Court-approved restructuring plan: how it protects a business and how to obtain one
Under the current Spanish insolvency framework, the court-approved restructuring plan is the cornerstone of Spain’s pre-insolvency regime. It is a legal instrument designed to modify the composition, terms or structure of a debtor’s assets, liabilities or equity, including transfers of assets, business units or the business as a going concern, together with any operational changes required to implement the restructuring.
Its purpose is not merely to refinance debt. Rather, it provides a preventive, flexible and structured mechanism for reorganising a company’s financial, corporate and, where appropriate, operational structure, enabling insolvency proceedings to be avoided where there remains a reasonable prospect of the business continuing as a viable undertaking.
Court-approved restructuring plans: protection against enforcement action and dissenting creditors
A court-approved restructuring plan protects a financially distressed business in several respects, including against enforcement action, dissenting creditors, corporate governance obstacles and deadlock created by shareholders or minority creditor classes.
Once the application for court approval has been admitted, the court must order a stay on the commencement of judicial or out-of-court enforcement proceedings against the debtor’s assets, together with the suspension of any enforcement proceedings already underway until the application for approval has been determined.
Furthermore, the order approving the restructuring plan lifts the stay in respect of claims that are not affected by the plan, while also terminating enforcement proceedings relating to claims that are subject to it.
Judicial approval is required where the debtor intends to extend the effects of the restructuring plan to creditors or classes of creditors that did not vote in favour of it, or to the shareholders of a corporate debtor. It is also necessary where the plan seeks to terminate contracts in the interests of the restructuring or to protect interim financing and new financing from subsequent avoidance actions.
Once approved, the restructuring plan takes immediate effect in relation to all affected claims, the debtor and, in the case of a company, its shareholders.
Corporate measures under a court-approved restructuring plan
A restructuring plan may include a wide range of corporate measures, including share capital increases or reductions, debt-to-equity conversions and amendments to the company’s articles of association.
Where the restructuring plan includes measures requiring shareholder approval and the general meeting fails to approve them, the directors, or any person appointed by the court, may take the steps necessary to implement those measures. In such cases, the court order approving the restructuring plan constitutes sufficient legal title for registering the relevant amendments to the company’s articles of association with the Mercantile Registry.
This provision is particularly significant where shareholders oppose a restructuring that is necessary in circumstances of actual or imminent insolvency. In such situations, the objective of preserving a viable business may prevail over shareholder opposition.
Protection of financing under a court-approved restructuring plan
Spanish insolvency legislation protects both interim financing, granted during restructuring negotiations to ensure business continuity or preserve the value of the undertaking, and new financing provided under the restructuring plan where it is necessary for its implementation.
This protection operates primarily by shielding such financing from potential avoidance actions in any subsequent insolvency proceedings. Where the claims affected by the court-approved restructuring plan represent at least 51% of the debtor’s total liabilities, the plan will generally not be subject to avoidance, except in cases involving fraud. The same protection also extends to reasonable and necessary acts carried out during the negotiations, interim financing, new financing and transactions required to implement the restructuring plan.
Where the financing is provided by persons closely connected with the debtor, enhanced approval thresholds apply. In such cases, the affected claims, excluding those held by related parties, must represent more than 60% of the debtor’s total liabilities.
Requirements for obtaining a court-approved restructuring plan
Obtaining court approval requires the restructuring plan to be carefully structured. This includes defining the scope of the affected claims, properly forming creditor classes, securing the required voting majorities, demonstrating the viability of the business, complying with the applicable procedural requirements and, in certain cases, overcoming challenges brought by creditors or shareholders.
Court approval may be sought where the debtor is likely to become insolvent or is facing imminent insolvency.
At a minimum, the restructuring plan must include the identity of the debtor, the identity of the restructuring expert (where one has been appointed), a description of the debtor’s financial and employment position, details of its assets and liabilities, identification of affected and unaffected creditors, the proposed operational and financial restructuring measures, details of any interim and new financing, projected cash flows, evidence demonstrating the business’s short- and medium-term viability and, where public claims are affected, certificates confirming compliance with tax and social security obligations.
The requirement to demonstrate viability is far from a mere formality. The restructuring plan must explain why it is capable of avoiding formal insolvency proceedings and ensuring the continued operation of the business. It is not sufficient simply to impose debt write-downs or payment deferrals; the plan must be supported by a sound economic rationale justifying the sacrifices required of creditors and shareholders.
Formation of creditor classes
The proposed restructuring plan must be communicated to all creditors whose claims may be affected by it. Those creditors vote on the plan in separate classes of creditors.
Creditor classes must be formed on the basis of a common interest, determined by objective criteria. As a general rule, secured creditors constitute a single class unless the diversity of the assets or rights subject to security justifies their separation into different classes. Public law claims constitute a separate class within their respective insolvency ranking.
The correct formation of creditor classes is one of the most sensitive aspects of the restructuring process. Artificial or inappropriate classification may distort voting majorities and result in an improper court approval.
For that reason, Spanish insolvency legislation allows the debtor, or creditors representing more than 50% of the affected liabilities, to apply for optional judicial confirmation of the class formation before seeking court approval of the restructuring plan.
Voting majorities, inter-class cram-down and the viability assessment
A restructuring plan may still be approved even where not all creditor classes vote in its favour. Court approval remains possible where the plan is supported by a simple majority of creditor classes, provided that at least one approving class would have ranked as a secured or generally preferred class in formal insolvency proceedings. Alternatively, approval may also be granted where at least one approving class would reasonably have been expected to receive some payment based on the valuation of the debtor as a going concern.
In the latter case, the application for court approval must be accompanied by a report from the restructuring expert assessing the value of the debtor on a going-concern basis.
This mechanism enables what is commonly referred to as an inter-class cram-down, allowing dissenting creditor classes to be bound by the restructuring plan under certain conditions. However, the greater the economic sacrifice imposed upon dissenting classes, the more important it becomes to justify the valuation of the business, the scope of the affected claims, the formation of creditor classes and compliance with the applicable priority rules.
Formal execution and court jurisdiction
The restructuring plan must be executed by means of a public instrument (notarial deed), incorporating a certificate from the restructuring expert, where one has been appointed, or from the company’s auditor, confirming that the statutory voting majorities have been obtained.
Jurisdiction lies with the Commercial Court having jurisdiction to hear any future insolvency proceedings relating to the debtor. Where the debtor has previously notified the court that restructuring negotiations have commenced, jurisdiction will rest with the Commercial Court before which that notification was filed.
The application for court approval must be accompanied by a complete copy of the public instrument, evidence of the voting majorities obtained, the restructuring expert’s report where applicable and, where public claims are affected, certificates issued by the Spanish Tax Agency and the General Treasury of the Social Security confirming compliance with the relevant obligations.
Unless it is manifestly apparent from the documentation submitted that the statutory requirements have not been satisfied, the court will approve the restructuring plan.
Challenging a court-approved restructuring plan
Affected creditors and shareholders are entitled to challenge the restructuring plan through the mechanisms provided by law.
As a general rule, where a court upholds a challenge, its judgment will declare that the effects of the restructuring plan do not extend to the successful claimant only, while the court approval remains effective in respect of all other affected creditors and shareholders.
However, where the challenge succeeds because the required voting majorities were not achieved or because the creditor classes were improperly constituted, the court will declare the restructuring plan ineffective.
FAQs on court-approved restructuring plans
What is a court-approved restructuring plan?
A court-approved restructuring plan is a pre-insolvency restructuring instrument under Spanish law that enables a company to modify the structure of its assets, liabilities or equity in order to avoid formal insolvency proceedings, provided there is a reasonable prospect of the business remaining viable.
What is the purpose of a court-approved restructuring plan?
Its purpose is to protect a financially distressed business against enforcement action, dissenting creditors, shareholder deadlock and the risks arising from a failure to reach agreement, while allowing an orderly restructuring of its financial, corporate and operational position.
When is court approval of a restructuring plan required?
Court approval is required where the restructuring plan seeks to extend its effects to creditors or creditor classes that have not voted in favour of it, to the shareholders of a corporate debtor, to terminate contracts in the interests of the restructuring or to protect interim financing and new financing from subsequent avoidance actions.
What are the effects of court approval?
Once approved, the restructuring plan immediately becomes binding on all affected claims, the debtor and, where the debtor is a company, its shareholders. It may also result in the suspension or termination of enforcement proceedings relating to affected claims.
Can a court-approved restructuring plan affect shareholders?
Yes. A restructuring plan may include corporate measures such as share capital increases or reductions, debt-to-equity conversions or amendments to the company’s articles of association. In certain circumstances, preserving a viable business may take precedence over shareholder opposition.
What protection is afforded to interim financing and new financing?
Spanish law protects interim financing and new financing against subsequent avoidance actions in later insolvency proceedings, provided that the statutory requirements and the applicable voting thresholds have been satisfied.
What information must a court-approved restructuring plan contain?
Among other matters, the restructuring plan must include details of the debtor, its financial and employment position, its assets and liabilities, the affected and unaffected creditors, the proposed operational and financial measures, interim and new financing, projected cash flows and evidence demonstrating the viability of the business.
Why is it important to demonstrate the viability of the business?
Because the restructuring plan must do more than impose debt write-downs or payment deferrals. It must explain why it is capable of avoiding formal insolvency proceedings and ensuring the continued operation of the business, supported by a sound economic rationale that justifies the sacrifices required of creditors and shareholders.
How are creditors organised under a restructuring plan?
Affected creditors vote in separate creditor classes. Those classes must be formed according to objective criteria reflecting a common interest, thereby avoiding artificial classifications that could distort the voting majorities required for court approval.
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