Debt Restructuring Frameworks - Complete Legal Guide

Debt Restructuring = Changing original terms of debt - maturity, interest, principal, currency, security, or converting debt to equity - to avoid default / insolvency, under consensual or statutory framework.

4 Global Frameworks apply in Spain/EU/India context:

I. Framework 1 - Out-of-Court / Contractual Restructuring (Consensual)

No court, just contract amendment under Civil Code Art 1203-1213 Spain, LMA terms.

• Tools: Rescheduling (extend maturity), moratorium, interest reduction, debt-for-equity swap, waiver, new money
• Requirement: Unanimous or majority lender consent per facility agreement

Advantage: Fast, confidential, no stigma

Risk: Holdout creditor can sue, no moratorium protection

Case Law:
Redwood Master Fund Ltd v TD Bank Europe Ltd All ER (D) 141
English High Court held majority lenders can amend syndicated loan if power granted, no implied duty to act for benefit of all lenders. Minority cannot block if agreement allows majority amendment. Foundation for consensual restructuring in syndicated loans.[2002]

II. Framework 2 - Spanish / EU Preventive Restructuring - EU Directive 2019/1023 + Spanish Law 16/2022 (Texto Refundido Ley Concursal - TRLC Book II)

Spain transposed EU Restructuring Directive in Sept 2022 - most advanced in EU.

Key Features:

1. Early Warning: Company likely to become insolvent in 2 years can access
2. Stay: Up to 12 months moratorium on enforcement (Art 601 TRLC)
3. Cross-Class Cram-Down: Court can force dissenting creditor class to accept plan if:
   • At least one class of affected creditors approves
   • Best interest test: dissenting creditor gets at least as much as in liquidation
   • Absolute priority or relative priority respected
4. Classes: Secured, unsecured, employees, public, equity
5. No need for 100%: 75% of secured claims, 66 2/3% unsecured within class

Spanish Procedure:

• Communication of opening negotiations (Comunicación de apertura de negociaciones) - Art 585 TRLC: File with Commercial Court, 3 months to negotiate (extendable to 12), automatic stay on enforcement of necessary assets
• Restructuring Plan (Plan de Reestructuración): File, creditor voting, homologation (court confirmation)

Case Laws - Spanish:

1. STS - Celsa Group - Juzgado Mercantil Barcelona 2023 - Largest Spanish Restructuring
€2.8B debt, 7 creditor classes, cross-class cram-down applied for first time. Court forced dissenting junior creditors. Upheld on appeal. Shows new law works for syndicated loans.

2. Single Home - STS 2023 - Best Interest Test
Court refused homologation because plan gave unsecured creditor less than liquidation value. Must prove via independent expert report.

3. CJEU C-... - Spanish SME Restructuring - Relative Priority
EU Directive allows member states to choose relative priority - Spain chose relative - dissenting class can get less than senior if fair.

III. Framework 3 - Indian RBI Frameworks

A. RBI Prudential Framework for Resolution of Stressed Assets - 7 June 2019 (superseded S4A, SDR, JLF):

• Applies to exposures > Rs 2000cr (review period 30 days), Rs 100-2000cr (180 days)
• Lenders must sign Inter-Creditor Agreement (ICA)
• Resolution Plan: Any plan - restructuring, change in ownership, sale
• If 75% by value and 60% by number agree, binding on all

B. IBC Section 54A - Pre-Packaged Insolvency Resolution Process (PPIRP) for MSME - 2021:

• Debtor-in-possession, 120 days, base resolution plan by debtor

C. RBI COVID Frameworks 1.0 & 2.0 - 2020-21:

Case Laws India:

4. Vidarbha Industries Power Ltd v Axis Bank Ltd - Supreme Court 2022
SC held NCLT not bound to admit CIRP if debt restructuring negotiations pending under RBI framework, must consider viability.

5. Swiss Ribbons Pvt Ltd v Union of India - 2019 - Constitutionality of IBC
SC upheld IBC - financial creditor vs operational creditor classification valid.

6. Committee of Creditors of Essar Steel v Satish Kumar Gupta - 2019 - CoC Primacy
SC: CoC decision with 66% majority binding, commercial wisdom not justiciable. Applies to restructuring plans.

7. IVRCL NCLT Hyderabad - Debt Converted to Equity Not Debt
We discussed - converted debt loses financial debt character. Important for restructuring: After debt-equity swap, bank loses CoC voting.

8. Cochin International Airport vs HUDCO - DRT cannot accept equity
DRT cannot force equity settlement - must be consensual.

IV. Framework 4 - US / English Scheme of Arrangement + Restructuring Plan

English Part 26 Scheme (Companies Act 2006) + Part 26A Restructuring Plan 2020:

• Scheme: 75% by value in each class, court sanction, can cram-down within class but not cross-class until 2020
• Restructuring Plan: Adds cross-class cram-down, similar to Spanish model

Case:

9. Re DeepOcean 1 UK Ltd - First Cross-Class Cram-Down in UK
Court crammed down dissenting class using new Part 26A, showing UK now similar to EU.[2021]

10. Re Gategroup Guarantee Ltd
UK court allowed restructuring of Swiss company with English law debt - shows jurisdictional reach for syndicated loans governed by English law (common for Spanish syndicates).[2021]

V. Types of Restructuring Tools

VI. Safeguards & Disputes in Restructuring

Valuation Dispute: At what enterprise value? Requires independent expert - EY, KPMG. If low valuation, shareholders claim oppression u/s 241 India / Art 340 TRLC Spain.

Best Interest Test: Dissenting creditor must get at least liquidation value. Must provide liquidation valuation.

Absolute vs Relative Priority: Spain allows relative - senior can be crammed if junior gets something.

New Money Priority: Dispute if existing creditors provide new money to gain priority over others - must be fair.

Bottom Line for Spain: Since Law 16/2022, Spain has one of most debtor-friendly preventive frameworks in EU - early filing, long stay, cross-class cram-down. Syndicated lenders must engage early - once communication filed, cannot enforce necessary assets.