July 19, 2020

New normal” in Spain: Business crisis and restructuring scenarios: Risks and opportunities. New insolvency rules and EU Directive 2019/1023

The “new normal” requires companies to review their structure and adapt it to the new economic situation: Companies will have to review costs, adapt the way of servicing customers, work, redefine business strategies, perhaps transfer or discontinue some business units with their elements, or start others: structural changes will affect many areas of the organization, including the corporate level, offering advantages of opportunities to grow acquiring companies, assets or business units having to be smart to negotiate with potentially accumulated debt, integrate with other companies or establish strategic joint-venture agreements, etc.

In many cases this crisis will also trigger latent crisis  pre-covid-29, underlying crises that had been brewing in recent years long before the pandemic. Spanish business landscape, extremely fragmented in numerous medium, small and “micro-business” tiny enterprises and self-employed whose small size and “weak financial muscle”, prevents access to markets, financing and business opportunities will be even more vulnerable to this crisis: It is necessary to gain robustness if you want to survive.

Investors, with savings, financial capacity and funds ready to invest, will find investment opportunities in well-planned businesses and projects needing financing to materialize value propositions.

In the midst of the state of alarm, emergency regulations have been issued, including some relating to certain bankruptcy obligations that, after removal of the state of alarm, become relevant.

In the broader framework in our Law there are legal instruments (more and better than in the previous crisis of 2008) that will be useful to tackle new challenges, but they also have requirements that should not be ignored by directors, shareholders and particularly creditors, let’s see:

1.-        Act 3/2009, of April 3, on Corporate Restructuring offers efficient procedures to carry out mergers, de-mergers, or split, including spin-off, business unit segregation and subsidiarization, general assignment of assets and liabilities, etc. that the new context make necessary and affect the capital structure, shareholders and key assets, with publicity mechanisms and protection of creditors.

2.-        Act 27/2014 of November 27, on Corporation Tax offers the Special Regime for mergers, divisions, asset contributions, exchange of securities and others, facilitate these structural modifications with fiscal neutrality and tax consolidation regime, all of which tend to improve the fiscal efficiency of groups of companies, that help to gain more competitive structure and size.

3.-        Act 22/2003 of July 9 on Insolvency and related legal provisions contain various instruments, for restructuring and protecting viable businesses when cashflow or insolvency difficulties require so: approval of debt restructuring agreements, “pre-bankruptcy ” procedure under article 5.bis and the provisions to encourage refinancing of article 71bis and the Additional Provision no.4. The new Consolidated Text of the Insolvency Act approved by Legislative RD 1/2020 of May 5 will come into force on September 1, 2020, organizing the numerous existing legal provisions on the subject in a consolidated code incorporating the experience of these years.

Company directors and executives, shareholders and commercial and financial creditors must follow up closely, get professional advice and be prepared to be constructive, in the face of a harsh scenario with demanding rules and that will even impose sacrifices, for example:

a.-        Bankruptcy is presumed to be fraudulent if shareholders or directors unjustifiably refuse to accept debt capitalization -that is supported by a fair purpose as endorsed by an expert report- thus jeopardizing a refinancing agreement, in which case the courts may condemn, among others, shareholders who unreasonably refuse to capitalize their debt causing or aggravating insolvency.

b.-       If a refinancing agreement is reached, creditors who do not adhere to it have the option of capitalizing their credit rights against the company, or collecting it with a deduction equal to the nominal amount of the shares – if applicable increased by share premium it would correspond to them- in the absence of response they shall be deemed to opt for a debt reduction.

c.-        Shortly, Directive (EU) 2019/1023 of June 20, 2019 (which EU Member States must transpose by July 17, 2021) goes further, with provisions that practically eliminate the shareholders’ right to decide on capitalizing their credit rights against the company,  giving the States three alternatives to transpose the principle of avoiding blocking viability and refinancing agreements: (i) the suppression of voting rights of shareholders in the restructuring plan; (ii) the judicial imposition on the shareholders of a restructuring plan even if they voted against, or (iii) alternatively to all this, the Directive orders States to enact provisions that “guarantee by other means that these shareholders shall not prevent or unreasonably hinder the adoption, confirmation or execution of a restructuring plan. ” In view of the many questions on this approach, we will have to wait for how this Directive is transposed into the Spanish legal system.

It is therefore important to closely follow up the business and its organization, consult with professionals, and take the appropriate measures at all times in defense of the legitimate interests at stake.

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