Availability of the preventive restructuring frameworks

As far as we are concerned, the main thrust of the Directive is that Member State’s regulations provide a framework of preventive restructuring which debtors have access in order to avoid insolvency and guarantee viability from an early stage.

In this respect, Article 4 sets the freedom of proceedings.  This means the Directive grants the Member states greater flexibility so that they can decide in which cases judicial intervention should be compulsory and in which cases it should not. All without interfering with the objective of guaranteeing both parties rights’ and in the agility of the insolvency proceedings.

Access may be subject to a viability test aimed at excluding debtors who have no prospect of viability. The number of times a debtor may have recourse to these frameworks over a period of time can be limited. Moreover, access to debtors convicted of serious breaches of accounting obligations can be restricted.

As for the application, it will be available not only to debtors but also at the request of creditors and employees' representatives, subject to the consent of the debtors. This may be limited to cases where the debtors are SMEs.

Therefore, considering the current regulation three significant changes stand out; (i) the possibility of limiting the access to the restructuring framework or establishing requirements for resorting to it, (ii) the possibility of having greater judicial intervention during the negotiations period, which could lead on the appointment of a judicial or administrative authority in certain cases, and (iii) to enhance that the request cannot be only made at the debtor's petition but also extended to other parties affected by the insolvency proceedings (creditors, workers' representatives). These are all substantial changes to the current rules that will surely be reflected on new article 5 bis or pre-litigation.

Restructuring plans

Preventive restructuring frameworks may be ordered through restructuring plans and their respective checklist, which will include, among others, as provided for in Article 8 of the Directive, the debtor's assets and liabilities, categories of creditors, proposed measures, financial flows, duration and new financing. One of the improvements is found in the second paragraph, where SMEs are stronger included.

With regard to the presentation of the plans, regardless who requests the procedure, all will be entitled (debtor, creditors and authorities in matters of restructuring).

The parties affected by the plan shall have the right to vote on the adoption of the plan. However, Article 9 includes the possibility of excluding certain creditors from voting (similar to what is already provided for in Additional Provision 4 of our current Law).  Specifically the could be excluded (i) equity holders; (ii) creditors whose claims rank below ordinary unsecured creditors in the normal ranking of liquidation priorities; (iii) any related party of the debtor or the debtor’s business, with a conflict of interest under national law.

Moreover, it is important to highlight the change introduced by the Directive with regard to the categorization of the vote of the affected parties. This, in relation with the current creditors' agreement regulation. In this respect, the plan will be adopted when obtained the majority of claims or interests on each category/class. They can be differentiated classes, for example, secured credits or employee credits. On the other hand, this will allow SMEs to decide whether or not to adopt such a system of categories. In addition, it may be provided that, in each category, a majority of the number of affected parties must be reached. These majorities shall not be higher than 75% of claims or interests in each class. However, it can be foreseen that a formal vote can be replaced by an agreement obtained with the requested majority.

In our IL, as regards majorities, the approval of the collective refinancing agreement regulated in article 71 bis.1 requires that it should be signed by creditors whose claims represent at least 60% of the debtor's liabilities and 75% if there is a syndication agreement. However, for its homologation (Fourth Additional Provision of IL), and consequent extension of effects to dissenting creditors, 51% of the financial liability is required. This majority without taking into consideration those financial creditors that are considered a special related person. Finally, the homologation of the individual refinancing agreement provided for in article 71 bis.2 distinguishes two groups;  (i) creditors with real guarantee which need 65% of the financial liability for agreements of up to 5 years and 80% of the financial liability for agreements of more than 5 years up to a maximum limit of 10, and (ii) creditors without real guarantee whose approval requires 60% of the financial liability for agreements for agreements of up to 5 years and 75% of the financial liability for agreements for agreements between 5 and 10 years.        

The Directive allows restructuring plans to be approved without the need of confirmation by a judicial or administrative authority, unless, as listed in Article 10, (i) they concerns dissenting affected parties (ii) they imply new funding or (iii) they involve the loss of more than 25% of the workforce. This is an attempt to simplify and reduce the costs of restructuring. Thus, the new class majority regime creates a more complex system of carry-overs between creditors of the same class and creditors of different classes.

On the other hand, the rest of the principles referring to this dragging system are maintained, only with adjustments in the previous wording. Therefore, the following requirements are maintained for the carryforward:

• Approval by a majority not exceeding 75% of the financial liability for agreements.

• Compliance with “best interest of creditors test”. It is a test that is satisfied if no dissenting creditor would be worse off under a restructuring plan than such a creditor would be if the normal ranking of liquidation priorities under national law were applied.
• Creditors are not unjustifiably harmed.
• The plan is reasonably viable.

The conditions for confirmation by the relevant authority must be clearly specified and include, at least, the following:

• The majorities foreseen in the regulations for each class have been adopted.
• Creditors with sufficient commonality of interest in the same class are treated equally, and in a manner proportionate to their claim.
• The restructuring plan has been notify in accordance with national law to all affected parties.
• In the case of dissenting creditors in the restructuring plan, the best-interest-of-creditors test should be satisfied.
• Where applicable, any new financing is necessary to implement the restructuring plan and does not unfairly prejudice the interests of creditors.
• It offers a reasonable prospect of avoiding the insolvency of the debtor.

After regulating the ordinary restructuring plans in Articles 9 and 10 of the proposal, Article 11 sets out the specific rules applicable to "Cross-class cram-down" plans. In this case, a plan not approved by the affected parties, in every voting class, may be confirmed by a judicial or administrative authority upon the proposal of a debtor or with the debtor’s agreement. In this scenario, it will become binding to the dissenting voting classes, when the restructuring plan fulfils at least the following conditions:

• When it fulfils the abovementioned conditions for confirmation laid down in Article 10(2) and (3).
• When it has been approved by:
  1. a majority of the voting classes of affected parties, provided that at least one of those classes is a secured creditors class or superior to the ordinary unsecured creditors class. Or,
  2. at least one of the voting classes of affected the parties or where so provided under national law, impaired parties, other than an equity-holders class or any other class which, upon a valuation of the debtor as a going-concern, would not receive any payment or keep any interest, or, where so provided under national law, which could be reasonably presumed not to receive any payment or keep any interest, if the normal ranking of liquidation priorities were applied under national law.
• It ensures that dissenting voting classes of affected creditors are treated at least as favorably as any other class of the same rank and more favorably than any junior class.
• No class of affected parties can, under the restructuring plan, receive or keep more than the full amount of its claims or interests.

Articles 12 and 13 of the Directive introduce a number of measures in order to protect the rights of workers and of the debtor's partners and shareholders.

With regard to the valuation of the debtor's business by the relevant authority, this will only be necessary if a dissenting party challenges the plan on the grounds of non-compliance (i) with regard to the creditors' best interests test and (ii) with the terms of a cross-class cram-down.

The Directive introduces a significant novelty regarding the possible appeals. However, we believe that this will be a controversial issue as the Directive on this point is not entirely clear. The IL currently provides the challenge of the judicial resolution resolving the homologation of refinancing agreements by (i) the lack of concurrence of the required percentages or (ii) the assessment of the disproportionate sacrifice demanded by the creditors, however, the ruling is not subject to appeal to a higher instance. Article 16 of the Directive makes it compulsory to provide in the legislation a provision which allows an appeal against a confirmatory or negative decision to a higher judicial authority, a matter which apparently does not appears to be in line with other provisions of the Directive.

Conclusions

Following the above, the most important aspects of the Directive that will have a direct impact on the current Insolvency Law are:

• The Insolvency Law will have to be modified, essentially in all aspects referring pre-insolvency proceedings (both Article 5bis and Additional Provision 4 will have to be modified to adapt to the Directive). A period of two years is available for this purpose.
• Article 5bis its modify on the following aspects:

1. In addition to the debtor, this procedure may be requested by others who are affected by the potential insolvency of the debtor company.
2. The Court may refuse to allow the debtor to use this procedure if they consider that the company is not viable.
3. A practitioner in the field of restructuring insolvency and discharge of debt may be appointed in certain cases. We understand the legislator should consider the appointment of the practitioner on an exceptional basis in order to avoid the procedural costs to increase.
4. The minimum period will be four months, which may be extended up to twelve months in certain cases.
5. The Directive will have to be transposed by all Member States within two years period. We will follow up to any legislative advances that may occur, especially considering the possible approval of a Codified Text of the Insolvency Law that was intended to be approved in the previous legislature and that perhaps with the approval of this Directive, must be adapted to the new reality.
6. The legal regime currently provided in the Fourth Additional Provision will have to be modified. Changing, among others, the following aspects:

• Adopt the provision that the maximum majority required will be 75% and not 80% as currently reflected in the Insolvency Law.
• The vote of the restructuring plans will be done by differentiated categories of creditors. As is the case with the processing of creditors' agreements in the current Insolvency Law.
• Certain creditors may force the approval of a restructuring framework in certain cases (Cross-class cram-down).