The Celsa Case: A Landmark Restructuring Under Spain’s New Insolvency Regime

The restructuring of Grupo Celsa, a prominent steel group, marks a significant milestone in Spain’s restructuring market. This case is particularly noteworthy as it is the first non-consensual court-sanctioned restructuring implemented under Spain’s new pre-insolvency regime, which came into force in September 2022.

The case has gathered considerable attention from the media, the public, and the scientific community, as it leveraged one of the most impactful tools provided by the new law: the ability to drag shareholders into the restructuring process without their consent.

Background and Challenges

Grupo Celsa, a family-controlled enterprise, had been grappling with persistent liquidity challenges for years, leading to multiple refinancing attempts.

Despite these efforts, no progress was made in equity-related negotiations. This situation was exacerbated by the legal protections afforded to debtors under Spanish law and the limitations of the previous pre-insolvency regime.

The introduction of enhanced pre-insolvency tools in Spain was rooted in the framework established by the European Union (EU) Restructuring Directive, approved on June 20, 2019 with the aim of reaching a harmonized preventive restructuring framework within the EU. Such EU Restructuring Directive was transposed in Spain more assertively than in other EU countries, providing a crucial opportunity to address a prolonged pattern of debtor resistance.

The timing of the entry into force of the new pre-insolvency regime was crucial to the success of the transaction. The enhancements to the regime were essential for implementing the measures needed to relaunch the company and restore profitability.

The Celsa case, as the first case under this new legislation, posed significant challenges due to the absence of legal precedents.

The Celsa case, as the first case under this new legislation, posed significant challenges due to the absence of legal precedents

Grupo Celsa, a family-controlled enterprise, had been grappling with persistent liquidity challenges for years, leading to multiple refinancing attempts.

Despite these efforts, no progress was made in equity-related negotiations. This situation was exacerbated by the legal protections afforded to debtors under Spanish law and the limitations of the previous pre-insolvency regime.

The introduction of enhanced pre-insolvency tools in Spain was rooted in the framework established by the European Union (EU) Restructuring Directive, approved on June 20, 2019 with the aim of reaching a harmonized preventive restructuring framework within the EU. Such EU Restructuring Directive was transposed in Spain more assertively than in other EU countries, providing a crucial opportunity to address a prolonged pattern of debtor resistance.

The timing of the entry into force of the new pre-insolvency regime was crucial to the success of the transaction. The enhancements to the regime were essential for implementing the measures needed to relaunch the company and restore profitability.

The Celsa case, as the first case under this new legislation, posed significant challenges due to the absence of legal precedents.

The Celsa case, as the first case under this new legislation, posed significant challenges due to the absence of legal precedents

First Step Taken: The Appointment of the Restructuring Expert

The first strategic move was the appointment of a restructuring expert, as required under the new regime for the imposition of a shareholders’ cramdown. The restructuring expert plays a crucial role, acting as a neutral third party to facilitate the restructuring process and ensure that the interests of all parties are fairly represented.

A preliminary restructuring plan was filed simultaneously with the request for the appointment of the restructuring expert. This approach has the effect of mitigating the risk of the borrower filing for insolvency.

A preliminary restructuring plan was filed simultaneously with the request for the appointment of the restructuring expert

The first strategic move was the appointment of a restructuring expert, as required under the new regime for the imposition of a shareholders’ cramdown. The restructuring expert plays a crucial role, acting as a neutral third party to facilitate the restructuring process and ensure that the interests of all parties are fairly represented.

A preliminary restructuring plan was filed simultaneously with the request for the appointment of the restructuring expert. This approach has the effect of mitigating the risk of the borrower filing for insolvency.

a preliminary restructuring plan was filed simultaneously with the request for the appointment of the restructuring expert

Strategic Use of Procedural Safeguards in the New Pre-Insolvency Regime

The new pre-insolvency regime offers two key procedural steps to prevent the subsequent review or challenges with respect to certain aspects: first, the confirmation of class formation (incidente de confirmación de clases), which serves to confirm the class formation and makes such class formation unchallengeable, and second, the preliminary objection (contradicción previa), which allows the early resolution of disputes concerning the restructuring plan in the first instance, which makes the decision final.

Under the new pre-insolvency regime, a restructuring plan can be entirely invalidated if successfully challenged on the grounds of incorrect class formation

1. Confirmation of Class Formation

Under the new pre-insolvency regime, a restructuring plan can be entirely invalidated if successfully challenged on the grounds of incorrect class formation. This regime also establishes specific criteria for class formation and the treatment afforded to creditors within each class, with the absolute priority rule and the best creditors’ interest rule being the most critical.

The absolute priority rule mandates that senior creditors must be paid in full before junior creditors receive any distribution, while the best creditors’ interest rule ensures that no dissenting creditor is worse off under the restructuring plan than they would be in a liquidation scenario. These rules can lead to complex and controversial situations.

Under the new pre-insolvency regime, a restructuring plan can be entirely invalidated if successfully challenged on the grounds of incorrect class formation

In the Celsa case, forming creditor classes under this new regime was a pioneering effort in the Spanish market. Aware of the critical importance and risks of being the first to navigate this untested territory, the judicial confirmation process was activated before the Commercial Court to secure approval of the class structure upfront. This approach was intended to prevent any future reviews of this aspect, which could carry the risk of invalidating the entire plan.

2. Preliminary Objection Phase

Activating the preliminary objection can render the decision concerning the homologation of the restructuring plan final at the first instance, but it also carries the risk of the plan being dismissed early in the process, with no opportunity to challenge the decision before a higher court.

Given the circumstances surrounding the Celsa case, particularly the critical nature of the structural amendments to be implemented upon the plan’s approval, the parties proposing the plan agreed to activate this step.

This approach was essential to ensuring that the decision rendered by the Commercial Court of Barcelona would be final and binding, providing certainty on the outcome and preventing potential complications that could arise from a successful challenge considering the impact of the corporate measures envisaged in the plan and the difficulties associated with an eventual necessity to remove any structural amendment already implemented.

This strategy proved successful in the Celsa case, as the Commercial Court accepted the technical soundness of the restructuring. However, it is important to recognize that this approach may not be suitable for every case.

Consequently, lenders must face a strategic choice in this regard on a case-by-case basis: opting for a definitive, though potentially more time-consuming and risk-intensive process at the first instance, or pursuing an initial homologation that could be challenged and possibly totally or partially reverted later.

Shareholders’ Cramdown

The shareholders’ cramdown in the Celsa case was a key aspect of the restructuring process, requiring careful attention to the strict legal standards set by the new Spanish pre-insolvency regime.

The shareholders strongly contested the two main requirements for the cramdown: the company’s insolvency status and whether the shareholders were “out of the money.

The shareholders’ cramdown in the Celsa case was a key aspect of the restructuring process, requiring careful attention to the strict legal standards

First Requirement: Establishing Insolvency Status

The primary condition for enforcing a cramdown is proving that the company is in a state of actual or imminent insolvency.

The shareholders had judicialized the debt and tried to build an argument questioning the clarity of the company’s insolvency status claiming that the debt was contingent, together with a number of other arguments trying to contest the insolvency status of the Celsa Group.

However, during the preliminary objection process, the Commercial Court dismissed these challenges and the judge upheld the lenders’ position, confirmed the company’s insolvency, and allowed the restructuring plan – and consequently, the cramdown – to proceed.

Second Requirement: Determining Equity Out of the Money

The valuation of the going concern business is critical in non-consensual restructuring plans as it determines where the company’s value breaks. In the Celsa case, since the Group’s debt exceeded its value, the shareholders’ equity was deemed out-of-the-money, justifying the cramdown.

In this instance, the restructuring expert submitted a valuation report, which was subsequently challenged or supported by other parties involved in the process through their own party-appointed expert reports. The judge ultimately made the final decision after evaluating all the evidence presented and concluded that the creditors' and restructuring expert’s less optimistic and more thorough analysis was more convincing.

The restructuring expert submitted a valuation report, which was subsequently challenged or supported by other parties involved in the process
Conclusion: A Landmark Achievement

The restructuring of Grupo Celsa stands as a landmark achievement in the Spanish and European restructuring market. Looking forward, the Celsa case will undoubtedly serve as a key reference for future restructurings in Spain.

This case has proven the flexibility of the new legal framework. The innovative strategies employed reveal the relevance of being properly advised to deliver tailored solutions that ensure the success of the transaction.

This article is based on public information only. GA_P acted as leading legal counsel to the ad-hoc group of creditors that proposed the plan.