Judicial Approval and Cram-Down: Making Your Restructuring Plan Binding

Judicial approval of the restructuring plan is the procedure under Articles 639 and following of the Consolidated Insolvency Act (TRLC — Texto Refundido de la Ley Concursal) by which the competent Mercantile Court validates the restructuring plan approved by the qualified majorities of creditors and extends its effects to dissenting creditors through the cram-down mechanism. To obtain approval, the plan must have secured the support of 60% or 75% of the debt of each affected creditor class (depending on the scope of the cram-down sought), must satisfy the dissenting creditor test (no dissenting class may be left worse off than in the liquidation scenario), and must comply with the formal and content requirements of the TRLC. The approval order constitutes an enforceable instrument and is effective from the date it is issued, even if subject to appeal before the Provincial Court. BMC, in collaboration with Herrera García Abogados, manages the complete approval procedure, from the pre-approval audit of the plan through to the defence against potential challenges by dissenting creditors.

Are dissenting creditors blocking your restructuring plan?

The pre-insolvency restructuring plan is a powerful tool, but its real effectiveness depends on the ability to convert a majority agreement with creditors into a legally binding instrument for all — including those who have not consented. This is the function of judicial approval and the cram-down.

In practice, restructuring plans rarely have the unanimous support of all affected creditors. Dissenting creditors are common, particularly in three situations: (1) debt funds that have acquired the debt on the secondary market expecting full recovery or a takeover of the company; (2) trade creditors with a weak negotiating position who prefer to await the judicial outcome; and (3) public administrations, whose legal capacity to accept haircuts is limited.

The mechanism of Art. 639 TRLC resolves this problem: if the plan achieves 60% or 75% of the debt of each class, the court can impose it on the dissenters of that class. But the approval procedure has its own technical requirements: if they are not met, the approval can be refused or successfully challenged, rendering all the prior negotiation work worthless.

How judicial approval and the cram-down work (Art. 639 TRLC)

The approval procedure develops in four phases:

1. Application and documentation. The company (or any creditor that voted in favour of the plan) files the approval application before the Mercantile Court that would have jurisdiction over any eventual insolvency proceedings. The application must be accompanied by: the complete text of the plan, the certification of the majorities per class, the liquidation scenario valuation report, and the documentation evidencing compliance with the Art. 639 TRLC requirements.

2. Processing of the file and hearing. The court opens the file and grants a hearing to the affected creditors. Dissenting creditors can submit observations opposing approval, principally arguing: that the majorities are incorrect, that the dissenting creditor test is not satisfied, that the classification of debts into classes is inadequate, or that the plan content violates mandatory TRLC rules.

3. Approval or refusal order. The court examines the approval requirements and issues the order. If it approves, the plan becomes binding on all affected creditors — including dissenters — with the enforceability of a judicial instrument. If it refuses, it sets out the reasons so they can be remedied.

4. Possible appeals before the Provincial Court. Dissenting creditors have a time limit to appeal the order before the competent Provincial Court. The grounds for challenge are exhaustive (Art. 657 TRLC): violation of the dissenting creditor test, unjustified discrimination between classes, or non-compliance with formal requirements or required majorities. The order is enforceable during the appeal proceedings, unless the Provincial Court orders a precautionary stay.

The dissenting creditor test: the key to approval

The dissenting creditor test (Art. 656.1 TRLC) is the most critical and most contested requirement for approval. It requires that no class of dissenting creditors is left worse off by the plan than it would be in the most likely alternative scenario absent the plan.

The relevant alternative scenario is typically the orderly liquidation of the company: how much would the creditors of each class recover if, instead of the plan, all the company’s assets were liquidated? If the plan offers them at least that amount — in net present value terms — the test is satisfied and the cram-down is valid.

Disputes over this test almost always turn on the value of the assets in the liquidation scenario. Dissenting creditors have incentives to argue that the assets are worth more than the plan recognises (and therefore that they would recover more in liquidation). The company has incentives to demonstrate that the assets are worth less in liquidation than on a going-concern basis. The quality of the liquidation scenario valuation report — with appropriate methodology, justified assumptions and recognised expert credibility — is what determines the outcome of these disputes.

Absolute priority rule: order between creditor classes

When the cram-down is imposed on an entire class (cross-class cram-down, Art. 640 TRLC), the plan must observe the absolute priority rule: no class of lower rank can receive value under the plan while a class of higher rank has not received payment in full or has not consented to the plan.

This rule has important practical implications:

• Shareholders (existing members) cannot retain participations in the company if creditors have not been paid in full, unless the affected class consents.
• A class of unsecured creditors cannot receive more than a class of creditors with general privilege, unless the higher-ranking class consents.
• Plans that intend to maintain the shareholders’ participation in the restructured company must be carefully designed to avoid violating this rule.

The absolute priority rule has an exception in the TRLC: it can be departed from with the consent of the affected class. The strategic design of the plan — deciding which classes require express consent and which can be subject to the cram-down — is one of the areas where expert advisory adds the most value.

Pre-insolvency restructuring plan vs. insolvency agreement: approval comparison

For companies seeking to resolve their situation before formal insolvency and with maximum discretion, judicial approval of the restructuring plan is the appropriate route. For those already in formal insolvency proceedings, the equivalent instrument is the insolvency agreement (convenio concursal).

This service is part of our insolvency and restructuring practice.