Toward a New DIP Financing Regime Under European Restructuring Pl...

The EU Directive on restructuring and insolvency [1] has imposed an obligation to Member States to introduce relevant changes in their legal regimes on restructuring plans, which can be implemented even if the entity is in “the likelihood of insolvency.” [2] The purpose of the EU Directive is to encourage companies to address insolvency problems at a very early stage so they avoid one of the effects of formal insolvency proceedings: the social stigma, which, unfortunately, is still common in European countries. [3]

In accordance with article 288 of the Treaty of the Functioning of the European Union, [4] directives in the EU “shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods.” Thus, as opposed to European Regulations (such as the European Insolvency Regulation), the exact specific solution and wording will depend on national instruments and will differ within each EU Member State.

The EU Directive specifically addresses a debtor’s need to finance their restructuring. Specifically, the EU Directive on restructuring and insolvency introduces a specific regime for interim and new financing under restructuring plans:

• Article 2(7) of the Directive on restructuring and insolvency defines “new financing” as “any new financial assistance provided by an existing or a new creditor in order to implement a restructuring plan and that is included in that restructuring plan.”
• Under article 2(8) of the Directive on restructuring and insolvency, “interim financing” is defined as “any new financial assistance, provided by an existing or a new creditor, that includes, as a minimum, financial assistance during the stay of individual enforcement actions, and that is reasonable and immediately necessary for the debtor’s business to continue operating, or to preserve or enhance the value of that business.”

The EU Directive broadly defines the concept of financial assistance, referring expressly that it could include not only the provision of new money but also “third-party guarantees and the supply of stock, inventory, raw materials and utilities, for example through granting the debtor a longer repayment period.”

The purpose of this new European regime for new money is clear, as the success of a restructuring will also depend on the financial assistance provided during both the negotiations and the implementation of a confirmed restructuring plan.

EU Member States had the obligation to implement the Directive by July 17, 2022. By mid-August, only 18 EU countries had complied with their implementation obligation. [5] At the end of August, Spain implemented the EU Directive, being the nineteenth European country to do so.

The Specific Protection of Interim and New Financing Under the EU Directive on Restructuring and Insolvency

Chapter 4 of the EU Directive on restructuring and insolvency addresses the necessary protection for interim and new financing and other restructuring-related transactions. As explained under Recital 66, if such protection is not granted, it could “jeopardise the availability of financing” in practice.

In this regard, Article 17 of the EU Directive requires EU Member States to protect interim and new financing in an adequate manner. Thus, EU countries, at a minimum, shall ensure:

• protection of interim and new financing from actions that could declare it “void, voidable or unenforceable”; and
• protection of grantors of the interim and new financing from “civil, administrative or criminal liability” on the sole ground of the financing being detrimental to the general body of creditors. [6]

When providing this protection, EU Member States may:

• require an ex ante control to interim financings in order to grant them this protection only when the financing is “reasonably and immediately necessary for the continued operation or survival of the debtor’s business”; [7]
• require confirmation of the restructuring plan (by either an administrative or judicial authority) to grant protection to new financing;
• only provide protection to interim financing when the debtor is under a state of current insolvency (as opposed to imminent insolvency or under the likelihood of insolvency); and
• regulate a priority regime for the repayment of interim and new financing in subsequent insolvency proceedings in order to encourage new lenders to provide financial assistance.

Specific Provisions on DIP Financing Under Spanish Restructuring Plans

The Spanish reform of the Insolvency Act that implements the EU Directive on restructuring and insolvency [8] adopts the concepts of interim financing (new article 655) and new financing (new article 666) of the EU Directive.

Protection from Avoidance Actions

In the event of subsequent insolvency proceedings (“concurso de acreedores”) in Spain, interim and new financings are protected from clawback and avoidance actions only if the claims affected by a court-sanctioned [9] restructuring plan affect at least 51% of the liabilities of the insolvent company. Therefore, confirmation of the restructuring plan by the commercial court (“Juzgado de lo Mercantil”) in Spain is required in order to obtain such protection. Nevertheless, the reformed Spanish law expressly mentions that there is no protection from avoidance actions (even when the 51% threshold is met) if the financing was granted in fraud of creditors.

In cases where the restructuring plans do not affect at least 51% of the liabilities of the insolvent company, interim and new financings are not protected from avoidance actions. However, there is still a benefit for the financing provider as, if an avoidance action is brought under a subsequent concurso de acreedores, these financings will be excluded from the presumptions of acts that are detrimental to the general body of creditors. The detriment to the insolvency estate in these cases should then need to be proved.

A clear advance [10] has occurred with regard to financing provided by especially related persons. [11] The reform foresees that the interim and new financings these persons provide will also be protected from avoidance actions. However, in these cases, the threshold of affected claims by the court-sanctioned restructuring is higher, as it needs to reach 60% of the total liabilities of the company (excluding the claims of the financing-providers). [12]

If financing provided by especially related persons does not meet the threshold, no protection from avoidance actions is granted. Furthermore, in these cases, the law does not exclude these acts from the application of the legal presumptions of being detrimental to the insolvency estate in the case of avoidance actions.

Priority in Payment Under a Scenario of Subsequent Insolvency Proceedings

Finally, the reform grants priority for the repayment of interim and new financing under confirmed restructuring plans in subsequent insolvency proceedings. This solution is similar to what was foreseen in the past in Spain under refinancing agreements — the previous restructuring tool that has been substituted by the restructuring plans — although only for new financing. In this respect:

• Fifty percent of the interim or new financing obtains the priority treatment of post-petition claims (“crédito contra la masa”); and [13]
• The remaining 50% receives the treatment of a pre-petition claim with general privilege (“crédito con privilegio especial”), [14] with priority over both ordinary and subordinated claims.

Especially related persons also obtain this priority if 60% of the total liabilities of the company (excluding the claims of the financing providers) are affected by the confirmed restructuring plan under which the financing is granted.

Conclusion

In practice, companies in distress usually need additional financial assistance for their restructuring process to be successful. Minimum rules on the protection of interim and new financing under pre-insolvency scenarios, such as the provisions of the EU Directive on restructuring and insolvency, encourage this additional financial assistance.

Among other European countries, Spain has recently transposed the EU Directive on restructuring and insolvency and has improved the protection granted to interim and new financings. The advance has been clear with regard to the protection of interim financings within the frame of restructuring plans (which were not protected under the previous refinancing agreements) and the new treatment granted to financial assistance provided by especially related persons.

As the reform in Spain came into force recently (on Sept. 26, 2022), we still have to verify whether the new provisions truly encourage DIP financings under restructuring plans.