29/03/2018 Proposal for a EU directive on company restructurings
Àlex Plana Paluzie, M&A Lawyer. AGM Abogados
One of the main objectives of the Proposal for a EU Directive on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures (hereinafter, the “Proposal”) is to maintain the business activity of companies in insolvency proceedings when that activity is actually viable after they are restructured.
The Proposal’s new regime, which is highly inspired by Chapter 11 of the United States Bankruptcy Code, seeks to provide a more efficient solution for restructuring companies. This is because the current regime does not often take into account the going concern surplus, so sometimes companies which could have provided a larger return to their creditors as a whole if they had remained active are liquidated. To maintain that surplus, the EU regulations have included for the first time the cross-class cram-down. The cram-down includes each class of creditor: privileged creditors, ordinary creditors, subordinated creditors, shareholders, etc. Needless to say, the workers can belong to another class and the creditors with special privileges over other assets can also belong to other clases.
The Proposal envisages not only the possibility of binding the dissenting creditors to the restructuring plan approved by their class (article 9 of the Proposal) but also allows a restructuring plan to be binding upon a class that has not approved this (article 11 of the Proposal). In other words, there are two ways of binding dissenting creditors:
- When the majority of the creditors in the same class approve the plan.
- When the same class of creditors has not approved the plan but it is binding by virtue of article 11 of the Proposal.
To approve a restructuring plan that does not bind the creditors of a dissenting class (i.e., when all the affected classes have approved the plan), four basic requirements must be met:
- The plan must be adopted with the applicable majorities (each Member State must establish the majority, which cannot exceed 75%) and procedure (article 9 of the Proposal).
- The plan must comply with the best interest of creditors test (which means that no creditors can receive more in the event of liquidation).
- The new financing is necessary for the plan and must not unfairly harm the creditors’ interests.
- The plan must be reasonably viable.
After regulating the ordinary restructuring plans in articles 9 and 10 of the Proposal, article 11 envisages the specific rules applicable to the “cross-class cram-down”. In this case, in addition to the aforementioned four requirements, the following two must also be met:
- The plan must be approved by at least one class of affected creditors which does not correspond to the creditors which would have not received anything in the event of liquidation (each Member State can decide whether to increase the number of minimum classes so that only one is not sufficient).
- The plan must comply with the absolute priority rule (which means that no creditors can receive over 100% of the value of their credit or collect this before the class corresponding to them).
A significant effect of the Proposal is that the insolvent company’s valuation becomes even more important for the insolvency proceedings. This is because the partners/shareholders may be a class of creditors which allows the approval of a cross-class cram-down. To do this, the value established for the company must be higher than the credits, so that the latter will receive something with the liquidation. Although this is not usual since subordinated creditors and shareholders do not normally receive anything, applying this to preventive restructurings (before the insolvency declaration) could more or less turn into a usual practice.
Another significant effect is the importance of correctly identifying the various classes of creditors since, once the creditors are divided into classes, a restructuring plan may or may not be approved.
In short, the Proposal provides a new framework regime aimed at restructuring companies in distress by creating a more complex regime that is more in line with the economic interests that are affected. Moreover, if a class of creditors proposes a more efficient solution in the new regime, its proposed plan may be imposed over the other classes without their approval. If this new regime is approved, the companies are expected to obtain more and better restructuring plans and the distressed M&A transactions are expected to be facilitated. Furthermore, once the Directive is approved, we must wait and see how each Member State transposes it so that the restructuring plans may be more or less flexible and easy to achieve depending on the Member State.
This article was published in the well known spanish newspaper Expansión: