What, how and when: key points of the Directive on restructuring and insolvency
Julio Menchaca Vite, lawyer Transactions, Mergers and Acquisitions. AGM Abogados
Objective of Directive (EU) 2019/1023 of 20 June 2019:
According to Whereas 1, its objective is to remove obstacles to the free movement of capital, standardising the regulations concerning preventive restructuring, insolvency, discharge of debt and disqualifications, improving their procedures and ensuring that viable enterprises and entrepreneurs can continue operating and honest entrepreneurs can benefit from a full discharge of debt.
Pursuant to article 34, the Member States have up to two years from the entry into force of the Directive to adopt and publish it, i.e. by 17 July 2021.
As an exception to that deadline:
- Article 28 a), b) and c) on the use of electronic means of communication to file claims, submit restructuring or repayment plans, and notify creditors will be adopted and published no later than 17 July 2024.
- Article 28 d) on the use of electronic means of communication to lodge challenges and appeals will be adopted and published no later than 17 July 2026.
Likewise, Member States that encounter particular difficulties in implementing the Directive can benefit from an extension of a maximum of one year, notifying the Commission by 17 January 2021.
- Early warning tools will be put in place to warn debtors.
- Preventive restructuring frameworks:
- Debtors will have access to them with the aim of preventing insolvency and ensuring their viability.
- They can take place out of court.
- They will also be available at the request of creditors and employees’ representatives.
- Viability tests can be included.
- Practitioners in the field of restructuring can be appointed to negotiate and draft a restructuring plan, which will be mandatory in certain cases. These types of practitioners are not included in Spanish legislation, so this must be adapted accordingly.
- There will be a stay of individual enforcement actions to foster the negotiations for restructuring plans. Its initial duration must not exceed 4 months, which can be extended to a maximum of 12 months. The Spanish insolvency law must also be adapted in this respect.
- The creditors will not be allowed to withhold performance or terminate, accelerate or modify executory contracts essential for the day-to-day operations of the business.
- Adoption of restructuring plans:
- The parties that are not affected will not have voting rights in the adoption of the plans. Likewise, certain classes can be excluded from their voting rights.
- Debtors that are SMEs should be able decide not to treat affected parties in separate classes.
- Measures should be established for vulnerable creditors such as small suppliers.
- The restructuring plans will be adopted if a majority of the claims are reached in each creditor class. Moreover, a majority of the affected parties should be able to be provided for in each creditor class. Each Member State will establish the majorities, which will not exceed 75% in any case.
- Confirmation of restructuring plans:
- They must be confirmed by the authorities at least when they affect dissenting parties, there is new financing or there is a loss of more than 25% of the workforce.
- The concept of ‘best-interest-of-creditors test’ was introduced and defined in the Directive as “a test that is satisfied if no dissenting creditor would be worse off under a restructuring plan than such a creditor would be if the normal ranking of liquidation priorities under national law were applied, either in the event of liquidation, whether piecemeal or by sale as a going concern, or in the event of the next-best-alternative scenario if the restructuring plan were not confirmed“. As can be seen, what differs from Spanish legislation is the part relating to the best alternative solution if the restructuring plan is not confirmed, so this section must also be adapted in the Spanish Insolvency Act.
- Cram-down: for a restructuring plan to become binding on the dissenting parties:
- The plan must be approved by: (i) at least one of the classes which is a secured creditors class or is senior to the ordinary unsecured creditors class; or, failing that, (ii) at least one of the voting classes that would not receive, or which could be reasonably presumed not to receive, any payment if the normal ranking of liquidation priorities were applied.
- The dissenting parties must be appropriately protected, with the possibility of applying the absolute priority rule or the relative priority rule; the latter is the actual new feature that is not envisaged in the Spanish Insolvency Act at present, so we will have to wait and see if the Spanish legislature decides to include this. Nevertheless, we believe that the absolute priority rule will remain because of the difficulties concerning the aforementioned alternative.
- The absolute priority rule can have exceptions such as the equity holders maintaining certain interests or in the case of essential suppliers.
- Appeals against decisions confirming or rejecting restructuring plans must be brought before a higher judicial authority, which changes the current mechanism in Spain, where the same authority makes the decision.
- New financing and interim financing: additional protection is provided for so that such financing is not declared void, voidable or unenforceable, and the grantors of such financing cannot incur civil, administrative or criminal liability, except in cases such as bad faith, fraud and conflict of interest.
- The main new features regarding the discharge of entrepreneurs’ debt are as follows:
- The period after which they are able to be discharged from their debts is no longer than three years (in the case of good faith), which is currently five years in Spain.
- Consolidation of insolvency proceedings regarding professional and non-professional debts.
- The decision whether or not to discharge public law claims is left up to the Member States.
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