Restructuring & Insolvency Newsletter - July 2024 | Judgments

International case law

European jurisprudence on universal and territorial procedures

Judgment of the Court of Justice of the European Union of April 18, 2024 (AIR BERLIN case)

The resolution addresses different conflicting issues regarding the relationships between a main insolvency procedure (in this case, in Germany, where the debtor has its center of main interests) and a secondary procedure (in Spain, where the debtor has a branch). The Court concludes that: (i) the secondary procedure is what must be taken into account to elucidate the classification of labor credits; (ii) the administrator of the main procedure has the power to transfer the debtor's assets from Spain to Germany as long as the secondary procedure is not opened and he does not exercise this power in an abusive manner; and (iii) the administrator of the secondary procedure can exercise revocatory actions against the main procedure.

 

Restructuring plans

Court confirmation of a restructuring plan proposed by creditors and evicting the existing shareholders 

Judgement by Commercial Court no 2 of Barcelona dated September 4, 2023 (CELSA matter)

An application for Court confirmation of a restructuring plan providing for the eviction of pre-restructuring shareholders can be made by standing creditors (in this case, by a “majority of classes” re article 639.1 TRLC), even with the objection of the shareholders themselves and of the debtor as long as the insolvency exists, and the shareholders are “out of money” according to the company valuation of the Restructuring Expert. In this context, despite negotiation of the plan with shareholders being an option, it is not a requirement for preparing and later applying for Court confirmation of the restructuring plan.

 

Court confirmation of a non-consensual restructuring not based on a majority of classes but on enterprise valuation 

Order of the Commercial Court 3 of Las Palmas de Gran Canaria of December 31, 2023 (NAVIERA ARMAS matter)

The Court confirmation of a non-consensual plan via article 639. 2 TRLC (support of at least an “in the money” class according to the enterprise valuation performed by the restructuring expert) is requested to extend the effects to dissident creditors and protect interim and new financing. The plan is approved by at least one class of creditors “in the money,” that is, who would have received some payment following a valuation of the debtor as a going concern. A 100% write-off is imposed on ordinary claims (including financial claims with ICO guarantee) in group companies in which such claims are out of money according to the company valuation carried out by the restructuring expert. The plan is confirmed by the Court; its effects are extended to dissident creditors; interim financing is protected against rescission actions; and it is declared that creditors who directly or indirectly capitalize their credits in compliance with the plan shall not be equitable subordinated.

 

Restriction to early termination of contracts due to a change of control derived from a Court-confirmed restructuring plan

Order of the Commercial Court 1 of Pontevedra of May 20, 2024 (FANDICOSTA matter)

The debtor and its shareholders requested the Court-validation of a non-consensual restructuring plan via article 639.2 TRLC. The plan provided, in addition to write-offs and waits for creditors, emergency financing in the interim to maintain the activity. Carrying out an analysis of compliance with the formal requirements, the judge validates the proposed plan, extending its effects to creditors who did not vote in favor of the plan and granting the appropriate protection to the interim financing. The power to resolve or terminate contracts resulting from the validation of the restructuring plan or from any analogous or directly related circumstance is expressly limited.

 

Combined court confirmation of various individual restructuring plans

Order by Commercial Court no 1 of Seville dated May 23, 2023 (EZENTIS matter)

In order to prevent contradictory decisions, the Court simultaneously confirmed several individual restructuring plans relating to various companies in the same group, some of which are of foreign nationality.

 

Joint appointment of restructuring expert for Spanish and foreign companies of the same group

Order by Commercial Court no 5 of Madrid dated May 4, 2023 (TELEPIZZA matter)

The joint appointment of the same restructuring expert for three Spanish companies and two foreign companies belonging to the same group of companies is admitted, in anticipation of the expert having to carry out legally required functions in the event of a later pre-insolvency communication or an application for court confirmation that will also affect the foreign companies. The judge authorized that the restructuring expert be expressly empowered so that, on behalf of all the creditors -including the dissidents- he could sign contracts and private or public documents, and/or carry out any actions, necessary and without limitation, to implement the restructuring plan, without the need for prior judicial authorization.

 

It is not necessary to value guarantees in plans that have unanimous support of affected creditors

Order by Commercial Court no 7 of Madrid dated January 23, 2024 (DENEF matter)

The Court confirmation of a consensual plan is requested as part of a restructuring of an international group of which the Spanish debtor is a subsidiary. The plan is approved unanimously by affected creditors. The valuation of guarantees is considered unnecessary to the extent that the result of the valuation would not have modified the approval percentages, it has no significance for the purposes of class formation and the valuation would have increased the costs of the process.

 

Denial of Court-validation of a joint restructuring plan due to non-compliance by one of the requesting debtors

Order of the Commercial Court of Seville of March 6, 2024

Request for Court-validation of a joint restructuring plan for companies within the same group. The Court denies it as: (i) the public instrument does not include the certification of the previously appointed restructuring expert; (ii) with respect to one of the debtors, the plan does not respect the principle of parity of treatment between credits of the same type; and (iii) the classes have not been correctly formed, attributing voting rights to creditors not affected by the plan. It is expressly permitted to request the Court-validation of a new plan without having to wait a year, as this is a temporary limitation that applies in the event of Court-validation being granted but not when it is denied.

 

Financial claims with and without an ICO guarantee can form separate classes of creditors

Judgment by Commercial Court no 1 of Oviedo dated July 13, 2023

In order to obtain court confirmation of the classes of creditors, given the absence of common interest and the existing conflict of interest between public and private claims, those financial claims with ICO guarantees and those without public guarantees may be separated into their own classes of creditors.

 

Possibility of obtaining court confirmation of individual restructuring plans of foreign companies with a Spanish parent

Order by Commercial Court no 1 of Seville dated June 12, 2023

Restructuring plans of foreign companies with Spanish parent companies may obtain court confirmation via article 755 TRLC if the Spanish parent company is also subject to the restructuring plan with respect to common contractual creditors, regardless of whether the center of main interests of these companies is located outside Spain.

 

Competing restructuring plans must be handled in a time-based priority order

Order by Commercial Court no 5 of Madrid dated April 10, 2023

The first of the restructuring plans filed by different parties (debtor and certain creditors) obtained Court confirmation because none of the other filed applications went through the prior objection proceeding, and therefore no procedure existed that would allow the different proposals for Court confirmation to be compared and accumulated.

 

Bankruptcy proceedings

Shareholders be liable for outstanding tax debt in the event of the bankruptcy being concluded due to insufficient assets

Judgement by Supreme Court (Public law Chamber) dated October 23, 2023

The Supreme Court considers that the termination of bankruptcy due to insufficient assets does not necessarily mean that the liquidation of the company has occurred, nor implies that liquidation operations can be dispensed, even when there are insufficient assets to pay post-insolvency claims. Therefore, in such cases, the shareholders that do not ask for a proper liquidation after the bankruptcy termination may be considered successors without limitation of liability in relation to the company's tax debts.

 

An arrangement with creditors cannot alter priority in the order of payment of claims, nor impose obligations on creditors who are not parties to the proposal with respect to other proceedings

Judgment by Commercial Court no 8 of Madrid dated July 24, 2023

The Court rejected approval of an arrangement with creditors giving separate favorable treatment to “financial claims” by holding that it breaches the rules on the content of arrangements. Similarly, the judge rejected the option of ex officio amending the arrangement - to facilitate its approval - by removing certain clauses imposing on dissenting creditors the obligation to withdraw from pending judicial or arbitration proceedings.

 

The initial assessment of an insolvency proceeding as a no-asset bankruptcy does not prevent a potential subsequent declaration of a full-fledged insolvency proceeding

Order by Commercial Court no 1 of Alicante dated May 15, 2023

If, after a no-asset bankruptcy has been declared and the appointment of an insolvency administrator has been requested to issue their reasoned report, it is found certain prima facie evidence of acts detrimental to the estate, potential liability actions or an insolvency being assessed as fault-based, an additional Order will have to be delivered declaring the opening of the insolvency proceeding with simultaneous commencement of the liquidation phase.

 

Termination of contracts in the interests of insolvency proceedings is incompatible with regular grounds for termination of contract under civil law

Judgment by the Provincial Appellate Court of Madrid dated March 24, 2023

The termination of contracts in the interests of insolvency proceedings comes into play where there are no contractual nor statutory termination for bringing the contractual relationship to an end, because that mechanism is not related to unforeseen circumstances in a contract or on a breach of contractual obligations.

 

Nonpayment of one past-due claim is a sufficient ground for applying for declaration of a breach of the arrangement with creditors

Judgment by the Provincial Appellate Court of Murcia dated March 23, 2023

Nonpayment of one past-due claim entitles creditors to apply for a Court declaration of a breach of the arrangement with creditors, although that breach must exist when the application is filed. The health crisis caused by Covid-19 is not a sufficient ground to justify force majeure in the breach.