Judicial Approval and Challenges to Restructuring Plans in Spain

In the current financial and business context, restructuring plans (or refinancing agreements) play a crucial role in debt restructuring and the economic viability of struggling companies. These plans enable debtors to negotiate with their main creditors for debt reductions, delays, debt conversions, and other measures designed to alleviate their complex financial situation.

Main Effects of Judicial Approval

In Spain, restructuring plans can undergo judicial approval, meaning formal approval by a judge, to provide them with greater legal certainty. Judicial approval of a restructuring plan grants the debtor the following main effects:

• Extension of the plan’s effects to non-signatory creditors or the debtor’s partners
• Resolution of contracts in the plan’s interest
• Protection of new financing outlined in the plan (prioritizing payment) and rendering resulting actions and transactions irrevocable.

Requirements for Judicial Approval

The new regime for judicial approval of restructuring plans, resulting from the latest reform of the Insolvency Law in September 2022, in line with the requirements of European Union law, mandates:

• Obtaining specific creditor majorities
• Compliance with specific formal and substantive criteria established by the law.

Grounds for Challenging Restructuring Plans

As a result, under certain circumstances, creditors adversely affected by the restructuring plan can challenge it, leading to its complete ineffectiveness or the non-extension of its effects.

Primary grounds for challenging include:

• Procedural defects: for example, failure to notify certain creditors of the plan
• Improper formation of creditor classes: classification based on non-objective or unjustifiable criteria, often aiming to secure majority votes in each class
• Plan inaccuracies: intended to ensure debtor viability
• Disproportionate burden on affected creditors by the plan.

Legal Protection

In summary, judicial approval of restructuring plans is a tool that provides legal security to the debtor and other parties signing the plan, generating effects aimed at safeguarding the agreed terms. Spanish courts operate on the principle of granting flexibility to debtors and other stakeholders to negotiate and define plan terms, thereby respecting the principle of preserving business transactions.

However, this flexibility cannot be absolute. Therefore, the restructuring plan must comply with minimum criteria outlined by insolvency regulations, particularly concerning required majorities, objective formation of creditor classes, proportionality of measures, absence of arbitrary actions, and avoidance of creditor fraud or unfairness, among other aspects.

Failure to meet these criteria may lead affected creditors to challenge the plan, potentially resulting in the plan being deemed partially or wholly ineffective against the challenging creditor.

If you need additional information about the judicial approval of restructuring plans in Spain,