How the Royal Decree Law 5/2023 Affects Bankruptcy Proceedings

The new Royal Decree Law 5/2023 which entered into force the past 30^th of June, adopts and extends certain measures in response to the economic and social consequences of the War in Ukraine, supporting the reconstruction of La Palma and other situations of vulnerability and transposing EU directives on the structural modifications of commercial companies and reconciliation of family life. It provides, among other things, a series of regulations that adapt the content of several articles in the Insolvency Act, in terms of creditors agreements and company restructuring plans to the new regime imposed by the European Directives, the main purpose of which is to protect creditors of the same debtor to a greater extent.

Thus, the Royal Decree Law foresees the possibility that companies that find themselves in a situation of insolvency, or subject to a restructuring plan, or as the case may be, to a continuation plan, may undergo a process of transformation, merger, spin off or global transfer, always within the limits established in the Insolvency Law.

In such cases, creditors who have claims which arose prior to the publication of the relevant draft proposed by the debtor company, and which have not yet matured at the time of such publication and who do not agree with the securities offered by the debtor, or in the absence of such securities and have notified the debtor company of their disagreement, may:

1) Apply to the commercial register of the debtor company’s registered office if an independent experts report on the security has been issued and found to be inadequate or insufficient. In this case, the commercial register will transfer the report to the debtor company so that it can extend or offer another type of security for the creditors. If the creditor remains dissatisfied, it may request the presiding Commercial Court to establish guarantees the debtor company should provide if necessary.

2) To apply directly to the Commercial Court, if an independent expert’s report has been issued about the guarantees and considers them to be adequate. In this case, the Commercial Court will process the procedure and communicate it to the Commercial Register via court order for publication and registration.

3) Or ask the Commercial Registrar directly to appoint an independent expert to issue an expert report on the recovery of guarantees for the creditors of the joint debtor.

In any such case, the creditors must demonstrate that the satisfaction of their claims is at risk due to the structural modification sought by the debtor company and, furthermore, that such security for recovery is insufficient and/or inadequate. In any case, it shall be presumed, in the absence of necessary evidence to the contrary, that guarantees are adequate and/or necessary when the independent experts report has established that such adequacy and/or necessity, or the debtor company has issued the formal statement on its financial situation as provided for in this law.

On the other hand, this RDL obliges the administrators of the debtor company to insert and publish on the company’s website at least one month before the date of the general meeting intended to agree on a structural modification within the company:

A- The draft of the structural modification

B- A notice informing the shareholders, creditors and representatives of the companies employees that they may make observations on the said project

C- The independent experts report on the guarantees offered to creditors and the viability of the project, without prejudice to any confidential information it may contain.

In terms of the actual insolvency proceedings, this new rule affects the proposed creditors agreement, modifying the wording of the article that referred to the possible inclusion in the proposed agreement of the possibility of a merger, spin-off or global transfer of assets and liabilities of the insolvent entity. Now, with this new reform, the reference is simply to “structural modification”, this being understood as the transformation of the company, which had already been accepted in Spanish insolvency practice.

In any event, it is foreseen that, under no circumstances may the converted, acquiring, new or spin-off company or the transferee company have negative net assets as a result of such a “Structural modification”.

The registration of the merger, the total division or the global transfer of assets and liabilities resulting in the extinction of a company declared bankrupt shall be a cause for the termination of bankruptcy proceedings.

This same royal decree law amends the Insolvency Act, in the sense that article 399 of Law 16/22 of the 5^th of September initially excluded creditors’ right of opposition in the event that that the insolvency agreement provided for a merger, spin-off or global transfer of assets and liabilities. Now, with this RDL, it is specified that in the event that the agreement provides for a structural modification of the debtor company, the bankruptcy creditors will not have the rights of individual guardianship recognised in the first book of this Royal Decree 5/2023 of the 28^th of June.

Finally, with this RDL, creditors affected by the restructuring plan presented by the debtor company are denied the individual trusteeship rights recognised in the first book of the Royal Decree Law 5/2023 of 28^th of June.