Spanish Insolvency Law Reform Reaches Composition Contracts


Spanish Insolvency Law Reform Reaches Composition Contracts

Another round of fabric reforms should let the viability of distressed companies in The country.

Royal Decree Law 11/2014 (the brand new Reform) is yet another obvious effort to lower the amount of insolvent companies which finish in value-destructive liquidation in The country. To have this, the brand new Reform has extended the primary concepts of pre-insolvency refinancing contracts – that have been created by the March 2014 reform from the Spanish Insolvency Law (the March Reform1) – to composition contracts and it has established certain rules concerning the purchase of production units and company liquidation.

Within this Client Alert, we discuss the next key implications:

? Composition agreement provisions: Among other amendments, the scope from the composition agreement provisions continues to be broadened and cram-lower options happen to be built-in.

? Production unit sales and liquidation: The Brand New Reform has incorporated specific rules.

? Various other provisions: Among other amendments, the brand new Reform includes new insolvency ‘guilty’ classification rules an additional chance for composition contracts.

Please visit full Alert below to learn more.


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Latham & Watkins Restructuring, Insolvency & Workouts Practice September 26, 2014 | Number 1746
Spanish Insolvency Law Reform Extends to Composition
A second round of material reforms should encourage the viability of distressed
companies in Spain.
Royal Decree Law 11/2014 (the New Reform) is another clear effort to decrease the number of insolvent
companies which end up in value-destructive liquidation in Spain. In order to achieve this, the New
Reform has extended the main principles of pre-insolvency refinancing agreements — which were
introduced by the March 2014 reform of the Spanish Insolvency Law (the March Reform1) — to
composition agreements and has set forth certain rules regarding the sale of production units and
company liquidation.
In this Client Alert, we discuss the following key implications:
• Composition agreement provisions: Among other amendments, the scope of the composition
agreement provisions has been broadened and cram-down possibilities have been built in.
• Production unit sales and liquidation: The New Reform has included specific rules.
• Other related provisions: Among other amendments, the New Reform includes new insolvency
‘guilty’ classification rules and a second opportunity for composition agreements.
Composition agreements provisions
Extension of the terms of a composition agreement
Composition agreements can now be more flexible because the New Reform allows for more varied
alternatives. Hopefully these four new alternatives described below will help reduce the increasing
number of insolvent companies which end up in liquidation:
(i) Limitations: The New Reform has removed the previous general restrictions on stays and haircuts.
Now a 10-year limit applies to stays, as opposed to the previous five-year general limit to stays,
(which will not apply if the composition agreement is unanimously approved); and haircuts are
(ii) Alternative proposal: The New Reform allows for the composition agreement to include alternative
proposals including the conversion of debt into shares, convertible bonds, subordinated loans,
participating loans, loans with capitalized interest or any other financial instrument with ranking,
maturity or other characteristics different from those of the original facility. However, these alternative
proposals may not be imposed on public creditors (i.e. public authorities).
Latham & Watkins September 26, 2014 | Number 1746 | Page 2
(iii) Assignment of assets in lieu of payment: This alternative is available to the extent that (a) said
assets are not necessary for the business or professional activity of the insolvent debtor; and (b) their
value2 (please see B (ii) below) is equal to or less than the amount of the relevant claim (any excess
should be paid back to the insolvent estate). Again, this measure may not be imposed on public
(iv) Direct sale: The composition agreement may include proposals regarding the direct sale of the
insolvent debtor’s whole business or of particular production units. Please see section “Production
unit sales and liquidation” below for the relevant applicable rules.
Notably, many of the above alternatives may not be imposed on public creditors. Depending on the
insolvent debtor’s kind of company, and depending on the nature of its liabilities (e.g. if public creditors
hold the majority of credit rights), including so many exceptions for public creditors could mean, in
practice, that the above described terms have little or no effect.
Privileged creditors
Specially and generally privileged creditors have now been divided into four creditor classes. In addition,
given that specially privileged creditors’ claims are only privileged up to the value of the security interest,
certain provisions have been included in order to ascertain how to calculate such value:
(i) Classes of privileged creditors: Specially privileged creditors (i.e. secured creditors) and
generally privileged creditors have each been classified into the following four categories:
• Labor creditors (i.e. employees)
• Public creditors (i.e. public authorities)
• Financial creditors
• All other creditors (mainly, trade creditors)
Significantly, when dealing with majorities, the New Reform (in contrast to the UK Scheme of
Arrangement) does not refer to the number of creditors within any particular class, but rather
only considers the percentage of total liabilities or value of the security (please see ‘Voting
rights and majorities’ below) within a class of creditors.
(ii) Value of security interests: The value of the specially privileged creditors’ security interest is
calculated using the same formula which is used in pre-insolvency refinancing agreements3
pursuant to the March Reform; the following rules apply to the calculation of the “reasonable
value” of security:
• Publicly traded securities: The reasonable value shall be the weighted average price during the
quarter immediately preceding the declaration of insolvency.
• Real estate property: The reasonable value shall be determined in an appraisal report issued by a
recognized appraisal expert (sociedad de tasación).
• Other type of assets: The reasonable value shall be determined by means of an independent expert’s
appraisal report.

Calculating the reasonable value of security interests over assets other than publicly traded securities or
real estate property can be troublesome, given that a reliable and developed market precedent may not
be available — such as a pledge over contingent or unquantified future credit rights arising from purchase
agreements or hedging agreements. This issue is particularly relevant in multijurisdictional cross-border
deals and/or if such underlying agreements are subject to foreign law, since this adds even more
Latham & Watkins September 26, 2014 | Number 1746 | Page 3
Further to the above, we would have expected the reforms to have included rules allowing for the
valuation to be updated throughout the insolvency proceedings, since the value of the collateral is likely to
vary during that time.
In addition, significant questions remain around the issue of whether the resulting appraisal of the security
interest could be challenged and, if so, by whom, how and when. Arguably, given that creditors may
challenge the list of creditors and the inventory, they should also be able to challenge the value of
security interests. However, this matter remains unfortunately unclear.
Voting rights and majorities
The New Reform includes certain voting rules and majorities which inter alia update, most notably, the
cram-down regime:
(i) Post-insolvency acquisitions: Creditors (whether subject to supervision or not) who have
acquired their credit rights after the initiation of insolvency proceedings are now entitled to vote
regarding the composition agreements, unless the creditors are specially related4 to the
insolvent debtor.
Particularly worthwhile, the concept of a company’s “shareholders” — for the purposes of
specially related persons — includes both direct and indirect shareholders. This significantly
broadens the concept of “specially related person” and may materially affect lenders involved
in insolvency proceedings in Spain.
(ii) Syndicated facilities: The 75 percent majority rule included in the March Reform5 has now
been extended to composition agreements.
(iii) Majorities generally: The New Reform has included three majority log-steps which debtors
must reach in order to approve a composition agreement depending on its proposed content:
Majority required Stay Haircut Alternative
“Super Soft
Simple majority of
those participating
in the vote
Up to 3 years None None

None Less than
At least 50% of
ordinary claims
Up to 5 years Up to 50% Conversion of debt
into participating
loans for up to 5
years. This is not
applicable to labor
or public creditors
At least 65% of
ordinary claims
More than 5
and up to 10
years (unless
there is
Over 50% Conversion of debt
into participating
loans for up to 5
years or other
measures (please
see A(ii) above).
This is not
applicable to labor
or public creditors
Latham & Watkins September 26, 2014 | Number 1746 | Page 4
(iv) Extension of composition agreements to privileged creditors: The effects of composition
agreements may be extended to privileged creditors provided the following majorities are
reached within each creditor class (please see below):
• 60 percent for arrangements under (iii)(1) “Super Soft Composition agreements” and (iii)(2) “Soft
Composition agreements” above
• 75 percent for arrangements under (iii)(3) “Hard Composition agreements” above

Creditors should bear in mind that in this case, majorities are calculated over total value of security
granted within each class. Therefore, a case could arise whereby a mezzanine lender with a subordinated
security interest could be motivated to waive its security in order to avoid the compromise of its voting
power in the composition agreement.
Failure to effect composition agreements
In the event that a composition agreement is not effected and the insolvency court declares by means of
a court ruling that the parties have not complied with the agreement, any specially privileged creditors
who were bound by such composition agreement may initiate separate enforcement proceedings or
continue any enforcement proceedings which had been suspended, even if the liquidation phase has not
Production unit sales and liquidation
As we stressed in our Clients Alerts dated 18 March 2014 and 30 July 2014, we were expecting from the
lawmakers a proper uniform and detailed regulation in the Spanish Insolvency Law applicable to the
whole Spanish regime as opposed to merely in Catalonia. The New Reform has, indeed, set forth clear
rules, although it has also raised a few questions:
Production unit sales
(i) Transfer of assets: The New Reform sets forth that the assignee shall automatically — i.e.,
without the counterparty’s consent — acquire the rights and obligations arising from:
• Agreements which are used in the insolvent debtors’ business, provided that the relevant
counterparty has not requested their termination
• Administrative or governmental licenses or authorizations which are necessary for the
insolvent debtor’s business and which are included in the production unit, provided that the
assignee continues the insolvent debtor’s activity in the same premises
Most notably, the assignee may choose which agreements, licenses and authorizations it
wishes to take on and which to leave behind.
(ii) Payment obligations: The assignee shall not be obliged to pay any liabilities which arose
prior to the transfer unless it expressly agrees to do so, unless the assignee is specially
related to the insolvent debtor.
By way of an exception, the assignee must pay labor and social security obligations (though
we understand only in respect of the employees being transferred) — thus contradicting the
views of the Mercantile Courts of Catalonia6 which were issued earlier this year. In respect of
labor obligations, the insolvency court may decide that the Wages Guarantee Fund (Fondo de
Garantía Salarial) shall pay part of those labor liabilities (as set forth in the applicable
This amendment reflects the most widely shared views among Spanish courts.
Latham & Watkins September 26, 2014 | Number 1746 | Page 5
(iii) Appraisal of the business as well as of all of its production units: This appraisal must
now be included as an item in the insolvency receiver’s report, which may delay the
publication of the report. Probably — in case of large corporations — including such an
appraisal is wishful thinking.
(i) Assignment of assets: The liquidation plan may include the assignment of assets in lieu of
payment. However, this may not apply to public creditors.
(ii) Alternative ways to transfer assets: The insolvency court may authorize the direct sale of
assets or their sale through a specialized entity, in the event that an auction is unsuccessful or
that court consider such alternative means to be in the best interests of the insolvency
proceedings. This rule applies to the extent that a liquidation plan is not approved or that it
does not provide for such sale.
(iii) Transfer of encumbered assets:
• If the assets are transferred and the security is released, the privileged creditors are entitled to
receive an amount equal to the consideration for the production unit multiplied by the result of dividing
the value of the asset by the total value of the transferred production unit:

(Production Unit Consideration) x (Value of asset / Value of Production Unit)

If the resulting amount is less than the value of the security interest, the transfer will
require the consent of privileged creditors representing at least 75 percent of specially
privileged claims within the same class who are entitled to separate enforcement
proceedings and who are affected by the sale.

• If the assets are transferred, the security remains in place and the assignee takes the place of the
insolvent debtor. The relevant claim shall be excluded from the list of insolvency claims and the
specially privileged creditor’s consent will not be required in order to carry out the transfer.
Other related provisions
We summarize below the most noteworthy of the New Reform’s few additional provisions:
(i) ‘Guilty’ classification of the insolvency: The guilty classification section shall not be
triggered if the approved composition agreement includes, for any class of creditors (including
the four new classes), a stay of less than three years or a haircut of less than 1/3 of liabilities.
(ii) Public works and services concession holders and public contractors: Insolvency
proceedings which have already been initiated regarding these kind of insolvent debtors may
be conjoined, provided that the proposed composition agreement affects all the proceedings to
be conjoined. Further, the Spanish public authorities may propose a composition agreement.
Although the Spanish legislator has not tackled the core problem which is — the validity of the
pledge over the RPA (Spanish state financial liability) regulated in the controversial article
90.1.6º of the Spanish Insolvency Law7 — they have at least included the foregoing new rule.
(iii) Second opportunity, refinancing of the composition agreement: For the case of
composition agreements which were in place prior to the New Reform, but with which parties
have not complied within two years following the New Reform, the insolvent debtor, as well as
creditors representing at least 30 percent of total liabilities at that time, may propose to amend
Latham & Watkins September 26, 2014 | Number 1746 | Page 6
the composition agreement and to include the measures and particularities set forth in the
New Reform.
Certain special majorities are required in order to secure the court ruling from the insolvency
court to approve such an amendment. Provided that both the creditors and the insolvency
court approve the relevant amendments, its effects shall be extended to privileged and
ordinary creditors who have not voted in favor of the amendment, as well as to subordinated
creditors. Such amendments will not, however, apply to public creditors.
The above majority system is not only much harsher toward privileged creditors than the
general cram-down regime, but the majority system also excludes public creditors, who seem
unaffected by almost any unfavorable arrangements.
(iv) Sareb’s8 voting rights: Clearly, now even if Sareb is specially related to the insolvent debtor,
Sareb’s claims must be taken into account for the purposes of the majorities required to
approve the so-called Spanish Scheme of Arrangement9.
(v) Amendment of the Spanish Procedural Law: The Spanish legislator has added one more
possibility for debtors to challenge the enforcement of security interests, which could
potentially affect the liquidity and pricing of the non-performing loans secured market.
In general, the amendments set forth in the New Reform are welcome. The Spanish legislator has
extended the principles of pre-insolvency refinancing agreements to composition agreements, including
features from other jurisdictions into the Spanish insolvency system (particularly, from the UK — such as
the cram-down concept, the creditors classes, etc.). Indeed, this reform remedies the previous illogical
situation which provided more restructuring tools in the pre-insolvency stage than in the concurso itself.
Further, as we advocated, clear rules on the sale of production units have been introduced, which market
players likely will welcome as the most effective way to maximize the debtor’s assets’ proceeds of sale.
The beneficial treatment given to the claims of public creditors like public authorities is questionable.
We must now wait to see how Spanish insolvency courts will interpret and apply the New Reform to
properly ascertain how it will fare in practice.
Separately, the March Reform, which was a royal decree law, is currently being enacted into law. We
expect that, in addition to the measures included in the March Reform, the insolvency receivers’ status
will be changed, basically to regulate the criteria for their appointment.
Finally, the Spanish legislator should now strive to provide transparency and predictability — and
ultimately comfort — to the market players by avoiding multiple reforms of the Spanish Insolvency Law. In
this sense, market players should note that some of the New Reform’s measures will have retroactive
effect, which does not provide legal certainty and could make investors reluctant to play in the Spanish

Latham & Watkins September 26, 2014 | Number 1746 | Page 7

If you have questions about this Client Alert, please contact one of the authors listed below or the Latham
lawyer with whom you normally consult:
Ignacio Pallarés

Javier López-Antón

Fernando Colomina

Isabel Borrero
+34 91 791 5032

You Might Also Be Interested In
Material Reform of the Spanish Insolvency Law
Spanish Insolvency Act Amendment Offers Comfort to Parties in SAREB Transactions
Insolvency and Corporate Reorganization Survey 2014: a Snapshot of Global Restructuring
Mercantile Courts of Catalonia’s Conclusions Clarify Aspects of Production Unit Sales

Client Alert is published by Latham & Watkins as a news reporting service to clients and other friends.
The information contained in this publication should not be construed as legal advice. Should further
analysis or explanation of the subject matter be required, please contact the lawyer with whom you
normally consult. The invitation to contact is not a solicitation for legal work under the laws of any
jurisdiction in which Latham lawyers are not authorized to practice. A complete list of Latham’s Client
Alerts can be found at If you wish to update your contact details or customize the
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Latham & Watkins September 26, 2014 | Number 1746 | Page 8

1 Please see our Client Alert dated 18 March 2014, available at
2 Please see section 5 of our Client Alert dated 18 March 2014, available at
3 Please see section 5 of our Client Alert dated 18 March 2014, available at
4 Please note that the list of persons who are specially related to the insolvent debtor is longer after the Reform. Basically, for
insolvent debtors who are legal persons, provided that any shareholder of the insolvent company is a natural person:
a) A number of their relatives
b) Any companies controlled by such shareholder or its relatives
c) The directors or de facto directors of, or companies within the same group as the companies controlled by such
shareholder or its relatives
d) The companies where the shareholder’s relatives serve as directors or de facto directors
shall be considered specially related to the insolvent debtor.
5 Please see our Client Alert dated 18 March 2014, available at
6 Please see our Client Alert dated 30 July 2014, available at
7 Please see our Client Alert dated 30 July 2014, available at
8 Management Company for Assets Arising from the Banking Sector Reorganisation (Sociedad de Gestión de Activos
Procedentes de la Reestructuración Bancaria or “Sareb”).
9 Please see our Client Alert dated 17 December 2013, available at

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