The restructuring plan of Naviera Armas remains valid

One of the most expected cases in recent times regarding restructuring plans has been resolved. Ruling 133/2025 of Las Palmas de Gran Canaria Provincial Court (4th section), dated March 11, has dismissed all grounds for challenging the approval of the restructuring plan of Naviera Armas Group, thus making it final. The ruling reiterates several arguments from previous decisions, which are now almost consolidated. But it also addresses some new issues that had not been dealt with until now, highlighting the interest of this decision.

It is worth noting the importance of the reports issued by independent experts and, where applicable, endorsed by the restructuring expert, as expressly indicated by the Provincial Court in the ruling. In fact, a gross calculation error in the valuation report of the expert of the challenging financial entities, acknowledged by said expert during the hearing, prevented a complete contrast of the alleged data. This circumstance was even taken into account in the costs: "the costs are imposed on the challengers as their inquiries were based on unconvincing reports for the Court".

Background

On December 21, 2023, the Commercial Court (No. 3) of Las Palmas de Gran Canaria issued two orders approving the joint restructuring plan of Naviera Armas Group, one of them resulting from the autonomous request made confidentially by application of article 755 of Insolvency Act, in order to release the Luxembourg companies of the group from the publicity in the Public Insolvency Register.

Challenges were filed against this approval by dissenting creditors, including the Official Credit Institute and the Spanish Ministry of Foreign Affairs and Digital Transformation. The grounds for challenge asserted by the different challengers were the lack of viability (article 654.1º of Insolvency Act), communication deficit (art. 654.1º), lack of objective ground (art. 654.3º), lack of equality treatment in the class (art. 654.5º) and in the rank (art. 655.2.3º), disproportionate sacrifice (art. 654.6º), breach of best interest of creditors rule (654.7º), reverse rule (art. 655.2.2º) and breach of the absolute priority rule (655.2.4º). Challenges based on class formation or the perimeter of affected claims were not raised, thus said issues not discussed, unlike what has been the case in almost all previous challenges or adversary proceedings.

Lack of notification

Some dissenters pointed out that the restructuring plan was communicated to them when it was already agreed upon, thus not allowing them the option to participate in its negotiation or discussion of its terms, so their intervention was limited to voting to approve or reject the plan. The ruling confirms a consolidated approach, specifically that the communication required by article 627 of Insolvency Act is not for the purpose of allowing affected creditors to participate in the preparation of the plan, which can be prepared without the intervention of all involved parties, but exclusively to provide notice to affected for them to be in a position to vote the plan or, if applicable, challenge the plan.

On the other hand, a creditor with a claim not affected by the restructuring plan, but belonging to the group of one of the financial entities with companies holding affected claims, also alleged the absence of communication. The Court dismisses the obligation to communicate to creditors not affected by the plan, especially if no breach of class formation or the perimeter of claims affected is alleged.

Lack of objective grounds: imminent insolvency

Before analyzing the lack of objective grounds (as well as other related challenges), the Provincial Court addresses the importance of expert reports in the controversy, particularly in determining the concurrence of the objective grounds to launch the restructuring plan, the business viability, and the distribution of the surplus value of the company as a going concern. These reports should facilitate the prevention of arbitrary decisions and reject mere intuitive hypotheses or absurd valuation conclusions. Although, it acknowledges that economic science is not exact but, instead, works on hypotheses and projections, the verification must be based on solid and reliable data according to an appropriate method, with prudent projections in line with economic logic.

In the analysis of the absence of insolvency (article 654.3º of Insolvency Act), the dissenters intended that the requirement of a 20 million cash coverage to avoid breaches of a refinancing agreed in 2021, which would resolve factoring or confirming contracts, be considered. To cover this need, a loan was requested as interim financing, which would mature in December 2023. Given the impossibility of making this payment at the due date, the restructuring plan was therefore filed. The ruling is very clear on this point, indicating that "any significant contractual breach can lead to actions by the creditor, essentially the maturity of the term or termination of the contract".

Lack of viability of the debtor group

Based on the indicated trust that expert reports should generate, it points out that the viability plan prepared a projection based on the information from the debtor's management team, but also considering current market data related to recent activity, with conclusions endorsed by the restructuring expert. In particular, public maritime traffic data provide reliable and verified information, and the debtor's operational metrics respect the company's historical data. The conclusion is that the method and projections of the viability report are prudent and appropriate, offering a logical scenario both from an operational and financial perspective, dismissing this ground for challenge (art. 654.4º of Insolvency Act).

The allegation of one of the dissenters regarding the lack of viability connected to the fact that the operating value of the company is estimated to be lower than the value of selling its assets, which would recommend its liquidation, is also rejected. A liquidation sale would significantly diminish asset value due to the loss of market synergies and the increased supply in a limited market (ships), leading to a reduction in the liquidation price. These considerations were also useful in assessing the eventual best interest of the creditors, as we will see. 

Finally, a contradiction is noted in the challenges presented by the challengers regarding other alleged grounds, highlighting an incoherent argument. On one hand, they suggest a lack of viability, while on the other, they claim that some creditors (bondholders) would eventually profit from the acquisition and sale of a prosperous business.

Lack of equality treatment in the class and rank

The challengers stated that the credits of the same class have not been treated equally (article 654.5º of Insolvency Act), and, furthermore, that their credits have received less favorable treatment than credits of the same rank (article 655.2.3º).

In the plan, four classes were formed: Secured Debt (secured by rights in rem), Syndicated Ordinary Debt (includes the part of secured debt not covered by guarantees), Non-Syndicated Ordinary Debt, and Subordinated Debt. The treatment for the secured class includes refinancing of the so-called Tranche A a debt-for-equity swap with prior reduction of equity to zero (Sub-tranche B1) and a 100% haircut for one part of the debt (Sub-tranche B2). The treatment for the ordinary and subordinated classes is a 100% haircut, although the part of the syndicated debt that participates in the surplus value in each debtor company is given the option to elect a 100% haircut or a debt-for-equity swap with participation in a group company that is not the parent company. The controversy centers on the ordinary debt, separated into two different classes.

One of the issues raised is whether the treatment granted should be equal in the class and rank at the level of all the restructured group's debtor companies, or whether equal treatment is only needed on the same class or rank at the level of each debtor company. The Provincial Court holds that the value distribution should refer to the credit of each company and the value given to each company. Therefore, the treatment within the same class across different debtor companies does not need to be identical, nor does the ranking of different debtors need to be equal. In other words, the comparison is only applicable to each individual company.

Regarding treatment in the rank, the ruling understands that there is no unfavorable treatment as the ordinary classes suffer the same treatment, justified at the value level of each company.

Disproportionate sacrifice

The challengers also argue that the group's viability does not require such a significant reduction in the value of their claims (article 654.6º of Insolvency Act), which implies a 100% haircut. They argue that the viability plan is excessively conservative and that a more reasonable approach to the business plan and proposed debt could have been possible, including interim financing, allowing ordinary creditors to recover part of their claims. However, the reports presented by the debtor group, with data also endorsed by the restructuring expert, show how the interim financing was adequate to avoid insolvency and allow business operations, and that the debt-to-EBITDA ratio is also correctly adjusted, considering that there is a portion of the debt not covered by securities that is capitalized, so the group cannot assume additional debt above the capitalized debt even with the EBITDA ratio suggested by the challengers.

The best interest of the creditors

Another ground for challenge is that the restructuring plan proposes solutions that leave the dissenting creditors' claims in a worse situation than they would have had in a liquidation bankruptcy scenario in two years (article 654.7º of Insolvency Act). The challengers particularly point out mistakes in the calculation of the business value, including the value of subsidiaries and unaffected debt, which determines a correction of the contrast value against a possible liquidation scenario.

However, the ruling notes that the special circumstances in which bankruptcy liquidation occurs usually imply a lower value than the operating business, requiring a higher level of certainty in the valuation predictions of the experts, with market analysis and the assets to sale. Considering all the data and reports, it concludes that it is not proven that the affected creditors would have received more in bankruptcy liquidation than provided in the restructuring plan. As we have noted, the market saturation of ship sales was considered if they were sold all at once.

Perception of value by a class above the value of their credits (reverse rule)

The challenging creditors also assert that the reverse rule is violated because the creditors with secured debt will receive a value higher than the amount of their credits (article 655.2.2º of Insolvency Act) in the overall operation. To do this, they accumulate the treatment of different tranches and sub-tranches, as well as the interim financing they granted, to conclude that, after maintaining the nominal value of the interim financing and the secured bonds, the equity-swap of one sub-tranche, and the 100% haircut in another sub-tranche, these creditors obtain a net gain higher than the full value of the claims. However, the calculation error of the expert of the financial entities determines the inconsistency of the ground and its dismissal, as even the expert himself corrected the data that confirmed the strength of the restructuring plan on this point. In fact, it was demonstrated that the secured class received an amount lower than the value of their claims with the restructuring plan.

Absolute priority rule and its exceptions: gifting from the secured class

The most notable section of the ruling addresses the possible breach of absolute priority rule (article 655.2.4º of Insolvency Act), a ground asserted by all dissenters, who argued that the distribution of 6% of the equity to the two former shareholders of the Group, when the ordinary and subordinated classes suffered a 100% haircut, was a clear breach of this essential principle of pre-insolvency restructurings.

The ruling outlines the part of the plan where the secured class is affected, with a refinancing of the so-called Tranche A, while Tranche B distinguishes a part that is converted into equity after a reduction of equity to zero (Sub-tranche B1), and another part that suffers a 100% haircut (Sub-tranche B2). The reduction of equity to zero, followed by a subsequent capital increase through an equity swap and without shareholders' pre-emptive rights (article 631.4 of Insolvency Act) consequently implies the exit of current shareholders.

The Provincial Court first examines whether the distribution of that 6% of the post-reorganization equity to former shareholders is part of the restructuring plan. This equity distribution (gift) was agreed in a lock-up agreement between the shareholders, bondholders, and agents, but was not included in the restructuring plan which was silent on this regard. Thus, it has not been voted by the affected creditors, nor can it even be challenged by the dissenters. It is an inter-party agreement that only binds the signatories in its terms. This statement is very important in strategic and negotiation terms.

Indeed, the Court states that the distribution of equity to former shareholders does not harm the challenging creditors, because in any case "they are out of the money, so they lack standing to claim what is not theirs". If a higher-ranking class consents to give the result of the restructuring on its claim (equity) to a lower-ranking class or the shareholders without altering the fair treatment of the claims of the intermediate classes, absolute priority rule is not breached. The ruling concludes with a forceful statement: "the supposed 'gifting' is neither part of the plan nor do the creditors have standing to claim it, so the ground is dismissed". Thus, it is the first judicial ruling that recognizes gifting as an exception to absolute priority rule.