New rules so companies can renegotiate debt and avoid insolvency

Automatic summary, not yet reviewed

1. A debtor may tell the court it has started negotiations for a refinancing agreement. This can suspend court enforcement actions on assets needed for its business, and also actions by financial creditors if financial liabilities representing at least 51 percent support the negotiations. Public law claims are excluded.
2. It creates a special regime for refinancing agreements that cannot be rescinded if the company later enters insolvency. Some require support from three fifths of liabilities and an auditor's certificate; others, with no required majority, demand strict conditions, such as a clear improvement in the debtor's financial position.
3. It improves court approval (homologación) of refinancing agreements. Approval only requires creditors holding 51 percent of financial liabilities, and effects can extend to dissenting creditors: payment deferrals with 60 percent support, and debt reductions, debt-to-equity conversions or asset transfers in payment with 75 percent.
4. It encourages new funding and debt-to-equity conversions. New cash contributions count as credits against the insolvency estate for two years, and shareholders who refuse a debt capitalization without reasonable cause can be found liable for the insolvency.
5. It eases the tax treatment of these transactions: debt capitalization is not taxed except in specific cases, gains from debt reductions and deferrals are recognized gradually, and deeds containing debt reductions are exempt from the Transfer Tax.
6. It adds complementary measures: the Bank of Spain will set criteria to classify refinanced operations as normal risk, it clarifies that public administrations cannot agree reduced late-payment interest, and the rule preventing capital reductions due to real estate losses is extended for 2014.

Who it affects

• Viable companies with excessive financial debt: They can renegotiate their debt with legal protection, without enforcement actions pushing them into insolvency.
• Financial creditors (banks and other lenders): They can sign refinancing agreements that cannot be rescinded, though effects may sometimes extend to non-participants.
• Shareholders and directors of debtor companies: They can be held liable for the insolvency if they refuse debt capitalization without reasonable cause.
• Debtors signing debt reductions or deferrals: They benefit from tax advantages and exemption from the Transfer Tax on the relevant deeds.

Words worth knowing

Acuerdo de refinanciación

An agreement between a company and its creditors to change debt terms: deadlines, interest or amounts.

Homologación judicial

Court approval of that agreement, giving it stronger legal effects.

Quita

A reduction of the part of the debt the creditor forgives.

Espera

A deferral of debt payment to a later date.

Crédito contra la masa

A credit paid earlier and with priority if the company enters insolvency proceedings.

It summarizes the law as published in the BOE. It is written by artificial intelligence and may contain mistakes: the official text is what counts. Read the official text · How we make summaries