Ruling 155/2020, of 30 April, issued by the Court of First Instance No. 60 of Madrid – Celsa group case –
The Court of First Instance No. 60 of Madrid in its ruling dated 30 April 2020 (the “Ruling“) awarded interim relief to various Spanish companies of the Celsa group on the grounds of the rebus sic stantibus doctrine in order to suspend payment obligations and financial covenants under a refinancing agreement as a result of the change of circumstances caused by the Covid-19 outbreak.
The Ruling is relevant as it is the first Spanish court resolution that applies the rebus sic stantibus doctrine in the context of financing agreements.
On 31 October 2017, the Spanish parent of the Celsa group, Barna Steel, S.A., as borrower and most of its Spanish subsidiaries, as guarantors, entered into a pre-insolvency refinancing agreement with a syndicate of banks led by BBVA, as agent.
The refinancing agreement counted on the support of almost all creditors and on 13 December 2017 it was approved (by virtue of judicial homologation) by the Commercial Court No. 9 of Barcelona making the effects of the agreement extensive and applicable to dissenting creditors.
The refinancing was entered into on the basis of a 2017-2022 viability plan for the Celsa group aimed at reducing the group’s debt by dividing it into (i) sustainable debt to be repaid during the following five years (i.e., until 2022) and (ii) unsustainable debt to be repaid in one single instalment (bullet) in 2023, thus ensuring the viability of the Celsa group for the following five years.
However, following the Covid-19 outbreak and given the likely default of the Celsa group’s payment obligations and the risk of the lenders enforcing the security interests granted under the refinancing agreement, the Celsa group requested and obtained an interim relief consisting in (i) a one-year moratorium on principal and interest, (ii) the suspension of the obligation to comply with the financial ratios until 31 March 2021 and, (iii) the prohibition imposed on the lenders to accelerate the loans and enforce their rights under the loans and the security documents.
Application of the rebus sic stantibus doctrine by Spanish case law
It is worth noting that in Spain rebus sic stantibus is a doctrine developed by court jurisprudence and not expressly regulated under Spanish law. So far Spanish case law has traditionally applied rebus sic stantibus in an exceptional and restrictive manner and only in respect of agreements with ongoing mutual and reciprocal obligations pending fulfilment (such as, for instance, lease agreements) and not in the context of financing agreements where all the main obligations of the lenders have been fulfilled and only the obligations of the borrower group are outstanding. Likewise, in respect of its contractual effects, Spanish courts have generally shown a clear preference towards amending and adapting the terms of an agreement to the new circumstances as a result of the rebus doctrine rather than early terminating the affected contract.
In 2014, this traditional interpretation seemed to evolve, in theory, to a more flexible application of the rebus sic stantibus principle when, in the context of the economic crisis and in relation to agreements with reciprocal ongoing obligations, the Supreme Court ruled that the rebus sic stantibus doctrine should be applied in a more flexible manner and “in line with the necessary adjustment or adaptation of the institutions to the current social reality”.
The rebus sic stantibus doctrinerequires the affected party to prove an extraordinary change in the circumstances at the time of performance of the agreement, which was unforeseeable by the parties when they entered into the agreement, and which results in an excessive disproportion, beyond any calculation, between the parties’ rights and obligations that frustrates the purpose of the agreement. Such a change must be caused by an event beyond the control or action of the parties and must be assessed within the specific economic and business context where it occurs (and not in a merely theoretical or abstract sense).
Application of the rebus sic stantibus doctrine to the Celsa group case
The Ruling states that there is sufficient evidence that the payment obligations and financial covenants under the refinancing agreement were agreed on the basis of the viability plan and based on the assumption that the Celsa group business activity would be carried out on normal market conditions, and Grupo Celsa had punctually fulfilled its obligations and undertakings prior to the Covid-19 outbreak.
The Spanish court also acknowledges that the crisis caused by the Covid-19 pandemic, which was totally unforeseeable, seriously and negatively affected the feasibility of the viability plan approved back in 2017 due to the significant decrease in the Celsa group’s production and sales, mainly as a consequence of the lockdown approved by the Spanish government.
The court concludes that the current unforeseeable and extraordinary circumstances entail an exorbitant disproportion, beyond any calculation, between the rights and obligations of the parties that severely affects the ability of the Celsa group to comply with the agreed financial ratios and fulfil its payment obligations under the refinancing agreement.
The Court of First of Instance No. 60 of Madrid applied the rebus sic stantibus doctrine to suspend payment obligations and financial covenants under the refinancing agreement and prevent the lenders from accelerating their loans. In summary, the conclusions of the Spanish court, taking into consideration the requirements of rebus sic stantibus, are the following: (i) the Covid-19 outbreak entails an extraordinary change in circumstances, which was totally unforeseeable when the Celsa group entered into the refinancing agreement on the basis of the viability plan prepared therefor; (ii) the current situation has negatively and significantly affected the Celsa group’s business activity rendering the performance of the agreement extremely onerous for the Celsa group; and (iii) the inability of the Celsa group to fulfil its obligations under the refinancing agreement are a direct consequence of the Covid-19 outbreak.
Even though the Ruling may remain as an isolated decision, currently being challenged by some lenders and, therefore, susceptible of being reversed by a higher court, it may set a change in Spanish case law on the enforcement of obligations under financing agreements by means of the application of the rebus sic stantibus doctrine in the context of the current Covid-19 pandemic.
In view of the above and until there is more visibility on the trend to be followed by Spanish courts in the coming months, it may be prudent for lenders to explore mutually agreed solutions before engaging in more aggressive actions, the outcome of which may prove uncertain in the prevailing circumstances.
Co-written by Inés Colás.