Spanish measures for restructuring/insolvency in the context of coronavirus (COVID-19)—threats and opportunities

Spanish measures for restructuring/insolvency in the context of coronavirus (COVID-19)—threats and opportunities

The Spanish government has enacted a series of measures to temporarily relieve directors of the strict obligation to file for insolvency within two months of insolvency in Royal Decree-Law 8/2020 (RDL 8/2020) and other pieces of law like Royal Decree 463/2020, in response to coronavirus, COVID-19. What do these measures imply in the context of insolvencies and restructurings? Written by Jose Christian Bertram, José Antonio Rodríguez and Jorge Vázquez of Ashurst LLP.

Can directors still file for insolvency of a company?

Yes, they can, but it is worth noting that the obligation for them to file within two months is disapplied for so long as the state of alarm that was declared on 14 March 2020 (the State of Alarm) is in place.

What if the directors decide not to file within such two-month period but a third party does?

The risk of a third party filing for the insolvency of a company is a risk that borrowers are always aware of and that might make directors more prone to file. The way RDL 8/2020 deals with this is ensuring that, even if a third party files, such third party filing will not be processed until two months after the end of the State of Alarm—and if the borrower has also filed at any time during the State of Alarm or within the two months following the end of it, it will be treated as having filed first.

How does this affect an art. 5bis filing?

In respect of any filing under art. 5bis that had been made prior to 14 March 2020 (the start of the State of Alarm) but which filing period expires during such State of Alarm, the relevant borrower will not be required to file for insolvency during such time even if the art. 5bis deadline has elapsed.

Could I use the enhanced time frame now to pursue restructuring negotiations?

Yes. The additional timing made available in the case of an art. 5bis filing or for the purposes of filing for insolvency may facilitate the negotiation of a restructuring between the borrower and its financial lenders. The fact that the more general obligation to file for insolvency within a two-month period is put on hold is also giving borrowers and lenders some leeway to negotiate the terms of a restructuring.

How does the stay in any procedural timings affect a homologation or Spanish scheme?

Parties to a restructuring are entitled to freely negotiate the terms thereof: no change there. In the event that such parties need a homologation court ruling to cram down dissenting lenders, they can still file the writ with the competent court, but note that it will not be resolved until the stay in procedural timings has been lifted. This can in turn have an impact on how a restructuring is designed:

  • the effects of the restructuring on dissenting creditors will not be in force until the homologation court ruling has been issued, and hence there might be an interim period during which the contractual relationship with the dissenting lenders is still subject to the pre-restructuring terms of the relevant agreement
  • in the event that the restructuring documentation foresees that it shall only become effective upon the homologation court ruling having been issued, the current situation might give rise to delays that may stress the company's cash situation—companies should therefore avoid any suggestion of restructuring documentation being subject to homologation

Enforcement of security

The measures around COVID-19 include a general stay on the time frames of court proceedings, including in this case insolvency proceedings. As the market is aware, the Spanish Insolvency Act contains a provision that provides for a stay on enforcement of security interests over assets necessary for the borrower's business until a creditors' voluntary arrangement (not affecting the claim secured by such security) has been reached, or a year has elapsed without liquidation having been opened. Typically secured creditors build in the time frame of a year in their expectations, and practice has shown that borrowers tend to (if no CVA is reached) file for liquidation immediately upon the one-year period expiring in order to avoid enforcement of security—once liquidation has been declared by the court, the ability to start enforcement on security is taken from the secured creditor's hands, who will have to abide by the procedures for sale set out in the liquidation plan that will be drawn up. However, the general stay in court processes may provide a window of opportunity now for creditors to bring enforcement claims.

Challenges of liquidation plans

There are several cases in Spain of liquidation plans that have been challenged in court in the relevant proceedings, and where the lack of speed of the court system has led to the hearing at the relevant court of appeal being delayed for over a year. This can now be impacted by the general stay in court proceedings, as some hearings were due to take place in March/April this year and there is currently a proposal for the state of alarm to be extended until 11 April 2020, for now.

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About the author:

Zahra started working as a paralegal at LexisNexis in the Lexis®PSL Banking & Finance and Restructuring & Insolvency teams in April 2019 and moved to the Corporate team in June 2020, where she currently works as a Market Tracker Analyst. Zahra graduated with 2.1 honours in BA French and Spanish and completed the GDL at BPP University. She has undertaken voluntary work for law firms in London, Argentina and Colombia.