Draft bill encourages the refinancing of businesses and pre-insolvency agreements - International Law Office

On December 17 2010 the Cabinet approved the draft bill reforming the Insolvency Act, which will now take several months to pass through Parliament.

The reforms will encourage banks to refinance debts and provide liquidity for businesses in difficulty so that they can avoid bankruptcy, thus reducing the workload of the commercial courts. In this respect, the following points should be noted:

• During the pre-insolvency phase, financial institutions may take precedence over minority creditors when bank debts represent at least 75% of the firm's liabilities and the business has a viability plan approved by an independent expert and accepted by the court.
• The 'fresh money' regulation has been introduced for the first time - this involves creditors injecting funds into firms in difficulties under a refinancing agreement. The new bill states that 50% of this cash injection into the business under a refinancing agreement is considered to be a charge against the debtor's estate (ie, a preferential debt), which represents greater security for institutions providing credit to refloat a business.

The reforms also aim to streamline and improve procedures in order to reduce costs and lessen the workload of the commercial courts by encouraging the use of the fast-track or simplified proceedings and enhancing the status of administrators/receivers through a greater degree of professionalism.

The court may decide on fast-track proceedings when it considers the insolvency to be uncomplicated - that is:

• the list of creditors filed by the debtor contains fewer than 50 names;
• the initial estimated liabilities do not exceed €5 million; and
• the value of the tangible and intangible assets is below €5 million.

Fast-track proceedings may also be used when the debtor files a proposed scheme of arrangement in advance or a scheme that includes structural changes resulting in a transfer of all its assets and liabilities. The court will necessarily apply fast-track proceedings when, together with the application for insolvency proceedings, the debtor files a liquidation plan containing a binding written offer to purchase its production unit if the firm has either ceased trading entirely or has no contracts of employment in force.

Administrators/receivers will have powers to correct any errors in the list of creditors, which will result in a considerable reduction in incidental issues - the main cause of delay in insolvency proceedings. The appointment of assistants to administrators/receivers by the courts will be encouraged, and the bill allows for the possibility of insolvency practitioners to form a corporate entity, known as an insolvency practitioner company.

For further information on this topic please contact Tomás Garcés at Ventura Garcés & López-Ibor Abogados by telephone (+34 93 241 97 40), fax (+34 93 209 83 91) or email (tomas.garces@ventura-garces.com).