Not all creditors may be grouped as one sees fit: class formation in restructuring plans
The formation of classes of creditors in a restructuring plan is not a formal question or an engineering exercise at the debtor's service. It is a central decision that determines how voting power is distributed among the various groups of creditors, what majorities are needed to approve the plan and, ultimately, whether the plan can be confirmed by the court and withstand challenges. The consolidated text of the Spanish Insolvency Act —the “texto refundido de la Ley Concursal”, TRLC—, following the transposition of Directive (EU) 2019/1023, has incorporated detailed rules on class formation, based on the existence of a common interest within each class and on objective criteria of the rank and nature of the claim. Understanding this logic is essential in order to design workable plans and to prevent an incorrect classification from jeopardising their confirmation.
1.Class formation as a structural decision of the plan
The starting point is article 622 of the consolidated text of the Spanish Insolvency Act —the “texto refundido de la Ley Concursal”, TRLC—, approved by Royal Legislative Decree 1/2020 of 5 May, which provides that creditors holding claims affected by the restructuring plan are to vote grouped by classes of claims. Voting by classes is the element that connects the structure of the liabilities with the mechanism for approving the plan: the vote is not taken as a single block, but by groups of creditors that share certain characteristics. Article 623 develops the general criteria for class formation and requires that formation have regard to the existence of an interest common to the members of each class, determined in accordance with objective criteria.
The requirement of a common interest is not mere rhetoric. Paragraph 2 of article 623 states that a common interest is deemed to exist between claims of equal rank as determined by the order of payment in insolvency proceedings, the Spanish “concurso de acreedores”. In other words, as a general rule, claims occupying the same position in the insolvency order of priority share a common interest, because their prospects of recovery in a liquidation scenario or under the alternative to the plan are similar. From there, paragraph 3 allows claims of the same insolvency rank to be separated into different classes where there are sufficient reasons to justify it, having regard in particular to the financial or non-financial nature of the claim, to the conflict of interest that creditors forming part of different classes may have, or to how the claims are to be affected by the plan. In addition, where the creditors are small or medium-sized enterprises and the plan imposes on them a sacrifice of more than fifty per cent of the amount of their claim, they must form a separate class.
These rules reflect the direct influence of Directive (EU) 2019/1023, whose recital 44 and provisions on the formation of classes insist that substantially similar rights must receive the same treatment and that classification must reflect the ranking of claims and the commonality of interest. The Directive allows Member States to require more than two classes of creditors and to treat particularly vulnerable creditors, such as workers or small suppliers, separately. The Spanish legislature has taken up this approach, introducing the specific class of SME creditors bearing a sacrifice of more than fifty per cent and the possibility of separating classes within the same rank on grounds of the nature of the claim or of a conflict of interest.
2.Specific classes: claims secured by security in rem and public-law claims
The Spanish rules add specific provisions for certain categories of claim. Article 624 provides that claims secured by security in rem over the debtor's assets are to form a single class, unless the heterogeneity of the assets or rights charged justifies their separation into two or more classes. The idea is that secured creditors share a common interest deriving from their special priority, but that material differences may exist, justifying a separation, where the security is taken over assets of a very different nature or with differing value and liquidity.
For its part, article 624 bis provides that public-law claims are to form a separate class among the classes of the same insolvency rank. This provision reflects the special position of tax and social security claims, which have their own regime as regards priorities, the scope for write-downs and deferrals and their treatment in insolvency proceedings. Grouping them in a specific class prevents their presence from distorting the majorities in other classes and allows differentiated treatment in accordance with the special rules applicable to them.
Class formation is not, therefore, a free exercise. The debtor and its advisers must start from the insolvency rank of the claims, identify common interests and possible conflicts, distinguish between financial and non-financial claims, separate out the SMEs bearing a particular sacrifice and respect the specific classes for secured and public-law claims. Any attempt to group creditors with divergent interests in the same class in order to dilute the opposition of some of them, or to split classes artificially in order to make majorities easier to obtain, may be called into question at the confirmation stage.
3.Common interest and the distribution of voting power
The notion of a common interest has a direct bearing on the distribution of voting power. Article 628 of the consolidated text confers the right to vote on all creditors whose claims may be affected by the plan, and article 629 sets the majorities required for approval of the plan by each class: more than two thirds of the amount of the liabilities in that class, and three quarters in the case of classes made up of claims secured by security in rem. In other words, within each class voting power is allocated according to the amount of the claims, and approval requires qualified majorities.
If class formation is carried out correctly, creditors that share a common interest vote together and the majorities reflect a reasonable balance between the protection of minorities and the possibility of approving plans involving proportionate sacrifices. If, by contrast, creditors with very different interests are grouped in the same class, the result may be that a majority of creditors bearing little sacrifice crams down a minority bearing a very heavy one, or that creditors in a privileged position block reasonable solutions for ordinary creditors. Hence the importance of separating classes where there are material conflicts of interest or where the plan affects claims of equal rank in very different ways.
Directive 2019/1023 underlines this logic by requiring the formation of classes to reflect the rights and the ranking of claims and interests, and by allowing Member States to lay down specific rules for non-diversified or particularly vulnerable creditors. The aim is to prevent the class structure from being used to manipulate majorities and to ensure that the distribution of voting power is consistent with the legal and economic position of each group of creditors.
4.Judicial scrutiny of class formation and the risk to confirmation
The importance of class formation is also reflected in judicial scrutiny. Article 625 of the consolidated text gives the debtor and creditors representing more than fifty per cent of the liabilities to be affected by the plan standing to apply for judicial confirmation that the classes have been correctly formed, in advance of the application for court confirmation of the plan. Article 626 governs the procedure: the application is made to the judge with jurisdiction over confirmation, it is published in the “Registro público concursal”, the public insolvency register, the affected creditors may object within ten days and the judge rules by judgment within five days, with no appeal. If the proposed classes are confirmed, class formation may not be relied on as a ground for challenging or objecting to confirmation of the plan.
This optional confirmation is a tool of legal certainty. It makes it possible to “ring-fence” the class structure before submitting the plan for confirmation, reducing the risk of dissenting creditors challenging the plan for defects in the classification. If it is not used, class formation remains open to review at the confirmation stage, and an incorrect structure may jeopardise judicial approval of the plan. Comparative experience and Directive 2019/1023 itself show that classification is one of the most litigated points in complex restructurings, because it determines who votes with whom and with what weight.
Court confirmation of the plan, governed by article 635 et seq. of the consolidated text, is required where the intention is to extend its effects to creditors or classes that have not voted in favour, where termination of contracts in the interests of the restructuring is sought, or where the aim is to protect interim financing and new financing against avoidance actions and to grant them priority in payment. At this stage the judge must verify, among other matters, the correct formation of classes, the presence of the majorities required in each class and compliance with the rules on cramming down dissenting classes. A defective classification may lead to confirmation being refused, forcing the plan to be redesigned or even frustrating the restructuring.
5.Classes and the cram-down of dissenting creditors
Class formation is also at the heart of the mechanisms for cramming down dissenting creditors. Directive 2019/1023 introduces the possibility of confirming restructuring plans even where not all classes have voted in favour, through what is known as “cross-class cram-down”, provided that certain conditions protecting dissenting creditors are met, such as the best-interest-of-creditors test and compliance with the absolute or relative priority rule. The consolidated text of the Spanish Insolvency Act has incorporated these mechanisms, allowing a plan approved by certain classes to be extended to others that have voted against it, provided that the safeguards laid down are respected.
In this context, class formation takes on a strategic dimension. If the classes are formed in such a way as to group together creditors with common interests appropriately and to separate those with divergent interests, cram-down can be applied in a proportionate and controlled manner. If, by contrast, artificial classes are used in order to facilitate the cram-down of creditors bearing a particular sacrifice or to prevent certain groups from blocking the plan, the risk of challenge and of confirmation being refused increases. The case law that becomes settled on these mechanisms, both at national and at European level, will probably have a direct impact on the interpretation of articles 622 to 626 and on the practice of class formation.
6.Conclusion: classification as a map of power in insolvency
The formation of classes of creditors in restructuring plans is, in truth, the construction of a map of power in insolvency. Each class groups together creditors that share a common interest, defined by their rank, their nature and their position in relation to the plan, and each class votes by qualified majorities that reflect that interest. The class structure determines who decides, with whom and with what weight, and it conditions the possibility of approving the plan, of cramming down dissenting creditors and of obtaining court confirmation.
Not all creditors may be grouped as one sees fit. The consolidated text of the Spanish Insolvency Act requires the common interest to be respected, the insolvency rank to be taken as the starting point, financial and non-financial claims to be distinguished, the SMEs bearing a particular sacrifice to be separated and specific classes to be recognised for secured claims and for public-law claims. Directive (EU) 2019/1023 reinforces this logic, insisting that classification must reflect rights and ranking and that the participation of creditors in the restructuring must be organised in an orderly and balanced way.
For those who design restructuring plans, the lesson is clear: classification is not a formality, but a structural decision that must be approached with technical rigour and with an awareness of its implications for the distribution of power among creditors. A well-constructed class structure can make approval and confirmation of the plan easier; a defective structure can jeopardise it from the outset. In an insolvency law increasingly oriented towards restructuring and increasingly aligned with European standards, understanding class formation means understanding how the future of a company in difficulty is decided.
