European Union: Directive On Restructuring And Insolvency

Directive 2019/1023 of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 ("Directive on restructuring and insolvency")

The overall objective of the directive is to reduce the most significant barriers to the free flow of capital stemming from differences in member states' restructuring and insolvency frameworks, and to enhance the rescue culture in the EU based on the principle of second chance. The new rules also aim to reduce the amount of non-performing loans (NPLs) on banks' balance sheets and to prevent the accumulation of such NPLs in the future. In doing so, the Directive aims to strike an appropriate balance between the interests of the debtors and the creditors.

The key elements of the new rules include:

  • Early warning and access to information to help debtors detect circumstances that could give rise to a likelihood of insolvency and signal to them the need to act quickly.
  • Preventive restructuring frameworks: debtors will have access to a preventive restructuring framework that enables them to restructure, with a view to preventing insolvency and ensuring their viability, thereby protecting jobs and business activity. Those frameworks may be available also at the request of creditors and employees' representatives.
  • Facilitating negotiations on preventive restructuring plans with the appointment, in certain cases, of a practitioner in the field of restructuring to help in drafting the plan.
  • Restructuring plans: the new rules foresee a number of elements that must be part of a plan, including a description of the economic situation, the affected parties and their classes, the terms of the plans, etc.
  • Stay of individual enforcement actions: debtors may benefit from a stay of individual enforcement actions to support the negotiations of a restructuring plan in a preventive restructuring framework. The initial duration of a stay of individual enforcement actions shall be limited to a maximum period of no more than four months.
  • Discharge of debt: over-indebted entrepreneurs will have access to at least one procedure that can lead to a full discharge of their debt after a maximum period of 3 years, under the conditions set out in the directive.

Current Spanish insolvency legislation and transposition procedure

Spanish insolvency legislation is mostly adapted to the current trends on the restructuring procedures which are being proposed in this directive. Therefore, most of the provisions set out in the Directive 2012/30/E are already implemented within the Spanish insolvency legislation (i.e. Spanish Insolvency Law 22/2003 and the new proposal for the consolidated text on the insolvency law which is pending to be approved).

Nevertheless, the following provisions have not been implemented in the Spanish legislation yet:

  1. In accordance with Article 3 - Early warning and access to information - Spain shall ensure that debtors have access to one or more clear and transparent early warning tools which can detect circumstances that could give rise to a likelihood of insolvency and can signal to them the need to act without delay.
  2. In accordance to Article 5 - Debtor in possession - Spain shall, at least, provide the regulations for the appointment of a practitioner in the field of restructuring, to assist the debtor and creditors in negotiating and drafting the plan, for the case such appointment is decided by the judicial or administrative authority.
  3. Even though the judicial or administrative authority shall decide on a case-by-case basis the appointment of such practitioner, according to such Article 5, the practitioner shall be appointed, at least, in the following cases:

    1. where a general stay of individual enforcement is granted by a judicial or administrative authority, and the judicial or administrative authority decides that such a practitioner is necessary to safeguard the interest of the parties;
    2. where the restructuring plan needs to be confirmed by a judicial or administrative authority by means of a cross-class cram-down; and
    3. where it is requested by the debtor or by a majority of the creditors.

    *Under Spanish Insolvency Law, the appointment of a practitioner is not necessary under the restructuring procedures.

  4. In accordance with Article 6 - Stay of individual enforcement actions - Spain shall ensure that judicial or administrative authorities can lift a stay of individual enforcement actions in some cases. However, Spain would be able to set out a maximum period of four months in which it would not be possible to lift the stay of individual enforcement actions.

  5. *Under Spanish Insolvency Law, the stay of individual enforcement actions cannot be lifted in any case until the fourth month period has elapsed and/or the required support to the negotiations on the restructuring plan has been reached. Therefore, Spain would be within the period of four months set out in the directive.

  6. In accordance with Article 8 - Content of restructuring plans - the content of the restructuring plan is determined. The restructuring plan shall contain at least the following information:
    1. the identity of the debtor;
    2. the debtor's assets and liabilities at the time of submission of the restructuring plan;
    3. the affected parties;
    4. where applicable, the classes into which the affected parties have been grouped;
    5. where applicable, the parties which are not affected by the restructuring plan;
    6. where applicable, the identity of the practitioner in the field of restructuring;
    7. the terms of the restructuring plan; and
    8. a statement of reasons which explains why the restructuring plan has a reasonable prospect of preventing the insolvency of the debtor and ensuring the viability of the business.

    *Under Spanish Insolvency Law, neither the content of the restructuring plan nor the viability plan is determined. Nevertheless, the same content set out in the directive is normally included in the restructuring plans.

    Additionally, Spain shall make available online a comprehensive check-list for restructuring plans, adapted to the needs of SMEs ("Pymes"). The check-list shall include practical guidelines on how the restructuring plan has to be drafted under national law. This checklist shall be made also available in at least in a language used in international business.

  7. In accordance with Article 9 - Adoption of restructuring plans - Spain shall put in place appropriate measures to ensure that class formation in which the affected parties shall be separated, is done with a particular view to protecting vulnerable creditors such as small suppliers.

  8. *Under Spanish Insolvency Law, the small suppliers are not treated differently from other creditors.

  9. In accordance with Article 14, - Valuation by the judicial or administrative authority - the judicial or administrative authority shall take a decision on the valuation of the debtor's business only where a restructuring plan is challenged by a dissenting affected party on the grounds of either:
    1. an alleged failure to satisfy the best-interest-of-creditors test;
    2. an alleged breach of the conditions for a cross-class cram-down.

    For the purpose of taking a decision on a valuation, judicial or administrative authorities may appoint or hear properly qualified experts.

    *Under Spanish Insolvency Law, valuation of the debtor's business is never required where a restructuring plan is challenged by a dissenting affected party. Therefore, new provisions shall be included in order to regulate this.

  10. In accordance with Article 16 - Appeals - Spain shall ensure that any appeal provided for under national law against a decision to confirm or reject a restructuring plan taken by a judicial authority is brought before a higher judicial authority.

  11. *Under Spanish Insolvency Law, the appeal against a decision to confirm or reject a restructuring plan which has been taken by a judicial authority is brought before a the same judicial authority and it is not possible to appeal before a higher judicial authority. Therefore, Spanish Insolvency Law shall amend the Additional Disposition 4 (Disposición Adicional 4) in this sense.

  12. In accordance with Article 19 - Duties of directors where there is a likelihood of insolvency - Spain shall ensure that where there is a likelihood of insolvency, directors, have due regard, among others, the interests of creditors.

*Under Spanish Law, the directors shall not have at first glance due regard to the interest of creditors unless the company has filed for insolvency.

Other provisions set out in the Directive 2012/30/EU which Spain has neither implemented yet are not mandatory: "member states may or may not...". Therefore, Spain could decide whether such provisions should be implemented or not.

The Member States have a deadline for the transposition of this Directive until 17 July 2021 (with the exception of the provisions necessary to comply with Article 28 (a), (b) and (c)) which will be adopted and shall publish no later than 17 July 2024, and the provisions necessary to comply with Article 28 (d), which shall be adopted and published no later than 17 July 2026.

Member States that encounter particular difficulties in implementing this Directive shall be able to benefit from an extension of a maximum of one year more of the implementation period provided and shall notify to the Commission the need to make use of this option to extend the implementation period by 17 January 2021.

Main issues must be taken into account

From a practical point of view, three main issues must be taken into account:

  1. Pre-requisite (Presupuesto Objetivo):

    1. The nominal value of the dissident creditors is reduced to the liquidation value (or its equivalent).
    2. The crystallization will allow the payment to the subordinated creditors.
    3. Early termination of the claims and the options over the future value of the Company.
    4. Whereas 34 of the Directive mentions the moment prior to the insolvency, which is not defined in the Spanish Law. Therefore, such term is being discussed: the majority considers that it shall be defined as the possibility of insolvency.
  1. Debtor (Presupuesto Subjetivo):

    a. Debtor consent + opting out:

    • Only the debtor + incentives;
    • No need for the debtor consent neither the shareholders;
    • Debtor consent but no shareholders consent.

    b. Shareholders are creditor of last class. Expropriation mechanisms to the shareholders. In case they are considered creditors, they can vote and are necessary to get a majority.

  1. Appeals:

    The literality of the Directive set out the obligation to regulate the possibility of an appeal to a higher court. Some practitioners consider that the homologation is already an appeal to a higher court (Whereas 65).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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