Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?
Restructuring & Insolvency
Availability of and special priorities concerning new financing are not expressly regulated in the Insolvency Act, however, in principle, a debt restructuring agreement may provide for any action deemed necessary to restore or preserve the debtor’s solvency (please refer to Question 7). In accordance with the general provisions pertaining to the conclusion of restructuring agreements, and to the approval of any new financial commitment of the debtor, the terms and conditions of such financing shall be approved by the administrator, by the creditors and subsequently by the court.
Recent reforms grant the possibility to obtain new financing as long as the borrower opts to attempt reorganisation through an In-court Settlement or a DRA.
Firstly, bridge finance granted in view of applying for In-court Settlement procedure or confirmation of a DRA will have administrative priority claim status if the following conditions are met:
- the bridge loan cannot be used to pay existing debts or anticipate performance of the reorganisation plan.
- the new finance must be expressly contemplated in the reorganisation plan.
- its priority is sanctioned in the court order opening the In-court Settlement or confirming the DRA.
To incentivise intra-group bridge financing, administrative priority is afforded (up to 80% of the amount of the financing) to downstream and cross-stream intra-group financing that meets the requirements.
Second, during the interim period between filing the In-court Settlement or DRA and final court confirmation, the debtor can seek authorisation to receive new financing (which will benefit from administrative priority) to fund ongoing operations and the restructuring process. Authorization is given if an expert certifies that the financing is appropriate and will likely enable all creditors to have a better chance of being satisfied than without it. The court can also authorise the creation of security interests as collateral for the new finance.
Third, the debtor is entitled to ask the court (after filing an In-court Settlement but before submitting the plan, or during DRA negotiations) to authorize interim rescue financing on an expedited basis (providing a lender with an administrative priority claim) if it is needed urgently to carry on the company's business. The debtor must provide evidence that (i) there are no viable financing alternatives and (ii) failure to obtain the loan will result in imminent irreparable prejudice to the debtor.
Last, administrative priority is given to any new exit financing given under (or in performance of) a court-confirmed In-court Settlement or DRA.
The new money granted in the framework of a refinancing agreement, that accomplish requirements set forth in article 71.bis of the Spanish Insolvency Act, will privilege of a high priority of payment (50% of the amount will be satisfied as it becomes due (crédito contra la masa) pursuant to article 84.2.11 of the Spanish Insolvency Act and the remaining 50% will be considered a general privilege claim (crédito con privilegio general) according to article 91.1.6 of the Spanish Insolvency Act.
However, the new moneys privileges has certain limitations: (i) does not have a super priority in a liquidation scenario and it will rank junior to administrative expenses; and (ii) there are no priming liens over previous encumbered assets. In addition, the insolvency administrator could modify the term of payments with the judge approval which lead us to a high uncertainty to creditors and do not encourage such kind of creditors rescue. Notwithstanding the aforesaid, certain provisions could be established in the amended facilities to avoid potential risks in the repayment of the new money.
As previously stated, the Spanish Law does not provide a debt-in-possession financing and there is no incentives or privileges for granting additional financing during the in-court procedure. The entirety of the new financing claim would have the status of an administrative expenses but junior to certain expenses, as the labour law claims.
In both civil rehabilitation proceedings and corporate reorganisation proceedings, the debtor’s or the trustee’s right to borrow new money is subject to the court’s permission. The court will grant permission if the debtor shows that new funding is necessary to continue trading and maximise the value of the company’s business. The lender can collect its claim outside these proceedings as a common benefit claim. This places the new lender in a better position than prior unsecured creditors, but the new money funding will not have priority over secured creditors in respect of their secured assets.
A debtor in restructuring proceedings is not prevented from obtaining new financing.
A creditor does not automatically become better secured but he may be if a proposal to this effect is made in a restructuring proposal that is approval. The claim may also rank second in the order of priority in subsequent insolvency proceedings if the financing is obtained with the consent of the restructuring administrator officer.
Public loans obtained for the financing of employees’ salaries in the restructuring period will automatically rank second in the order of priority in any subsequent insolvency proceedings.
A debtor can obtain financing and otherwise use its assets as security in a scheme of arrangement and informal voluntary reorganisations. This is solely a matter for agreement between the company and its creditors. There are no special priorities given to new debt as of right and such priorities have to be negotiated and agreed with any existing creditors who already hold some form of priority.
Both official liquidators and provisional liquidators may obtain third party financing and grant security over the company's assets, subject to obtaining the prior approval of the Court.
In the absence of any security interest being granted to a lender, such lending will rank as an expense of the liquidation, with the lender enjoying a statutory priority over the company's unsecured creditors.
Yes, this is possible. The administrator's consent and in case of posting of collateral, court approval will have to be sought and, if granted, the claim for repayment of the financing party is granted a super-priority in the form of an obligation of the estate which will be satisfied ahead of all other claims. Administrators in Switzerland are generally rather reluctant to take out new financing, though.
After an insolvency petition has been filed, financing during preliminary proceedings is most often limited to a pre financing of the employees’ wages in order to continue business. Such financing is secured by the employees’ claims against the Federal Employment Agency, because the State will – if certain requirements are met – substitute their salaries up to a threshold amount for a maximum period of three months before insolvency proceedings are opened. The employees’ substituted claims are assigned to the State by operation of law.
If during (final) insolvency proceedings the administrator (or the debtor in self-administration) enters into a loan agreement and receives the loan, its repayment constitutes a liability of the estate, ranking after the court costs and the administrator’s fees, but ahead of the claims of unsecured creditors and must be paid in full, before unsecured creditors (other than those entitled to separate satisfaction) receive a dividend.
Further, an insolvency plan can stipulate that financing granted during the supervision period after an insolvency plan has been confirmed by the court shall have super priority status if the rescue fails and new insolvency proceedings are opened (Sec. 264 Insolvency Code).
Yes, DIP Financings are available under Mexican law with the prior approval of the Mediator or the Insolvency Court. DIP Financings are paid on a “super-priority” basis only after labor claims for salaries and severance for the calendar year immediately preceding the Insolvency Judgment, as described in our answer to Question 5 above.
British Virgin Islands
None of the restructuring procedures specifically contemplate post-commencement financing; however, if a scheme or plan of arrangement is approved by the court and provides that the company may borrow, such funding may be obtained. The position is similar in relation to creditors’ arrangements; however, if financing is obtained without the consent of the creditors and/or members, it may be that this would found a claim for relief or other sanction.
In a liquidation, a permanent liquidator or provisional liquidator (unless his powers under the Companies Act 1981 have been restricted) can raise finance, including finance from existing creditors, to the extent necessary for the beneficial winding-up of the company. This is often advisable. Repayment of this finance depends on the negotiated terms which must be approved by the Court and which would usually take priority over existing creditors as a debt in the winding up.
The proposed rehabilitation or restructuring plan may provide for any restructuring measure including new financing which may be agreed to rank super senior against the restructured debts. The GIC recognizes the first-class ranking privilege of claims for “new money” injected or goods or services provided to ensure the continuation of the business by virtue of a formal restructuring and irrespectively of the successful ratification of implementation of the rehabilitation or the reorganization plan.
The amendments to the Companies Act that will take effect in the second quarter of 2017 introduce super priority for rescue financing. The court will be able to grant four levels of priority, specifically for the rescue financing to be (i) treated as an administrative expense, (ii) have super priority over preferential debts, (iii) secured by a security interest that is subordinate to existing security, or (iv) secured by a super priority security interest. The granting of a super priority security interest will be subject to safeguards, to ensure existing secured creditors are not unfairly prejudiced.
There is no express provision for super-priority rescue financing in an insolvency process, such as the DIP regime found in the US.
An intercreditor agreement will invariably be attempted first. Where it is not possible to reach agreement with all creditors, a scheme of arrangement may be used in certain circumstances to ‘cram-down’ a proposal on a non-consenting minority, which could include an offer of new financing to the debtor on a super-priority basis.
Credit extended to a company in administration may be given priority over unsecured claims by being classified as an administration expense. There is limited case law on this point and the structure is not commonly used as a restructuring tool.
Yes, it can. For a Delay of Payment (restructuring proceeding), the Bankruptcy Law (Article 240 (4)) allows the debtor to obtain new financing from third parties with the prior consent of the administrator provided that the new financing is only intended to increase the assets of the debtor. If the new financing requires collateral, the debtor may encumber his assets under a pledge, fiduciary security, hak tanggungan, hypothec, or other security right, as long as the new financing has approval from the administrator and the supervisory judge. The encumbrance of the debtor’s assets (under a pledge, fiduciary security, hak tanggungan, hypothec, or other security right) for the new financing is only possible for assets that are not yet encumbered.
When a conciliation agreement is approved (homologué) by the court, creditors that have provided new money, goods or services during the conciliation proceeding to ensure the continuation of the business will benefit from a “new money” priority (“privilège de conciliation”) which will allow them to enjoy priority of payment over all pre-petition claims (except for certain employee-related liabilities) and post-filing claims (except for post-filing procedural fees) in the event of subsequent insolvency proceedings.
Pursuant to Article 350(L) of the Companies Law, the court has the authority to grant permission to the company to receive new credit even after insolvency proceedings have commenced, and to approve the collateral required collateral for this credit.
Any new credit taken by the company is treated as an expense in the hands of the company. Unless the court decides differently, such credit debt receives priority over other debts.
There is no DiP-financing framework under Dutch law. Such financing is provided on a case by case basis and requires the cooperation of the trustee or administrator in case of suspension of payments.
Neither in bankruptcy nor in controlled management proceedings is the debtor entitled to borrow money or grant a guarantee or security. Such operations require the authorization of the court and will be decided upon by the receiver.
Yes. Under certain conditions, these new debts are qualified as debts of the estate, and have (subject to certain limitations) absolute priority if the debtor subsequently goes bankrupt.
There are no provisions in the law as regards financing companies in restructuring proceedings. However, as there is no prohibition, we have seen some cases of new financing in restructuring proceedings which worked and were secured with new guarantees.
A debtor generally has three sources for operating capital during a reorganization: (a) existing cash or future cash flows not subject to a secured creditor’s security interest; (b) existing cash and cash generated from continued operations that is subject to a creditor’s perfected prepetition secured interest; and (c) postpetition financing when cash on hand is not available or is insufficient to cover projected needs.
Where cash on hand may not be sufficient to operate a debtor’s business in chapter 11, the U.S. Bankruptcy Code also permits a debtor to obtain DIP financing and provides incentives for lenders to extend credit. DIP financing is often required because prepetition facilities such as asset-based revolving loans or securitization facilities are frozen under U.S. bankruptcy law as of the filing and may not be drawn upon. DIP facilities are generally similar to out-of-court credit facilities with respect to representations, warranties, covenants, defaults, and credit documentation.
DIP financing typically comes from one of several potential sources: (a) existing secured lenders; (b) junior creditors; (c) equity holders; (d) commercial banks or hedge funds; and (e) prospective buyers.
Section 364 of the U.S. Bankruptcy Code governs access to postpetition credit. Section 364(a) of the U.S. Bankruptcy Code authorizes the debtor to obtain unsecured credit and to incur unsecured debt in the ordinary course of business (i.e., to support its day-to-day operations related to its business). Such obligations will receive administrative expense status under section 503(b)(1) of the U.S. Bankruptcy Code.
If the debtor seeks to obtain credit outside of the ordinary course of business, the debtor must seek and obtain court authorization pursuant to section 364(b) of the U.S. Bankruptcy Code. If approved by the bankruptcy court, such claims will receive administrative expense status under section 503(b)(1).
If the debtor is unable to find a lender willing to provide such credit in exchange for “ordinary” administrative expense status, the debtor may seek authorization for alternative financing under section 364(c) and/or section 364(d)(1) of the U.S. Bankruptcy Code. More specifically, section 364(c) provides that a debtor may seek credit that will receive “superpriority” administrative expense status, a lien on unencumbered property, or a junior lien on property that is already subject to a lien.
In the event that the debtor is unable to obtain credit otherwise, the debtor may also seek to obtain credit by providing a senior or pari passu lien on property that is already subject to a lien pursuant to section 364(d)(1) of the U.S. Bankruptcy Code (often referred to as a “priming” DIP).
To obtain DIP financing, a debtor must provide “adequate protection” to any creditor with an existing lien on the collateral being pledged. Adequate protection is intended to compensate a creditor for the diminution in the value of its collateral because of: (a) the imposition of the automatic stay and the corresponding limitation on the creditor’s ability to foreclose on its collateral; (b) the debtor’s use of the property (e.g., depreciation); and (c) the grant of a pari passu or priming lien under a DIP facility. More specifically, section 361 of the U.S. Bankruptcy Code provides a non-exclusive list of what may constitute adequate protection: periodic cash payments; additional/replacement liens; or the “indubitable equivalent” of the creditor’s interest in the collateral.
A “primed” lender may also obtain a superpriority “administrative” claim under section 507(b) of the U.S. Bankruptcy Code if adequate protection is insufficient to cover diminution. Administrative claims must be paid in full in cash upon confirmation of a chapter 11 plan of reorganization.
In an examinership the company can obtain financing where required to ensure the survival of the company during the period of examinership. That financing will be certified by the examiner as having been necessarily incurred to ensure the survival of the business. If the examinership does not succeed and the company is liquidated, the certified debt will rank after the claims of fixed charge holders and the costs of the examinership but ahead of all other claims, including preferential creditors, floating charge holders and unsecured creditors.
A liquidator can raise financing where necessary to fund the activities of the liquidation, and such financing if appropriately incurred will generally rank as a cost and expense of the liquidation and therefore ahead of all other claims.
Subject to the terms of the security document pursuant to which he was appointed, a receiver can raise financing to fund the activities of the receivership, and such financing will generally rank as a cost and expense of the receivership and therefore will be paid from the proceeds of the sale of the secured assets ahead of all other claims including those of the secured creditor.