International insolvency: the three novelties introduced in the Insolvency Law Reform Bill

The Insolvency Law Reform Bill for the incorporation into Spanish law of Directive (EU) 2019/1023, of the European Parliament and of the Council of 20 June 2019 (the “Bill”) contains several novelties when it comes to international insolvency regulation. A few of these aim to adapt the Spanish law to various provisions of the Regulation (EU) 2015/848 on insolvency proceedings. A case in point is article 735 of the Bill, drawn up to define a few elements of the synthetic territorial proceedings set out in article 36 of the regulation; or article 745 bis in fine of the Bill, which provides for a specific international jurisdiction forum for the Spanish authorities to approve modifications to employment contracts under Spanish law where the insolvency proceeding is conducted in another country. Along the same lines of responding to the demands of the regulation is the requirement to provide reasoning for the international jurisdiction of Spanish courts and the placement of an own-initiative court control of its jurisdiction when conducting the new pre-insolvency proceedings set out in the Bill.

The most sweeping reforms, however, are perhaps those resulting from transposition of Directive 2019/1023 and therefore relate exclusively to pre-insolvency scenarios. One is the introduction of a new international jurisdiction forum for groups of companies. Another is the removal of almost all exceptions to Spanish law in relation to pre-insolvency mechanisms conducted in Spain. And, lastly, a specific rule is included which is intended to govern cooperation with foreign pre-insolvency proceedings and the recognition of any decisions adopted in them.

1. New international jurisdiction forum for groups of companies

The first of the aforementioned novelties is located in article 755 of the Bill. That article contains a rule on international jurisdiction specifically designed for groups of companies, which allows a universal pre-insolvency proceeding to be conducted in Spain on the companies part of a group, even if those companies have their centers of main interests, or COMIs, abroad, when the parent company's COMI is in Spain.

To gauge the importance of this rule it needs to be remembered that the Spanish international insolvency system has been based until now on the “principle of separation” or the “entity-by-entity principle” and had rejected the option of identifying a “group COMI” (located, for example, in the parent company's COMI). Therefore, the companies in a group could only be included in an insolvency proceeding in Spain if all of them had their COMIs in Spain. What we had, in short, was a model for the international jurisdiction of Spanish courts based on a territorially fragmented approach, which was completely out of step with a reality in which a group is actually perceived as a single unit, when it comes to either planning how it functions, or designing its financing. And it is clear that this scenario posed a serious risk to the restructuring of a great many international groups of companies, because it almost completely shut out the option of restructuring the group as a single unit, and with it, the option of increasing the value of the group’s assets as a whole, which has on several occasions prompted a flight of Spanish groups to other jurisdictions ensuring a centralized response.

The new rule conditions the application of the jurisdiction forum posed in it  to the fulfillment of three requirements: (1) that “the parent company must have requested the notice defined in Book two of this law or must be going to be subject to the restructuring plan”; (2) that “the inclusion of the subsidiaries in the court’s jurisdiction must be necessary to ensure the sucess of the negotiations for a restructuring plan, or the adoption and fulfillment of the plan” and (3) that “the notice or the court sanction of the restructuring plan must have been filed as a secret proceeding in relation to the subsidiaries”. However, where the fulfillment of these three conditions is confirmed, the jurisdiction of Spanish courts “shall only include the contractual creditors common to both the parent company and the subsidiaries”, a restriction that seems reasonable. In these cases the creditors accept de facto that the group represents a single economic unit, and therefore the reflection of such scenario within the proceedings, namely, the centralization of proceedings with respect to the various companies in the group, should not be seen by them as an unforeseeable or arbitrary solution.

The requirement that the notice or the court sanction of the restructuring plan must have been filed as secret proceeding in relation to subsidiaries has a great significance because it means leaving outside the regulation the effects that the Spanish pre-insolvency procedure could have upon them. This is because the such legislation excludes from its scope any domestic procedures that are not public. And it is precisely this circumstance, inspired by the dual track private international law system in the Dutch scheme of arrangement, which gives article 755 of the Bill major practical importance, by allowing it to be applied not only in relation to subsidiaries having their COMIs in third countries, but also to subsidiaries whose COMIs are located in a member state. However, the trade-off to secret proceedings falling outside the regulation is that they cannot benefit from its legislation on recognition of court decisions.

To the contrary, the effects of the notice or of the court sanction of the restructuring plan will be recognized in the other member States according to their domestic legislation which might possibly be more restrictive than the one contained in the European regulation and might not allow recognition of their effects in relation to non-Spanish companies, because they do not have their COMIs in Spain. Spanish law, aligned with the decision made by other European lawmakers is going to make a choice to provide a tool that will operate in parallel with the regulation, and operators will have to take the circumstances we have just described into account when it comes to deciding whether this tool should be chosen in each specific case.

Article 755 of the Bill is also set to be particularly relevant in relation to applying two rules on intra-group guarantees placed in articles 596 and 652.2 of the Bill. Those articles set out the ways to grant or release guarantees provided by companies of the group. Even if these companies are not formally part of a pre-insolvency proceeding conducted in Spain, the fact that they are bound by the effects of the notice or of the restructuring plan would require Spanish courts to have an independent basis for international jurisdiction over them. Therefore, if Spanish law did not have an article like the new article 755 of the Bill, articles 596 and  652.2 would only be applicable where the guarantor companies had their COMIs in Spain, because otherwise the courts would not have international jurisdiction over them (article 45 and article 47 of the Revised Insolvency Law). Article 755 of the Bill thus significantly broadens the scope of these articles.

2. Removal of most of the exceptions to the application of Spanish law to pre-insolvency mechanisms: article 754 of the Bill

Similarly to the regulation, the Revised Insolvency Law contains a “mini-codification” of conflict rules in articles 722 through 731, applicable in both insolvency and pre-insolvency proceedings. The general rule is contained in article 722 of the Revised Insolvency Law and determines that Spanish law is applicable to “the conditions for and effects of insolvency proceedings declared in Spain”. Additionally, the exceptions that the Revised Insolvency Law allows to the application of article 722 are contained in articles 723 through 731. Although the grounds and the modus operandi for the various exceptions are very diverse, they all introduce a number of variables to the proceeding (problems of adjustment between the law of the state where the proceeding is conducted and the law that they allow to be applied, proof of foreign law, etc.), which may bring challenges to those proceedings and as a result pose a risk to the success of the restructuring.

Perhaps for this reason the Bill has now chosen to remove all exceptions to the application of Spanish law. The only exception retained is the one provided in article 726 of the Revised Insolvency Law for rights over securities represented by book entries and for transactions performed in “payment and clearing systems” or on an “organized financial market”. It was considered necessary at all costs to maintain in these cases the application of the law of the state of the registry where the book entries for those securities were made, in the former case, or the law applicable on the system or market in the latter, so as not to alter the stability of these structures.    

3. Modifications to the rules on coordination and recognition of foreign proceedings: the new article 753.2 of the Bill

The third novelty worth noting is the new article 753.2 of the Bill. The function of this article is to identify the requirements that need to be fulfilled by “foreign preventive restructuring proceedings” for the Spanish authorities to recognize them and coordinate with them. More specifically, the article restricts application of Title III (articles 742 through 748) and Title IV (articles 749 through 752) of the future Book Four of the Revised Insolvency Law (currently Book Three), to only those foreign proceedings that are “functionally equivalent” to those defined in the revised law itself. Moreover, the article contains the following presumption: “existence of a functional equivalence shall be presumed in cases involving collective proceedings based on insolvency law, and which aim for the restructuring of the debtor or of the debtor’s business, to ensure its viability and prevent insolvency”.

Actually, the intended function of the new article 753.2 is currently fulfilled by the already existing 742.1.1 of the Revised Insolvency Law. This article was drafted, however, at a time when practically the only conceivable insolvency proceeding was the classic Spanish “concurso de acreedores” insolvency proceeding, and therefore the wording of a few of the requirements laid down for foreign proceedings could be interpreted strictly as excluding their application to pre-insolvency mechanisms. The example usually given is the requirement that the foreign proceeding is subject “to the control or supervision of a foreign judge or authority”. Although this is a highly questionable objection, the function of the new 753.2 of the bill appears to be to eliminate any trace of doubt, so as to make it clear that foreign pre-insolvency proceedings fall within the scope of application of the rules in the Revised Insolvency Law on cooperation and recognition of foreign proceedings. This means, in short, that both provisions must be seen as a single set of rules, having as their aim to subject cooperation with a foreign proceeding, and the recognition in Spain of any decisions that may be adopted in that proceeding, to the requirement that the proceeding is functionally equivalent to any Spanish insolvency proceeding, either to the Spanish “concurso de acreedores” insolvency proceeding or to any Spanish pre-insolvency proceeding.

However, the wording of article 753.2 of the Bill could lead to error. The article requires foreign proceedings to be “based on insolvency law”; a phrase taken from the United Nations Commission on International Trade Law (UNCITRAL) Model Law on cross-border insolvency which is without a doubt one of the most important sources of reference for interpreting the Spanish international insolvency legislation. However, contrary to what its wording might make believe, it must not be considered that this phrase requires that the foreign proceeding must be found in the specific insolvency legislation of that State. What is required by the new article —and the Guide to Enactment and Interpretation of the UNCITRAL Model Law on Cross-Border Insolvency is absolutely clear in this respect— is that the foreign proceeding must be conducted “in close proximity to the commencement of the foreign proceeding” on a given person, either to deal with, or to prevent, insolvency, and this being completely separate from the specific body of laws in which the applied rule or rules are written. Interpreting otherwise to consider that this phrase requires that the foreign proceeding must be defined within the specific legislation on insolvency would mean that similar foreign proceedings could receive different treatment simply because in one state they were included in their insolvency law and in the other, for example, they were found in corporate law (which is becoming increasingly common in other jurisdictions to try and avoid the stigma associated with insolvency).

As a result, any decisions delivered in the context of the new UK restructuring plans, which are considered “genuine” insolvency proceedings by scholars and the courts alike in that country, should be classed as “proceedings based on insolvency law” for the purposes of the presumption contained in article 753.2, despite being defined in the Companies Act (Part 26 A) rather than in the Insolvency Act. And the same would occur with the widely known schemes of arrangement, recognized in economically powerful Anglo-Saxon countries such as the UK, Canada, Australia or New Zealand. Schemes of arrangement are defined formally in corporate law, although they may be employed to achieve a restructuring of debtors in serious economic distress and for that reason they should also be considered “proceedings based on insolvency law” for the purposes of article 753.2 of the Bill.