Analysis of the ruling on the Celsa Group restructuring plan

"It is the first application of the restructuring regulations included in the TRLC approved by RDL 1/2020 of May 5, to a company of the economic size of Celsa in restructuring plans not agreed upon with the debtor."

Note prepared by Cristina Jimenez Savurido for Congress on the latest resolutions on restructuring that Fide held in Madrid on September 28, 2023.

Available in English here >>>

Sentence 26/2023 of September 4 of the Commercial Court No. 2 of Barcelona which approves the Restructuring Plan of the Celsa Group constitutes a precedent in Spain. It is the first application of the restructuring regulations included in the TRLC approved by RDL 1/2020 of May 5, to a company of the economic size of Celsa in restructuring plans not agreed upon with the debtor.

It has been applauded by professionals in the legal, economic and financial fields. Provides legal security to the credit market, both for national banks that, in the event of non-payments, have to go to the secondary market, and for investors in this type of markets.

The homologation procedure that this ruling puts an end to is, in the words of the resolution itself, a truly unique procedure. "It is the particular and simultaneous confluence of this exceptional melting pot of circumstances that has outlined the specificity of this dispute between the shareholders of a company and its creditors.”

The Sentence marks from the beginning a series of guiding ideas that help the general understanding of all the issues addressed throughout its 155 pages, and we highlight them here, at the beginning of this note, just as the ruling does in its legal basis first for the usefulness to glimpse the depth of the ideas, solutions and proposals formulated throughout the text.

“The incorporation into the bankruptcy regulations of the new procedure for approval of a restructuring plan has meant a paradigm shift."

“The controversy presents a clear economic nature "which has a lot to do with the distribution of the company's value, with the insolvency situation of the Celsa Group, with the position it holds in the market and with the economic interests of the shareholders and creditors."

“In a globalized world, within the framework of a modern competitive economy without artificial barriers to entry, nor atavistic protectionisms that mask unjustified privileges, “The market is and must be the sole arbiter of economic survival.”

“In the new scenario illuminated by the reform of the TRLC The debtor actually only has three alternatives."either he negotiates in the terms that his economic possibilities allow or he has to limit himself to accepting the design of his creditors or, ultimately, he satisfies the debt."

The sentence, adjusting to the taxonomy and discipline of the TRLC, resolves all the issues raised, but affirms that The causes of opposition to the approval of the plan have been assessed and the resolution must be adjusted to them. However, it encompasses under the rubric of “incidental issues” a plurality of issues raised by the shareholders or the dissident creditor, contributing in this caso also arguments of maximum usefulness for the interpretation of the regulations that apply.

1.- Incidental issues

In the cast of “incidental issues analyzed, the following should be highlighted:

a.- The negotiation process between the parties, that in the caso that concerns us has not culminated in an agreement.

Affirms that “the agreement is an alternative, and probably the best alternative they have at their disposal…. But clearly, an option is not a condition. Nor does it constitute a procedural requirement.”

b.- The adaptation of the standard to Directive 2019/1023 of the European Parliament and of the Council of June 20, 2019.

Having formulated by the shareholders the proposal of two questions of preliminary ruling before the CJEU, the ruling discards the formulation of both because it understands, as it had already done in previous resolutions, that:  

.- "the debtor is not, nor in any way caso may be part of the contradictory approval process of the Restructuring Plan", nor is his consent necessary, nor is he entitled to oppose the approval or make any appeal against the judicial resolutions issued in this procedure, when the procedure has been initiated by the creditors. As we stated then, the PDR is basically “a matter between creditors”,

.- "There is no distinction between the company and the holders of the shares or social participations.”

The ruling maintains that the regulation contained in articles 612, 637, 640 and 684.2 of the TRLC fully complies with the Directive, that the national legislator has opted for the option provided for in article 11 of the aforementioned directive and that the "debate between those who have a legitimate interest in the company, and those who have an interest in its residual value after the restructuring.”

.- The double possibility of processing the approval application The one that the Spanish legislator has chosen is in accordance with the provisions of Article 16 of the Directive and the instructions included in its Considering 65, and understands that in accordance with number 6 of the Recommendations approved on November 8, 2019, it is not possible reasonable doubt about the correct way to interpret the legal norm.

In this sense it incorporates an interesting interpretation about what should be understood by reasonable doubt by stating that “It is, certainly, a classic concept in the field of law that operates as a standard of evidence when making a decision. Jurisprudence has clarified the concept in the sense that it cannot be understood in terms of the judge's subjective conviction regarding a certain interpretation of Community Law, but more properly, as a objective, clear and definitive absence of any doubt in its application.

Doubt cannot be artificially generated to question the applicability of a precept"

c.- The constitutionality of the norm.

He argues that the regulation contained in article 640.2 TRLC that allows the approval of the restructuring plan without the approval of the partners in caso that the company is in a situation of current or imminent insolvency and the exclusion of the debtor in the preparation of the restructuring plan does not violate the fundamental right of business freedom, the principle of equality or the right to effective judicial protection.

d.- It is not possible to allege civil prejudice in the approval procedure of the restructuring plan.

The possible economic effect that the resolutions issued in pending procedures could have “is not sufficient to consider a preliminary ruling of a civil nature because The existence of an adequate procedural channel is also required. that is, that the Legal System configures with that prejudicial nature the existence of the antecedents on which the issue is based.”

2.- Reasons for opposition to the plan.

The analysis of the reasons for opposition to the plan articulated by the shareholders and the dissident creditor is preceded by a general reflection of maximum interest for the interpretation of the norm.

Under the rubric of “ultimate purpose of the formal requirements of the plan” The ruling states that this is none other than providing all those interested and entitled to adhere to or oppose the plan with the necessary and sufficient information to do so. Therefore, he states, “Compliance with the requirements of the Plan must be weighed based on each of its alternatives or modalities, since It is not appropriate to establish a homogeneous and universal canon of interpretation of compliance with those requirements or formalities, without differentiating when it is proposed by the creditors or by the debtor.”

It highlights the asymmetry of information that exists between the debtor and the creditors and therefore the consequences that this unfolds when analyzing compliance or not with the requirements of the plan and the consequences that this has on the rights of the parties.

It succinctly resolves the question of legitimation of creditors of a group of companies to request the approval of a plan that affects the group, in a positive sense, since this is deduced from a comprehensive interpretation of article 642 TRLC, as well as the requirements that the equally joint plan must meet.

Now entering into the analysis of each of the articulated reasons for opposition, the following sections should be highlighted:

a.- Communication of the plan to creditors. Although the legal text does not establish a specific temporal iter, it must be analyzed whether the following in each caso has harmed any of the rights of those entitled to oppose or adhere, and, according to the ruling, it is perfectly in accordance with the law that creditors who consider that they meet the legally required majorities for their approval present it before the judicial body without opening an accession phase to other creditors.

b.- Formalization in public deed, incorporation of the majority certifications issued by the independent expert, identification of credits and affected creditors. The resolution affirms here, as it will do at other times, that the mere generic allegation of non-compliance is not enough. Whoever challenges the plan must specify in as much detail as possible why the requirement has been breached, the damage it has caused and what the consequence should be.

c.- The question of current or imminent insolvency. The ruling highlights the relevance, here as in the field of company valuation or the viability of business activity, the importance of expert reports. Highlights the importance of the rigor of the expert reports provided in the procedure and the need for “observe the standards of objectivity and scientificity coined by the corresponding scientific discipline.”

It carries out a rigorous analysis of the reports provided to conclude that the existence of pending lawsuits between the parties does not allow us to exclude from the insolvency analysis the credits that are discussed there nor to address reports that do not provide supporting data for the statements they contain.

The sentence insists on several occasions in the importance of data, absolutely essential so that the judge can make a considered evaluation of each of the proposals proposed by the parties.

d.- The viability of Celsa.

To answer the question of whether the proposed restructuring plan offers “a reasonable prospect of avoiding bankruptcy and ensuring the viability of the company in the short and medium term” (articles 633.10 and 638.1 of the TRLC) responds to the report prepared by Houlihan Lockey and the counterreports of PwC and BDO.

Make a prior statement of interest to determine whether or not the reason for opposition exists: “What should be understood by a Viability Plan? and states that “The exposition of “conditions” and “reasons” to ensure, in the first caso the success of the plan, and guarantee the viability of the company and avoid bankruptcy in the second, They do not require a detailed enumeration of the innumerable data, variants and analyzes that a “business plan” traditionally contains.

It carefully analyzes the data taken into consideration in the different reports and makes an exhaustive assessment of each of them, arguing why it estimates some and not others to conclude that reports must be analyzed in a coordinated manner and hire them with other reports made by the company before different authorities in the request for public aid before the SEPI. It is not enough to affirm that some had one purpose and others another. Or that the dates, all of which are close, are not relevant.

The debate that has taken place regarding the sources of information that the parties have used and the relevance of taking into consideration not only the company's own projections but also others stands out. sources of information that allow reports to be adequately contrasted with reality.

Regarding the feasibility plan itself, it resolves the contradictions alleged by the parties by analyzing each of them from an exclusively economic perspective, stating for example that in the practice of economic analysis A period of three years is an absolutely reasonable period of time and in line with the short and medium term time perspective., or what "Article 633.10 of the TRLC does not require that the PDR guarantee the debtor's ability to service the entire refinanced debt upon maturity, ensuring its payment through cash flows, but, much more properly, “What it is about is eliminating the current or imminent situation of insolvency.”

It is therefore worth highlighting here, as in other reasons for opposition, the importance of an economic approach in the analysis of expert reports and the objectivity of the data incorporated.

e.-The equivalence of value. Valuation methods and expert reports.

This is, without a doubt, the determining basis of the ruling, not only because of the rigorous analysis it makes of the expert reports, but because the decisive factor of the resolution depends on the valuation of the company, the distribution of a company's value between shareholders and its creditors.  

He emphasizes that the method of analysis is important and for this he uses the maximum of "... the best possible empirical evidence,…. of the need for the judge to explain and justify his decision in an intersubjectively shared language and…. that the argument that should prevail is the one that offers greater and better evidence regardless of who supports it.”

The parties have devoted significant efforts in their respective writings, in the expert reports provided and in the development of the evidence at trial to prove the validity of their allegations based on the expert reports and the ruling details the data in the cases one by one. that each report supports its conclusions.

It highlights the importance of the sources of information that each of the experts have taken into consideration and the need to contribute "extraordinary evidence to prove extraordinary facts."

Given the proposal contained in the restructuring plan whose approval is requested, the capitalization of 1.163 million euros in Celsa Group shares is decisive in accurately valuing the underlying assets.

Carefully compare the expert reports in each of the aspects in which the experts have highlighted that there are contradictions or calculation errors, to conclude that “"The value of the Celsa Group's shares is below the amount of its debt."

F. Formation of classes, equal treatment between classes and between creditors of the same class.

Firstly, the ruling affirms that having followed the procedure established in art. 626.4 TRLC for prior confirmation of classes ""In this process, it is not possible to artificially reproduce the challenge."

The complexity of caso of the Celsa Group requires that the resolution detail the origin and composition of the debt, the affected companies, the debt instruments and the perimeter of impact. And the sentence resolves it describing (or almost transcribing) the 2017 Refinancing document, judicially approved, which remains almost unchanged in the new restructuring plan and which clarifies, in his opinion, the reasonableness of the proposal of the current creditors, that the treatment offered to all is substantially the one that all of them already accepted as reasonable when they agreed request before the corresponding court the approval of the Refinancing and that, in short, already contained, due to the design of the debt instruments and the cross guarantees, the measure that is now being executed,  the conversion of debt into equity and the takeover by creditors of the entire group.

And the ruling also highlights that the formation of classes, the treatment that the plan grants to each of the creditors between classes and within each class responds to the will of the creditors and debtors themselves at the time of refinancing, a criterion that His understanding must be taken into consideration to make the judicial assessment.

In relation to the dissident creditor (dragged in the 2017 refinancing and who has systematically denied his status as a creditor), the ruling includes several relevant considerations, namely:

  • "“The promoters of the restructuring plan are not obliged to offer the same conditions to all creditors.”.  
  • “the right to receive capital for compensation of credits does not necessarily, nor in all caso, confers a superior economic position or, simply, more advantageous than that corresponding to the creditor who holds a mere credit right. Admitting that it is possible to affirm that “We are in the presence of financially equivalent positions”
  • And it highlights that, in the caso concrete, All other creditors of its class have not only not opposed the approval of the plan, but have renewed their positions (more than 500 million euros of framework debt) during the processing of the process, which would require, in the judge's understanding, an added explanation of why what is good for almost 99% of creditors of a class is not good for the challenging.

g.- The best interest of the creditor.

It highlights the importance of accurately specifying the terms of the comparison established in article 654 of the TRLC to determine whether or not this requirement is met. And, it is certainly not only important in general to identify what are the terms of comparison, but in the caso concrete by the specific obligation that is imposed on the dissident creditor.

Due to the nature of Kutxabank's credit, consisting of the obligation to make the undrawn working capital line available to the Celsa Group in the amount of 6,5 million euros, the analyzed resolution expressly indicates that "It is necessary to compare the obligation to make available and, therefore, the Celsa Group's right to dispose of the working line immediately, with the liquidation fee that, eventually, it would be up to KUTXABANK to collect two years after the formalization of the Restructuring Plan”, and, the answer is that the proposal contained in the Restructuring Plan is superior, since it offers refinancing and payment in five years of the entire amount owed.”

And he concludes that ““The approval of the Restructuring Plan seeks a better position for all creditors of the Framework Contract.” which is also decisive in ruling out the existence of a disproportionate sacrifice by Kutxabank. And this is in line with the purpose of the standard “guarantee a dynamic balance between all creditors”and with that, “The balance has to be weighed and has to adjust both to the financial needs of the company and to the equal distribution of the effort with the rest of the creditors participating in the plan.”

It emphasizes, in relation to the treatment that the plan offers to other creditors, that they all finance the company, some through debt refinancing and others through the loss of value they experience in their credits, of almost 45%, for the partial capitalization of its debt.

He ends this argument by stating that "This “carryover” that is, the consolidation of homogeneous positions in financing imposed by a significant majority of creditors is perfectly legal, adjusted to the legality of the TRLC and consistent with the principle that inspires the reform by virtue of which, for the sake of the continuity of business activity, Collective interests are absolutely superior to individual interests".

3.- The execution of the plan. Corporate issues and delegation to the expert.

After admitting that the execution of a complex plan such as the one that is subject to approval in the ruling and the circumstances of lack of consensus in which it is executed evidence multiple tensions between the TRLC and the LSC, he categorically affirms that "Whatever the interpretive option we opt for, there is only one result that is manifestly prohibited: paralysis, blockade or non-execution of the PDR.”.

a.- Corporate issues.

It individually details each of the operations described in the plan and that according to the shareholders would be illegal in order to dismiss the arguments and affirm, in general terms, that "in these casos, if we adjust to the non-derogable maximum incorporated into the Directive that proscribes the blocking or paralysis of the Plan, then The only alternative that is possible is to carry out an integrative exegesis of the norm, understanding that it is “adjusted to the applicable corporate regulations” to replace the strict formalities contemplated in the legal text with substitute alternatives that perform the same function of control and guarantee.

The guiding idea should be to approximate as closely as possible the original document provided for in corporate legislation. and this as long as the lack of information or its quality makes this alternative advisable.”

Clarify the nature of the expert role in the performance of its function during the execution of the plan, indicating in several paragraphs issues of maximum relevance to understand the execution proposal offered:

.- “the person designated by the judge enjoys the delegated powers not only to make public the agreements adopted at the Meeting, but also - and this is the most important thing - to agree all those acts necessary for the execution of the plan "measures that require agreement of the Board" -, as well as the statutory modifications that are necessary for this purpose.

.- “Note that, as inferred from the legal precept, it is not the Expert or the person designated by the judge who replaces the will of the administrators - or more properly speaking, their lack of will to cooperate - but rather this third party acts by delegation of the judge to whom this substitution capacity corresponds. It is the court, and not the third party or the expert, who defines and outlines the corporate acts that must be carried out in execution of the Plan. Delegation, by definition, is of powers that the holder originally possesses.”

b.- Execution of the plan. Alternative implementation.

The ruling anticipates, as requested by the creditors, possible alterations to the plan during its execution, but clearly establishes, given what the parties describe as “alternative implementation” that “The approved PDR is the one that the Applicants have presented by common agreement with the very few exceptions mentioned in this resolution and the approval granted must be limited to its perimeter and literality and cannot be extended to other alternatives that have not been subject to judicial evaluation. and whose content, of course, is unknown. This would entail a significantly exaggerated degree of discretion and, in my opinion, would clearly exceed the purpose of the procedure.

If any of the situations described in clause 6.2 of the PDR occur that would advise modifying, in equivalent economic terms, the approved requirements, the Applicants would have to reiterate the request for approval with respect to those conditions that entail a variation or alteration of the now approved PDR. ”

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