transfer of assets and liabilities to a bridge bank.

c. Transfer of assets and liabilities to an asset management entity.

d. Financial support for the purchasers of the business, the bridge bank or the asset management company, when necessary to facilitate implementation and to minimize the use of public measures.

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Financial Collateral Lawand Practice in Spanish Courts

September 2012

1. Themagicofthefinancialcollateralregime

The present paper is devoted to provide to foreign lawyers and investors a brief but accurate picture of the Spanish “financial collateral regulation” (FC regulation), as it is at present interpreted by Courts. The Spanish implementation of the Directive 47/2002 (FCD) was carried out by the Royal Law Decree 5/2005 (RDL FC), later amended in 2011 to introduce the modifications required to comply with the Directive 44/2009.

Since the Spanish 2005 implementation of the FCD1, banks and their lawyers have been interested to meet the conditions to stand under the umbrella of the financial collateral special regime. Obviously, entrepreneurial debtors are much less anxious thereto. The reasons for that impetus to the FC coverage are threefold. Firstly, the right to dispose of the encumbered assets (Article 5 FCD) endows the collateral taker the power to trade and deal by itself with the collateral, without the danger that each disposition or substitution should be deemed as a new security device. The piercing of the “unity” of the security interest would affect the creditor’s ranking vis-à-vis other secured or unsecured junior creditors, when the new dispositions and acquisitions come close to the onset of the insolvency. Secondly, the new regime clearly provides that the appropriation of the collateral would not be challenged as a prohibited forfeiture (pactum commissorium, Article 1859 Civil Code)2. That greatly matters, for the classical ways of realization of the collateral value under Spanish law are cumbersome, and left the creditor with the unhappy option to appropriate the asset (if, as usually was the case, there were no other bidders) by giving the debtor full credit and making unavailable any deficiency claim for the future. The Supreme Court has rightly addressed this material difference between the old and the new regulations in its ruling dated June 24, 2010 (Metainversión v. Merryl Linch)3. Thirdly, in spite of the confusing wording of the FCD and the RDL FC, the new financial collateral regime grants creditors a safe harbour against the general avoidance rules set forth in Article 71 of the Insolvency Act, a provision that is currently being subject by courts to an unfriendly interpretation for secured creditors, making hence more vivid the need to find safe harbours.

Contrary to expected, though, the “freedom of forms” of Article 3 of the FCD has played no momentum in the abovementioned rush to seek protection under the FC coverage. Despite the clear terms of the FCD, pledges (but no repos transactions) continue to be agreed in solemn notary form, as ruled by Article 1865

1 See ZUNZUNEGUI, “Una aproximación a las garantías financieras (Comentarios al capítulo segundo del Real Decreto

Ley 5/2005)”, in Garantías reales mobiliarias en Europa / coord. por María Elena Lauroba Lacasa, Joan Marsal Guillamet,

2006, pp. 415-430; GARCIMARTÍN, “Acuerdos de garantía financiera y riesgo concursal: un estudio de los problemas de ley

aplicable”, Revista de Derecho Concursal y Paraconcursal, 9, 2008, pp. 75-86; LYCZKOWSKA, “La revolución en el mundo

de las garantías financieras está a la vuelta de la esquina: proyecto de modificación del Real Decreto Ley 5/2005”, Diario La

Ley, n.º 7611, 2011; HORMAECHEA, “Algunas cuestiones en torno a las garantías financieras del Real Decreto Ley 5/2005,

de 11 de marzo, tras su primer lustro de vigencia”, Revista de Derecho Bancario y Bursátil, 124, 2011, pp. 151-212.

2 See Spanish Supreme Court’s ruling dated November, 10th 2011 (Westlaw JUR 2011/435446), which expressly admits that

the prohibition of pactum commissorium does not apply to certain security devices, such as Financial Collateral Agreements.

3 Westlaw, RJ 2010/5410.


Civil Code. The reasons behind this routine are not only the classical conservatism of lawyers, but also the desire to avoid the risk of being denied access to judicial enforcement if the contract is not embodied in public deed (Article 517 Civil Procedure Act) and the fact that security interests and mortgages are bargained normally as a “package” of collateral devices, some of them not covered by the scope of the FC regulation.

2. Financial Collateral regulation in a Civil Law system

Although having the same regulatory basis than the English Law, the Spanish financial collateral implementation did not have to address idiosyncratic UK specific problems, which have conditioned up to now the understanding and application of the UK FC Regulation by English courts and scholars. Floating charges, as known in Common Law jurisdictions, do not exist in Civil Law tradition. Hence, the problem of coordinating the requirement of negative control [FCD, preamble (9) and Article 2.2] with the right to freely dispose of the encumbered asset, which corresponds to the chargor in every floating-charge scheme, has not been considered as a problem in the Spanish regulation and praxis4. Secondly, the limited scope of trust schemes in Spanish Law does not permit to speculate, unlike in English Law, with the situation of the beneficiaries who hold an equitable control over financial instruments and money kept in custody by the depositary, in common or separate accounts5. For such reason one may say with certainty that, in spite of the fuss made in the Common Law jurisdictions on this topic, control and its “ghosts” will never appear as a fundamental problem in Civil Law countries, which is proved, for instance, by the meaningful fact that in some relevant jurisdictions, like the German6, the subject matter of control has not been addressed in the FCD implementation and the requirements for granting specific financial collateral are the same as what they used to be before the European harmonization.

3. Issues not yet addressed by Courts

The following are FCD issues that at present have not been addressed by Spanish Court rulings in application of the RDL FC.

a. In spite of being a true concern in Spanish Law practice, courts have never focused on the question of whether the FC regulation extends or not to shares of a non listed company7. In fact, under Spanish law (Article 2 Securities Market Act), shares of companies that are not traded in a regulated multilateral

4 Compare to Gray & Ors v G-T-P Group Ltd Re F2G Realisations Limited (in Liquidation), High Court of Justice Chancery

Division, 7 May 2010, [2010] EWHC 1772 (Ch); for this case’s analysis from the Spanish law point of view, see LYCZKOWSKA,

“Las garantías financieras en el Real Decreto Ley 5/2005 a la luz de tres resoluciones judiciales extranjeras (Palmerton, Gray

y Lehman Brothers)”, Aranzadi Civil, n.º 10/2010.

5 Compare to Lehman Brothers International (Europe) in administration v. Rab Market Cycles (Master) Fund Ltd, Chancery

Division (Companies Court), 21 October 2009, [2009] EWHC 2545 (Ch) and Lehman Brothers International (Europe) (In

Administration), Re Supreme Court, 29 February 2012, [2012] UKSC 6, (2012) 162 N.L.J. 364. The way of deciding a

dispute like Lehman in a jurisdiction impractical to the use of trust devices is illustrated by the judgment given by Madrid

Court of Appeals (sec. 14), judgment dated December 21, 2004, Westlaw, JUR 2005/38640 (Transword Financial Services).

The decision was wrong: the classical rules on commingling of goods (commixtio, Article 381 Civil Code) would suffice to

reach an outcome parallel to those expected in a trust friendly jurisdiction.

6 Gesetz zur Umsetzung der Richtlinie 2002/47/EG vom 6. Juni 2002 über Finanzsicherheiten und zur Änderung des

Hypothekenbankgesetzes und anderer Gesetze.

7 Serious objections against this possibility have not been raised or, in any case, they are overcome, as in VEIGA, Tratado de

la prenda, 2011, p. 288.

8 See ECB website, General Documentation on Eurosystem Monetary Policy Instruments and Procedures (2011):

http://www.ecb.int/pub/pdf/other/gendoc2011en.pdf.

http://www.ecb.int/pub/pdf/other/gendoc2011en.pdf

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market may be “financial instruments” (FCD, article 1.4a), if the company is not a pure closed entity. The ECB also recently endorsed the possibility to accept as collateral non marketable financial assets8. Some court rulings have been delivered on the necessary, but unexpressed, assumption that non-listed companies lie in the regulatory scope of the RDL FC, as far as the other subjective and objective conditions are met. This was the case in the important judgment given by the Mercantile Court Coruña 1, July 4, 2011 (Martinsa Fadesa)9. The court applied the RDL FC insolvency rules to the security interest granted by the parent company over the shares it held in the subsidiary companies of the group, non-listed companies, and most of them established abroad.

It is difficult to accept that shares not traded in regulated financial markets may be eligible assets under the FC regulation. They lack the fundamental condition of being liquid assets, assets over which the chargee may freely dispose in order to meet its own collateral requirements (cfr. Article 5.2 FCD: “equivalent collateral”). In non marketable assets it will be cumbersome to value the collateral in order to justify an execution by appropriation (Article 11.3 RDL FC), and a risk exists that this kind of enforcement is challenged as an unbearable forfeiture because of substantial differences between the true value of the asset and the credit for whose payment the asset has been finally appropriated. Non marketable shares are not capable of being handled and liquidated as it is laid down in Article 12.2 II RDL FC, because no account depositary exists at all, and there is no way to give orders to the market for selling the collateral within the same day. Illiquidity is besides fostered by the fact that almost every non-listed company incorporates in its by-laws some restrictive provisions on shares’ tradeability, causing that a chargee who appropriates the collateral, even by a fair price, will be surely pre-empted by other shareholders, who may acquire the shares at a discounted “reasonable price”10.

b. As to the control requirement [FCD preamble (9) and Article 2.2; RDL FC Article 8.2a]. No decision has been yet given – and probably will be never given- as to the question of whether the control requirement is a mandatory supplementary kind of “provision”, so as to be required that the collateral taker makes sure not only that the collateral is “held, transferred or registered”, but also that, beyond that, the collateral is effectively under the creditor´s control, whatever “control” may mean. This is a minor issue as to financial instruments, because the book entry system for transferring and encumbering securities could not have been eroded by the new “control” device, as implicitly recognises Article 8.2a in fine RDL FC. However, the control topic is of great relevance with respect to cash collateral and credit-claims collateral. Confusing statements made and duplicated by art. 8.2b RDL FC do not allow the interpreter to know whether the acts there described are mere devices to “identify” the asset or mechanisms to make sure that the assets are “under control”. It is open to discussion the question of whether the mere and classical “notification to debtor” will suffice in the future for perfecting a security interest over cash held by a depositary in a cash account, or a pledge over a monetary claim against a depositary, or whether the credit claim may be held as security by the single “inclusion in a list of claims submitted in writing, or in a legally equivalent manner”11, in the quite strange wording of Article 1.5 III FCD. ¿Should an additional “control requirement” be satisfied, so as to render unperfected the “notified” security as far as the chargee and the depositary have not entered into a control agreement? Besides, the uncertainty extends to the question of whether a pledge on claims that is registered in the Registry of (movable) charges (prenda registrada sin desplazamiento) satisfies or not the control requirement.

4. “Financial obligations”

9 Westlaw, AC 2011/1492.

10 As was the case in the recent Supreme Court ruling dated May 29, 2012: according to the Law, the chargee was subject

to give credit for the whole amount of the existing credit, but the company purchased back in pre-emption at a substantial

lower price.

11 MENESES seems to implicitly support this thesis (“Los derechos de crédito como garantía tras la reforma del Real Decreto

Ley 5/2005, de 11 marzo”, Cuadernos de Derecho y Comercio n.º 56, diciembre 2011).


As a proof of the poor quality of the FCD and of the lack of care displayed in using legal concepts, “relevant financial obligations” is a term which is embodied in the Definition list of Article 2 FCD, but is a term which is never used in the subsequent articulated text, neither to define the scope of the Directive nor to put forward any particular consequence. Relevant financial obligations are “obligations that are secured by a financial collateral arrangement and that give a right to a cash settlement and/or delivery of financial instruments”. The definition is duplicated in Article 6.4 RDL FC, but with the (unessential) originality of substituting “principal” to “relevant”.

There are two possible constructions of the term. According to the first, the term as such is almost useless in the scope of the FC regime and it only states that the financial collateral arrangement may secure any kind of underlying money obligations and also specific obligations to transfer financial instruments.

Taking for granted that the “transfer” could not properly refer to the “provision” of collateral as such, either as encumbrance or as property in a title-transfer arrangement, the duty to transfer financial instruments as a secured duty ought to arise from a normal sale, from a loan of securities or from a repurchase operation. An underlying repurchase operation could not be the arrangement according to which “a collateral provider transfers full ownership of, or full entitlement to, financial collateral to a collateral taker for the purpose of securing or otherwise covering the performance of relevant financial obligations”, because in that case secured obligation (repo) and security device (repo as well) would be the same. But the terms used by the Directive cause some trouble, for in fact it seems that the underlying transaction is also a security device. Trying to give some meaning to the final part of the legal definition of “financial obligations”, one may conclude that the FCD states that a title-transfer security device (like a pledge device) may secure an obligation that arises out from other (underlying) title transfer security device. But this underlying transaction is also a security device, as indicated by Article 6.2 II RDL FC! In conclusion, any kind of financial obligation – including a financial collateral arrangement! – may be secured by a financial collateral arrangement.

The second interpretation puts the whole emphasis on the word “settlement”. “Settlement” is a term of art used in the English version of the FCD. In the Spanish version and in the RDL FC, the term employed is “payment in cash”. There is no proper way to translate “settlement” into Spanish, keeping its true core still as a term of art. “Payment” is a disqualified term, but “settlement” is a technical wording whose meaning has to be taken from the Derivatives Law12. “Settlement” is a composition, a net obligation, a balance “netted” by way of compensation of two streams of (contingent) obligations between parties linked by a derivative contract. According to this point of view, the underlying obligation could only be a close-out netting provision, or, at least, an obligation to pay or to transfer that arises from any of the “financial operations” listed in Article 5.2 RDL FC (loan of securities, any kind of derivatives, repurchase transactions and title-transfer and pledge-structured operations over financial collateral), although they are liquidated outside a netting transaction. A ‘close-out netting provision’ means “a provision of a financial collateral arrangement, or of an arrangement of which a financial collateral arrangement forms part”, that upon the occurrence of an enforcement event, whether through the operation of netting or set-off or otherwise: (i) the obligations of the parties are accelerated so as to be immediately due and expressed as an obligation to pay an amount representing their estimated current value, or are terminated and replaced by an obligation to pay such an amount; and/or (ii) an account is taken of what is due from each party to the other in respect of such obligations, and a net sum equal to the balance of the account is payable by the party from whom the larger amount is due to the other party”. That would amount to say that only close-out netting transactions could serve as underlying transaction to a financial collateral arrangement (netting as “an arrangement of which a financial collateral arrangement forms part”), this conclusion not hindering the (apparent) paradoxical fact that also financial collateral arrangements may be construed as close-out netting devices (netting as “a provision of a financial collateral arrangement”)13.

12 Cfr. the definition of Settlement Amount in cl. 14 of the ISDA Master Agreement.

13 A financial collateral arrangement is also qualified as “financial operation” structured as a close-out netting agreement,

Article 5.2a RDL FC.

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This limited scope of application of the FC regulation was defended by a learned practitioner, just after the publication of the RDL FC14.

Being conscious of the two possible constructions of the rules, the Barcelona Court of Appeals (Commercial), in judgement dated September 30, 2008 (Administrator of Boc’s estate v. Banco Santander)15 ruled that there is no basis for limiting the scope of the Spanish FC regulation. Any kind of contractual monetary obligation, agreed into parties eligible for the special regime of the RDL FC, may be secured by a security mechanism governed by the FC Security Law.

It should be borne in mind that Spain did not use the opting-out possibility given by paragraphs 3 and 4 of Article 1 of the FCD. Almost all players are eligible for the FC regime, every kind of financial instruments are subject to the rule and every class of obligation to pay cash is a “financial obligation”. In Spain at least, the FC regime has overlapped a large part of the classical field of Security Law in personal property.

5. The“insolvencyproof”nettingarrangements

The unclear relationship between netting agreements and financial collateral arrangements, both in the FCD and in the RDL FC, brings about the outcome that netting and financial collateral arrangements may be connected in any of the following ways. Firstly, both a financial collateral arrangement or a close-out netting arrangement may equally cause that financial collateral be provided for securing the net sum accounting for the balance of the two reciprocal stream of payments16. In other word, also a close-out-netting agreement may serve as a financial collateral arrangement, i.e. as a legal source to provide financial collateral. Secondly, the financial collateral itself (for instance, the repo transaction) is structured like a “financial operation” in which two streams of correlative payments should be netted. Third, the single close-out netting agreement may be qualified as a financial collateral mechanism. For instance, the parties agree on a current account relationship in which they merge the present and future bilateral positions, which are not capable of independent enforcement, and the depositary is granted a security interest over the cash account held under its control.

Netting agreements are granted a strong position in insolvency proceedings. The insolvency proceeding does not hamper the right of the party in bonis to keep the contract on track, to rescind it according to the terms of the contract or, even, to withhold its own payments, in case this party is “out of the money” but the bankrupt counterparty incurs – and it always does, being insolvent – in an event of default. Finally, the net amount settled after the commencement of the proceeding, if the creditor of the insolvent company is “in the money”, is considered as an administrative insolvency expense, therefore bestowing the creditor a corresponding ranking priority over the unsecured creditors even in cases where the former does not hold financial collateral securing the claim for the net amount.

Concerning netting agreements, the practical problem that has been addressed by Spanish Courts in application of the RDL FC is the situation where a borrower in a bilateral or syndicate loan enters with the lender in a separate swap transaction in order to keep the risk exposure “hedged” against a fluctuation on interest rates (or in currency interchanges) that may raise the cost of the lender’s funding procurement. Is it a netting arrangement in the sense of the FC insolvency regulation? The question has passed unresolved till the Barcelona Court of Appeals (Commercial Section), in a flow of consistent

14 DÍAZ / RUIZ, “Reformas urgentes para el impulso a la productividad: importantes reformas y algunas lagunas”, Diario La

Ley, n.º 6240, 27 Abr. 2005.

15 Westlaw, JUR 2009/81340.

16 The purchaser needs a financial collateral security device, not only for securing its contingent credit for the balance, but

mainly for appropriating or disposing of the instruments which are the object of the transaction, where the seller, becoming

bankrupt, cannot honour its duty to purchase back. It is market practice to agree the granting of a title-transfer collateral

over the financial instruments that have been title-transferred in the underlying repo transaction.


decisions, ruled that the netting agreement framed into a single financial operation lies outside the scope of the FC regulation; in order to be covered by this regime, the swap agreement should form part of a group of transactions under the umbrella of a single framework netting arrangement17. The question is still not settled in other Commercial Courts18.

6. Conventionalsetoffasfinancialcollateral

“Cash”, as asset that may be “provided” as financial collateral, has two possible meanings in the FC regulation, either “cash” as corporeal money possessed by the grantee, or “credit over cash account” held by the grantee or by third party. The most common case is the cash account held as deposit by the creditor who is vested with a financial claim vis-à-vis the debtor who holds title to the account. Spanish Law allows for a creditor to take as collateral its own debt as depositary. When the parties have agreed (as usual) that the creditor is entitled to set off its financial claim against its depositary obligation, this device turns out to be a financial collateral arrangement, according to the Court of Appeals (Commercial) Barcelona, ruling as from September 30, 2008 (Caixa d’ Estalvis del Penedés)19. According to the Court, that agreement does not amount to a netting agreement in the sense of the RDL FC, but it surpasses the modest condition of a single legal set off. The difference is of enormous relevance in Spanish Law, because we do not have such a device like the English insolvency set off, and Article 58 of the Insolvency Act divests the creditor of the faculty to extinguish by compensation its own debt when both credit and debit are not yet due and liquid, upon declaration of insolvency of the debtor by court decision. But financial collateral extends its protective effects beyond the commencement of insolvency proceedings, insofar as the funds in the account are not after-acquired-property. Parties risk to completely fail in the protection of their interest when they persist in qualifying these conventional devices as netting agreements, as shows another judgment of the Court of Appeals (Mercantile) Barcelona, September 23, 2008 (Boc’s insolvency administration v. Banco Santander)20. The secret for the magic of that qualification is the possibility to continue dealing after the commencement of the proceeding, accounting against the balance new postpetition claims owed by the insolvent company. On the contrary, if the compensation device qualifies (only!) as cash financial collateral, the creditor is entitled to keep on in possession (control) of the collateral, but it is deprived of further dealing with the asset in order to cover future postpetition liabilities of the insolvent company.

In my opinion the assumption made by the Court of Appeals Tarragona, judgment October 13, 2009 (Idra Iberica’s insolvency administrator v. Caixa de Cataluyna)21 was wrong when it refused to qualify the compensation scheme as a cash financial collateral, on the spurious grounds that, although the cash is credit in the depositary account, it was, however, not “provided” in the sense of Article 8 of the RDL FC.

7. Margin call

The FCD treats the topic of additional collateral as an episode in the framework of the insolvency provisions, in order to provide to this collateral the same level of protection granted to the original asset. Article 8.3 refers to the “obligation to provide financial collateral or additional financial collateral in order to take account of changes in the value of the financial collateral or in the amount of the

17 As to recent judgements, June 1, 2011, Westlaw, JUR 2011/321430; February 16, 2012, Westlaw, JUR 2012/150013 (which

states that not only the swap agreement must form part of a whole framework netting agreement, but also that the parties

should expressly agree on the application of Financial Collateral regime).

18 Apparently upholding the RDL FC protection, Valencia Court of Appeal (Commercial section), judgement as from January 20,

2011 (Banco Guipuzcoano v Midascon), Westlaw, AC 2011/306.

19 Westaw, JUR 2009/94119.

20 Westlaw, JUR 2009/81340.

21 Westlaw, JUR 2010/46646.

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relevant financial obligations”. Likewise, Article 10 of the RDL FC limits the qualified protection to additional assets which have been provided for to take account of the changes in the collateral value or of the increased amount of the secured obligation. According to the Commercial Court Madrid 922 the creditor may call for additional collateral where there has been a shortfall in the loan-to-value ratio, but not when the creditor seeks to enjoy a strong secured position and no additional duties exist.

8. Insolvencyconsequences

According to Article 8.1 FCD, Member States shall ensure that a financial collateral arrangement, as well as the provision of financial collateral under such arrangement, may not be declared invalid or void or be reversed in the insolvency situations thereunder listed. However, the Directive “leaves unaffected the general rules of national insolvency law in relation to the voidance of transactions” (Article 8.4). The Spanish implementation almost mimics the quoted wording. Pursuant to Article 15.1 RDL FC, the commencement of an insolvency proceeding will not suffice to “declare void or to rescind” the financial collateral arrangement or the provision of collateral. Arrangements and provision may be rescinded “only” if the insolvency administration proves that they were entered into “in fraud” of (unsecured) creditors. That gives secured creditors a comfortable position in the insolvency of the debtor, because in the common Insolvency Law the insolvency administrator ought only to prove that the provision of the collateral caused “prejudice” to the state, and this obscure wording is being construed by the majority of courts in the sense that prejudice is given by the mere fact that the granting of the security causes the beneficiary an unfair preference vis-à vis other unsecured creditors23.

Two topics have been addressed by courts regarding the insolvency provisions of the RDL FC. In the judgment dated October 10, 2011 (Caja de Ahorros del Mediterráneo) the Supreme Court was put before the claimant’s postulation that, being a member of the syndicate of lenders who were beneficiaries of a package of financial collaterals, its credit against the bankrupt debtor could not be subordinated according to Article 93 of the Insolvency Act (the lender’s equity in the debtor’s stock reached the threshold that determines the insider condition), because that subordination would determine the avoidance of the security interest (Art. 97.2 Insolvency Act), with the consequence that financial collateral arrangement would not be insolvency proof, which would be contrary to the FC regulation’s mandate. According to the claimant Caja (a savings bank), proving effective fraud should be required in order to set aside the security device. The Supreme Court did not endorse said argument. The Court held that the RDL FC did impede to make financial collateral void by reasons related to retroactive nullifying effects of the commencement of insolvency, but it did not prevent the nullity of financial security due to the rule that refuses to recognise secured claims when its holder was an insider of the insolvent company.

Before the reform made on the RDL FC by Law 21/2007, the avoidance power of the insolvency administrator was not subject to the severe burden of proof of the creditor having bargained with fraud to other creditors. It sufficed that the collateral holder dealt in prejudice of those other creditors. According to the ruling of the Commercial Court La Coruña 1, July 4, 2011 (Martinsa Fadesa), “dealing in prejudice” was more stringent requirement that bringing “prejudice”, which was the wording of Article 71 of the Insolvency Act. For “dealing in prejudice” did require additional conditions, and a constructive or an imputed intention or awareness to cause harm to the other creditors could not stand as a valid inference of the ratio legis of the Law. In the instant case, it could not be presumed that the syndicated lenders who caused the debtor to be refinanced months before the insolvency petition were aware they were dealing in a way to cause harm to the unsecured creditors.

According to Articles 6 and 8 of the RDL FC, a financial pledge over the cash account held by the

22 Judgments March 26, 2010 and November 26, 2009 (not reported cases).

23 Cfr. CARRASCO, Los derechos de garantía en la Ley Concursal, 3th edit, 2009, pp. 388 ff.


depositary (agent) bank is financial collateral. As a consequence, Articles 11.2 and 15.4 did prohibit that the realization and enforcement of the security be limited in any way when the creditors seek to make effective their rights. Following Article 15 RDL FC, the debtor’s insolvency does not allow for the terms of the security arrangement to be modified. However the judgment of the Commercial Court 10 Barcelona dated March 27, 2012 (Caixabank v. Spanair)24 refused to take these provisions into account, ruling that the agent bank was bound to release the funds accrued into the account after the commencement of the proceeding, though (?) upholding the claimant’s opinion that the bank had in fact a security interest over those funds.

24 Westlaw, JUR 2012/121268.

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The ruling of Commercial Court No. 6of Barcelona, dated 5 June 2012Spanish Court homologation of refinancing agreements

Additional provision no 41 of the Spanish Insolvency Act

October 2012

Pre-insolvency mechanisms aimed at the restructuring of companies in distress as an alternative to formal insolvency proceedings have been a critical feature of the reforms of the Spanish Insolvency Act carried out since 20092.

Among the elements introduced by such amendments of the insolvency act, the requirements to obtain the judicial homologation of a refinancing agreement and hence to extend the effects of that agreement to dissident creditors3 has been the subject of numerous interpretations (and speculation) by lawyers involved in debt restructuring transactions.

The ruling of Commercial Court No. 6 of Barcelona, dated 5 June 2012 on the first request for homologation carried out under additional disposition nº 4 of the insolvency act by Santa & Cole Neoseries, S.L. and Intramundana, S.A. has brought some clarity (and yet introduced important grounds of concern to credit providers and other participants in the debt trading industry) to the legal requirements of the homologation.

After the reform of the Spanish insolvency act carried out in October last year, additional section nº 4 established that refinancing arrangements compliant with the requirements set out in section 71.6 of the Insolvency Act were eligible for court homologation.

By receiving this court homologation, the deferral in payment agreed in the refinancing agreement for financial debt providers may be extended to unsecured dissident credit entities.

Further to the above deferral, the homologation resolution may also provide for the stay in individual enforcement proceedings for a maximum period equivalent to (i) the deferral of payments of unsecured and unsubordinated claims in accordance with the refinancing agreement, or (ii) 3 years whichever is the shorter.

It appears from the literality of additional section nº 4 of the Spanish Insolvency Act that in order to be eligible for the court homologation, the refinancing agreement submitted to the judge needs to abide by the requirements of general refinancing agreements established in article 71.6 of the Spanish Insolvency Act, namely that4:


1 4th additional provision of the Insolvency Act..

2 Real Decreto Ley 3/2009 and Ley 38/2011, dated October 10.

3 Unsecured creditors that did not vote the refinancing agreement or that voted against it.






a. The purposes of the refinancing agreement shall be to (i) substantially increase the funds available to the debtor; and/or (ii) expand the tenor or reorganize the terms of the debt that is to be re-negotiated by means of the refinancing agreement;

b. The refinancing agreement shall be a part of a short and mid-term viability plan of the debtor;

c. It must be approved by creditors representing, at least, 3/5 of the liabilities of the debtor;

d. It should be executed before a Spanish Public Notary and recorded in a public deed; and

e. An independent expert appointed by the Companies Registry should issue a report assessing: (i) the sufficiency of the information provided by the parties (in particular, by the debtor); (ii) the reasonability of the refinancing agreement and that the viability plan is appropriate and feasible; and (iii) the security package of the refinancing agreement being proportional to market practice.

It was not clear in the text of the additional section nº 4 whether the 3 year limit applied only as the maximum duration of the restriction to individual enforcements or if it also applied as a maximum duration of the deferral of payments capable of being imposed on dissident creditors.

Beyond compliance with the aforementioned requirements, eligibility for court homologation requires the approval of financial entities holding at least 75% of the “bank debt” of the debtor5.

Once the above requirements have been complied with, the Commercial Court dealing with the homologation request proceeds with the homologation provided that the measures and burdens imposed on dissident creditors are not disproportionate.

The only grounds available to challenge a Court homologation resolution are breach of the requirements described above, and secondly, where the measures imposed on dissident creditors would be disproportionate.

The ruling of Commercial Court No. 6 of Barcelona has interpreted that:

i. Despite the general reference contained in the additional section nº 4 of the Spanish Insolvency Act to the requirements of refinancing agreements and against the opinion of the majority of the Spanish legal commentators, the court resolved that the homologation of a refinancing agreement only required the approval of financial entities holding at least 75% of the “bank debt” of the debtor and not that referred to in letter c. above. The rationale behind this interpretation was that the specific rule (75% of the “bank debt” of the debtor) should prevail over and override the general requisite (3/5 of the overall liabilities of the debtor) since the homologation ruling should only affect financial creditors, and to consider the interest of unaffected non financial creditors would substantially increase the risk of failure of the homologation attempt6,.

ii. In order to evaluate the burdens imposed on dissident creditors, special attention should be paid to the financial situation of each creditor, the amount of its claim, the existence of encumbrances on the sizeable assets of the debtor, and the security package agreed in the refinancing agreement. This interpretation and especially the combination of the two underlined criteria may raise some concerns to purchasers of distressed debts or NPLs that acquired their claims at a substantial discount where their relative burdens may be assessed against the effective acquisition price and not against the nominal value of the claim.

iii. The meaning of the term “deferral” is not restricted to the mere postponement of the payment by the debtor of amounts already due and payable under a particular debt instrument, but rather involves (or could

5 Cfr. note 4.

6 Cfr. note 4.

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involve) the amendment of the specific financing agreement to preserve any unused disbursement rights. In this particular case the disbursement right of unused amounts was preserved for an additional period of three years.

In interpreting what amounts to a “disproportionate burden”, the judge ruled that a refinancing agreement could legitimately maintain the right of the debtor to carry out additional draw downs under credit facilities made available by a dissident creditor (preservation of existing disbursement rights) but could not impose on such credit providers the increase of the amounts available under those facility arrangements.

iv. The 3 year reference established by additional section 4ª operates only as a maximum duration of the ban on individual enforcements, but not as a limitation of the maximum duration of the deferral of payments capable of being imposed on dissident creditors, which, in the case at hand extended over a period of 7 years.


Rescission under the Spanish Insolvency Act

October 2012


This paper aims to briefly describe the scenarios where acts or actions might be rescinded (particularly in the context of refinancing or debt restructuring of Spanish companies) pursuant to the Spanish Insolvency Act (“SIA”) and the consequences of rescission from a legal standpoint. Procedural questions related to the subject matter are not analyzed in this document.

Whatactscanberescinded?

Section 71 of the SIA establishes the possibility of rescinding certain acts within the two (2) year period preceding the Declaration of Insolvency, on the grounds that those acts are prejudicial to the insolvent estate and regardless of whether or not those acts had been performed with the aim of deceiving the interests of the creditors. Upon Declaration of Insolvency, those actions which are deemed by the judge to be detrimental to the estate of the insolvent debtor and which have been carried out during the two (2) year period preceding such date, may be rescinded even in the absence of fraudulent intention. The underlying rationale for this mechanism of rescission is the protection of the assets of the insolvent debtor as well as the principle of equality amongst creditors (par condition creditorum).

In order to assess which acts or actions may be detrimental to the insolvent estate (and therefore which actions may be rescinded upon Declaration of Insolvency of the Spanish debtor); the SIA establishes two main presumptions:

a. Thus, pursuant to section 71.2 of the SIA, the detrimental nature of the act is irrefutably assumed in cases of (i) disposal actions without consideration (except for liberalities); and (ii) other acts aimed at discharging obligations where the due date is subsequent to the date of the Declaration of Insolvency (in other words, advanced payments) except if such obligations were secured with in rem security.

By way of example of one of the presumptions mentioned above, there are Commercial Court precedents that provide for the rescission of guarantees granted by subsidiary companies in favour of their parent companies “without a consideration” on the grounds of these being detrimental to the aggregate assets of the insolvent company (in this case, the subsidiary companies which granted the securities).

b. Furthermore, pursuant to section 71.2 of the SIA, detrimental nature of acts is presumed but can be rebutted in the event of (i) disposal actions carried out in favour of a party related to the insolvent debtor (i.e. shareholders of the debtor); (ii) creation of in rem guarantees to secure pre-existing liabilities or new liabilities assumed to substitute the former and (iii) payment in advance of obligations or liabilities guaranteed with in rem security, which had a due date subsequent to the Declaration of Insolvency.

In the event of acts or actions outside the scope of the presumptions mentioned above, the detriment shall be evidenced by the person bringing the action of rescission. The fact that an act or action is detrimental to the insolvent debtor’s estate shall be examined by the courts on a case-by-case basis.

Careful consideration should be given to structural modifications of capital companies, such as mergers, spin offs, and assignments of assets and liabilities, among other transactions. Recent case law which cites Section 44.2 and 47.1 of Act 3/2009, on Structural Modifications (Ley de Modificaciones Estructurales de las sociedades mercantiles or “LME”) has consolidated the principle of immunity to rescission of structural adjustments based on (a) the company creditors’ right to contest such transactions in the term and conditions provided for in

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the LME and (ii) the impunity of these structural adjustments once they have been duly registered with the Companies’ Registry.

Whocanbringanactionofrescission?

The legal standing to bring an action of rescission corresponds to the insolvency administrators. Creditors shall have subsidiary legal standing and shall be entitled to bring such an action when they had applied in writing to exercise any action, by stating the specific acts/actions they aim to rescind or contest, when the insolvency administration did not do so within the two (2) months following the request by the creditors.

Effects of rescission

According to the SIA (section 73), the ruling admitting the rescission shall declare the contested act ineffective and shall condemn the parties involved in the rescinded act to the reciprocal restitution of the goods or services, plus interest and fruits, if any.

In the event that the rights and assets affected by the rescission can no longer be returned to the insolvent debtor (since they no longer belong to the defendant but to third parties or parties which, according to the ruling, had intervened in good faith, or which enjoyed non recoverability or registry protection), the defendant shall be liable for paying the value of the assets/rights at the time of their exit from the insolvent debtor’s estate in addition to legal interest. If the ruling finds that the party which contracted with the insolvent debtor intervened in bad faith, the party shall be required to compensate for the damages caused to the insolvent debtor’s estate.

Once there is a ruling in favour of rescission, the defendant creditor shall have a claim against the aggregate liabilities of the insolvent debtor, which shall be paid simultaneously to the reintegration of the assets and rights subject to the rescinded act, except if the court declares bad faith on the part of the defendant creditor, in which case the creditor’s claim will be subordinated.

Exceptions

The SIA lists certain acts which shall not be rescindable, namely, (a) ordinary acts of the professional or business activity of the insolvent debtor performed under normal conditions, (b) acts comprehended within the scope of the special laws that regulate the payment and setoff and liquidation systems of securities and derivative instruments; and (c) security created in favour of claims under Public Law and in favour of the Salary Guarantee Fund (Fogasa) in the agreements foreseen in their specific regulations.

RefinancingAgreements

The rescission regime under the SIA explained above complicated the refinancing process of Spanish companies and the SIA was amended in 2009 and 20111 in order to somehow facilitate and incentivize the refinancing processes.

Further to these amendments, another exception to rescission under the SIA refers to certain refinancing agreements between the insolvent debtor and its creditors. Thus, refinancing agreements (hereinafter referred to as the “RefinancingAgreements” or “RA”) whose purpose shall be to (i) substantially increase the funds available to the deb tor; and/or (ii) expand the tenor or reorganize the terms of the debt that are to be re-negotiated (either by extending its maturity date or creating new obligations in substitution of the former), shall not be rescinded provided they meet the requirements set out in Section 71.6 of the SIA. This protection against rescission will not only cover the Refinancing Agreement itself but will extend to any arrangements and/or payments documented by any mean as well as to the security granted pursuant to such Refinancing Agreement.

1 Real Decreto Ley 3/2009 and Ley 38/2011, dated October 10.


Briefly, the mandatory requirements of a Refinancing Agreement set out in Section 71.6 of the SIA are as follows:

a. The RA shall be part of the debtor’s short and mid-term viability plan;

b. It shall be approved by creditors repre senting, at least, 3/5 of the liabilities of the debtor;

c. It shall be executed before a Spanish Public Notary and recorded in a public document;

d. An independent expert appointed by the Companies Registry of the domicile of the debtor should issue a report assessing: (i) the sufficiency of the information provided by the parties (in particular, by the debtor); (ii) the reasona bility of the Refinancing Agreement and whether the viability plan is sensible and flexible; and (iii) whether the security package of the RA is proportional to market practice.

If the above requirements are met, it is arguable that only the insolvency administrators (and not any other creditors) shall have the legal standing to bring an action for rescission against a Refinancing Agreement. Hence, even though documenting any preinsolvency arrangements among debtor and creditors as a Refinancing Agreement mitigates the risk of rescission, such risk cannot be fully discarded.

Other actions

Outside the scope of the SIA, the Spanish Civil Code contemplates the legal action aimed at the rescission of acts and actions made in fraud of creditors in instances when the creditors cannot collect what is due to them in any other way. In this case, the statute of limitation shall be of four (4) years. However, once the court has issued the Declaration of Insolvency, only the insolvency administrators, and in certain cases the creditors, shall have the legal standing to execute this action.

Conclusions

The insolvency administrators will carefully review any acts or actions performed during the two (2) year hardening period and examine the terms and conditions under which they were carried out. From the creditor’s perspective, it is of paramount importance to check that any acts executed with borrowers are not assumable in the list of presumptions included in the SIA. Likewise, if at all possible, documenting any preinsolvency arrangements among a company and its creditors as a Refinancing Agreement under Section 71.6 of the SIA is highly recommended in order to prevent from the possibility of other creditors claiming the rescission of such agreement.

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Subordinated Credits underthe Spanish insolvency Act

October 2012


1. Introduction

The Spanish Insolvency Act (“SIA”) classifies credits into three main groups: privileged credits, ordinary credits and subordinated credits.

This note is aimed at discussing certain aspects related to subordinated credits, with special emphasize placed on those granted by insiders of the insolvent company (parties “specially related” to the debtor according to the SIA) and credits held by parties acting in bad faith.

2. Subordinated credits

The following credits will be considered subordinated according to the SIA (Section 92 of the SIA):

1. Credits included in the list of creditors made by the receivers but which were submitted late by the relevant creditor1. This is one of the measures contained in the SIA to encourage creditors to meet the deadlines contained in the law; indeed, late communication has as its primary consequence full subordination of the credit that was not communicated on time.

2. Credits characterised as subordinated to all other credits of the debtor according to the contractual arrangements agreed by the parties;

3. Credits for interest of any kind, including late interest, except for those secured by an in rem security up to the sum covered by the security;

4. Credits for fines and other monetary penalties;

5. Credits held by any of the parties “specially related” to the debtor (insiders);

6. Credits arising as a result of revocation actions, when the Court has declared that the counterparty of the debtor acted in bad faith;

7. Credits arising from contracts with reciprocal obligations which are kept in force or reinstated after the declaration of bankruptcy, if it is determined that the creditor has repeatedly hindered fulfilment of the contract against the insolvency interests.

2.1. Insiders

The SIA introduced the concept of “insider” (person or entity “specially related to the debtor” according to the SIA) to the Spanish insolvency regulations in order to identify entities or individuals who have a privileged position in terms of information about the debtor or influence on the decisions made by the debtor.

1 Except for credits whose existence arises from the documentation of the debtor or any in any other manner recorded in the

insolvency procedures, in which case subordination is not applicable.


The SIA defines the insiders according to two categories depending on whether the insolvent company is a natural person or a corporation.

The first group (when the debtor is a natural person) is based on family links: the debtor’s spouse, relatives (ascendants, descendants and siblings) and the in-laws (spouses of those relatives previously mentioned).

Regarding the second group (cases in which the debtor is a company or corporation), the following qualify as insiders and therefore their credits will be considered subordinated in accordance with the SIA:

a. Shareholders who are liable for the company debts and shareholders who were holders, when the credit was granted, of at least 5% of the share capital of the debtor (in the case of listed companies) or 10% of the share capital (for non-listed companies).

The above stakes in the company will determine subordination of the debt against the debtor only if the relevant stake was held from the beginning (when the credit was granted), not affecting those creditors who reached such level of participation at a later stage. However, it is important to note that if the company that acquires the trigger stake after granting the credit has performed administrative duties (either by appointing directors, by having “shadow” directors, or by falling into any of the circumstances foreseen in section b) below), the credit will be subordinated;

b. Directors (legally appointed or de facto), liquidators and representatives with general powers of the debtor (as well as those who have acted as such during the 2 years preceding the declaration of insolvency).

c. Companies forming part of the same group as the insolvent company and their “common shareholders” (provided that the latter fulfil the requirements of section a) above). Reference of the SIA to the “common shareholders” (introduced in an amendment to the SIA published in 2011) is not totally clear and can be open to different interpretations. It would be reasonable to construe that the law intends to subordinate credits held by persons or entities that have a stake of 5% or 10% in all the companies belonging to the group except for the insolvent company. But a literal interpretation of the law would also accept cases such as companies having a 5% or 10% stake in at least 2 of the companies belonging to the group of the debtor.

In addition, assignees or awardees of credits held by persons or entities that are considered insiders according to the above rules are presumed to be insiders if the acquisition of the credit has been effected within the 2-year period prior to declaration of bankruptcy. In other words, the acquisition of credits from an insider will imply subordination even if the new creditor does not fall within the circumstances contemplated above. The SIA leaves an open window to challenge the subordination by stating that the presumption of insider admits evidence to the contrary. The discussion in this case is whether such evidence to the contrary can really amount to challenging the ratio legis (for instance, if the assignee did not have a privileged position that justifies the consideration of “insider”) or if the challenge would only be limited to the qualification of the assignor as an insider or the compliance with the 2-year hardening period.

Finally, it is important to note that if the creditor classified as an insider does not challenge such ranking in a timely and correct manner, the Insolvency Court shall declare the guarantees of any kind granted in favor of such creditor extinguished.

2.2. Insolvency revocation and creditors acting in bad faith

Sections 71 to 73 of the SIA contemplate cases in which acts carried out by the debtor can be rescinded through the insolvency procedure. As a general rule, acts carried out by the debtor within the 2 years prior to the declaration of insolvency can be rescinded if they are detrimental to the assets

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of the bankruptcy. The SIA further states that a fraudulent intention is not required for the act to be subject to revocation.

If an act or business carried out by the debtor is rescinded within the insolvency procedure, the immediate consequence is that the act is declared ineffective, and the parties (the insolvent company and its counterparty) will be liable for restoring the contributions effected. Therefore, in certain circumstances, this might imply that the debtor is compelled to restore third parties to the price paid for the acquisition of certain assets whose transfer has been rescinded, thus giving rise to a credit in favour of such third party.

In view of the above, as a cautionary procedure to protect the insolvent company and, particularly the rest of the creditors of the insolvency, the SIA states that credits borne in a revocation action, but in favour of creditors who acted in bad faith, are subordinated to the rest of the creditors of the insolvency.

Bad faith is not presumed, but must be declared in the relevant judicial ruling. However, the concept of bad faith is not defined in the SIA and consideration of the same is ultimately left up to the discretion of the courts. According to case law, certain circumstances such as knowledge by the creditor of the economic difficulties of the debtor, or trying to take advantage of such information against the interests of the rest of the creditors, are key considerations when evaluating bad faith being concurrent on the creditor.

Finally, it is important to point out that, in addition to the subordination consequences, the party acting in bad faith shall be responsible for paying the insolvent company.an indemnification for the losses and damages caused to the assets of the insolvency.

3. Other consequences of the subordination

The are other consequences applicable to subordinated credits under the SIA, such as the following:

─ Holders of subordinated credits can request a declaration of insolvency of the debtor before the Spanish Court, but will not benefit from the privilege contained in Section 91.6 of the Insolvency Law2.

─ Holders of subordinated credits cannot be appointed as insolvency administrators. However, if a creditor holds both subordinated and unsubordinated credits, he can be appointed as the insolvency administrator.

─ Subordinated creditors shall not be entitled to vote at the creditors meeting, but the composition with creditors (convenio) will be fully binding for them.

─ Subordinated creditors shall be affected by the same reductions of debt and waiting periods applicable to ordinary creditors according to the composition with creditors. But the waiting periods of the subordinated debt will only be counted starting from the date on which the composition with ordinary creditors has been totally fulfilled.

However, it is important to mention that Section 100.1 of the SIA states that proposals for composition with creditors cannot include, for ordinary credits, reduction of debts over 50% or waiting periods longer than 5 years. These limits are only established for ordinary credits; therefore, notwithstanding the above paragraph, it should be understood that the composition for creditors can contain proposals for subordinated debts which are beyond these limits.

2 According to the SIA, 50% of the credit held by the entity that has requested in Court declaration of insolvency of the debtor

is considered privileged (therefore payable with priority to ordinary credits). However, if the creditor that filed for declaration

of bankruptcy is considered as a subordinated creditor, this privilege will not be applicable to such creditor.


The above does not affect the possibility that the subordinated creditors have to accept alternative proposals for conversion of their credits into shares or stakes in the insolvent company, or in participation loans (créditos participativos), if the proposal for composition with creditors has offered such alternative.

─ If the insolvency ends up in a winding-up, Section 158 of the SIA states that payment of the subordinated credits shall not be performed until the ordinary credits have been fully settled (including unsecured ordinary credits, secured credits and privileged credits). Therefore, subordinated credits rank below all other credits of the insolvent company but have seniority with respect to equity. Payment shall be made in the order established in Section 92 (see list contained in section 1 above) and, when appropriate, proportionally within each group.

─ According to the SIA, if the directors (legally appointed or de facto) are liable for the insolvency, the judgement imposed on such directors (either individuals or corporations) can include total or partial coverage of the deficit of the insolvency (assets vs. debts). This implies that subordinated creditors could eventually benefit from such a sentence if the judgement includes responsibility by directors for the deficit required to cover subordinated debts. Therefore, in those cases where the directors have acted negligently, subordinated creditors will have important incentives to obtain such a sentence in the insolvency procedure.

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Some Legal Issues on SpanishPre-Insolvency Debt Restructurings

March 2013

1. Introduction

Given the prolonged distressed situation of the Spanish credit market, corporates and creditors are finding it increasingly necessary to proceed to debt restructurings. Such debt restructurings may be limited to amend and to extend situations or have a broader effect, including haircuts, equitization and/or equivalent measures. In the recent years we have seen different restructuring trends mainly due to: (i) the Insolvency Laws having been amended to open alternative routes (not as useful as intended); (ii) the use of foreign jurisdictions to procure non-consensual restructurings and (iii) the evolution of Spanish restructuring market practice as well as market participants becoming more knowledgeable on structures which have been already known in other jurisdictions for some time.

This note aims to briefly identify the most analysed restructuring alternatives in Spain and spots some of the main legal issues and tools surrounding the same. For the purposes of this note the term “Insolvency Act” or “SIA” shall refer to Law 22/2003 as amended from time to time; whereas the term “Consensual Restructuring” shall refer to a debt restructuring on which 100% of the creditors are consenting; likewise, the term “Non-Consensual Restructuring” shall refer to a debt restructuring were not 100% of the creditors are consenting.

This document does not pretend to be comprehensive and should not be relied upon. Specific legal advice should be at all times requested for each particular situation.

2. Some Issues on Spanish Restructuring

Consensual Restructuring as a pattern

It can be asserted that most of the Spanish debt restructurings (certainly in number, and less clearly in terms of volume) have been performed by means of Consensual Restructurings. Therefore, a particular debtor will be facing maturities, liquidity tensions and/or other distressed situations and financial creditors will unanimously agree to provide refinancing or restructuring options. This has been the general pattern in the past, although it will not necessarily be the pattern in the future.

As a general principle —and subject to different provisions being agreed upon the finance documents— financial debt restructuring will require consent of 100% of the creditors whose debt is to be amended. If the respective finance documentation provides otherwise —like majority decisions under syndicated agreements— such different agreements should be respected, although it is market practice in Spain that haircuts, extensions, amendment of interest rates and generally all “money terms” under bank documents require unanimous consent to be amended. This is not always the case for some delicate issues such as amending pre-payment provisions or changing applicable law, where particular attention should be given.

Filing for insolvency by the Debtor if a deal is not agreed

According to Section 5 of the Insolvency Act a debtor must file for insolvency within the two (2) months following the date on which it knows —or should have been aware— of his state of insolvency. By “state of insolvency” the SIA refers to a cash flow test measured on the inability to pay its debts when due. This “obligation to file” is critical on each pre-insolvency restructuring process as it will determine an end-game



date, save for the pre-insolvency period described below. Director’s liabilities if filing is not made serves as a good incentive for the filing and a creditor should expect the company to do so within the said period. Creditor’s filing for insolvency is technically possible although difficult in practice due to the tests that need to be evidenced and the chances that, upon such risk, the debtor prefers to file itself.

The Pre-Insolvency Period (Section 5 bis of the SIA)

Section 5 bis of the SIA allows the debtor to postpone the declaration of voluntary insolvency if it has commenced negotiations in order to reach a refinancing agreement or adhesions to an early composition of creditors. In this case the debtor shall communicate such negotiations at any time before the ending of the two (2) month period and will benefit from additional four (4) months to reach an agreement with its creditors (three (3) to reach an agreement and one (1) more to document it) (the “Pre-Insolvency Period”).

During the Pre-Insolvency Period the main effects are that the company is protected from being filed for insolvency by its creditors and that directors are not obliged to file for insolvency within the statutory two (2) month period. However, Section 5 bis does not include any temporal stay to individual enforcements or foreclosures by creditors during the Pre-Insolvency Period. If during the Pre-Insolvency Period the borrower reaches an agreement with its creditors by virtue of which it is no longer insolvent, then it will not have to file for insolvency after the said period. However, it will most likely do so if the agreement is not reached. It should be also be noted that nothing prevents the debtor from filing for insolvency at any time within the Pre-Insolvency Period if it so considers.

Clawback and the concept of Refinancing Agreements

In order to protect the assets of the insolvent debtor as well as to maintain the principle of equality amongst creditors (par condition creditorum), Section 71 of the SIA establishes the possibility of rescinding certain acts within the two (2) year period preceding the declaration of insolvency, on the grounds that those acts are prejudicial to the insolvent’s estate. Upon declaration of insolvency, those actions which are deemed to be detrimental to the estate of the insolvent debtor and which have been carried out during the two (2) year period preceding such date, may be rescinded even in the absence of fraudulent intention.

Some actions which one would ordinarily expect to see in a Consensual Restructuring, such as the granting of new security in exchange of an extension, the increase in the interest rate (or inclusion of PIK elements) and alike may not only fall within the risk of rescission but, in some circumstances, fall under, certain presumptions of rescindibility (mostly based on voidable preference or undervalued transactions) which need to be analysed in detail.

In order to mitigate this risk the Insolvency Act was amended to include the concept of a refinancing agreement (“RefinancingAgreement”). A Refinancing Agreement is a transaction which complies with the following conditions: (i) the Refinancing Agreement shall be aimed at substantially increasing the funds available to the debtor; and/or to amending the terms of the debt that is to be re-negotiated by means of the Refinancing Agreement; (ii) the Refinancing Agreement shall be a part of a short and mid term viability plan of the debtor; (iii) the Refinancing Agreement shall be approved by creditors representing, at least, 3/5 of the total liabilities of the debtor; and (iv) an independent expert appointed by the Spanish Companies House (Registro Mercantil) should issue a report assessing on, among other issues, sufficiency of the information provided, reasonability of the Refinancing Agreement, proportionality of its security and feasibility of the viability plan.

From a formal standpoint the Refinancing Agreement shall be executed before a Spanish Notary Public and recorded in a public deed to which all documents evidencing the content of the Refinancing Agreement as well as the fulfilment of all the above-mentioned requirements shall have to be attached. If the above is complied with and the restructuring is included within a broader Refinancing Agreement, then the claw-back risk of the financing or its security is severally mitigated (not eliminated, although there is substantial discussion as to the exact level of protection given by the Refinancing Agreement due to the argued inconsistency of two different provisions within the SIA).

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Additionally, the Refinancing Agreement will have two additional effects: (i) section 84.2.11º of the SIA provides that any credits representing income for the debtor (“fresh money”) obtained within a Refinancing Agreement shall be deemed 50% credit against the estate —i.e. super senior as regards non-charged assets— and 50% privileged –senior to ordinary claims and junior to pre-deductible claims, in both cases as regards non-charged assets-; and (ii) a Refinancing Agreement could be used to effect a certain “cram-down” through a Court Homologation, as described below.

Note that the rule that a Refinancing Agreement requires 3/5 of total liabilities of the debtor does not replace the need for the 100% consent of the debt which was described above. This is, 3/5 of total liabilities will be needed in order to qualify as a Refinancing Agreement and, in addition, the required majorities for obtaining consent will need to be in place or a Court Homologation —described below— be available and used.

Limited Non-Consensual Restructurings

As said above the tools available for pre-insolvency non-consensual restructurings in Spain are limited and thus its use has not been significant. Limited does not however mean inexistent and they need to be considered in each situation. Below is the description of some available options. This note intends to refer to pre-insolvency options and thus it does not cover the alternatives which the Spanish insolvency process (or concurso) brings, either by reaching an agreement within the insolvency process or reaching an anticipated composition before insolvency and imposing it while insolvent (thus shortening the respective timeframes).

Cram-down through Court Homologation

The 4th Additional Disposition of the SIA provides that any Refinancing Agreement that is compliant with the requirements set out above and is approved by financial entities holding al least 75% of the “bank debt” of the debtor can be approved by the relevant Commercial Court (“homologación judicial”) and, if approved, some of its provisions can be forced to the other 25% of unsecured financial entities. Although the wording of the provision is unclear, the intention seems to be that once the Refinancing Agreement has been homologated, the stays in payments accepted by the financial entities adhering to it are extended to any absent or dissident unsecured financial entity (secured credits not being forced to the stay)1.

The relevant Commercial Court shall ensure the reasonability of the Refinancing Agreement and make sure that the mechanism is not disproportionate with respect to any absent or dissident creditors. In particular, the judge shall ensure that the stay period agreed under the Refinancing Agreement and security granted to secure such agreement are not disproportionate for dissenting creditors.

The said Additional Disposition includes a three (3) year limitation which has lead to confusion by market participants, being doubtful whether such three (3) year limit applies as a maximum duration of the deferral of payments capable of being imposed on dissident creditors or as the maximum duration of a restriction to individual enforcements (which could eventually even affect to secured creditors as argued by some scholars) which the provision includes. There are some Court Precedents stating that the three (3) year period established by the 4th Additional Disposition does not operate as a limitation of the maximum duration of the deferral of payments capable of being imposed on dissident creditors, thus if this interpretation is maintained longer periods could be imposed (Ruling of the Commercial Court of Barcelona number 6, dated June 5, 2012 / Ruling of the Commercial Court of Seville, dated May 21, 2012). Whether this interpretation will finally prevail is still unclear. However how the three (3) year limitation on enforcement is to be interpreted is still unclear, particularly as regards who can be prevented from enforcing (secured and/or unsecured) and how this provisions should be read in combination with the stay to the unsecured.






There are also discussions as to whether the Refinancing Agreement to be homologated will require both the 3/5 of total debt approval requirement which is inserted in the definition of “Refinancing Agreement” and the 75% requirement mentioned above or if, on the contrary, only the latter is required. On this topic the Commercial Court number 6 of Barcelona dated June 5, 2012 confirmed that the homologation of a Refinancing Agreement only requires the approval of financial entities holding at least 75% of the “bank debt” of the debtor (and not 3/5 of the liabilities, as it is established in Section 71.6), since the homologation ruling should only affect financial creditors. Again whether this interpretation will prevail is still unclear2.

What so far seems to be clear is that the limitations of this Court Homologation are significant: (i) secured creditors should not be forced to a stay through a Court Homologation (note that the law seems to refer to the impossibility of forcing secured creditors rather than forcing creditors as regards the value of their security); (ii) non-consenting creditors may not be forced to a haircut through a Court Homologation and (iii) creditors may not, through this process, be obliged to equitise their debt (debt-for-equity swap). These limitations have made the Court Homologation less useful in practice.

Non-consensual restructuring through the use of contractual provisions

In addition to using a legal process, many market participants have considered (and executed) Non-Consensual Restructurings by applying structures and contractual provisions which were inserted in their respective documents when the deal was initially agreed on in a previous restructuring. Generally this will involve: (i) a somewhat controlled enforcement of the pledge of shares of the debtor (or its holdco) which generally will require a majority vote; (ii) payment of the enforcement price through debt (or sustainable notes) rather than in cash; (iii) delivery of such notes to consenting and dissenting lenders of the syndicate (so including the lenders that did not vote in favour of the enforcement) through the respective waterfall and (iv) application of release provisions in the intercreditor agreement to release the remaining debt (which generally can only be applied upon an enforcement of security taking place).

There are various reasons why these type of structures are rarely used in Spain, mostly being: (i) this system generally requires that a pledge over the shares of the borrower or its holding company be in place, which is not always the case, (ii) in order to proceed in this way the enforcement of the shares will generally need to be made by appropriation (rather than by public auction, which is the Spanish primary system for enforcement) and this will ordinarily imply using jurisdictions such as Luxembourg, which may not be in place at the time, (iii) within the enforcement process payment will need to be made in new debt (sustainable notes) rather than in cash, such method of payment creating a number of issues in a Spanish enforcement and thus reverting generally again to foreign jurisdictions, and (iv) the vast majority of the intercreditor agreements drafted under Spanish law not including release provisions which would allow the Agent to release the remaining debt (and even more, most of the Spanish capital structures below a certain thresholds not having significant intercreditor agreements in place).

Due to the above limitations this process seems to be particularly useful in structures where Luxco entities (or equivalents) are located on top of the operative company, the pledge agreements can be enforced in jurisdictions that allow for non-cash appropriation and mostly where the finance documents are UK law or, if Spanish law, LMA based. These characteristics will mostly be found in post-LBO structures and in some other deals which, being above a certain value, have already been restructured.

The use of a UK Scheme of Arrangement

It is not the purpose of this note to discuss and argue on the validity and enforceability of a UK Scheme of Arrangement on the debt of a company with its Center of Main Interest (or COMI) in Spain but it should be indicated that UK Scheme of Arrangements to effect a non-consensual restructuring of a Spanish company have been used in the past and should be analyzed for particular situations.

2 Cfr. note 1.

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1. Introduction

The subject matter of this article is to summarize the amendments recently made to Spanish legislation through Act 1/2013, dated 14 May on certain measures aimed at reinforcing the protection of mortgage debtors, the refinancing of debts and the so-called “social lease” (hereinafter, “Act 1/2013”). Act 1/2013 was published in the State Official Gazette on 15 May 2013 and, according to its Preliminary Recitals, is mainly aimed at “alleviating the situation of mortgage debtors”, as well as at reinforcing its protection. This Act is the result of the development of Royal Decree 27/2012, dated 15 November, on urgent measures to protect mortgage debtors without resources, validated by the Congress of Deputies and carried out through urgent proceedings for its processing.

Likewise, according to its Preliminary Recitals, Act 1/2013 is the result of several proposals made during over the past year in the view of current financial situation of our country at the request of both the popular initiative and the different parliamentary groups represented in the Spanish Parliament. Furthermore, this act is also aimed at reflecting the Judgment rendered on 14 March 2013 by the European Union Court of Justice, which issued its decision regarding the question brought before it by the Commercial Court No. 3 of Barcelona in connection with the interpretation of the Council Directive 93/13/EEC, dated 5 April 1993, on abusive clauses in contracts entered into by consumers, in compliance with the provisions of Section 267 of the Treaty on the Functioning of the European Union.

As already mentioned, we shall now briefly analyze the most relevant amendments made to our legislation, which can be divided into the following sections:

2. Legal analysis

2.1. Preliminary

As already announced, the subject matter of this article is to analyze the recent amendments introduced as a result of the publication and entry into force of Act 1/2013, which is divided into the following four chapters:

i. Chapter I regulates, among other things, the immediate two-year stay on evictions with regard to families in a situation of special vulnerability and who have suffered a relevant change in their economical circumstances.

ii. Chapter II, III and IV are aimed at modifying the regulations for the mortgage market, civil proceedings and those related to urgent measures for debtors without financial resources, respectively.

Particularly, the amendments introduced by Act 1/2013 affect the following acts:

Act 1/2013, Dated 14 Mayon Certain Measures Aimed at Reinforcingthe Protection of Mortgage Debtors,the Refinancing of Debts and the so-called “Social Lease”

July 2013



— The Mortgage Act dated 8 February 1946 (hereinafter, “MA”).

— Act 1/1981, dated 25 March, regulating the mortgage market.

— Act 41/2007, dated 7 December, which modifies Act 2/1981, dated 25 March, on the regulation of the mortgage market and other rules.

— Civil Procedure Act 1/2000, dated 7 January (hereinafter, “CPA”).

— Royal Decree 6/2012, dated 9 March, on urgent measures to protect mortgage debtors without resources.

— Consolidated Text of the Act regulating pension plans and funds, as approved through Royal Legislative Decree 1/2002, dated 29 November.

— And finally, the Consolidated Text of the Act governing and monitoring private insurance Businesses, approved through Royal Legislative Decree 6/2004, dated 29 October.

Notwithstanding the modifications mentioned above, we shall focus this article on the amendments made to the mortgage regulations, as well as in eviction proceedings.

2.2. Suspension of evictions affecting first residences of specially vulnerable collectives

The first measure adopted by Act 1/2013, of an exceptional nature, is the immediate suspension of the evictions affecting certain social collectives in determined economical circumstances. The adoption of this first measure tacitly revokes the efficacy of Royal Decree-Law 27/2013, dated 15 November, on urgent measures to reinforce the protection of mortgage debtors.

In particular, according to Act 1/2013, the following requirements have to be met to obtain the suspension of evictions (see Section 1):

a. This measure shall only be in force during the two years following the entry into force of Act 1/2013.

b. The measure shall be applicable to judicial and extra-judicial proceedings regarding the sale of debtors’ first residence.

c. Debtors shall have to be in a situation of special vulnerability, which shall be considered to exist in the following cases:

• Large families (“familias numerosas”) with three or more children.

• Single-parent families with two children.

• Families responsible for the care of a minor below the age of 3.

• Families in which one of its members has a degree of disability greater than 33%, a dependency situation or a permanent illness which prevent the performance of any labor activity.

• Families in which the mortgage debtor is unemployed and has already exhausted his unemployment benefits.

• And finally, victims of gender violence.

Furthermore, according to Act 1/2013, the following economical circumstances shall have to exist to evidence an alteration or a relevant difficulty:

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— Total family income cannot exceed three times the so-called “indicador público de renta de efectos múltiples” (public revenue index).

— A relevant alteration within the last four years in the economical circumstances of the family, understood, among others, in case the mortgage charge of the family has been increased by, at least, 1,5.

— Mortgage instalments exceeding 50% of the net income of the family.

— The property is the only residence of the family.

According to the act, the mortgage debtor shall be entitled to evidence all the above before the Judge or the Notary Public in charge of the proceedings at any time but always, before the eviction itself takes pace.

2.3. Relevant amendments affecting the mortgage market

Chapter II of Act 1/2013 is aimed at modifying the mortgage regulation with the purpose of improving the mortgage market and specially, the condition of mortgage debtors. In particular and as already commented, this chapter modifies the Mortgage Act, the Act regulating the Mortgage Market and Act 41/2007, which modifies the regulation of mortgage market.

Amendments made to the Mortgage Act

The amendments made to the Mortgage Act are mainly focused on the regulations affecting mortgages constituted on people’s first residences.

In this regard, the first amendment introduced is referred to the registry of mortgages related to first residences at the Land Registry; stating the nature of such mortgages therein (Section 21 of the Mortgage Act).

The nature of these mortgages (i.e. the fact that they are for a first residence) grants the mortgage debtor certain additional protections, such as the limit established by Section 114.3 MA in relation to the interests in arrears accrued by the mortgage debtor on his/her first residence, which cannot surpass three times the rate for legal interest and it shall only be accrued on the loan’s principal and shall not be capitalized, except in the case mentioned under Section 579 CPA.

In connection with mortgage enforcements, the out-of-court sale of mortgaged properties has also been reinforced under this law. In particular, it is now established that such sales shall be made before a Notary Public if the following requirements are met (Section 129 of the MA):

— Valuation of the property. A minimum of 75% of the property’s assessed value must be a fixed amount and it is not possible to use any value different from the one established for direct judicial enforcement. This value is also fixed for the enforcement of pledges.

— Agreements regarding extra-judicial enforcement proceedings. This provision shall have to be separately included in the corresponding public deed, expressing the nature of first residence of the asset. In cases where such nature is not expressly stated, it shall be presumed.

— Determined amount. Extra-judicial sales shall only be applicable to guarantees where the amount is initially determined, with two particularities: (1) in cases where there is a progressive reimbursement agreement, payments already made shall have to be evidenced, (2) in cases where floating interests rates were agreed upon, its liquidation pursuant to the agreed means shall have to be also evidenced.


— Electronic public auction. The sale shall be performed through an electronic public auction, where the rules set forth under the Mortgage Regulations for notifications, procedure, amounts and effects enforceability are applicable, in addition to the rules Spanish Civil Procedures Act. At the end of the proceedings, a notarial certificate shall be issued to evidence the final bid (“precio del remate”) and the pending payment debt.

— Abusive clauses. In case the Notary Public understands that some of the clauses included in the mortgage deed could be considered abusive, he/she will inform on this fact to the debtor, the creditor and to any other participants, in which case it is possible the suspension of the proceedings, if the parties evidence that they initiated the proceedings to obtain a declaration of the abusive nature of such clauses.

Amendments affecting Act 1/1981, dated 25 March, regulating the Mortgage Market, and Act 41/2007, dated 7 December, by means of which Act 2/1981 is modified

Firstly, the purpose of this amendment is to strengthen the independence of the appraisal companies with regards to financial entities. Furthermore, and for greater security, appraisal companies shall be audited and their financial year must coincide with the calendar year (see Section 3 Act 2/1981).

It should be stressed a new obligation has been established for financial entities (even for ones that have their own appraisal services), whereby such entities must accept any appraisal provided by the client, if such appraisal is certified and in force; this is established without prejudice to the financial entity’s being entitled to carry out the relevant verifications. Non-compliance with this obligation will be considered as a severe infringement (see Section 3 bis I Act 2/1981).

Another of the measures imposed on financial entities is the prohibition from acquiring or holding a significant stake (10%) in the appraisal company.

With regards to credit transactions, and in particular to the content of Section 5, subparagraph 2 of Act 2/1981, which provides that the loan or credit guaranteed by the mortgage shall not exceed 80% of the appraisal value, it is stated that the term for repaying the loan or credit, when it is to finance the purchase, construction or renovation of the property, shall not exceed 30 years.

Finally, subparagraph 3 of the same Section 5 has been deleted, thus eliminating the possibility for financial entities to request an extension of the mortgage, in the event the value of the property decreases by more than 20% of its value, due to market fluctuations or any other circumstance.

As far as Act 41/2007 is concerned, it does not contain any significant amendments, except for the First Additional Provision, Section 1a, which extends the scope of application of the regulations for reversing mortgages, causing them to cover not only dependent persons but also those with a degree of disability of at least 33%.

2.4. Amendments to the enforcement proceedings

Civil Procedure al Act 1/2000, dated 7 January

Even though Act 1/2013 indicates that the amendments to the abovementioned Civil Procedure Act does only affect the foreclosure provisions “so that the rights and interests of the mortgagor are effectively protected”, the truth is that Chapter III of Act 1/2013 affects all the enforcement proceedings in general, not only foreclosure proceedings.

For a better comprehension of the amendments made to the Civil Procedure Act, this section will be divided into three subsections: (a) effects on foreclosures, (b) effects on enforcement proceedings and (c) effects on real estate public auctions.

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a. Amendments affecting foreclosure regulations

— Rate of the foreclosure auction. The document establishing the mortgage shall contain the assessed value of the mortgaged property determined by the parties, so that this might serve as a rate at the auction. However, Act 1/2013 has included a limit to such price, establishing that it cannot be lower than 75% of the appraisal value.

— New grounds for challenging foreclosures. This amendment affects all enforcement proceedings, but in particular, as set forth by Section 696 CPA, it provides new grounds for contesting foreclosure proceedings. Once the challenge has been filed, the Court Clerk shall summon the parties to a hearing before the Court which issued the general enforcement order, at least fifteen (15)days1 after the date of issuance of the order of enforcement. If the challenge is admitted, the enforcement proceedings shall be dismissed if an abusive clause is the reason for the foreclosure. If not, the enforcement will continue without taking into account such abusive clause.

— Debtor’s cooperation in possible decreases of the mortgage debt. In order to encourage the participation in auctions, if an interested party requests that the property undergo an inspection and the debtor agrees to such request and cooperates with the inspection, a 2% decrease of the relevant value can be requested before the Court (see 691 CPA).

— Increase of the number of outstanding instalments necessary to claim the totality of the debt. Previously, the Civil Procedure Act provided that if a mortgage payment came due and the debtor had not complied with his payment obligation, then the total debt could be claimed, on condition that this provision was registered. Act 1/2013 modifies Section 693 CPA by providing that, in order to claim the totality of the debt, three instalments must be outstanding. In the event of mortgages over people’s first residence, Act 1/2013 does also establish that the debtor has the possibility of depositing the amounts for the instalments, in order to release the property.

b. Amendments affecting enforcement proceedings regulations

— Abusive clauses. One of the most important features introduced by Act 1/2013 is the possibility of analyzing whether the clauses included for enforcement are abusive or not. This question can be considered by (1) the Judge, ex oficio, granting the parties with a term of fifteen (15) days2 for makingallegations (see 552.1.2 of the CPA) or (2) as grounds to challenge the enforcement, which would prevent the debtor from initiating other proceedings with no suspensive effects for the recognition of the abusive clauses. (see 557.1.7º CPA).

As to the transitional regime, the 4th Additional Provision of Act 1/2013 grants the debtor an additional one-month term to file an extraordinary motion for opposition based on the abusiveness of the clauses, if the enforcement proceedings were already initiated and the opposition period of ten (10) days had already expired when this Act entered into force.

— Limitation of debtors’ legal costs in cases where the first residence is being foreclosed. Legal costs are limited to 5% of the amount requested in the claim for enforcement (see 575.1 bis CPA).

1 Subject of a new amendment made by Act 8/2013, of 26 June, on the restoration, renewal and renovation of property. Act 1/2013 only provided four (4) days.

2 Subject of a new amendment made by Act 8/2013, of 26 June, on the restoration, renewal and renovation of property. Act 1/2013 only provided five (5) days.


— Insufficiency of the final bid in cases where the first residence is put up for auction. Section 579 of the CPA establishes that if the final bid for the auctioned mortgage is insufficient, then the creditor may seek satisfaction by bringing other enforcement proceedings. However, in the event of first residences:

• The debtor will be released from his/her obligations if 65% of the total amount of the debt is covered in a five-year term from the time the order approving the auction is issued (or 85%, if it is covered in ten years thereafter). Otherwise, the creditor can claim the total outstanding amount.

• 50% reduction of the debt, if the first residence is sold within ten years from the acceptance of the final bid.

c. Amendments affecting the regulations for auction proceedings

— Holding the auction. Firstly, the deposit to be made by the bidders has decreased from 20% to 5% of the appraisal value for the assets (see 647.1 CPA), which encourages the participation in auctions. In line with the foregoing, in order to obtain a wider dissemination of the information, electronic public auctions are provided. Furthermore, the term provided for depositing the difference between the deposit initially made by the bidder and the final price has been increased from twenty (20) to forty (40) days (see 670.1 CPA).

— Payment allocation. If the result of the auction were not enough to satisfy the amounts requested by the creditor, plus the interest and the legal costs, the amount obtained will be allocated according to the following order: compensatory interest, principal, default interest and costs; and the Court will issue a certificate indicating the final outstanding amount (see 654.3 CPA).

— Increase the percentage for the awarding of the property by the creditor in case of an auction with no bidders (see 671 CPA) If there are no bidders at the auction, the creditor may seek the awarding of the property for an amount equivalent to 50% of the appraisal value. However, if the property is the first residence of the debtor, the awarding shall be for 70% of the appraisal value or, if the total amount due is lower that such 70%, the property shall be awarded for 60% of its appraisal value. The resulting amount shall be divided up according to the payment allocation rule set forth in Section 654.3 CPA (compensatory interests, principal, default interest and costs).

2.5. Other amendments

Royal Decree-Law 6/2012, of 9 March, on urgent measures for the protection of mortgage debtors without resources

Act 1/2013 extends the applicable scope of the Royal Decree-Law to any type of mortgage guarantors, under the same conditions as those of the debtor. Furthermore, a new section (Section 3 bis) is included in order to allow the guarantors and non-debtor mortgagors that may be at the exclusion threshold to request that the creditor exhaust all the debtor’s assets before claiming the debt, even if they have waived the benefit of excussion.

Moreover, Act 1/2013 expands the scope of application of exclusion threshold in case of debt restructuration if (1) the total income of the family does not exceed three times the IPREM (public revenue index); (2) a relevant alteration within the last four years in the economical circumstances of the family, understood, among others, in case the mortgage charge of the family has been increased by, at least, 1,5 or (3) if the mortgage installments exceed 50% of the net income of the family.

For the reduction of the debt or the dation in payment (“dación en pago”), the following additional requirements have to be met: (1) that any member of the family unit has other assets for paying

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the debt; (2) that mortgage is established over the first residence of the debtor and that it was granted for its acquisition; (3) that no other guarantees are provided, (4) and that, in case of co-debtors outside the family unit, they are also included in the so-called exclusion threshold.

The amendment contains a reduction to 2% of the default interest accrued over the pending principal of the loan for the persons included in the exclusion threshold.

Act 1/2013 also modifies certain provisions related to the voluntary adhesion to the Code of Good Practice by financial entities set forth in the Royal Decree-Law. Said code includes three measures for protecting mortgage debtors:

1. Previous debt restructuration prior to foreclosure proceedings.

2. As an additional measure, reduction of the debt if there is no possibility of restructuration.

3. And as a substitutive measure, “dación en pago” or dation in payment, in case the two abovementioned measures are completely unfeasible.

Furthermore, Act 1/2013 also establishes the obligation for financial entities to inform their clients about the possibility of adhering to such provisions, in case they meet the exclusion threshold requirements and the law imposes sanctions if this obligation is breached.

Consolidated Text of the Act on Pension Plans and Funds, enacted by Royal Legislative Decree 1/2002, of 29 November

Act 1/2013 included the 7th Additional Provision which included the participants of a pension fund’s faculty to effectively request their vested rights in order to avoid losing their residence. This measure will be applicable for a term of two years as from the entry into force of Act 1/2013, if other requirements are met, such as the lack of any other possible assets for the repayment of the debt.

Consolidated Text of the Private Insurance Supervisory Act, enacted by Royal Legislative Decree 6/2004 of 29 October 2004

A minimal amendment is made regarding life insurance, particularly with regard to the types of insurance where the policy holder does not assume investment risks.


1. Introduction

Recent court resolutions in respect of pre-insolvency homologation of refinancing agreements in Spain and, in particular, the ruling issued recently regarding the case of CELSA (Compañía Española de Laminación, S. A.), have significantly altered the existing understanding of creditors (secured and unsecured) in respect of the Spanish restructuring options. In particular these resolutions affect the 4th Additional Disposition of the Spanish Insolvency Act (the “SIA”) which allows to, upon certain circumstances, force extensions to dissident creditors in Spanish restructurings through the intervention of a Court (hereinafter, the “Court Homologation”).

The regulation on Court Homologations has been subject to different interpretations due to its lack of clarity. Its literal wording is unhelpful and unclear and thus market participants, and Courts, are having to interpret it on a case by case basis. At this point case law is becoming relevant to understand which interpretations seem to be prevailing, although contrary resolutions cannot be disregarded.

This note aims to briefly identify some of the issues which the said Court resolutions have established as regards the Court Homologation. For the purposes of this note the term “Insolvency Act” or “SIA” shall refer to Law 22/2003 as amended from time to time.

2. ConceptofRefinancingAgreements

A “RefinancingAgreement” (as a defined term) is a particular transaction defined in the SIA which complies with the following conditions: (i) the Refinancing Agreement shall be aimed at substantially increasing the funds available to the debtor; and/or to amending the terms of the debt that is to be re-negotiated by means of the Refinancing Agreement; (ii) the Refinancing Agreement shall be a part of a short and mid term viability plan of the debtor; (iii) the Refinancing Agreement shall be approved by creditors representing, at least, 3/5 of the total liabilities of the debtor; and (iv) an independent expert appointed by the Spanish Companies House (Registro Mercantil) should issue a report assessing on, among other issues, sufficiency of the information provided, reasonability of the Refinancing Agreement, proportionality of its security and feasibility of the viability plan. From a formal standpoint the Refinancing Agreement shall be executed before a Spanish Notary Public and recorded in a public deed. The Refinancing Agreement concept was included in the SIA in order to provide a certain safe-harbor from claw-back risk (the possibility of rescinding certain acts within the two (2) year period preceding the declaration of insolvency, on the grounds that those acts are prejudicial to the insolvent’s estate) upon Spanish refinancing/restructurings.

3. Concept of Court Homologation

However, the Refinancing Agreement has other advantages in addition to providing a certain safe-harbor from claw-back. In particular it has the capacity of being “homologated” by Court, certain aspects of such agreement being in this case forced to dissident creditors.

Recent Case Law Regarding CourtHomologations under the SpanishInsolvency Act: a New Route to BindDissident Creditors in SpanishPre-Insolvency Restructurings?

July 2013


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The 4th Additional Disposition of the SIA provides that any Refinancing Agreement that is compliant with the requirements set out above and is approved by financial entities holding at least 75% of the debt held by financial entities can be approved by the relevant Commercial Court (homologación judicial) through the said Court Homologation and, if so, some of its provisions can be forced to the other 25% of unsecured financial entities. Although the wording of the provision is unclear, the intention seems to be that once the Refinancing Agreement has been homologated, the stays in payments accepted by the financial entities adhering to it are extended to any absent or dissident unsecured financial entity. The relevant Commercial Court shall ensure the reasonability of the Refinancing Agreement and make sure that the mechanism is not disproportionate with respect to any absent or dissident creditors. Also the Court Homologation can effect an stay on individual enforcement actions by creditors for a period of up to three (3) years, it being unclear in the literal wording whether this stay will be of the unsecured creditors (by the homologation of the underlying extended debt) or of the secured (and thus can be used as a tool to effectively affect the secured creditors by not allowing them to enforce their rights as against the company)1.

The literal wording of the Court Homologation has opened a significant list of questions, among others: (i) do the 3/5 and the 75% requirement apply in a combined manner or is it enough to comply one of them?, (ii) are secured creditors protected from being homologated in their entire debt, or only up to the value of their security?, (iii) if so, who and how values such security?, (iv) who does it apply to, ie what’s the definition of “financial entities”? is a fund or a fund’s vehicle a financial entity to these effects?, (v) what can be homologated? Only the extension? If so, on which terms? How about changes in margins, prepayment obligations, covenants and other issues which would normally be present in restructuring alternatives?, (vi) is the extension of the homologated underlying debt limited to three (3) years or is the stay on individual enforcement for a maximum of three (3) years? and (vii) would all creditors vote together or should there be a concept of “classes”? Most of these issues remain un-answered but some Courts have however taken an interesting view on some of them2.

4. Some court precedents on Court Homologation

The three main issues regarding Court Homologation which recent interpretation deserves special consideration are in our opinion the following:

a. Majorities’ requirement

There have been certain discussions as to whether the Refinancing Agreement to be homologated shall require both the 3/5 of total debt approval requirement which is inserted in the definition of “Refinancing Agreement” and the 75% requirement mentioned above or if, on the contrary, only the latter is required3.

On this topic the Ruling of the Commercial Court number 6 of Barcelona dated June 5, 2012, and the Ruling of the Commercial Court of Barcelona number 2 dated April 10, 2013 confirmed that the homologation of a Refinancing Agreement only requires the approval of financial entities holding at least 75% of the debt of the debtor (and not 3/5 of the liabilities, as it is established in Section 71.6), since the homologation ruling should only affect financial creditors. This interpretation has also been followed by the Commercial Court of Barcelona number 5 in its ruling dated June 28, 2013 (the “Celsa





2 Cfr. note 1.

3 Cfr. note 1.


Ruling”). The main argument here is that (i) the specific regulation of the 4th Additional Disposition shall prevail over the general principle of Section 71.6 of the SIA; and (ii) as mentioned in the paragraph above, the Court Homologation shall only affect financial creditors, being the 3/5 majority requirement only applicable in case the creditors were additionally seeking the safe harbor against clawback risks. Furthermore, the Ruling of the Court of Gijón dated July 10, 2012 and the Ruling of the Court of Santa Cruz de Tenerife dated January 18, 2013 also infer that the 75% of the bank debt shall be sufficient to homologate a Refinancing Agreement4.

Other resolutions take a different approach, establishing that both quorums are required (i.e. the Ruling of the Commercial Court of Jaen dated February 7, 2012), however seem so far to be less common.

b. Maximum stay period

As said, the 4th Additional Disposition includes a three (3) year limitation which has lead to confusion by market participants, being doubtful whether such three (3) year limit applies as a maximum duration of the deferral of payments capable of being imposed on dissident creditors or as the maximum duration of a restriction to individual enforcements (which could eventually even affect to secured creditors).

There are some Court precedents stating that the three (3) year period established by said Additional Disposition does not operate as a limitation of the maximum duration of the deferral of payments capable of being imposed on dissident creditors, thus if this interpretation is maintained longer extension periods could be imposed (Ruling of the Commercial Court of Barcelona number 6, dated June 5, 2012/Ruling of the Commercial Court of Seville, dated May 21, 2012/Ruling of the Commercial Court Seville dated December 11, 2012/Ruling of the Commercial Court of Jaen dated February 7, 2012).

There are certain court precedents which establish three (3) year period as a limitation of the maximum duration of the deferral of payments (i.e. the Ruling of the Commercial Court of Gijón dated July 10, 2012), however these seem so far to be less common.

c. Binding secured creditors

In accordance with the literal wording of the 4th Additional Disposition of the SIA the stay on payments agreed in a Refinancing Agreement can be extended to dissident financial entities whose credits are not secured. Even when the draft of the SIA seems to be clear, recent Commercial Courts are moving into a wide interpretation of this provision, which in our opinion entails the most significant change operated by the Celsa Ruling.

Celsa Ruling resolves that it is possible to force a dissident lender holding In Rem security on the basis of the following arguments: (i) enforcemet of the collateral requires a majority of creditors under the terms of the applicable finance document, (ii) to the extent that majority cannot be reached because a majority of creditors has supported the restructuring, individual lenders should not be immune to the Refinancing Agreement; and (iii) a creditor (to a syndicate facility agreement) cannot be considered as a secured creditor individually if security is granted in favour of a group of lenders and can only be enforced by the majority of such group.

Further to the above, another Ruling of the Commercial Court of Barcelona number 2 dated April 10, 2013 seems to leave the possibility open for forcing a stay to a secured dissident creditor even in the event that the facility foresaw an individual enforcement of the security, by analogous application of Section 56.2 of the SIA, which would allow the suspension of the enforcement once the insolvency of the debtor has been declared by the relevant Court, if the secured assets are affected to the debtor´s activity. For that purpose, it is argued that as long as the creditor cannot enforce the security within

4 Cfr. note 1.

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an insolvency process, he should not be allowed to enforce security within the pre-insolvency period, moreover when the intention of this period is avoiding an insolvency of the debtor.

However this interpretation has only been supported by the abovementioned Courts, there being several court precedents that adhere to the literal wording of the SIA, and which expressly state that the stay agreed under a Refinancing Agreement shall not bind secured dissident creditors, among others the Ruling of the Commercial Court of Madrid dated December 17, 2012; Ruling of the Commercial Court of Sevilla dated December 11, 2012; and Ruling of the Commercial Court of Gijón dated July 10, 2012.

3. Conclusion

As regards the main issues 1 and 2 described above, it seems that the most used interpretation followed by Spanish Courts tend to be that: (i) the three (3) year period established under the 4th Additional Disposition does not operate as a limitation of the maximum duration of the deferral of payments capable of being imposed on dissident creditors, but as a limitation to the duration of a restriction to individual enforcements; and (ii) the homologation of a Refinancing Agreement only requires the approval of financial entities holding at least 75% of the financial debt of the debtor5.

Regarding the capacity to force secured dissenting creditors there is a significant difference between the interpretation that the Barcelona Courts are making (allowing it when the individual creditor is not capable of enforcing its security) and the literal wording of the law (supported by various other Courts throughout Spain).

Borrowers, banks and other —present or future— creditors should follow the Court developments with significant care since the capacity to apply the Court Homologation in restructuring deals opens a very relevant and significant route to non-consensual pre-insolvency restructurings.

5 Cfr. note 1.


Recent Amendmentsto the Spanish Insolvency Actand How These Affect the Abilityto Bind Minority Creditorsin Spanish Restructurings

November 2013


1. Introduction

This paper intends to briefly describe the amendment to the Spanish Insolvency Act (“SIA”) approved by the Spanish Parliament on 19 September 2013 (the “Amendment”). Within the Amendment, we want to highlight two issues: (i) the changes introduced in Court homologation proceedings (see definition below), and (ii) the newly introduced out-of-court settlement procedure. This memorandum does not intend to be comprehensive and only points out some of the issues contained in the Amendment. Proper legal advice should be sought before taking any action.

2. Overviewofrefinancingagreementsandcourthomologations

2.1. Refinancing Agreements

A refinancing agreement, within the meaning of the SIA (the “RefinancingAgreement”), is a transaction which meets the following conditions: (i) the Refinancing Agreement aims at substantially increasing the funds available to the debtor and/or modifying the terms of the debt that is to be re-negotiated by means of the Refinancing Agreement; (ii) the Refinancing Agreement is a part of the debtor’s short and mid-term viability plan; (iii) the Refinancing Agreement has been approved by creditors representing, at least, 3/5 of the debtor’s total liabilities; and (iv) an independent expert appointed by the Spanish Register of Companies (Registro Mercantil) has issued a favourable report assessing, among other issues, the sufficiency of information provided, the reasonability of the Refinancing Agreement, the proportionality of its security and the feasibility of the viability plan.

From a formal standpoint, the Refinancing Agreement must be executed before a Spanish Notary Public and recorded in a public deed to which the debtor must attach all documents supporting the reasons for refinancing as well as those proving fulfillment of the requirements mentioned above.

The concept of Refinancing Agreement was originally included in the SIA in order to afford a safe-harbour of sorts against claw-back risks (the possibility of certain acts being rescinded within a 2-year period preceding the opening of insolvency proceedings, on the grounds that such acts are detrimental to the insolvent’s asset pool) in Spanish refinancings/restructurings. However, they now also have relevance for the purpose of potentially binding creditors though the use of Court homologations.

2.2. Court Homologations

Court homologations (“Court Homologations”) are a mechanism to force dissenting unsecured financial institutions into a Refinancing Agreement. Pursuant to it, any Refinancing Agreement that is compliant with the requirements set out above and is approved by financial institutions holding a

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certain percentage of the debt, can be homologated by the Commercial Court of competent jurisdiction (“homologación judicial”); and, through such homologation, some of its provisions (particularly, the time extension agreed with such financial institutions) can be forced onto non-consenting unsecured financial institutions.

2.3. How the amendment affects court homologations

The Amendment includes, among others, the following changes to Court Homologations:

i. Majorities´ requirement

The percentage of debt held by financial institutions required to force unsecured financial institutions is reduced from 75% to 55%. Therefore, once a Refinancing Agreement has been homologated, stays of payment accepted by 55% of the total debt held by financial institutions can be extended to the other 45% of absent or dissident unsecured financial institutions, provided such extension does not involve a disproportionate sacrifice (and that some other requirements are met).

ii. Quorum

It was unclear before the Amendment whether the Refinancing Agreement to be homologated required both the 3/5 of total debt approval included in the definition of a Refinancing Agreement and the (current) 55% approval mentioned above or if, on the contrary, only the latter was required. In the wake of some relevant court judgments (among others, Judgment of the Commercial Court of Barcelona dated 5 July 2012 / Judgment of the Commercial Court of Barcelona dated 28 June 2013 / Judgment of the Commercial Court of Barcelona dated 23 January 2013 / Judgment of the Commercial Court of Madrid dated 14 March 2013 / Judgment of the Commercial Court of Madrid dated 17 December 2012), the Amendment now clarifies that only the specific quorum (55% of the debt held by financial institutions) is required.

3. Overview of the out of court settlement

According to the SIA (as amended pursuant to the Amendment), an out of court settlement (the “Settlement”) can be applied, barring certain exceptions provided under the Amendment, by companies that comply with the following requirements: (i) the company is in a state of insolvency; (ii) the company meets the following conditions: a number of creditors lower or equal to 50; liabilities lower than €5 million (to be duly proved by the company’s relevant balance sheet); assets valuation lower than €5 million (although the law does not expressly clarify if all these three conditions should be met, various Court rulings applicable to similar circumstances seem to support the idea that only one of them is needed); (iii) the company has sufficient liquid assets to satisfy the costs of the procedure; and (iv) the company has equity and expected revenue figures which reasonably allow it to reach an agreement with its creditors.

In order to reach a Settlement, the Amendment introduces the figure of the insolvency mediator (the “Mediator”), who will be appointed by the Register of Companies or, in some cases, a Notary Public, and whose main role is to drive forward the Settlement procedure. The appointment of the Mediator and the Settlement procedure are conceived as occurring out-of-court and before a winding up petition has been presented.

The Settlement can involve (i) a maximum stay of 3 years; and (ii) a maximum haircut of 25% of claims. In order to homologate a Settlement, approval of creditors representing 60% of the total debt is required, unless the deal consists on debt for asset swaps, in which case it must be approved by 75% of the total debt and by the creditors with security over assets transferred. Total debt has the meaning here of debt affected by the proposed Settlement; secured creditors would only be affected if they so agree. In any event, the Settlement shall not affect government receivables.


The Settlement may be contested within a period of 10 days following its publication, although the grounds for such challenge are primarily limited to procedural errors or a disproportionate haircut/stay.

Finally, in the event that the Settlement is not approved pursuant to the majorities mentioned above or, if approved, it is not complied with, the company will go into insolvency with the particularity that a liquidation procedure (rather than a composition of creditors procedure) will follow straight after with the appointment of the Mediator as liquidator. In this situation, the claims held by unsecured creditors who, having received the notification of the creditors’ meeting, have neither attended nor duly stated their approval or opposition, shall be classed as subordinated. In contrast, creditors who attended the meeting and signed the Settlement shall be automatically recognised without having to serve any further communication.

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