The new Spanish Bankruptcy Law in September 2022 (TRLC)Law 16/2022 of 5 September, implementing the revised Insolvency Law (Texto Refundido de la Ley Concursal or TRLC). ushered in perhaps the most radical changes to the domestic restructuring market in any EU Member State that has so far implemented the EU Directive on Preventive Restructuring.Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring. For the first time, following satisfaction of certain conditions, the disenfranchisement of shareholders was permitted by imposing on them a restructuring plan that previously would have required shareholder approval in a general meeting. This was used to critical effect in the Celsa restructuring, in which ownership of the group was transferred in full to its financial creditors under a plan proposed by those creditors.
The English Court of Appeal’s decision to overturn the sanction of the Adler restructuring plan provides an interesting opportunity to compare how the TRLC might have addressed some of the issues raised, including the treatment of noteholders with differing maturities and shareholders, and the Spanish court’s approach to homologating a restructuring plan.
As a reminder, the Adler restricting plan envisaged the controlled wind-down of the group’s business through a staggered disposal of its real estate assets over an extended period, together with raising new liquidity in order to meet the impending maturities of series of notes due in 2023.English Court of Appeal Overturns Adler Sanction: What Next for Restructuring Plans? The plan proposed retaining the existing maturities of each remaining series of notes, which ranged from 2024 to 2029, other than those notes due in 2024. In exchange for a 12-month maturity extension, the 2024 notes would receive security and priority over the longer-dated notes.
The English court accepted that each series of notes formed its own independent creditor class for the purposes of the restructuring plan, which was certainly justified for the 2024 notes as they were receiving different treatment. However, each other series of notes was given similar treatment as between themselves (an increased coupon, which would be capitalised, new financial covenants and an enhanced guarantee package) while maintaining their existing maturities. The court accepted that, in the relevant alternative of a liquidation, each series of notes would rank equally. Therefore, the only difference between the “rights out” of each series under the RP was the preservation of their respective maturities. This ultimately proved fatal in the Court of Appeal’s assessment of the fairness of the RP because it was found unfair that the longest-dated notes (the 2029s, who failed to approve the plan by the statutory majority and a sub-set of whom opposed it at sanction) should bear the risk that there would be sufficient disposal proceeds to repay them in full.
In order to be homologated in the first instance, a Spanish plan requires the support of a majority of creditor classes. It is unlikely that the Spanish court would be sympathetic to a plan that artificially proliferates the number of classes in order to obtain those majorities. The formation of classes has been challenged by dissenting lenders in recent cases. In Xeldist Congelados,Xeldist Congelados, S.L.U., Order of the Provincial Appeal Court of Pontevedra, no.179/2023 (10 April 2023). the successful challenge was based on the argument that there must be substantial justification for segregating claims into distinct classes, which would otherwise be grouped together based on objective insolvency criteria. Under the TRLC (Article 622), there seems no reason why, faced with similar facts to Adler, all of the notes other than the 2024s would not have been placed in the same class based on their ranking in an insolvent liquidation and their treatment under the plan. Critical to this analysis would be whether each series of notes would have been treated under the plan on a parity basis (as required by Articles 638.4, 654.5, or 655.3). This would not require each series of notes to have the same maturities under the plan if, from a strictly financial point of view, the net present value of each series of notes remained the same before and after implementation of the plan. The other hurdle that the TRLC imposes is that the proposed treatment satisfies the “best interests of creditors” test that creditors must be better off under the plan than in an insolvent liquidation.
The Adler plan was unusual because it did not envisage the survival of the group’s business but rather its controlled wind-down through the disposal of assets over an extended period, paying off each series of notes in full in accordance with their temporal priorities or earlier.
This would present a difficulty under the TRLC because the plan would not have offered a reasonable prospect that the company’s viability would have been preserved in the short- and medium-term. In fact, the plan envisaged the ultimate liquidation of the plan company once the notes had been repaid on or before their scheduled maturities. The explanatory memorandum of the TRLC states that one of its key objectives is to allow viable companies access to a preventive restructuring framework that allows them to continue their business activity.See recitals 32,39, 41, 49, and 50 of the Directive and Articles 633.10 and 638.2 of the TRLC.
A recent decision of the Madrid Mercantile CourtIndustrias Biachezza, S.A.U., Order of the Mercantile Court (no.12) of Madrid, no 697/2023 (20 November 2023). rejected the approval of a restructuring plan in which a company had sold its business to a third party, having agreed a payment schedule with its creditors that was dependent on the success of the buyer’s business. The plan was rejected on the grounds that, since the company had no continuing business activity, it failed to comply with the provisions of Articles 633.10 and 638.1 of the TRLC. There is ongoing academic debate about whether, if creditors have approved a plan in these circumstances and there is no creditor challenge, the judge should limit its review to compliance with the formal requirements and homologate a plan in these circumstances. However, it remains a key difference between the Spanish and English regimes and would likely have prevented a plan such as Adler’s being homologated in Spain.
Adler determined that, notwithstanding that shareholders may be deeply out-of-the-money, a restructuring plan could not entirely disenfranchise them. As part of the need for a plan to be a “compromise or arrangement”, shareholders need to be offered something (however nominal). Because the TRLC has adopted an absolute priority rule, a Spanish court would have no such difficulty in cramming down an opposing shareholder class under a plan in exchange for no consideration to the extent that the shareholders do not have an economic interest in the company’s plan. The Celsa restructuring plan vividly illustrates this, as control of the group was wrested from the family shareholders in the face of sustained opposition.
The ability to disenfranchise shareholders represented a significant step towards modernising the Spanish pre-insolvency regime. The flexibility of the TRLC is expected to provide a viable alternative for Spanish groups when creditors who hold the economic interest wish to restructure with or without the co-operation of shareholders. The differing approach of the Spanish courts if presented with a “Spanish Adler” is an instructive comparison for groups, shareholders, and creditors in their jurisdictional decision-making of where to restructure.