Investing in Spain:
BY IÑIGO VILLORIA, PARTNER, CLIFFORD CHANCE
The question of whether a significant number of transactions involving distressed companies are taking
place in Spain frequently arises.
Regardless of whether the question
involves insolvent or nearly insolvent
companies, the answer is the same:
not as many as one might think.
Spanish system is now quite close
to other European jurisdictions.
A number of different transactions
involving an already insolvent company
are possible. In such cases, an investor
may be able to take advantage of the
imminent cash needs of shareholders,
lenders, and borrower companies.
agreement is reached with the borrower.
And the support of the majority of
ordinary creditors would be necessary
to overcome the insolvency scenario.
Further, since 2011, financial entities
(i.e., those subject to supervision)
that acquire debt after the insolvency
declaration do not lose voting rights in
the context of a creditors’ arrangement.
When dealing with insolvency
proceedings in Spain, some dramatic
statistics immediately stand out:
more than 90 percent of insolvent
companies end up in liquidation, and
among the 10 percent that manage
to enter into arrangements with their
creditors, most are ultimately unable
to meet agreed payment schedules.
Acquisition of Shares
In taking control of an insolvent
company, a purchaser assumes
financial exposure but no legal risk.
There is no shareholder liability unless
the shareholder acts fraudulently or is
accused of being a shadow director, and
the newly appointed directors only bear
liability arising from their own acts.
Purchase of Assets
The most straightforward way to invest
in the distressed market is to acquire
assets from an insolvent company.
Although the natural moment for a
sale continues to be at the liquidation
stage, there is now a lot of flexibility for
trading assets, if agreed upon between
the debtor company and the receivers.
This can be interpreted negatively:
insolvency is rarely a restructuring tool,
as it does not allow distressed companies
to recover. But a positive interpretation
is also possible: huge opportunities
in the distressed market should be
available if one considers that it is simply
unbelievable that there is no value
whatsoever beyond the proceeds of
liquidation for all of the companies that
die as a result of the insolvency process.
Under these circumstances, it remains
unclear why lenders continue to be
reluctant to enforce their share pledges
and take control of insolvent companies.
Would it not be reasonable to think that
their appointed directors could improve
the performance of the company? Or,
would it not at least be advisable for
lenders to initiate a smooth liquidation
process for their own benefit? In
most cases, it would be fair to think
that the company would be better off
out of the hands of those who took it
into insolvency and who sometimes
continue to receive high remuneration
in spite of the cash distress.
Acquiring assets in this context would
trigger no risks, as the court decision
authorising the sale would exclude
all liability and might limit labour and
tax exposure. As such, it could be said
that buying assets from an insolvent
company is the safest deal possible.
The reluctance of investors to get
involved in the Spanish insolvency
field over the years has been the natural
consequence of legal uncertainty. Until
2003, Spanish insolvency legislation
was archaic and gave rise to all kinds of
malpractice. Although radical changes
never happen from one day to the next,
the 2003 Insolvency Law involved a
complete overhaul of the system.
Some reforms are still pending, however.
Examples include pre-insolvency
restructuring tools (in 2011 the Spanish
legislature opted not to run the risk of
being too innovative), clawback rules
(case law has expanded their scope,
guided by deep pocket analysis),
and the legal status of insolvency
receivers, whose performance is
quite erratic and for which a liability
regime exists in name only.
Purchase of Debt
Another interesting source of business
is distressed debt trading. A number of
lenders are now under pressure to get
rid of bad debt at a discount. In addition
to the merely speculative trading, there
are midsize special purpose vehicles
(SPVs) in which taking control of the
insolvency process by purchasing
the debt of the main creditors would
be neither difficult nor expensive. In
particular, a number of rental assets,
such as hotels, shopping centres, and
office buildings, may provide interesting
opportunities for long-term investors.
A wide range of deals involving insolvent
companies are possible. While the risks
of loss are high (although proportional
to the potential profitability of a deal),
legal risks are much lower than they
are for deals involving non-insolvent
distressed companies. Thus, it may be
time for lenders and investors to try to
make the most of insolvency scenarios
in Spain by taking advantage of the
urgent cash needs of shareholders,
lenders, and borrower companies. T
Iñigo Villoria is a partner and head of insolvency and finance litigation in Spain with Clifford Chance. He specializes in advising creditors and debtors in insolvency proceedings
and debt restructuring negotiations.
But, broadly speaking, insolvency
practitioners all around Europe tend
to complain about similar issues. The
legal scenario for distressed trading
in the context of insolvency in the
According to Spanish Insolvency Law,
privileged debt would have control
of the insolvency process, as it ranks
ahead of any other debt, including
insolvency costs, and, sooner or later, it
can initiate enforcement actions if no