Pérez-Llorca organised two webinars to analyse the main pre-insolvency and insolvency-related measures approved to address the effects of COVID-19, as well as how the sale of litigation portfolios can be used as a mechanism to obtain liquidity, reduce uncertainty and value the claims filed by companies against the administration or other private entities.
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In the first webinar, Juan Oñate, a partner in the Corporate practice at Pérez-Llorca, began his presentation by explaining the measures set out in Royal Decree-law 16/2020 which have the aim of minimising the number of insolvencies and liquidations of companies that may occur as a consequence of the productive standstill caused by the declaration of the state of alarm, highlighting those aimed at strengthening approved refinancing arrangements. Oñate explained that debtors will be able to file a new application for approval without needing to wait for a year following the filing of the previous application, and will be able to avoid the application for breach of approved refinancing agreements by filing a new application within certain time limits. Furthermore, he explained the measures approved in relation to the duty to file for insolvency with the aim of protecting the debtor. These include the suspension of the duty to apply for voluntary insolvency until 31 December 2020, even if a 5 bis request has been submitted; the prohibition of applications for compulsory insolvency until 31 December 2020; and a measure establishing that if, before 30 September 2020, the debtor communicates that they are negotiating a proposal for an early composition agreement, a refinancing agreement, or an out-of-court payment settlement with their creditors, the general regime established in this law will apply.
Laura Ruiz explained the instruments provided for companies that are in compliance with the composition agreement, the possibility of amending the agreement and the deferral of the duty to apply for the opening of the liquidation phase. The senior associate of the Litigation and Arbitration practice indicated that until March 2021, there is no obligation for the debtor to apply for this opening due to breach of the composition agreement or due to insolvency if the amendment application is filed and admitted for processing before that date. She also noted that the courts will forward applications for a declaration of breach of the composition agreement filed before 30 September 2020 to the debtor, but they will not be processed until December of the same year. Additionally, during these three months, the debtor may submit proposals to amend the composition agreement (31 March 2021 being the deadline for admitting them for processing), which will be managed in preference to the request for the opening of the liquidation phase. Regarding the content of the agreement, Ruiz indicated that it must include a list of outstanding payments, a viability plan and a payment plan. There is no possibility of dragging along holders of preferential claims in the amendment of the composition agreement. Additionally, the processing of the amendment of the composition agreement will be carried out in writing, so as to avoid large meetings.
Javier García Marrero, a partner in the Litigation and Arbitration practice and a senior judge on leave of absence, concluded the discussion by analysing the insolvency measures set out in Royal Decree-law 16/2020 that aim to reduce the amount of work in the courts and to make managing these cases more efficient. Firstly, the partner highlighted the provision in Article 13 relating to the insolvency procedural plea of challenging the list of creditors and the inventory. García Marrero indicated that three limitations on this insolvency procedural plea have been established: on evidence, with only documentary and expert evidence being admitted; a ban on holding face-to-face hearings, unless the Commercial Court considers it appropriate; and the interpretation that being in default is an acceptance of the claims filed by the claimant. Additionally, the partner discussed a second measure set out in this Royal Decree-law that establishes preferential processing, from one year following the declaration of the state of alarm, in a series of instances. These include insolvency procedural pleas relating to labour, matters related to the processing or amendment of the composition agreement, and admissions to processing of requests for approval. Lastly, García Marrero explained a third measure approved to reduce the amount of work in the courts, through the liquidation of the estate in insolvency proceedings from now up to a year following the state of alarm, as well as in those that are already being processed.
The second virtual session was opened by Litigation and Arbitration partner Fernando Bedoya, who explained that in the financing of litigation, third-party funders finance the costs arising from litigation (lawyers, expert witnesses, legal expenses insurance, etc.) in exchange for a share of the investment they have made, depending on the outcome of the litigation. He also noted that it is a relatively mature market that already has many specialised funds. However, the acquisition of litigation portfolios is a more innovative and interesting product in the current circumstances. As he indicated, in this type of transaction, the funds co-invest in a portfolio of lawsuits (national, international, civil, litigious, among others) selected by the selling company, which allows them to advance some of the result of the litigation and in this way obtain immediate liquidity that can be used for the company’s other requirements. The amount of investment in this type of transaction is normally greater than the capacity of litigation financing funds, which has led to the introduction of new players. On the one hand, there are new investors, mainly hedge funds or alternative investment funds that have a great deal of flexibility when making their investments. On the other, there are developers or market makers, who are experts in litigation funding and are in charge of identifying investment opportunities and presenting them to possible investors. These new developers have been able to open the market to large IBEX-listed companies and it is expected that in the future it will open to other possible vendors with significant volumes of litigation in the position of claimants.
With regard to the types of transactions that may interest funds (or other possible investors) who participate in this type of transaction, Fernando Bedoya explained that they can take various forms. These include portfolios of different claims from a single claimant, portfolios from various claimants against a single respondent in similar litigation (for example litigation related to tax or competition), single claims or hybrid opportunities for financing and acquisition of litigation. José Azqueta then discussed the characteristics of tax litigation. The partner signalled that this is usually binary, but easily scalable as, once the case has been identified and a basic viability study has been carried out, it is simple to extrapolate it to other potential sellers. In addition, he stressed that this litigation often involves claims of improper income based on issues of unconstitutionality or lack of conformity with European Union law.
Pedro Marques de Gama analysed the main legal issues related to litigation sale transactions. The partner indicated that, in this type of transaction, which involves a co-investment, the claims and litigations are still held by their original claimant, and, as such, there is no possibility of a counterparty gaining the right to withdrawal for litigious claims. Another significant aspect to bear in mind is the seller’s insolvency risk: the buyer must be well aware of this risk and analyse the possibility of the seller undergoing insolvency proceedings in the following two years. Marques de Gama went on to explain other legal issues such as the possibility of the seller undergoing insolvency proceedings or the functioning of procedural subrogation in these cases. In relation to the contractual characteristics of this type of transaction, he noted that these documents are usually adapted to the transaction model and the type of litigation, and that, when drafting a contract, it is important to bear in mind if you are dealing with a portfolio of litigation or a single claim, as their levels of complexity are very different. José Azqueta ended the webinar by explaining the tax treatment of the transfer of the litigation.