The Commission’s directive proposal introduces a new approach to corporate insolvency in Europe, in order to encourage early restructuring of companies to prevent their eventual liquidation, thus protecting the employment and viability of companies.

It is understood that a significant percentage of companies and jobs could be maintained if there were preventive procedures in place (“pre-insolvency” procedures and early warning systems) in all Member States that were projected in preventive restructuring plans, which encourages action to be taken when companies still have credit and credibility from suppliers, customers, workers, financial institutions, etc.

There are very few warning mechanisms in Spain, and those that do exist are ineffective at helping companies detect potential issues with their financial situation and ensure their restructuring at an early stage. According to the Brussels assessment, insolvency must adapt to the current socio-economic reality and allow early restructuring to debtors in financial difficulty.

Currently, our bankruptcy law distinguishes between two insolvency types: current and imminent. Imminent insolvency is a company threatened by a fast-approaching situation where it predicts that it will be impossible to fulfil its payment obligations regularly. Current insolvency is a situation where the debtor has already made it impossible to comply with their obligations on a regular basis. This differentiation is not trivial, since only current insolvency creates the legal obligation to request an arrangement with creditors within two months, while imminent insolvency grants the power to do so. Until now, imminent insolvency was the most favourable trigger to adopt measures to rescue the company.

The Commission’s directive proposal introduces a
new approach to corporate insolvency in Europe, 
order to encourage early restructuring of companies

to prevent their eventual liquidation, thus protecting the
employment and viability of companies.

This new concept of “pre-insolvency” implies that, when there a risk of insolvency, Member States will ensure that debtors in financial difficulty will have access to an effective preventive restructuring framework, allowing them to restructure their debt or the company itself, restore its viability and avoid insolvency at an early stage, in accordance with the following guidelines:

  • Possible early warning mechanisms should include new obligations for debtors or administrators and managers of the debtor company, in terms of monitoring, accounting and information obligations.
  • The directive has expressed the thinking that part of the doctrine was defending, which should, in principle, leave debtors with control over their assets, day-to-day management of their business, and the suspension of executions by creditors and banks while negotiating the voluntary restructuring, giving them a small, 4-12 month respite.
  • Non-conforming minority shareholders may not block restructuring plans.
  • The new financing will enjoy specific protections to increase the success chance of the restructuring.
  • The appointment of an administrator responsible for the restructuring, whether a mediator supporting the negotiations for a restructuring plan or an insolvency administrator supervising the debtor’s actions, shall not be required, but will be decided on a case by case basis, depending on the circumstances or specific needs of the debtor. This will make the entire process swifter and more flexible.

However, this aspect is conflicting, since most countries in our environment advocate the mandatory intervention of an expert to give the process greater legal certainty.

  • Regarding flexibility, a court order shall not necessarily have to be issued to start the restructuring process, which may be “informal”, provided that the rights of third parties are not affected unjustifiably.
  • Creditors affected by the restructuring plan and shareholders (where appropriate under national law) must have voting rights on the adoption of the restructuring plan. The “best interests of creditors” ensures that no discrepant creditor is adversely affected by the restructuring plan.
  • This directive favours greater protection of social interest in a broad sense, understood as such, the common interest among all stakeholders.

For this reason, directors and executives of the company are required to comply with the general obligations set out in current Spanish legislation (loyalty, fidelity, avoidance of conflicts of interest, etc.) namely:

  1. adopt immediate measures to reduce minimum losses for creditors, shareholders, employees and other stakeholders;
  2. duly consider the interests of creditors and other interested parties;
  3. take reasonable steps to avoid insolvency;
  4. avoid gross deliberate conduct or negligence that endangers the viability of the company.
  • Mediators, insolvency administrators as well as social and managerial administrators must receive the necessary training to ensure that their services are provided in an efficient, impartial, independent, diligent and competent manner in relation to the parties being protected.

The broader concept of social interest (beyond maximising shareholder value) is shown in the figure, “imported” from the US bankruptcy law, “Cram down” (possibility of a plan approval by a class of creditors, imposing the plan on other classes and even shareholders, when the company valuation is less than the amount of the credit whose owners are ‘pulled’ by the plan), provided for in a novel way, in the aforementioned directive. Using this figure, the Plan can be judicially confirmed without approval by the creditor class holding the restructured credits, provided that the so-called “best interest of creditors test” and the “absolute priority rule” are always respected, which we refer to later.

The restructuring plan should be approved by
the majority provided for in national legislation,
according to the amount of the claims of
creditors in each category.

All of this is now reflected in Article 11 of the directive, which provides that a restructuring plan, not approved by each category of affected parties, can be confirmed by a court or competent administrative authority at the proposal of the debtor, or a creditor with the debtor’s consent. This plan becomes binding on one or more discrepant categories where the restructuring plan fulfils the conditions established in Article 10 (2), approved by at least one category of creditors affected, other than a category of shareholders and any other category, and fulfils the absolute priority rule.

The restructuring plan should be approved by the majority provided for in national legislation, according to the amount of the claims of creditors in each category. In cases where there are more than two creditor categories, Member States should be able to maintain or introduce provisions to authorise the courts to confirm the restructuring plans supported by the majority of these creditor categories (i.e. not by all categories), considering in particular the size of the claims of the respective creditor categories.

Until now, we had the current mechanism provided for in article 172 bis of the current insolvency law, introduced in the 2014 reform, which means that judges may convict all or some of the administrators, liquidators, de jure or de facto, or attorneys general, of the insolvent legal entity, as well as partners denied capitalisation of credits without reasonable cause.

Finally, as an important change, it is foreseen that employees of the insolvent company can access capital, in a similar way to the Italian cooperative movement. It is not surprising that the American “cram down” figure of partners is reinforced in our order with the justification of facilitating employee access to capital, and thus, along with other measures provided for in the directive, reach the primary objective, which is to avoid liquidation in an insolvency proceeding, to support growth and protect employment.

José María Dutilh Carvajal
LeQuid, Abogados, Economistas y Administradores Concursales SLP [Lawyers, Economists and Insolvency Administrators]