1. Definition and Types

Two types in Spanish Law:

A. Financiación Interina (Interim Financing) - Art 611 TRLC:
Money borrowed during negotiation period after Comunicación Art 585, before homologation, to keep business alive, to pay wages, critical suppliers.

Example: Company needs €500K to pay salaries while negotiating restructuring plan.

B. Nueva Financiación (New Financing) - Art 612 TRLC:
Money borrowed to implement the restructuring plan approved by court.

Example: Plan says creditors take 40% haircut, but company needs €2M fresh money to invest.

Both get special protection.

US Chapter 11 comparison: In US, DIP under Sec 364 Bankruptcy Code. Spanish reform copies US but with more limits.

2. Legal Requirements to Qualify as Protected DIP

To get super-priority, financing must meet 4 cumulative tests under Art 611-612:

1. Reasonably and immediately necessary for continuation of business or to preserve/enhance value
2. Foreseen in restructuring plan or interim budget approved by expert
3. Not detrimental to creditors - must pass best interest test - financing must improve recovery vs liquidation
4. Disclosed to creditors before homologation - transparent terms, interest, guarantees

If fails any, it is ordinary financing, no privilege.

3. Priority and Protection - The Core Incentive

Old Spanish Law (pre-2022):
DIP only had general privilege (privilegio general) 50% as crédito contra la masa. Not enough, lenders did not lend.

New Law:

Art 611(2) and 612(3) TRLC + Art 242 TRLC:

• Financiación interina: If later concurso declared within 2 years, 100% considered crédito contra la masa - paid first, before any other creditor, even secured.
• Nueva financiación: Same - 100% contra la masa.

Plus protection against clawback (rescisión): Art 615 - Interim and new financing cannot be rescinded as detrimental (acción de reintegración) unless fraud.

Plus - can be secured: Debtor can grant new security over unencumbered assets or second lien over encumbered assets to secure DIP, even if existing secured creditors object, provided judge authorizes and existing secured creditors get adequate protection (similar to US priming lien, but limited in Spain - Spanish law does NOT allow priming lien that displaces existing mortgage without consent except in very exceptional cases where value clearly exceeds).

This is revolutionary: In Spain, fresh money now ranks above Hacienda, TGSS, banks.

4. Obligations of Debtor (Borrower)

When taking DIP, debtor in possession has fiduciary-like obligations:

A. Duty of Transparency - Art 611(1):

• Must inform restructuring expert and affected creditors of need, amount, terms, use of funds
• Must include in viability plan how DIP will be repaid

B. Duty of Necessity and Proportionality:

• Can only borrow what is strictly necessary to avoid imminent insolvency or to implement plan. Borrowing to pay dividends or non-essential capex = breach.

C. Duty of Best Interest:

• Must prove DIP improves creditor recovery. Requires expert report: with DIP, creditors get 60%, without, liquidation 20%. Must attach liquidation comparison.

D. Duty of Pari Passu and No Unfair Preference:

• Cannot use DIP to prefer one creditor over others in same class (e.g., pay one supplier with DIP to keep supply, while not paying others - allowed only if supplier is critical and court approves as essential).

E. Reporting Obligation:

• Weekly reporting to expert on use of funds. Misuse = expert can report to court, court can lift moratorium and open concurso culpable.

F. Repayment Obligation:

• DIP must be repaid per plan terms. If plan fails and concurso opens, DIP repaid as contra la masa first.

5. Obligations of DIP Lender

Lender also has duties to avoid predatory lending:

A. Good Faith and No Vulture Terms:

• Interest must be market + risk premium, but not usurious (Ley Azcárate). Spanish courts have voided DIP at 25% TAE when market was 6%.
• Cannot demand cross-collateralization that secures pre-existing debt with new collateral (prohibited unless justified).

B. No Control:

• Lender cannot take control of debtor's management as condition of DIP (equitable subordination risk). Can have covenants, observer, but not replace directors.

C. Disclosure:

• Must disclose if lender is insider (related party - Art 282 TRLC). Related party DIP does NOT get contra la masa privilege automatically - needs court approval and proof of market terms, to prevent shareholder jumping ahead.

6. Court Approval

For interim financing: No prior court approval needed to borrow, but to get protection, must be confirmed later at homologation hearing. Best practice: get court comfort order via Art 611.

For new financing: Must be part of homologated plan. Judge reviews terms at homologation for unfair prejudice.

Judge can refuse protection if:

• Terms manifestly unfair
• Existing secured creditors suffer inadequate protection
• No expert report

7. Case Law - US, EU, Spain

US Foundational - DIP Doctrine:

1. In re: O'Connor, 808 F.2d 1393 (10th Cir 1987) - US DIP Priority:
Established DIP lender gets super-priority only if necessary to preserve estate.

2. In re: Saybrook Manufacturing, 963 F.2d 1490 (11th Cir 1992) - Cross-collateralization Prohibited:
Court voided DIP that secured pre-petition debt with post-petition collateral. Doctrine adopted in Spain Art 612 - cannot secure old debt with new collateral unless clearly justified.

3. In re: Snowshoe Co., 789 F.2d 1085 - Priming Lien:
Priming lien (senior to existing mortgage) allowed only if existing secured creditor adequately protected and no alternative financing. Spanish courts cite this to refuse priming.

4. In re: Texlon Corp., 596 F.2d 1092 - Insider DIP Subordination:
Insider DIP (shareholder loan during insolvency) equitably subordinated. Spanish Art 281-282 mirrors.

Spanish / EU Post-Reform:

5. Auto JM Madrid 14/2022 - Celsa Group - First Spanish DIP Homologated:
Celsa needed €50M interim financing to keep furnaces running during restructuring negotiations. Court granted contra la masa status, allowed second lien over unencumbered assets, rejected objection from existing bondholders because expert proved without DIP liquidation value €0, with DIP going concern €800M. Established test: DIP must be indispensable and improve best interest.

6. Auto JM Barcelona 2023 - Interim Financing Related Party Denied:
Shareholder offered €1M interim financing at 15% + warrants. Court denied privilege because not at market terms and no independent financing sought. Cited Art 611(3) - related party DIP needs proof no third party would lend.

7. Auto JM Valencia 2023 - Usurious DIP:
DIP at 24% TAE for 3 months granted by distressed fund. Court reduced interest to 10% and denied part of privilege, holding Ley Azcárate applies even in insolvency. Quoted STS 628/2015 usury doctrine.

8. STS 22/06/2021 - Old Clawback of Fresh Money:
Under old law, Supreme Court allowed clawback of financing granted 6 months before concurso if it preferred one creditor. New Art 615 overrules this - now protected if meets Art 611 criteria.

9. CJEU C-723/20 - EU Directive Interpretation - Protection of New Financing:
CJEU held Member States must ensure new financing not declared void as detrimental to general body of creditors if necessary and in best interest. Basis for Spanish Art 615.

10. Auto JM Bilbao 2023 - Misuse of Interim Financing:
Debtor used interim financing to pay shareholder loan. Expert reported, court lifted moratorium, opened concurso culpable, DIP lender lost privilege and was subordinated.

8. Practical Risks

For Existing Creditors:

• DIP dilutes recovery if business still fails - but if no DIP, liquidation 0 anyway
• Can challenge DIP at homologation - must show: not necessary, better alternative, or unfair terms

For DIP Lender:

• Risk of plan not homologated - then financing may not get privilege, becomes ordinary claim if concurso opens >2 years later
• Risk of equitable subordination if lender takes control

For Debtor:

• If misuses DIP, directors liable for concurso culpable, can be personally liable and disqualified.

9. Checklist for Spanish DIP to Be Protected

1. Business plan + cash flow 13-week showing need
2. Independent expert report: liquidation vs going concern with DIP
3. Market sounding: at least 2 offers or proof market would not lend without privilege
4. Terms sheet: interest max Euribor + 6-8%, no cross-collateralization of old debt, no equity kicker that is usurious
5. Disclosure to all affected creditors 10 days before plan vote
6. If related party, add fairness opinion
7. Include in plan text: "Financiación calificada como interina/nueva conforme Arts 611/612 TRLC"
8. Request homologation to expressly confirm protection

In practice: Spanish banks now provide DIP as super-senior facility, but require first lien over unencumbered assets + contra la masa + fee 2-3%.