Proposed new insolvency regulations and their Implication in Spanish distressed deals

In the light of the current economic climate, some of the restrictive provisions of the Insolvency Act and the fears of rescission of transactions carried out in relation to companies in distress have resulted in a high number of the petitions of insolvency to end up in liquidation of the debtor. Also, the existing Insolvency Act (the «Insolvency Act») has somewhat acted as a deterrent to a Spanish distressed market and certain of its provisions have proven to be too strict to facilitate proper restructurings. This has forced market participants to find imaginative solutions, whichin some cases include the use of foreign jurisdictions to carry out a restructuring plan.
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With the aim of preserving the business activities of companies in distress, to induce capital investment in distressed companies and to facilitate pre-insolvency restructurings, the Spanish legislator is working on new regulations and a substantial reform of the Insolvency Act is due to come into force in the coming months (the «Reform»). The Reform introduces concepts which have been unknown to the Spanish market such as cram-down mechanisms or dip financings and allows for certain purchasers of debt of insolvent companies to keep their right to vote in a composition of creditors. We have tried to list those issues within the Reform which we think directly affects distressed investors, rather than citing all proposals made within the Reform. Some of the main novelties of the Reform affecting distressed transactions are set forth below.